[Senate Hearing 108-494]
[From the U.S. Government Publishing Office]
S. Hrg. 108-494
CABLE COMPETITION--INCREASING PRICE; INCREASING VALUE?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
FEBRUARY 11, 2004
__________
Serial No. J-108-56
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
CHARLES E. GRASSLEY, Iowa PATRICK J. LEAHY, Vermont
ARLEN SPECTER, Pennsylvania EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
LARRY E. CRAIG, Idaho CHARLES E. SCHUMER, New York
SAXBY CHAMBLISS, Georgia RICHARD J. DURBIN, Illinois
JOHN CORNYN, Texas JOHN EDWARDS, North Carolina
Bruce Artim, Chief Counsel and Staff Director
Bruce A. Cohen, Democratic Chief Counsel and Staff Director
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Subcommittee on Antitrust, Competition Policy and Consumer Rights
MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania PATRICK J. LEAHY, Vermont
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
SAXBY CHAMBLISS, Georgia JOHN EDWARDS, North Carolina
Peter Levitas, Majority Chief Counsel and Staff Director
Jeffrey Miller, Democratic Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 1
Feingold, Hon. Russell D., a U.S. Senator from the State of
Wisconsin...................................................... 9
prepared statement........................................... 46
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah...... 4
prepared statement........................................... 48
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin... 3
prepared statement........................................... 59
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 6
prepared statement........................................... 61
WITNESSES
Cleland, Scott, Chief Executive Officer, Precursor Group......... 19
Cooper, Mark N., Director of Research, Consumer Federation of
America........................................................ 20
Johnson, Rodger, President and Chief Executive Officer, Knology,
Inc., on behalf of the Broadband Service Providers Association. 13
Sachs, Robert, President and Chief Executive Officer, National
Cable and Telecommunications Association....................... 15
Willner, Michael, President and Chief Executive Officer, Insight
Communications................................................. 11
Wilson, Coralie, President, National Association of
Telecommunications Officers and Advisors....................... 17
SUBMISSIONS FOR THE RECORD
Cleland, Scott, Chief Executive Officer, Precursor Group,
statement...................................................... 34
Cooper, Mark N., Director of Research, Consumer Federation of
America, statement............................................. 39
DeWine, Hon. Mike, A U.S. Senator from the State of Ohio and Hon.
Herbert Kohl, a U.S. Senator from the State of Wisconsin, joint
letter......................................................... 44
Johnson, Rodger, President and Chief Executive Officer, Knology,
Inc., on behalf of the Broadband Service Providers Association,
statement...................................................... 50
National Cable & Telecommunications Association, report.......... 63
Sachs, Robert, President and Chief Executive Officer, National
Cable and Telecommunications Association, statement............ 77
Wildman, Steven S., Michigan State University, paper............. 97
Willner, Michael, President and Chief Executive Officer, Insight
Communications, statement...................................... 125
Wilson, Coralie, President, National Association of
Telecommunications Officers and Advisors, statement............ 147
CABLE COMPETITION--INCREASING PRICE; INCREASING VALUE?
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WEDNESDAY, FEBRUARY 11, 2004
United States Senate,
Subcommittee on Antitrust, Competition Policy and Consumer
Rights, of the Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:47 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine,
Chairman of the Subcommittee, presiding.
Present: Senators DeWine, Hatch, Kohl, Leahy, and Feingold.
OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE
STATE OF OHIO
Chairman DeWine. Good morning. I apologize for being late
this morning.
As you can tell from the title of our hearing--``Cable
Competition--Rising Prices; Increasing Value?''--any evaluation
of cable television seems to require at least two different
points of view. In fact, in some ways the truth about cable has
always been really hard to pin down. The industry has swung
from regulation to deregulation and various stages in between,
and consumers and the Congress seem to have a long-term love/
hate relationship with the cable industry.
For this Subcommittee, it has been 3 years since our last
cable oversight hearing. The industry continues to be a source
of competition in some markets and a source of frustration in
others. On the one hand, the cable industry has made an
enormous investment over the last decade of between $75 to $85
billion to upgrade cable facilities.
Those upgrades have increased the quality and availability
of video, Internet and telephone services offered by the cable
companies and increased the competitive pressures on telephone
and satellite companies to improve their competitive offerings,
all to the benefit, of course, of consumers.
Unfortunately, there is a downside, as well, a downside
that is all too obvious to all of us. Cable prices have risen
dramatically over the last decade--53 percent, which is more
than twice the rate of inflation. That trend has accelerated
recently, with cable prices going up 5 percent from June 2002
to June 2003, compared to a general inflation rate of 2
percent. These increases, of course, are of great concern to
the Subcommittee and need to be examined. We need to
understand, for example, why prices are routinely increased,
despite the market presence of satellite providers and the so-
called cable overbuilders.
We are likely to hear testimony today from several
witnesses about the market share of satellite providers, which
account today for about 22 percent of national pay TV
subscribers, a level of market penetration that would normally
indicate serious competition.
Why isn't satellite competition limiting cable price
increases? Well, it is possible that the 22 percent figure is
somewhat misleading because it appears that competition between
satellite and cable is not spread evenly throughout the
country. Specifically, the satellite companies often have a
disproportionate number of customers in rural areas or other
areas that cable doesn't effectively serve.
On the other hand, satellite has technological limitations
that often restrict its ability to serve customers in crowded
urban markets. So there are a number of markets, large and
small, where cable and satellite do not compete with each
other, which may limit impact they have on each other's
pricing.
Even worse, satellite companies may have bigger market
share in the smallest markets and smaller market share in the
larger markets, making them a much weaker competitor and
further decreasing their ability to restrain prices. This is an
important factual issue and one the Subcommittee will, in fact,
pursue.
Accordingly, today Senator Kohl and I will send a letter to
the GAO asking them to examine market share of the incumbent
cable providers versus the market share of satellite providers
in geographic areas of different size and demographic make-up.
The letter also asks the GAO to examine if the market share of
satellite is affected by whether or not the local cable system
is fully upgraded. We are also willing to expand the study, if
necessary, and look forward to working with our witnesses for
any recommendations they may have to more fully explore this
issue.
However, pending completion of that study, and even
assuming that the satellite providers don't really compete in
certain large and small markets, they still represent over 20
million customers across a wide range of markets, and that
should be enough to allow them to more effectively blunt the
rise of cable price increases.
But that just doesn't seem to be happening. Why not? Is it
just another example of oligopoly pricing, or are we actually
seeing greater competition in the form of better customer
service and enhanced viewing options? Those are important
issues to evaluate today.
We also will examine another form of competition that has
been somewhat disappointing, and that is the competition
provided by cable overbuilders. Several years ago, these
companies were investing a lot of money to put fiber in the
ground and create brand new cable facilities that would provide
a range of services to customers--video, voice, and high-speed
data.
Last year, Senator Kohl and I commissioned a GAO report to
examine how much impact these companies were having in a range
of case study markets, and the report showed basically what one
would expect, that for the most part increasing competition led
to decreased prices and improved offerings.
However, the report also noted that the overbuilders as a
group are ailing. Many of the companies are having recent
financial difficulties and have been unable to expand to new
markets, or even to fully market their services within their
current regions. Why exactly are the overbuilders struggling?
Is it the result of predatory conduct by the incumbent cable
companies or just good, solid competition from cable and
satellite providers? Is the overbuilder business model viable?
We will explore these issues, as well as others, today.
To the extent that anticompetitive behavior is an element
in the overbuilder struggles, the Subcommittee is considering
at least one possible remedy--specifically, a modification of
the program access rules that require vertically-integrated
MVPDs to make content available to competitors on reasonable
terms and conditions.
These rules have long included the so-called terrestrial
loophole, which exempts programming delivered via wire, and
there has been some concern that this loophole impacts the
ability of competitors to compete. Senator Kohl and I are
currently planning to offer legislation to close the loophole
and look forward to discussing that idea here today.
Another idea to improve competition is to strengthen the
uniform pricing rules. Broadly speaking, existing regulations
require the incumbent to charge customers the same price
throughout a market unless they face effective competition in
that market. If they do face effective competition, they are
then allowed to vary pricing as they see fit customer to
customer. This allows incumbents to make very targeted
responses to competitive efforts into that market.
Some of our witnesses here today believe that we should
further limit the ability of incumbents to respond with
customer-by-customer offers. Others believe that such responses
are the essence of competition. This is an important issue that
the Subcommittee plans to examine, and we will no doubt hear a
spirited debate from our witnesses today.
Let me now turn to my colleague, the Ranking Member of the
Subcommittee, my good friend Senator Kohl.
STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF
WISCONSIN
Senator Kohl. Mr. Chairman, thank you for holding this
hearing today. In the cable arena, there are certain simple
truths. First, consumers pay more and more every year. Indeed,
increases in consumers' cable bills are now about as
predictable as the change of seasons. Second, cable companies
make more and more money from these increased prices. And today
we can add a third: Where real competition exists to cable,
prices are lower, and often dramatically so.
At our Subcommittee's April 2001 hearing, we reported that
cable prices had increased nearly three times the rate of
inflation since the passage of the 1996 Telecom Act. Today, the
just released FCC video competition report finds that little
has changed since 2001. In the year ending June 2003, cable
rates rose more than 5 percent, about two-and-a-half times the
rate of inflation. During the last 10 years, cable prices rose
about 53 percent, far in excess of the overall inflation rate.
While the prices consumers paid continued to escalate, so
did the cable companies' earnings. The FCC report found that
the cable industry's cash flow has increased more than 25
percent since 2001. So prices and profits go up dramatically in
the absence of competition.
The GAO report that we commissioned provides today's news.
It found that the cable industry reacts to competition with
lower prices and better services. In virtually all communities
where more than one cable company competes for customers, video
prices are lower by 15 to 41 percent.
Therefore, our conclusion seems to be rather simple. Real
competition benefits consumers and it keeps prices down. Our
challenge is how to make competition a reality. Despite what
the cable companies assert, satellite is not a complete
substitute for cable in most markets, particularly in urban
areas where many residents are not able to receive satellite.
The key to video competition is the presence of cable
overbuilders, companies that have built new cable systems to
compete with the incumbent operators.
Unfortunately, these new cable companies face a range of
obstacles which seriously harm their ability to survive. We
have heard many disturbing stories of allegedly anticompetitive
and predatory conduct by the cable incumbents, such as below-
cost pricing designed to drive their new rivals out of
business. Additionally, ties between programmers and the cable
incumbents often make it difficult for competitors to obtain
access to the very programming that consumers demand.
