[Senate Hearing 109-333]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-333
 
   VIDEO COMPETITION IN 2005: MORE CONSOLIDATION, OR NEW CHOICES FOR 
                               CONSUMERS?

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 19, 2005

                               __________

                          Serial No. J-109-43

                               __________

         Printed for the use of the Committee on the Judiciary




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                       COMMITTEE ON THE JUDICIARY

                 ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            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
JOHN CORNYN, Texas                   CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas                RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
           Michael O'Neill, 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
ARLEN SPECTER, Pennsylvania          HERBERT KOHL, Wisconsin
ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            JOSEPH R. BIDEN, Jr., Delaware
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas                CHARLES E. SCHUMER, New York
        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
    prepared statement...........................................    76
Feingold, Hon. Russell D., a U.S. Senator from the State of 
  Wisconsin, prepared statement..................................    78
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...     3
    prepared statement...........................................    85
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................    87

                               WITNESSES

Aquino, Peter D., President and Chief Executive Officer, RCN 
  Corporation, Herndon, Virginia.................................    11
Britt, Glenn A., Chairman and Chief Executive Officer, Time 
  Warner Cable, Stamford, Connecticut............................     5
Cleland, Scott, Founder and Chief Executive Officer, Precursor, 
  Washington, D.C................................................    12
Cooper, Mark, Director of Research, Consumer Federation of 
  America, Washington, D.C.......................................    14
Gorshein, Doron, Chief Executive Officer, The America Channel, 
  LLC, Heathrow, Florida.........................................     9
McCormick, Walter B., Jr., President and Chief Executive Officer, 
  United States Telecom Association, Washington, D.C.............     8
McSlarrow, Kyle, President and Chief Executive Officer, National 
  Cable & Telecommunications Association, Washington, D.C........     6

                       SUBMISSIONS FOR THE RECORD

Aquino, Peter D., President and Chief Executive Officer, RCN 
  Corporation, Herndon, Virginia, prepared statement.............    32
Britt, Glenn A., Chairman and Chief Executive Officer, Time 
  Warner Cable, Stamford, Connecticut, prepared statement........    49
Cleland, Scott, Founder and Chief Executive Officer, Precursor, 
  Washington, D.C., prepared statement...........................    60
Cooper, Mark, Director of Research, Consumer Federation of 
  America, Washington, D.C., prepared statement..................    72
Gorshein, Doron, Chief Executive Officer, The America Channel, 
  LLC, Heathrow, Florida, prepared statement.....................    80
McCormick, Walter B., Jr., President and Chief Executive Officer, 
  United States Telecom Association, Washington, D.C., prepared 
  statement......................................................    90
McSlarrow, Kyle, President and Chief Executive Officer, National 
  Cable & Telecommunications Association, Washington, D.C., 
  prepared statement.............................................    96

 
   VIDEO COMPETITION IN 2005: MORE CONSOLIDATION, OR NEW CHOICES FOR 
                               CONSUMERS?

                              ----------                              


                      WEDNESDAY, OCTOBER 19, 2005

                              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 2:04 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine, 
Chairman of the Subcommittee, presiding.
    Present: Senators DeWine, Hatch, and Kohl.

OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE 
                         STATE OF OHIO

