[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
                                 ------                                

   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

                              ----------                              

                    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?

                              ----------                              


                      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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