It is essential that these new challengers be given the
breathing room to survive so that consumers can reap the
benefits of true competition. Therefore, we will propose the
following measures: first, ensuring that competitors have
access to all essential programming owned by the cable
incumbents by closing loopholes in the program access laws.
Second, we urge that the Justice Department investigate
allegations of predatory behavior by incumbents and take action
to stop conduct which violates antitrust laws; and, third, a
GAO study to determine whether satellite TV is truly an
alternative to cable.
In closing, we should commend the cable industry for the
billions of dollars it has invested to upgrade the quality of
service in many areas. The cable industry is unquestionably
bringing much needed competition to local telephone companies.
Yet, we must not lose sight of the fundamental problem that
brings us here today, which is that American consumers suffer
with cable price increases and a lack of competitive choices.
We hope that today's hearing will be helpful in determining how
we can ensure that competition truly flourishes in this very
important industry.
Thank you, Mr. Chairman.
Chairman DeWine. Senator Kohl, thank you very much.
Let me turn to the Chairman of the Judiciary Committee,
Senator Hatch.
STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE
OF UTAH
Chairman Hatch. Well, thank you, Mr. Chairman.
First, I would like to thank Senator DeWine and Senator
Kohl for the work they do as Chairman and ranking Democrat
member of this Subcommittee, and I commend them for holding
this very, very important hearing.
As the title suggests, today's hearing will focus in part
on whether the strongly increasing cable prices paid by
consumers across the Nation actually reflect an increased value
in cable television services. I would like to turn that around
and, before I address the issue of price, comment briefly on
the value, or more accurately the values reflected in
television programming today.
I am sincerely troubled by some of the programming that is
being aired on both broadcast and cable television, and I am
not alone in this country in this criticism. Beyond Janet
Jackson's and Justin Timberlake's deeply inappropriate display
during the Super Bowl halftime show, I feel that certain recent
programming has tended to reflect the least admirable qualities
present in our Nation, and sometimes crosses the line into
denigrating the values that I and many of my constituents in
Utah, as well as millions of Americans, hold dear. At the
Grammys, Justin Timberlake apologized, and I respect him for
that and commend him for that.
Now, some of you may question what this has to do with
cable competition and the antitrust laws. A partial answer may
be that the enormous consolidation that has occurred in the
cable and media markets, as well as the substantial vertical
integration between these markets, appears to have resulted in
the increasing harmonization of programming across the country.
I am sure that some of these concerns will receive
attention in connection with Comcast's $66 billion bid to
acquire Disney that was announced this morning. These issues
also arose recently when many here in the Senate decried the
loss of localism in media markets during the debate over media
ownership rules.
It is not my intent to rekindle the media ownership debate
or to pre-judge the proposed Comcast acquisition, but I would
say that many of my constituents feel that the programming they
and their families view these days on television seems to be
targeted at an audience that has a distinctly higher tolerance
for profanity and sexually-suggestive behavior than they do.
Although the most recent controversy involves broadcast
television, some of the most offensive and indecent material
comes from such large cable stations as FX and MTV. So I would
like to take this opportunity to encourage all media operators,
broadcast and cable, to clean up their content.
Having voiced these concerns, I want to emphasize that I do
not mean to necessarily equate big with bad. I believe that
much of the recent consolidation in media and entertainment
markets has the potential to benefit consumers in the long run.
However, as I have frequently stated, it is essential that
consumer choice be preserved. In this case, that should include
the ability to choose not to be exposed to objectionable
material.
Turning to the narrower issue of competition in the market
for subscription television, I am pleased to note that recent
reports by the Federal Communications Commission and the
General Accounting Office indicate that greater competition
between cable television and direct broadcast satellite, or DBS
services, that has emerged in the last several years has, on
the whole, resulted in increased access and improved services
for consumers. It is less clear, at least to me, whether
current levels of competition adequately discipline price
increases.
Over the past 10 years, inflation, as measured by the
Consumer Price Index, as Senator Kohl has mentioned, has gone
up about 25 percent, while by some measures cable prices have
increased more than 50 percent during the same time period. I
think Senator Kohl mentioned 53 percent. While this
disproportionate increase in cable prices is partially
explained by increases in programming costs, and in particular
the skyrocketing price of some sports content, I am concerned
that higher costs may begin to significantly limit the ability
of consumers to afford subscription television service.
Interestingly, the recent GAO study indicates that
facilities-based competitors, often referred to as
overbuilders, may be successful in providing price competition
in markets where they compete with incumbent cable service
providers. I think this is something that deserves our ongoing
attention, and I commend Senators DeWine and Kohl for their
work on this issue.
I look forward to hearing more from the witnesses on this
panel today about these issues and about any emerging issues
arising as a result of quickly evolving technology and the
changing competitive landscape in the communications sector. In
particular, I hope that the witnesses will address the
increased competitive significance of bundled service offerings
that combine subscription television, local telephone and high-
speed Internet services into a single package. Also, I hope
that we will touch on the advent of Voice over Internet
Protocol technology and how it is expected to be deployed to
provide local telephone service.
Once again, I thank all of the witnesses for being here
today, welcome them to the Subcommittee, and again commend our
two leaders on this Subcommittee, Senators DeWine and Kohl, for
their work and for their holding a hearing on these important
issues. I am very grateful to them for doing so.
Thank you, Mr. Chairman.
Chairman DeWine. Chairman Hatch, thank you very much.
Senator Leahy.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Senator Leahy. Thank you very much, Mr. Chairman. As I have
said before, the partnership that you and Senator Kohl have in
running this Subcommittee benefits all of us in the Senate. It
certainly benefits the Judiciary Committee and it benefits the
Senate, and I believe the hard work both of you have done
benefits the country.
I might say in just referencing something my good friend
from Utah, Senator Hatch, has said, there is another part of
that thing that offended me even more, the halftime. I think
list most Americans, I totally missed the Janet Jackson thing
because it happened so quickly. However, I was bombarded for
several days afterwards, with the press making sure that I
could be appropriately offended by what happened by repeating
and repeating and repeating it.
But I will tell there was one thing that went on at some
length that I haven't heard anybody talk about. Do you know
what the most offensive thing to me was about that halftime
show? Kid Rock prancing around with the American flag, with a
hole cut in it making it a pancho, and he goes around like that
desecrating our flag and then taking it off and throwing it
out, I assume onto the ground.
Now, if people want to get offended by something, all
Americans ought to get offended by that. That didn't need
repeats over and over again so we could be properly offended.
That went on at such length that I was actually standing up
hollering at my TV set.
Chairman Hatch. Senator, I am happy to hear that because--
Senator Leahy. I was so annoyed that, in fact, my wife
finally said at one point, okay, Patrick, turn it off, turn it
off.
Frankly, I didn't even notice. I was eating some popcorn
and it happened it so fast. But, boy, that flag just ripped me.
Sorry about that. I just wanted to get that off my chest.
Chairman Hatch. Senator, I am glad you got that off your
chest. I presume now you are going to support the anti-
desecration flag amendment.
Senator Leahy. I don't think we need that, if the American
public would stand up.
Chairman Hatch. Oh, I see.
Senator Leahy. I will tell you right now, in my State we
don't stand for that kind of thing. We don't need a law to tell
us to protect the flag in Vermont. Vermonters are patriots. We
don't stand for that, we don't stand for that.
Anyway, this hearing is extremely appropriate. There were
three reports recently released by the Federal Communications
Commission and the General Accounting Office. They tell us what
we all know to be true: Greater competition among cable and
satellite providers results in better prices, more options and
improved service for consumers.
When Congress passed the Telecommunications Act of 1996, I
was one of five Senators who voted against it. I expressed
reservations at the time that the competition predicted by many
would fail to materialize. All those who said vote for this
because we have competition and prices will come down--I said
it is probably not going to happen. Unfortunately, it turned
out I was right.
The October 2003 GAO report notes that cable rates in this
country have gone way ahead of inflation. In the last 10 years,
to give you some idea, the Consumer Price Index has gone up
about 25 percent and cable rates have gone up 53 percent; in
other words, more than double what the Consumer Price Index has
been.
In my own State of Vermont, I have heard complaints from a
number of constituents who are very upset at substantial
increases in their cable subscription fees. After all, when
they see them go up twice the rate of inflation, of course,
they are going to be upset, and rightly so. And as is the case
in all but 2 percent of the television markets across the U.S.,
there is no wire-based competitor available to Vermonters who
wish to change their service.
Now, I know we are going to hear testimony today
attributing the increase in subscription costs largely to the
increases in programming costs incurred by content providers.
But at least in markets there is only one wire-based cable
provider, why do we not see any downward market pressure on
content providers acting to keep programming prices low? And if
there is no meaningful downward pressure exerted on the cable
market, what is going to stop prices from skyrocketing?
When sports programming licensing fees increase 59 percent
in a 3-year period, as they did between 1999 and 2002, what
would lead us to assume that this upward spiral is going to
cease? I mean, at some point somebody is going to put in
legislation to require cable companies to build for program, so
if people don't want to buy the sports programming and that has
a certain cost and they won't take it, then their costs will be
lower.
They may decide they don't need ten channels with preachers
telling them that if they will just send money to that one
preacher, of course, they will be saved, the assumption being
that if they send it to the other nine, they won't, and so on.
Some people might say we don't want to pay for that.
I do understand that some of the increased price of cable
reflects increased quality, more and better programming. I am
told this by my staff and I am eager to see if that is so. But
what will this do for the bottom line of consumers making these
tough budgeting choices?
Subscription video services have become a vital component
of America's information infrastructure. Cable accounts for the
majority of that market across the country. According to the
FCC, 67 percent of households today subscribe to cable
television services. Many others subscribe to satellite DBS
services.
In Vermont, those numbers are different. We have the
highest penetration per-capita of satellite of any State in the
United States, and correspondingly fewer cable subscribers. But
we do lack much, if any, wire-based competition to Adelphia.
That is the cable company serving those Vermonters.
I can give you one example. They wire our capital city of
Montpelier and a couple of the adjoining towns. In my own town,
which borders and wraps around more than half of Montpelier,
there is no cable. There is no cable because the one monopoly
basically for Vermont decides they don't want to bother, so it
is not there. Many satellite subscribers in Vermont have no
cable alternative, and vice versa.
So what I am saying is when prices spiral out of control
for services Vermonters have come to depend on and there are no
real options existing in terms of alternative providers, they
are really hurting. And I suspect this is probably similar in
many, many other rural areas of America, probably affecting
most rural areas of America.
There are a variety of factors that conspire to raise cable
rates borne by consumers. As they rise, fewer people are going
to be able to afford access. It is my goal, and it should be
the goal of the Senate to provide access to high-quality
programming to as many Americans as possible.
Data from the FCC and GAO show us the best way to keep
prices low and to improve the quality and quantity of
programming offerings, of course, is to increase competition.
We all know that. While there is a discrepancy in the exact
amount of the reduction, all three reports show that
competition reduces cable rates and when there is no
competition, cable rates go up. The GAO study found that there
is a 15-percent reduction in the cost of cable services when
there are two wire-based cable competitors.
Finally, I know that my colleagues on the Antitrust
Subcommittee do not intend to specifically address media
consolidation, but it is an issue that impossible to avoid
whenever we talk about providing choices to consumers at a fair
price. Indeed, the GAO report points to this as an area of
concern. If nothing else, the data show that ever-tightening
bonds between corporate control of content and of distribution
are having an anticompetitive effect on what consumers can see
on their screens, and also how much they are going to pay for
it.
Many of the technological issues, I would say to Senator
Kohl, Senator DeWine, Senator Hatch and Senator Feingold--we
have worked on this--these issues are never put to rest because
the change is so rapid in this area. But I think providing
access to the latest and best information at a fair price to
consumers is an issue we can look forward to. And we have to do
that if we want all parts of our country to be competitive,
whether it is high-speed lines, whether it is working at home
or getting information at a price Americans can afford.
Thank you very much.
Chairman DeWine. Senator Leahy, thank you very much.
Senator Feingold.
STATEMENT OF HON. RUSSELL D. FEINGOLD, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Senator Feingold. Thank you, Mr. Chairman. I want to thank
you and Senator Kohl for convening this hearing on the
continuing increase in cable rates. It is a very important
consumer issue and one on which Congress and the American
people deserve some answers.
I am alarmed by the soaring cable rates that consumers in
Wisconsin and across the country have had to endure. For a
number of years, I have been hearing from my constituents about
the rising cost of basic cable and the many other services that
are often bundled together for the consumer, like high-speed
Internet connections, wireless phone service and digital
television.
For all of the promises of more services for less money
since 1988, average cable rates have increased each year.
Between the enactment of the Telecommunications Act of 1996,
which I also voted against, like Senator Leahy, and today,
rates have jumped by over 40 percent, almost three times the
rate of inflation.
In my home State of Wisconsin, the problem is exacerbated
in rural communities where there is no meaningful competitor to
the local cable operator. Over the years, I have been actively
engaged in efforts to foster true competition in the cable
industry, and I hope today's hearing will help spur Congress to
act responsibly.
I am concerned that as more and more services are bundled
together and companies claim to offer special prices for these
bundled services that we lose sight of the fact that already
high prices actually keep getting higher. About two-thirds of
the households in this country rely on cable for their
television programming, and more and more households receive
their Internet services from a cable company as well.
We now rely on cable for entertainment and information.
More and more, cable has become part of the monthly budget for
the average consumer. And instead of the cost going down
because so many people now use the service, the costs actually
just keep rising.
What I hear time and time again is not that we need
hundreds of channels or more bells and whistles for our
televisions, but rather that we need prices that families can
afford. I believe that we have a responsibility to ensure that
there is meaningful competition across the technological
spectrum.
Without competition, cable companies have no incentive to
keep rates low and consumers have nowhere else to turn for the
products they provide. As the GAO study confirms, when there is
a meaningful competition in a community, like a broadband or a
satellite service provider, then cable rates will decrease. I
believe Congress therefore has a responsibility to ensure that
there is true competition in the marketplace.
Again, according to the GAO report, cable companies charge
15 to 41 percent less for the exact same programming in areas
where they face competition. If applied across the country, the
savings for the American consumer would equal more than $4
billion. So I was a little bit surprised to read in a recent
Business Week interview with Rupert Murdoch, the new owner of
DirecTV, that when he was asked if he intended to undercut
cable's prices, he said that he wasn't, quote, ``going to get
into a price war with anyone,'' unquote.
If Rupert Murdoch isn't willing to compete, then we need to
make sure our rules will allow someone else to offer the
American people a better price.
I am looking forward to hearing about how Congress can
protect new entrants into the marketplace. As we watch the
providers of cable and satellite continue their vertical
integration of the industry by controlling the distribution and
production of content, I wonder if an independent operator
trying to reach homes across America today like Ted Turner once
did would have the same opportunity. Or have we gone so far in
allowing the vertical integration between those who create the
content and those who distribute content that new entrepreneurs
can never enter the marketplace with any realistic chance of
survival?
Mr. Chairman, I again thank you and the Ranking Member for
holding this hearing.
Chairman DeWine. Senator Feingold, thank you very much.
Before we get to our very patient panel today, let me just
mention the hostile takeover offer that has been made by
Comcast for Disney, which has already been mentioned here
today. Obviously, this is a very important deal, if indeed it
happens, and it is something that this Committee will, in fact,
be looking at, just as we looked at the DirecTV-NewsCorp deal
as well.
It is my pleasure to introduce our panel today, a very
distinguished panel. Mr. Michael Willner is the CEO and
President of Insight Communications Company, a company that he
co-founded in 1985. Insight is the ninth largest cable operator
in the country, serving customers throughout the Midwest,
including my home State of Ohio.
Mr. Rodger Johnson is the president and CEO of Knology. He
has been with Knology since 1999, before which he served as the
CEO at Communications Central.
Robert Sachs is the president and CEO of the National Cable
and Telecommunications Association. He has worked for over 25
years within the cable television industry. He has testified
before the Subcommittee in the past and we certainly welcome
him back.
Ms. Coralie Wilson is the president of the National
Association of Telecommunications Officers and Advisors Board
of Directors. She has worked extensively in the cable area
serving Ohio as the Executive Director of the Miami Valley
Cable Council, in Kettering, and as an adviser in the Dayton
City Manager's office working with cable administration.
Mr. Scott Cleland is the founder and CEO of Precursor
Group, and also serves as the Chairman of the Investorside
Research Association. He has testified before the Subcommittee
on prior occasions, and we also welcome him back as well.
Dr. Cooper is the Director of Research at the Consumer
Federation of America. He works on telecommunications, media
and economic policy. He is also the author of Media Ownership
and Democracy in the Digital Age. He has testified before the
Subcommittee in the past, and we welcome him back as well.
We will start from my left to my right, and we will start
with Mr. Willner. Thank you very much. We are going to follow
the five-minute rule and that will allow us to have plenty of
time for questions. I think you all know how the system works
up here. You get the one-minute warning.
Mr. Willner.
STATEMENT OF MICHAEL WILLNER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, INSIGHT COMMUNICATIONS
Mr. Willner. Mr. Chairman, thank you. I would like to point
out that with a name that starts with ``w,'' I think this is
the first time that I get to go first. So thank you very much.
Mr. Chairman and Senator Kohl, my name is Michael Willner,
and thank you for inviting me to testify today about the state
of competition in the multi-channel video market. I am the
President and CEO of Insight Communications, a cable company
that serves about 1.4 million customers in Illinois, Indiana,
Kentucky and Ohio. We also serve as employers of 3,200 people,
virtually all of whom live in the communities that we serve.
I would like to make three basic points this morning: one,
that the multi-channel video market is fully competitive; two,
that cable has invested heavily--as we heard earlier, $85
billion since 1996--to upgrade its facilities and bring new
services to market; and, three, that cable offers American
consumers that excellent value and our prices are a reflection
of what it costs to deliver top-quality product to consumers.
Competition is alive and well not only in Columbus, Ohio,
Mr. Chairman, where, as you know, we do have a wireline
overbuild, but as far as we are concerned in every community in
America. It is real and it keeps me awake at night.
Every customer we serve has at least three choices of video
service providers, and some have four. The fact is that our
most significant competitive pressure today does indeed come
from satellite. For instance, just last summer when satellite
began local-into-local broadcasts in the Louisville, Kentucky
market, we saw the most intense competitive attack against us
that we have ever experienced.
So why did DBS become our primary competition instead of
wireline overbuilders? Because their infrastructure is far more
cost-efficient than having to construct a duplicative wireline
network in every community. Indeed, since DBS launched in 1993,
cable's market share has dropped from 95 percent to under 75
percent today. Last year, DBS subscribership jumped from 19.4
million to 21.1 million, a painful 8.8-percent increase, while
cable subscribership remained flat.
The GAO has noted that DBS has emerged as the principal and
formidable competitor to cable. That is absolutely true. In
short, even though competition did not develop the way we
anticipated, competition is alive and kicking in the multi-
channel video business.
Because of competition, cable operators embarked on a
massive rebuild of our cable systems a few years ago. Yes, we
were encouraged by the Telecommunications Act of 1996 and the
subsequent deregulation it brought. But make no mistake about
it, competition caused cable operators to raise $85 billion of
risk capital to rebuild those systems. That is more than $1,200
per cable subscriber, and we did it without any government
assistance. This, in turn, spurred a response from our
competitors to roll out advanced services like digital
subscriber lines and high-definition television.
Since I met with you, Mr. Chairman, 18 months ago, Insight
has aggressively expanded and launched new and advanced
services. We now provide interactive digital video services to
over 400,000 customers, which includes video-on-demand,
interactive services, and more recently, digital video
recorders and high-definition television. We also deliver high-
speed access to the Internet to over 230,000 customers, and we
are a very aggressive competitor in facilities-based telephone
service. Today, we serve 55,000 circuit-switched voice
telephony customers in four markets, including in Columbus,
Ohio.
As we look to the future, we soon will launch an Internet-
based Voice-over-IP service in many of the markets where we do
not have telephony right now, and we will have a blended
service in the ones we currently serve. By any measure, from my
point of view, we are indeed fulfilling the promise of the 1996
Telecommunications Act to provide a facilities-based competitor
in every market.
So why do cable prices rise with all this competition in
place? The answer is simple. Our prices are a function of our
costs. Let me mention a few. I already talked about the $85
billion of invested capital, but did you know that the total
wages paid by cable operators to employees--employees who live
and work in the communities that we serve--rose 15 percent a
year, five times the rate of inflation? That increase reflects
the operating reality that competition brings--vastly improved
customer service, expansion of operating hours, and the higher-
tech nature of our business today.
And then there are the programming costs, our single
highest external cost. Between 1997 and 2003, expenditures by
basic cable networks on program acquisition and development
increased 121 percent, from $4.7 billion to $10.4 billion, an
average of 20 percent a year. The result of that investment is
that cable viewership has indeed exploded.
Eight years ago, many of us expected wireline overbuilds to
be the main competitor to cable operators. Instead, DBS
succeeded in that role. Both the GAO and the FCC have confirmed
the existence of a highly competitive multi-channel video
market. The current environment has been extraordinarily
successful in creating an opportunity where consumers enjoy
ever-increasing choices of providers, programming and services.
New regulations would simply deter additional investments while
depriving customers of exciting, new-generation services.
I would like to thank you again for the opportunity to
testify today and I will be pleased to answer any questions you
have.
[The prepared statement of Mr. Willner appears as a
submission for the record.]
Chairman DeWine. Thank you very much.
Mr. Johnson.
STATEMENT OF RODGER JOHNSON, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, KNOLOGY, INC., ON BEHALF OF THE BROADBAND SERVICE
PROVIDERS ASSOCIATION
Mr. Johnson. Good morning. I want to express my
appreciation to Senators Kohl and DeWine for sponsoring the GAO
study that has just been released. I would also like to thank
you for the opportunity to participate in this hearing and
provide additional testimony regarding competition in the cable
television market.
I am pleased to represent both Knology, a competitive
overbuilder, in the terminology that you have used, and the
Broadband Service Providers Association, the BSPA, which is a
trade association that represents the companies that the GAO
referred to as wire-based competitors to incumbent cable
operators in its most recently released study.
Consumers are reaping the benefit of a $6 billion capital
investment by BSPs in new, competitive networks. This new GAO
report again documents that customers in communities served by
broadband service providers, or BSPs, realized from 15-percent
to 41-percent lower cable television rates than consumers in
communities where there is no wire-based competition.
BSPs have shown that they not only provide consumers with
demonstrable benefits on pricing and services, but they are
proving the economic strength of their business model. This is
attested to by Knology's successful completion of its initial
public offering in the month of December. This is the first IPO
in the telecom media sector in over 3 years.
These BSP systems are models for the type of competition
envisioned by Congress in passing the Telecommunications Act of
1996. The key issue for policymakers today, however, is whether
the legislation and its implementation as it currently exists
supports the development of competition for cable services.
Knology and the BSPA are primarily concerned with three
issues that, if not addressed, could slow the deployment of
competitive broadband networks in communities around the
country.
First, regulators must not mistake competition between
cable and satellite with wire-based, head-to-head competition
between incumbent cable operators and broadband service
providers. In our experience, despite the fact that satellite
has a 22-percent national share, a fully upgraded cable
provider often maintains a market share of 90 percent or
greater in local markets when it is only competing against a
satellite provider. We do not believe that a market with 90
percent or more of subscribers concentrated with one provider
should be deemed fully competitive.
We want to thank you for your support to publicly document
the state of competition in local markets through an additional
GAO study. We further would hope that this market analysis
becomes part of the FCC's next annual assessment of
competition.
The second key issue to the success of the deployment of
competitive broadband networks is ensuring continued access to
the content necessary to compete. Specifically, the protections
of the 1992 Cable Act were limited to satellite-delivered
programming. This has come to be known as the terrestrial
loophole.
Incumbent cable providers have evaded application of the
program access protections in the Cable Act by migrating
critical programming services to terrestrial-based
distribution. As a result of this terrestrial loophole in the
Cable Act, BSPs and other competitors are often denied access
to vital regional sports and news programming controlled by
incumbent operators that consumers demand.
We fully endorse the need to close the terrestrial
loophole. The FCC has repeatedly and conclusively acknowledged
the critical nature of this issue. The Commission has
concluded, however, that existing legislation does not provide
it with the authority to promulgate rules prohibiting exclusive
arrangements involving terrestrially-delivered programming. We
agree. It is now time for Congress to step in and close the
terrestrial loophole and address the expanding issues of fair
access to content created by new technologies and distribution
platforms.
Third, the BSP industry is threatened by other types of
anticompetitive actions by incumbent operators, such as
targeted predatory pricing campaigns and other conduct designed
to prevent entrants from getting a foot-hold in a particular
market.
Predatory pricing strategies are frequently accompanied by
significantly higher prices in surrounding markets that do not
yet have the benefit of facilities-based competition.
Communities in the surrounding areas are, in effect,
subsidizing the economic costs of the predatory pricing
behavior of the incumbent cable provider. The FCC has
recognized public harm inherent in predatory pricing, and has
also disagreed that targeted discounts reflect merely healthy
competition.
In closing, broadband service providers have shown that in
markets they serve consumers enjoy the benefits of lower prices
for broadband services. In order to continue to expand the
availability of competitive broadband services, broadband
service providers need policymakers to recognize that the
market for cable television is not fully competitive and care
must be taken to prevent incumbents from erecting artificial
entry barriers and engaging in predatory pricing behavior.
Moreover, access to content is a threshold issue that needs to
be addressed in the upcoming session.
I again want to thank you for this opportunity to be with
you this morning and look forward to your questions.
[The prepared statement of Mr. Johnson appears as a
submission for the record.]
Chairman DeWine. Mr. Johnson, thank you very much.
Mr. Sachs.
STATEMENT OF ROBERT SACHS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NATIONAL CABLE AND TELECOMMUNICATIONS ASSOCIATION
Mr. Sachs. Mr. Chairman, Senator Kohl, Chairman Hatch and
Senator Leahy, my name is Robert Sachs and I am President and
CEO of the National Cable and Telecommunications Association.
Thank you very much for this opportunity to testify.
In assessing the competitive effect of wireline
overbuilders on incumbent cable operators, it is appropriate at
the outset to establish the context. There are more than 9,000
cable systems serving 33,000 communities in the United States.
And as the FCC has found, virtually all those systems face
vigorous competition from two well-established national DBS
providers.
While fierce competition from DBS is ubiquitous,
competition between wireline video providers is scarce and
often precarious. Only about 400 communities nationwide have
two competing franchised wireline providers. So the real story
of effective competition to cable is about satellite
competition.
The GAO study released yesterday is based on a tiny
percentage of those rare communities where there is a fourth
video provider, in addition to the incumbent cable operator
plus two national satellite providers. GAO examined six
overbuild communities and compared them with six other
communities that had a single cable operator and two satellite
providers.
The half dozen overbuilds GAO looked at exemplify many of
the difficulties faced by overbuilders. According to GAO, and
not surprisingly, all six are currently experiencing some level
of financial problems. In particular, the overbuilders told GAO
that, quote, ``their difficulty in obtaining access to
necessary capital is threatening their ability to construct
their networks and market their services,'' end quote.
The major reason for overbuilders' problems was that they
simply underestimated the extent to which the marketplace they
chose to enter was already fiercely competitive. Simply put,
too much capital was needed to attract too few potential
customers.
Overbuilders assumed that they could easily and profitably
capture customers from incumbent providers with lower prices.
But vigorous competition from DBS had already ensured that
cable operators were providing the services that best met
consumer demand at competitive prices. So overbuilders were
caught in an economic bind. To entice customers away from cable
and DBS, they had to charge lower prices than the incumbents,
but those lower prices proved insufficient to cover costs and
investment risk, and were economically unsustainable.
To supplement GAO's case study, which, as mentioned,
examined six overbuild communities, NCTA retained Kagan World
Media, a leading cable industry analyst, to review all of the
433 communities with identifiable overbuild systems. Kagan
found that most of them do, in fact, display anomalies that
explain why their prices and the prices of competing cable
companies in those communities may, at least temporarily, be
lower than prices in other communities.
As analyzed more fully for NCTA by economist Steven
Wildman, those anomalous characteristics confirm that
overbuilders frequently enter the market with prices that are
artificially low. Incumbent cable operators may have no choice
but to reduce their prices to such levels. But as Professor
Wildman concludes, these lower prices are either not
economically sustainable by the overbuilders or are sustainable
only because of artificial cost advantages.
Indeed, 83, or nearly 20 percent of the overbuilds
identified by Kagan, either have failed and are no longer
operational or are not yet operating to any meaningful extent.
Kagan also found that overbuilders might face significantly
less extensive and costly franchise requirements than those
imposed on incumbent operators. Kagan identified 96 such
overbuild communities.
Additionally, some overbuilders' prices may be artificially
low because the overbuilder is a not-for-profit entity with
access to below-market capital. Kagan identified 31
municipally-owned overbuilds and 10 overbuilds owned by
cooperatives.
The bottom line is that overbuilds are the result of
anomalous circumstances in nearly all cases. Whether or not
overbuilders ever develop sustainable businesses, their
artificially low prices in a tiny number of communities cannot
and should not serve as a benchmark to evaluate competitive
cable prices in 33,000 franchise cable communities. As GAO
states, and I quote, ``Our approach in this report--a case
study analysis--is not generalizable to the universe of cable
systems.''
Mr. Chairman, 21 million DBS customers offer ample evidence
that there is vigorous competition to cable. Cable customers
and all consumers have been the beneficiaries of such
competition. Effective competition does exist, just in a
different form than some had envisioned, and overbuild
competition tells only a very small part of a much larger
competitive story.
Thank you very much. I would appreciate it if my full
remarks, along with Professor Wildman's study and the Kagan
analysis, would be included in the record. Thank you.
Chairman DeWine. They will certainly be made part of the
record.
[The prepared statement of Mr. Sachs appears as a
submission for the record.]
Chairman DeWine. Let me just note for the record that with
regard to the six BSP markets chosen by the GAO to conduct
their study, those six markets represent more than 20 percent
of all the overbuilder markets throughout the country. In
addition, all six overbuilders chosen have been in existence
for more than 1 year. So I believe the study itself provides
useful insights into the broader national market for cable
services.
We do have a vote. As you may have noticed, some of the
other members have left. We are going to go vote. The first
member who will come back, whether it is Senator Kohl or
myself, will then resume the hearing. So you can take a break
for a moment. Whether it is Senator Kohl or myself--if Senator
Kohl gets back first, he will then resume the hearing and we
will start with Ms. Wilson, with her testimony. Thank you.
[The Subcommittee stood in recess from 11:38 a.m. to 11:53
a.m.]
Senator Kohl [presiding.] We will resume right now and I
believe, Ms. Wilson, your testimony is being requested.
STATEMENT OF CORALIE WILSON, PRESIDENT, NATIONAL ASSOCIATION OF
TELECOMMUNICATIONS OFFICERS AND ADVISORS
Ms. Wilson. Chairman Kohl and members of this Subcommittee,
I am Coralie Wilson, president of the board of directors of the
National Association of Telecommunications Officers and
Advisors. NATOA is a national organization that represents the
cable and telecommunications interests of local governments
across the United States. We are grateful for the opportunity
to share our views and suggestions on the important issues
before you today.
The FCC has repeatedly found that head-to-head competition
between terrestrial facilities-based providers of video
programming results in significantly lower rates, more channels
and better service for consumers. The General Accounting Office
recently estimated that the rate differential is approximately
15 percent and more nationwide.
Local governments therefore have a strong interest in
promoting robust cable competition. In the late 1990's,
competition actually began to emerge in many communities across
the United States. Often, however, incumbents sought to thwart
local governments from awarding competitive franchises and we
began to see incumbents engaging in a variety of
anticompetitive practices.
By 2002, the number of overbuilds declined dramatically.
Although the economy was clearly a factor, the feedback that
NATOA was receiving from its members suggested that the
anticompetitive activities of incumbents were also contributing
to this phenomenon. As a result, NATOA commissioned a study of
the kinds of anticompetitive practices that were occurring and
the steps that may be necessary to deal with this problem.
In March 2003, the Baller Herbst Law Group submitted its
extensive report, a copy of which is attached, with privileged
attorney-client material removed. As you will see, it contained
dozens of examples of anticompetitive behavior. The report
cautioned that, given the nature of the data collection
process, some of the information presented might not be
completely accurate or current, and that it has not been
subjected to detailed analysis.
In presenting the report to you, we underscore its
reservations and add a further qualification that the facts and
cases cited are now nearly a year old. The report concluded,
however, that the sheer volume of the information available
indicated that anticompetitive practices by incumbent cable
operators warranted further investigation.
Recent FCC decisions and orders have reflected increasing
concern about anticompetitive practices by the major incumbent
cable operators, but the agency believes that it lacks
statutory authority to do anything about this problem. To this
end, we believe that two statutory changes--you have already
mentioned some of them--while not the entire solution, would be
very helpful.
First, several major incumbent cable operators are
practicing targeted rate discrimination through what they call
win-back programs. A common and critical feature is that the
incumbent does not offer its own subscribers the same special
deals that it offers to subscribers who have transferred or are
threatening to transfer their business to an overbuilder.
It was precisely for this reason that Congress enacted in
1992 a uniform rate requirement in Section 623(d) of the
Communications Act. As Congress stated, the purpose of Section
623(d) was in part to prevent cable operators from dropping the
rates in one portion of a franchise area to undercut a
competitor temporarily.
In the Telecommunications Act of 1996, believing that true
competition in the cable industry was imminent, Congress
subjected the uniform rate requirement to an important
qualification. It would no longer be applicable if there was
effective competition in the relevant market. Because
meaningful competition has not yet evolved and this loophole is
being used to further frustrate competition, it should be
closed, and Congress should therefore delete the effective
competition exception from the uniform rate provision of the
Act.
Second, Section 628 of the Communications Act prohibits
vertically-integrated cable operators and programming vendors
from entering into or renewing exclusive contracts under most
circumstances. Unfortunately, the FCC has repeatedly found that
these provisions apply only to video programming delivered by
satellite and not to programming delivered terrestrially
through fiber optic cable. As the FCC has itself recognized,
this construction of the law adversely affects the ability of
overbuilders to obtain programming, especially regional sports
programming, and it gives incumbents the incentive to shift
programming delivery from satellite to terrestrial.
NATOA recommends that Congress eliminate the terrestrial
delivery loophole. Furthermore, given the efforts of major
cable incumbents to tie up content of all kinds in exclusive
contracts, Congress may also want to extend the ban on
exclusive contracts to include all content.
We appreciate this opportunity to testify and would be glad
to answer any questions or provide any further information that
the Subcommittee or its staff may desire. Thank you.
[The prepared statement of Ms. Wilson appears as a
submission for the record.]
Senator Kohl. Thank you, Ms. Wilson.
Mr. Cleland.
STATEMENT OF SCOTT CLELAND, CHIEF EXECUTIVE OFFICER, PRECURSOR
GROUP
Mr. Cleland. Thank you, Senator. I have the perspective of
investors. We do research for institutional investors and so I
have very much a market orientation type of point of view. I
want to kind of make three points here briefly in my oral
remarks.
One is that this is an artificial market created by the
Government that has actually created many competitive benefits
for consumers. Second, I will make a point that the pay T.V.
market that we see today is going to change dramatically going
forward. It will be very different going forward. It will be
more of a bundled service marketplace. And then, third, I will
make some comments about overbuilders, where they are possible
and where they are not.
Actually, starting now back to my first point about this
being an artificial market, this marketplace wouldn't exist if
the Government hadn't licensed two DBS providers--they actually
licensed four; only two ended up being viable--and creating the
program access. So I am a little surprised that, as critical
people are of the marketplace, 20 million Americans enjoy a
choice. I am one of them. We are no longer captive to a cable
provider. There is competition out there; there is vibrant
competition. Twenty million Americans can attest to that.
There has also been $86 billion invested into a high-speed
network. Cable now has the best high-speed network by far in
the country that is enabling millions of Americans to get high-
speed. They were forced through competition to improve their
customer service. You have much better customer service now
than you ever had because when they didn't take care of their
customers, their customers left. I actually was one of them.
They now have created a digital network, and that allows
them to do video-on-demand. Those are new products and new
services to keep people and to provide value to them. They are
also going to be able to offer cable telephony, and that is my
segue to my second point about how Voice over IP, VoIP, is a
game-changer.
I mean, the marketplace of the last 10 years has been pay
TV, cable versus DBS. Well, what VoIP does is it allows the
cable companies to be a direct competitor to the Bells, and so
the marketplace has changed. It is not going to be pay TV to
pay TV in the next 10 years. It is going to be service bundle
to service bundle.
You don't need to look any farther than to watch what did
the four Bells do very rapidly in 2003. They all made alliances
with DBS in preparation for this. In 2004, we expect that VoIP
will really ramp up. That is where the game is. So once again,
competition and technology are vibrant here. The marketplace is
changing, is responding, and I believe that many consumers are
going to enjoy some price benefits if they avail themselves of
the different competitive bundled choices going forward.
Now, is this going to be a perfect competitive market? No.
I mean, it costs a ton of money in order to be in this
business, and so people shouldn't think that there can be 5, 6,
7, 8, 9 competitors. It is not going to happen here. I know my
clients and investors look at it and say, boy, three, maybe
four.
Now, to my third point, when they look to overbuilders,
overbuilders for a wire is all driven by density. You can
create an overbuilder that could work, but it would to be in
the really dense apartments markets of New York or Chicago,
where you are really selective, where you can really get a real
good bang for your buck when you overbuild.
But as other people have said, investors are not looking to
invest in overbuilders. During the bubble, they got a lot of
capital, and the reason they got a lot of capital is the same
reason that CLECs, the telephone overbuilders, got a lot of
money. At the end of the bubble, investors in the marketplace
had more money than they knew what to do with. They were trying
to put money to work wherever they could. So a lot of these
overbuilder or CLEC models got funded during a period where
money was near free. Money is cheap now, but it is not anywhere
near free, and so there is very little interest from Wall
Street or the investment community to invest a lot of money
into overbuilding.
With that, I see my yellow light. I will quickly summarize.
Thank you, Senator.
[The prepared statement of Mr. Cleland appears as a
submission for the record.]
Senator Kohl. Thank you, Mr. Cleland.
Mr. Cooper.
STATEMENT OF MARK N. COOPER, DIRECTOR OF RESEARCH, CONSUMER
FEDERATION OF AMERICA
Mr. Cooper. Thank you, Senator Kohl. Several Senators
vented on the Super Bowl as a cultural event and I have to take
an opportunity as well. The moveon.com ad that CBS refused to
run had higher production values and a more thoughtful message
than all the commercial crap that they put on the air. This is
censorship that is just as much a threat to the values of our
country as the moral and patriotic issues that Senators Hatch
and Leahy properly raised. I think this needs to be thought
about as well because the choice of who gets to speak goes back
to the media ownership and concentration issue we mentioned
earlier.
But having vented, let me move on to the more mundane
question of price. In its first report on competition in the
video market back in 1994, the FCC found that head-to-head
competition between cable companies lowered prices by 16
percent. Last year, the GAO found that head-to-head competition
between cable companies--that is, intramodal competition
between two guys using the same technology--lowered prices by
15 percent. Several times in the decade, the same result was
obtained. So over the course of a decade, while satellite was
taking its 20 million customers, nothing diminished the ability
of cable head-to-head competition to lower price.
Satellite doesn't lower price, for the reasons you have
heard. It is not really head-to-head in lots of markets. It is
an upscale niche, high-quality, high-content package that
really doesn't address what we call the lunch bucket cable
crowd. The econometric analyses of the FCC and the GAO have
repeatedly found that satellite does not discipline cable
prices. The simply, common-sense observation over the decade is
correct.
So if only head-to-head competition matters, intramodal
competition, then that is what we have to look to for the
standard. And the excuses we heard about don't count these,
don't count those, don't count the other ones, do not diminish
the fact that over the past 8 years, since the passage of the
Telecom Act, if that 15 or 20 percent is right, that sums to
$30 billion of abuse of the American consumer by the cable
operators.
In addition, what the cable operators did not mention about
why it is so difficult--the one answer they did not look for
about how difficult it is for overbuilders is the
anticompetitive tactics that they use against overbuilders--the
withholding of programming, the exclusives, the playing around
in the regulatory process of the approvals. They don't sit idly
by while the overbuilders try to get approvals. So they have
created their own market power.
The other key lever that the cable operators use against
consumers is to bundle all of their programming into larger and
larger packages. They give consumers virtually no choice.
Actually, you get three choices--nothing, almost nothing and
almost everything. The ``almost everything''--the expanded tier
gets bigger and bigger. Lately, they have added the digital
tier and, of course, they have moved popular programming into
that tier, which causes people to pay more money to get the
same set of shows.
So what the cable operators never give the consumer is real
choice, the option to choose which shows they would want to
watch. They have got to buy that whole bundle in order to see
any. Ironically, if you gave consumers a la carte choice, you
would not only give them the ability to protect their
pocketbooks, but you would solve Senator Hatch's problem as
well because they would be able to defend and protect their
moral values. They would not choose to pay for, and therefore
not have in their homes, the shows that offend their moral
values. That sort of consumer sovereignty is critical to
advancing the welfare of the public with this industry, both
for its cultural values and for its pocketbook.
Congress created this problem by deregulating cable before
there was competition, in the hope there would be competition.
Overbuilders have been stymied, telephone companies have not
entered the market, and the track record on satellite is clear.
It won't give us the consumer protection we need.
If you believe the cable operators' message that
overbuilding is not economically viable, then you better re-
regulate fast because there is nothing to prevent the ongoing
abuse of the public in the intermodal competition that they
wave before you today. And it is going to get worse because the
cable bundle is the dominant bundle, so their market power will
become greater and greater.
Thank you, Senator.
[The prepared statement of Mr. Cooper appears as a
submission for the record.]
Senator Kohl. Thank you very much, Mr. Cooper.
My first question is for Mr. Sachs and Mr. Cooper. As noted
now at several points in this hearing, year after year
consumers have endured rising cable rates. Just two weeks ago,
the FCC reported that cable rates had increased more than 53
percent over the last 10 years and by more than 5 percent in
the last year, very much in excess of the rate of inflation.
We know that the cable industry blames much of the increase
in prices on the cost of programming. GAO has noted that a
substantial portion of these programming costs are recouped by
cable operators by increasing advertising revenues.
So, Mr. Sachs, and then Mr. Cooper, don't these constant
price increases really demonstrate the absence of competition
in the cable marketplace?
Mr. Sachs. Respectfully, Senator Kohl, I disagree with that
conclusion. As GAO noted in its October 2003 report, while
cable programming represented the most significant increase in
operating expense, there were significant increases as well in
personnel, which is the second largest category. This is an
industry that, as Mr. Willner pointed out, has invested $85
billion since passage of the 1996 Telecommunications Act in
infrastructure to provide consumers with new services like
high-speed broadband and high-definition television. But for
the cable industry's investment, we would not have the
broadband deployment that we see today.
To put cable prices in context, if you look at the CPI-U
numbers from the Bureau of Labor Statistics, which I believe
was 55 percent from the period December 1993 through June 2003,
education costs in this country went up 62 percent, college
tuition and fees 60 percent, financial services 56 percent,
cable television 55, admissions 55.
Let me focus on admissions, and I will submit an entire
list for the record. Admissions includes ticket costs for
movies, concerts, theater and sporting events. Cable in its
purest form is an entertainment medium, and we have seen across
entertainment alternatives that prices increase more rapidly
than inflation because the inputs for creating programs
increase--especially the inputs for sports salaries.
Do we think that consumers are getting good value for their
money? Absolutely. For $40 a month, the average cost of a cable
bill for basic cable and expanded cable, it is impossible to
take a family of four to a movie for a single evening in the
course of a month, whereas cable is something that people can
enjoy for the full month for $40 a month. Now, people elect to
pay more for premium services, for new digital services, for
high-speed Internet, and now for telephony in an increasing
number of communities. But those are all options that consumers
have.
Finally, I believe we have a fundamental disagreement with
Dr. Cooper about satellite competition. The fact that we have
seen 21 million American consumers elect to subscribe to a DBS
competitor offers ample evidence that consumers do have choices
and are making those choices.
Thank you.
Senator Kohl. Dr. Cooper.
Mr. Cooper. Senator Kohl, if you look at the operating
income of the cable companies, which is the cash available for
profits and other kinds of things, it essentially doubled since
the passage of the Telecom Act on a per-subscriber basis.
If you look at the question of the costs--and we tried to
do that in the paper we released on Monday--traditional video
services--that is, basic and expanded basic--were not driving
the cost of the upgrade. The upgrade was built to deliver
digital services, and lo and behold digital tiers and high-
speed Internet have now become the number two and number three
income streams of the cable operators. The digital upgrade is
paying for itself and that was the intent of developing that
plan.
So if you back out the reasonable projection of the
operating costs of traditional video services, the income has
been growing almost double over that period. And that takes
into account programming costs, all the non-operating costs. So
you have got a throw-off of cash here available for other uses.
So with respect to satellite, the 21 million, you have to
back out a significant number of satellite subscribers who
don't reside in places where they have cable, and that is where
satellite started. But the simple fact of the matter is the GAO
looked at it and they could barely find the merest price effect
of satellite. So satellite basically appeals to a different
market than does the basic lunch bucket cable opportunity that
we have.
The market share at the point of sale in every American
market roughly today is about an 80-percent market share. That
is a number that under traditional antitrust practice clearly
rises to a level at which monopoly abuse can be alleged. If a
company has less than 60, the courts won't listen to it. Once
you get to 65 or 70, you can allege monopoly abuse.
Let me make one simple point. In the recent Microsoft case,
Microsoft asserted the same thing, that you could find about 20
percent of the people who didn't use a Microsoft operating
system. Therefore, they concluded since people have choices,
ignore my market share. Of course, on a 7-0 vote of the D.C.
Circuit, they rejected that defense against the fundamental
question of whether market power exists.
Thank you.
Senator Kohl. Mr. Cleland.
Mr. Cleland. Yes. With all due respect to Mark, I have to
kick in here because it is a little bit of a retrograde kind of
regulatory view on cable. Ten years ago, in 1992, all of those
statements were dead-on, but over the last 12 years the world
has changed dramatically.
Twenty-one million Americans have chosen DBS. The cable
industry has gotten some sense into it and started treating its
consumers well so they wouldn't leave. It spent $86 billion or
so to completely reinvest so that it could compete. It is now
able to offer telephony, so it is competing against the local
monopoly. It competes against Blockbuster with video-on-demand.
So competition is so much more than price. There are the
benefits of competition, which means choice, innovation, new
products, new services. So I am a little bit stunned to think
that all is horrible in this market. It is never going to be
perfect. It is never going to be perfectly competitive because
it is an artificial market, but the strides that have occurred
because of originally the 1992 Cable Act and then the 1996
Telecom Act and the program access rules have made dramatic
gains for consumers.
Mr. Cooper. Scott, let's give consumers choice a la carte.
That is real choice. That let's me vote with my pocketbook both
for moral values and price values. Give me choice.
Mr. Cleland. I don't believe that every product in the
country is always served--
Mr. Cooper. But give me choice here. Instead of a $40
bundle, give me a series of choices, real choice so I can tell
you what I really want to pay for. A study recently done--we
mentioned it in our document--looked at ESPN, which is the most
expensive one, and 80 percent of the people said they would not
pay the price that ESPN is charging. Give me real choice, not
three choices. Give me real choice, and that will discipline
the heck out of this industry.
Senator Kohl. Ms. Wilson.
Ms. Wilson. First, I have to say I am not speaking as an
attorney, a financial analyst, or an economist. But I am
speaking as a regulator on the front lines in a normal
community.
It seems to me that one of the first tests of effective
competition, not competition alone, but effective competition
is the impact on rates. So while I can acknowledge that DBS
apparently does provide some competition, if the rates are not
affected, if customer service isn't markedly better, then I
would say that there is not effective competition, and
certainly not the kind of competition that is going to impact
what is most on the minds of a lot of my residents these days,
which is price.
Every time the rate goes up, I get phone calls from a lot
of people on fixed incomes, many of whom frankly do not have an
option of direct broadcast satellite because of their financial
circumstances, their living circumstances or their technical
aptitude. So satellite is simply not an option for them.
As has been pointed out, they get a lot of services on
expanded basic that they really don't want. They wouldn't buy
them if they weren't forced to take them. So I think there are
a number of issues here, but from my perspective and the
perspective of the people who are cable customers, I will tell
you that they do not believe that there is effective
competition in the marketplace when they only have a choice
between cable and DBS.
Senator Kohl. One other question before I turn it back to
Senator DeWine. This is for Mr. Sachs and Mr. Willner. For
years, we have heard allegations from competitors of predatory
conduct engaged in by cable incumbents against new competitors.
These allegations include stories of cable incumbents, when
faced with a new competitor entering their market, offering
subscribers extraordinary discounts off their normal prices,
prices which appear to be below the cost of acquiring the
programming. These discounts demonstrably are not being offered
in neighboring communities where the incumbent does not face
competition. So they clearly are a competitive action intended
to drive out cable competitors.
Now, Mr. Willner and Mr. Sachs, are you denying these
allegations? Are you saying they never occur or are you saying
this is the normal course of business? I will ask you, Mr.
Willner, first because you have some experience with this.
Mr. Willner. I do, and I thank you for that. Senator, we do
have two communities where we have wireline overbuilds. And as
I said in my oral statement, we think about competition in
every market that we serve. We do have win-back programs. We
have win-back programs against wireline competitors, we have
win-back programs against satellite competitors.
When DISH Network comes out with an offer, we respond to
that offer. When DirecTV comes out with an offer, we respond to
that offer. When we come out with an offer, they respond. And
it is the same thing with the wireline overbuilders; there is
no difference between having two competitors rather than three.
I can use the example in Columbus, Ohio, where only 70
percent of our system is, in fact, overbuilt by a wireline
competitor. In the areas where we have comparable service, the
rates are exactly the same, whether they have an overbuild
competitor or not in that market. The reason for that is
because, quite to the contrary of what Dr. Cooper said, the
satellite industry has, in fact, changed dramatically over the
last few years. They are, in fact, winning the lunch bucket
crew over to their services with their America's top 50 and top
100, and now it is top 120, with deeply discounted rates. And I
will tell you that those competitive forces are in place in
every community that we serve, not just where there is an
overbuild.
Senator Kohl. Mr. Sachs.
Mr. Sachs. Senator Kohl, if competitors have a grievance of
this nature, they do have the ability to take that complaint to
the FCC, where it can be adjudicated. I am aware that just
recently there was a case presented to the Commission which,
after investigating all the facts, found that the win-back
program was not inappropriate and was not in violation of the
uniform pricing rules.
Cable operators everyday are competing against satellite
providers who are offering very deep discounts, 3 months free
service, three rooms installed for free, and introductory rates
that may be one-half or a third of the normal rate for an
extended period of time. That is not being offered to all
existing customers. It is being offered in an effort to win
customers from the cable operators.
So without the benefit of the specific allegations and the
specific facts in a case, it is really difficult to respond
generally. But what I would say is that it is a fiercely
competitive environment out there. I am unaware of cases where
cable pricing practices have been found to be predatory.
Ms. Wilson referred to a study that they are submitting
today. We will obviously take a look at that study, but as I
understand it, it consists of allegations and facts that were
current as of a year ago. So it is difficult to respond more
specifically without specific case examples.
Senator Kohl. Mr. Johnson, what has been your experience?
Mr. Johnson. Quite the contrary to what these gentlemen
would say. We actually see markets--and we are the traditional
overbuilder--where promotions are offered at costs that are
less than the cost of programming that extend for in excess of
a 12-month period. That is not a short-term promotion and it is
significant for us as entrants into the marketplace, the degree
of difficulty competing with price points that are that low. As
a matter of fact, we have evidence in certain of our markets
where people can buy expanded basic cable service for as long
as $5 a month--very, very, very low.
I think if you look at the record, the statistics speak for
themselves. The pricing advantage is in markets where there are
overbuilders. I mean, that is where the discount actually
occurs.
One of the statements was made earlier in the testimony
about overbuilders coming in and pricing their product at a
lower price, an arbitrarily lower price that was not a
sustainable price. In fact, the reason that many of the
overbuilders or broadband service providers have been able to
price at that level is because they delivered earlier in the
marketplace a full bundle of all three service offerings--
telephone, video services and high-speed Internet services.
It stands to reason that when you are generating three
revenue streams off a single pipe into a residence, you can
discount all three services because it is germane. You have got
the same infrastructure in place. You have got one technician
to take care of all three products. So that is where the big
benefit of another wireline competitor evolves.
Ms. Wilson. Senator Kohl, we have given to the Subcommittee
staff an example of what we believe to be predatory pricing. It
certainly looks like predatory pricing to us. It is an offer
that MediaCom made to subscribers in Laurens, Iowa--Free
Family, which is their concept for expanded basic or digital
cable, for 2 months, and half price for the next 10 months and
free installation.
The normal price for this service, family cable, is $23.25
per month. Now, if you do the math, as we have done, the
effective price of this promotion takes the monthly rate down
to $9.69 per month for that year. That is certainly less than
what we believe the company is paying for programming. We
estimate that their programming costs alone for these
particular channels are a little over $14 per month. So that is
not taking into consideration any of their ongoing operating
costs, debt service, any of that kind of thing.
Again, I know that there are legal ways of looking at these
kinds of things, but the fact of the matter is this was an
offer that was only offered in Laurens, Iowa. It was not
offered in surrounding communities. We also gave to the staff a
transcript of a city council meeting with a representative from
MediaCom when they asked why they were not getting the $9.69
rate or the special offer.
They suggested--and I think it may be true--that if you
have got a larger company, a nationwide company with a lot of
systems, they can afford to do these kinds of things that a
smaller overbuilder will not be able to do. They can afford to
offer these kinds of low rates for a year at a time and a
competitive broadband or wireline overbuilder is not going to
be able to sustain that.
Senator Kohl. Dr. Cooper.
Mr. Cooper. Senator Kohl, let me offer another example of
predatory pricing used in an anticompetitive practice against
satellite. If you call Comcast today and say I want cable modem
service only, they will say you have to pay them $60 a month.
If you say you will also take basic cable with the bundle, the
price goes down to $45. In other words, there is a negative
price on basic service of $15. Now, I understand that
economists will argue about what the floor is under a predatory
price, but a minus 15 is pretty tough to justify.
When they rolled that price difference out, people started
calling and they said, this is nuts, I have satellite, I don't
want basic cable and they are just ripping me off; they are
trying to force me to take basic cable so that I can get that
$15 discount off of my cable modem service. It was intended as
a satellite killer. We have asked the Federal Trade Commission
to look into it.
When Mr. Sachs says, well, we haven't been found guilty in
a court, that may be one of the reason why the overbuilders
can't get going because you have got to do a 10-year antitrust
action before the markets will start to put up the money and
believe you have a fair competitive landscape.
Senator Kohl. Mr. Cleland.
Mr. Cleland. It seems like people are trying to have it
both ways. In this instance, consumers are getting a lower
price. Now, I do believe you can have predatory pricing for
some of these overbuilders in one city. There may be a problem
there with predatory practices because you are maybe using
pricing in order to try and put that company out of business.
But don't cry for DirecTV or DISH about predatory DBS
pricing. They are 10 million subscribers. They can hold their
own. They are doing just fine in the stock market. And if
anybody wants to offer me one of those so-called predatory
prices to go after DirecTV, I would be delighted to get it.
That is the price competition and the price decrease that you
want, so I am kind of lost here.
Mr. Cooper. You may actually suffer from the short-term
problem that Wall Street has inflicted us all with because
predatory pricing is, in fact, a long-term strategy.
Ms. Wilson. If I may, I might also add that Mr. Sachs
referred to an FCC ruling recently on a case before it. The
fact is that the FCC did not find that the win-back pricing was
okay under the uniform pricing rule. They didn't rule on the
underlying conduct. They said they couldn't deal with those
issues.
Again, that is why we are recommending that there be a
statutory change that allows the FCC to, in fact, deal with
predatory pricing. The reality is that, again, if a broadband
provider cannot sustain or cannot survive predatory pricing for
a year at a time, they are not going to be able to afford to go
to court and bring an antitrust action against a cable company
and bear that financial burden. It takes too much time and it
takes too much money.
Senator Kohl. One more comment and then we will turn it
back to Senator DeWine.
Mr. Johnson, do you want to say something?
Mr. Johnson. Sure. Mr. Cleland just made a comment that
there may in a single market be the opportunity for predatory
pricing. I think that is what we are finding out in the
competitive marketplace. I just pulled some pricing structures
and I am going to use Montgomery, Alabama, as one of our
marketplaces that we operate where there is a competitive
overbuilder.
At the end of last year, we priced $27.95 for our bundled
product. That was the equivalent price point for cable. If I
look at surrounding markets, Dothan, Alabama, $32.95: Selma,
Alabama, $36; Birmingham, $39.54, and up. What that is saying
is in the market where there is competition, there is viable
price benefit to the subscriber, but it doesn't translate to
those other markets that are, in fact, subsidizing the
opportunity to deliver discounted pricing by the incumbent in
those markets.
Senator Kohl. Mr. Willner, you wanted to say something.
Mr. Willner. Well, I would like to just point out that we
have 1.4 million subscribers. Each of the DBS companies has
somewhere close to 10 or 11 million. They are larger than every
cable company, except for two. You know, when we go in and open
up newspapers with full-page ads about free installation, free
service for 3 months, and service for three TVs in the house,
we know that they are pricing below their cost and we have to
respond to that.
Now, I don't know if that is really predatory pricing or
not, but a lot of times, for a lot of cable companies, they are
competing against much bigger satellite companies. This whole
debate as to whether or not there is predatory pricing or true
competition doesn't make a lot of sense to me in the everyday
marketplace, where we are responding to these types of
marketing tactics all the time.
Senator Kohl. I thank you, and I will turn it back to Mr.
DeWine with the expression of appreciation that no one has
commented on the cost of sports programming having gone up so
much.
Mr. Willner. Would you like me to?
Senator Kohl. You are very kind.
Chairman DeWine. I was going to ask about that.
Mr. Johnson. I think we can be unified in our position
there.
Chairman DeWine. Mr. Sachs, you haven't said anything about
this. Do you want to respond to any of this?
Mr. Sachs. Sure, I would be happy to. On the subject of
overbuilds, my home is in Boston, which is one of the
communities in the paired studies used by GAO, and I think it
is a good one to use as an example here. This is a market which
RCN entered in 1997. RCN is the largest alternative broadband
provider, the largest overbuilder. Today, they have
approximately 450,000 customers. They entered that market in
1997 with an expanded basic package which was below $20. The
price today is about twice that.
In the GAO study, there was one very large overbuild that
was noted. I believe that was probably Boston, where the prices
with a comparative city were actually higher in the city with
the overbuild than the city without the overbuild.
The point I want to make here is that cable franchises are
awarded for 15 years with successive renewal periods of another
10 years, typically. You have to take a long-term view of
prices to see whether they are sustainable.
RCN came into Boston with a lot of bravado six or 7 years
ago. Three years ago, their stock was trading at $72 a share.
At the end of December, it closed at $0.68 a share. The point
of our testimony is that, yes, you can find examples where
prices are lower, where there is overbuild competition. But you
really have to look over a long continuum of time and ask
yourselves ``is this sustainable competition?'' In some places
it may be, but generally it has not been.
But that does not diminish the fact that cable customers
can choose from two satellite providers. In 1992, Congress said
that if there is an alternative taken by more than 15 percent
of the people in a community, there is deemed to be effective
competition. Today, in 40 States, satellite competition exceeds
15 percent.
Chairman DeWine. Let me just say that Ms. Wilson mentioned
in her testimony that she was submitting a report which was
drafted by outside consultants which described alleged
anticompetitive behavior by incumbent cable companies. She also
noted that the information had not yet been subjected to a
detailed analysis, nor had those mentioned in the report had a
chance to respond to the allegations.
Accordingly, the Subcommittee is going to accept that
report with those reservations noted for the record. In
addition, the hearing record will remain open long enough for
any interested parties to examine the report and respond. We
will enter those responses in the record. So if anyone would
like to do that, they will certainly have the opportunity to do
that.
Mr. Johnson, let me direct this question to you, and also
to Ms. Wilson. According to the cable industry, you and your
fellow overbuilders are right on the verge of going out of
business. Let me ask you, what is your financial state and is
the overbuilder business model even a viable one today? If it
is viable, why are you having so much trouble convincing the
capital markets?
Mr. Johnson. Well, actually--and I appreciate that
question--from an economic viability standpoint, we feel very
comfortable with where we are. Knology completed a successful
initial public offering in December of 2003. At the current
time, our stock is trading at a level higher than the offering
price. It is rated by at least three analysts that I am aware
of right now as a ``buy.''
It is worth noting also that we accomplished the first
media/telecom IPO in approximately 3 1/2 years. The company has
also recently been presented with the opportunity to refinance
its existing debt at very much more attractive rates than we
have right now, if we choose to do so.
We operated in a positive free cash flow position in the
third and fourth quarters of last year. What that means is
fundamentally we have reached a stage of maturity--and
everybody has talked about the heavy front-end capital
investment, but we have reached a state of maturity where more
cash is coming in than cash is going out, a very, very healthy
position to be in.
I am also aware of other BSPs that have continued to raise
capital. As a matter of fact, from Knology's standpoint, over
these 3 years of very difficult economic times, we were able to
raise over $300 million in equity to continue to get our
business to the point where we are right now.
I am also aware that other BSPs have continued to raise
capital and to expand their business. At least one other BSP
that I have got public information on announced the successful
completion of a private equity funding round in the past 90
days. And just as Knology announced a major acquisition, this
firm also announced a major acquisition.
So when I hear some of the comments about economic
viability, I think it is a little bit like whistling past the
graveyard. We have been hearing this refrain. I have been
around Knology 5 years. I heard that the day I arrived there. I
think the incumbents have said that. They have tried to
convince the financial markets, and they have also now tried to
convince you. But quite frankly, we find that the companies
that are well-managed companies are able to get capital.
Chairman DeWine. Ms. Wilson.
Ms. Wilson. Well, I am not a broadband service provider, so
I can't speak to their business model or their financial
situation. But I do know that in 1992, or after 1992, with the
program access rules in place, there was a substantial amount
of overbuilder activity, and by the end of that decade we were
really starting to see some serious efforts.
Where I live in Minnesota now, we saw two companies, Wide
Open West and Everest, approaching us. And we had some concerns
whether the market could support three wireline providers, as
well as satellite, but we felt that it was not our
responsibility to choose winners and losers. So, you know, come
on in and do your best.
But in 1996, when that terrestrial loophole and the access
to programming--I mean, early on we did see a lot of complaints
that the overbuilders simply could not get access to
programming. That stopped when Congress said you can't do that
anymore. The terrestrial loophole, especially for regional
sports programming, is a problem, and I think certainly the
predatory pricing.
I think we have to be clear when we are talking about
predatory pricing. We are not talking about temporarily
lowering the price or special offers here and there. We are
talking about a long-term concerted effort to price the product
below cost for an extended period of time.
Chairman DeWine. Very quickly, Mr. Sachs.
Mr. Sachs. Yes. Ms. Wilson referred to the so-called
terrestrial loophole.
Chairman DeWine. Well, that was my next question. I want to
get into that. You can jump right in, but I also want to ask
Mr. Johnson about that.
Mr. Sachs. If I could make one other brief comment?
Chairman DeWine. Sure.
Mr. Sachs. I congratulate Mr. Johnson on his recent
successful public offering. But one fact he omitted was that
his company in 2002 filed for bankruptcy and emerged from
bankruptcy only after having shed $250 million in debt and
rearranged its balance sheet.
So I think if you are going to ask ``is this economically
viable?'' The answer is yes, if you are able to rearrange your
financing through bankruptcy, it may be. And if you are able to
use the proceeds from a public offering to purchase assets of
another overbuilder for a fraction of their original cost, the
economics of the business look a lot better.
Ms. Wilson. Senator DeWine, may I just make a brief
comment?
Chairman DeWine. Briefly, Ms. Wilson, and then briefly, Mr.
Johnson.
Ms. Wilson. I would say that if, in fact, we are not going
to get effective competition--and by effective competition I
mean competition that is going to affect rates--then the only
option that we have is to go to a more regulatory environment
in order to force that kind of rate behavior, that discipline
on the rates.
I don't think any of us wants to do that. But, again, if
you are going to get not just competition, but effective
competition, you either have to get more entrants into the
marketplace to bring that discipline to all of the participants
or you have to take a regulatory approach.
Chairman DeWine. Mr. Johnson.
Mr. Johnson. Senator DeWine, I would like to make two
comments. First, I cannot not address the bankruptcy question
that Mr. Sachs talked about, and then I will comment on your
terrestrial question to me.
First, relevant to the bankruptcy--
Chairman DeWine. Let me ask it first, though, will you?
Mr. Johnson. Excuse me?
Chairman DeWine. Let me ask the question first.
Mr. Johnson. Okay, I am sorry. Can I speak to the
bankruptcy first?
Chairman DeWine. Yes, sir.
Mr. Johnson. First, we saw an opportunity at the end of
2001 to restructure our debt on very, very favorable terms. Our
business model was in great shape. We actually had no debt
payments due for at least 18 months. We had the foresight,
recognizing that the bond markets were very, very soft at that
time, to be able to start buying our bonds back.
We went to our bond-holders and found 93 percent of our
bond-holders who said this is a great time for you guys to do
this; we support you entirely. We could not find 7 percent of
those bond-holders, and rather than end up with a capital
structure that had two diverse sets of bond-holders with two
different sets of covenants and restrictions, we asked our
lawyers was there a way to get a consolidated capital
structure.
They suggested this pre-packaged bankruptcy that had the
full support of 93 percent of our bond-holders that we could
locate. We completed this administrative transaction. There
were no service interruptions, no employee layoffs or lost
customers, and all vendors continued to be paid in full. So it
was not an escape from any debt obligations.
As a matter of fact, the Wharton Business School actually
developed a business case and taught it this spring,
highlighting Knology's restructuring as a premier example of
the use of bankruptcy as an administrative tool to affect and
improve capital structure.
Chairman DeWine. We appreciate that explanation, Mr.
Johnson.
Let me turn to the terrestrial loophole. Senator Kohl and I
have stated we plan to draw up legislation addressing this
loophole. In your experience, how often has the loophole been
utilized to prevent an overbuilder from obtaining content, and
how much of a factor is it in negotiations between the owners
of content and other distributors?
Mr. Johnson. It is used in a number of the markets that the
broadband service providers serve. As a matter of fact, in our
extended comments that we filed for this session we have a
listing of a number of cases in terms of regional sports
programming and regional news programming.
In the market that we just recently acquired, in Clearwater
and St. Petersburg, Florida, there is a local news programming
station down there that is owned by the incumbent that is
considered to be very, very viable. We would like to have
access to that, which we don't have at this particular point in
time. So we see it a good bit in the marketplace.
Chairman DeWine. Very quickly, Mr. Willner.
Mr. Willner. I would just like to talk about the test of
unintended consequences. That kind of a news channel, which is
a money-losing proposition for an incumbent to create--and they
are probably still not making any money--would never have been
created in the first place if they had to, under a law or a
regulation, sell it to their competitor. It is one of the tools
that people use to compete in the marketplace.
Chairman DeWine. Anybody else? Mr. Sachs.
Mr. Sachs. If I could add a word on that subject, when
Congress created the program access rules in 1992, it expressly
provided that if programming were being distributed
terrestrially, it would not be covered by those rules. And as
Mr. Willner just mentioned, that was to provide an incentive
for companies to create new local and regional programming.
Since that time, we have seen in more than 30 markets cable
operators invest to create 24-hour news channels like New York
One or New England Cable News, and the public has benefitted
from this. Virtually every nationally distributed network is
available to cable overbuilders and satellite. Local
programming is a small area where a company is able to
differentiate its product from a competitor and create a
service that is of benefit to that community. So, again, I
agree with Mr. Willner about the law of unintended
consequences.
Chairman DeWine. Mr. Cleland, as you have testified, phone
companies are now linking up with satellite providers to
provide bundled services, specifically SBC with EchoStar, Qwest
Communications with both EchoStar and DirecTV, Bell South with
DirecTV, Verizon with DirecTV. Is this enough competition for
the consumer, and will anyone else be able to provide bundled
services or are consumers going to be faced with a duopoly?
Mr. Cleland. Well, it is going to be more of two big
providers offering the bundle. I know in my personal case I was
upset with my cable company and I walked. I was one of the
early DBS people. But right now, I couldn't get DSL from
Verizon and so I got a cable modem and now I am entertaining
going back to cable for the bundle savings that you get. So
there is a benefit.
What it will create is a lot of different types of bundles
and different prices. People have mentioned that DBS is
competing at the low end. I imagine that the Bells and DBS will
be much more aggressive at the low end, will offer much more
aggressive pricing there. And I envision the cable companies
are going to try and hold on to their high-value-add customers.
So I think that one of the aspects of bundled competition
is probably going to result in a bifurcation of the market
where they start to choose sides in where they are going to go.
The reason for that is that the cable companies have a vastly
superior pipe and offering. So they are going to be able to
offer the high-value-added services that the high end wants,
and they are going to be able to command the price for it. DBS
and the Bells, in order to get the scale that they need and
have the customers they need, are going to have to compete more
on price.
Chairman DeWine. Mr. Cooper, go ahead.
Mr. Cooper. Senator DeWine, Scott has just described a
duopoly between two badly matched competitors. Two is not
enough, four is not enough for real competition. But he has
described the problem that satellite faces. They couldn't
deliver a high-speed Internet and so they have signed deals
with the cable operators, so it is not an integrated plan. So
the economies of scope that the BSP gets they don't get. They
are at a disadvantage. DSL is an inferior service. Even at the
discounted rates, on a megabit basis it costs two to three
times as much as cable services.
So what we have here, then, is a future which looks like
competition between two badly matched, partial competitors, one
a high-end product, one a low-end product. And that is not
going to get us effective competition that protects the
consumer.
Mr. Cleland. Could I follow up on that?
Chairman DeWine. Sure, Mr. Cleland.
Mr. Cleland. Many people talk about effective competition,
which is a euphemism for more competition than they have now so
that I have lower prices. Generally, to go in that direction,
you are going to have to get more intrusive on a regulatory
basis.
We see in the marketplace the Bells are hyper-regulated
now. We regulate them more than we regulate toxic waste in this
country, and their stock values and their business prospects
reflect that. Cable has a lighter regulatory hand, and they
then have the opportunity. Investors are willing to put their
money at risk to invest in new products, invest in new
technologies, invest in new plant, so that consumers can get
the benefit of new services. So it isn't an either/or or a
black-or-white.
By no means am I saying there is going to be perfect
competition for everybody. But from my standpoint, which is
admittedly an investor and market standpoint, you want to have
a light touch in the Government. If you have a heavy hand, you
are going to squash more than you would otherwise.
Chairman DeWine. I want to thank you all very much. We have
had a very vigorous conversation today. I think it has been
very helpful. We had good opening statements, but I think, as
usual, we get most of our information from exchanges from you
all back and forth between you. And none of you are very shy or
retiring, so that was very helpful.
This Subcommittee will continue to exercise oversight over
this very interesting industry and we will continue to hold
hearings in this area. So I thank you all very much.
[Whereupon, at 12:51 p.m., the Subcommittee was adjourned.]
[Additional material is being retained in the Committee's
files.]
[Submissions for the record follow.]
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