    Chairman DeWine. Well, good afternoon. We welcome all of 
you to the Antitrust Subcommittee's hearing entitled ``Video 
Competition in 2005--More Consolidation, or New Choices for 
Consumers?'' Today we will examine two important current 
issues: first, the purchase of Adelphia by Comcast and Time 
Warner Cable; and second, entry into the video marketplace by 
the Bell companies.
    These two events push the industry in different directions. 
There is a consolidation with the loss of Adelphia, with an 
increase in choices for consumers as overbuilders, Internet 
companies and the telephone companies roll out video services. 
These differing market dynamics are representative of the 
tremendous changes occurring more generally in the entire 
telecommunications and video marketplace, and these changes 
have broad, competitive implications which must be explored.
    Individually, each event is worth some attention, and 
accordingly, we will, of course, examine them today. To begin, 
Comcast and Time Warner Cable proposed to divide up Adelphia's 
cable operations in various markets around the country. This 
will make the two largest cable operators in the United States 
even larger. Many have concerns about this small but 
potentially significant increase in concentration.
    For example, what effect, if any, will this change have on 
the availability of independent programmers to break into the 
marketplace? Will the deal give Time Warner and Comcast a 
greater ability to strike exclusive deals with other 
programmers, or greater incentive to utilize the so-called 
``terrestrial exemption'' to prevent competitors from gaining 
access to their programming. These are issues which we intend 
to explore this afternoon.
    While the Adelphia deal gives us some cause for inquiry, 
there is certainly a significant counterbalance to the 
questions it raises. As part of this deal, Comcast is giving up 
its 17 percent stake in Time Warner Cable and its 4 percent 
stake in Time Warner Entertainment, which will remove a large 
financial connection between the two competitors. Additionally, 
this consolidation also likely will lead to efficiencies and a 
greater ability for these cable companies to improve and expand 
their competitive offerings.
    We look forward today to hearing about how Time Warner 
plans to use this deal to enhance the experience of its 
consumers.
    Unlike the Adelphia deal, which is in its final stages, the 
entry of the phone companies into the video business is just in 
its infancy, but in the long run, this entry likely will 
foretell a much more significant change in the marketplace. 
While the phone companies are upgrading their networks and 
gearing up to enter video overbuilders like RCN are offering 
much needed competition in a number of communities, which is 
bringing prices down and providing valuable new services for 
consumers. We will hear today from RCN, as well as the U.S. 
Telecom Association, to examine how they view the marketplace.
    More generally, we will discuss with all of our witnesses 
what steps are needed to ensure a competitive future for the 
rapidly changing world of video and telephone service. As we 
all know, this marketplace is evolving at an extraordinary 
pace. The phone companies are beginning to offer video. The 
cable companies are getting into phone service, and the 
Internet continues to expand as a medium for all sorts of 
content. In just a few short years all of these industries may 
be completely transformed in ways we can only being to imagine 
here today.
    But vibrant competition is not a sure thing. We need to 
take active steps to make sure that these markets welcome 
competition and innovation, and that new entry is in fact 
encouraged. Franchising regulations, access to content and 
regulatory parity are important issues among many that must be 
addressed. We have to get it right if we want the market to 
thrive and provide the maximum choice in value for American 
consumers.
    For those reasons, as we consider the cable and 
telecommunications laws in the upcoming months, we need to 
understand whether current regulations are getting in the way 
of a more competitive market, and if so, then we need to figure 
out what different rules will help the marketplace create 
better products for consumers. This is a task that the 
Antitrust Subcommittee intends to undertake. Our hearing today 
is a first step toward learning what we need to do to do that. 
So I hope that all of our witnesses can testify not just about 
the specifics of the Adelphia deal and of new entry, but also 
more broadly about how we can help promote competition in these 
markets.
    The Subcommittee, I believe, really has an obligation, an 
obligation to examine current laws and regulations to make sure 
that new entrants into video service have a real opportunity to 
get into these markets, and in fact, to compete. At the same 
time, of course, we must respect and understand the regulatory 
burden already placed on incumbent cable providers and take 
care to ensure that their long-term efforts and network 
investments are not unfairly diminished by any changes we make 
in the legal structure.
    In the last 10 years the cable operators collectively have 
spent approximately $100 billion upgrading their systems and 
improving their offerings to consumers, all based on the 
current laws and regulations. We must keep that in mind as we 
consider modifying the competitive framework that guides the 
industry.
    This is truly a difficult balance to strike, but we must 
strike it correctly because the reward will be a vigorously 
competitive marketplace that will ensure the economic vitality 
of this important sector in our economy. Most importantly, it 
will help the consumer, and aid in the creation and deployment 
of new and better products and services for individuals and 
businesses in our country. Those, of course, are very worthy 
goals, and merit our strongest efforts.
    Let me at this point turn to Senator Kohl, the Ranking 
Member of this Committee, and my partner who I have worked with 
so many years on the Committee.

 STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE 
                          OF WISCONSIN

    Senator Kohl. I thank you, Mr. Chairman, for holding this 
hearing today.
    As you know, we are at a crucial time for competition in 
the video industry. The decades-long control by local cable 
monopolies may finally be shaken by the promised entry of the 
giant telephone companies into video. But whether we are about 
to witness the birth of a new world of expanded choices for 
consumers will depend to a large extent on the policies adopted 
in the months ahead.
    Today's hearing will address several topics crucial to the 
development of a truly competitive video market. First, what 
will be the impact for consumers of the acquisition of Adelphia 
by the Nation's two largest cable competitors? Second, what are 
the policies we can adopt to ensure that important new 
competitors in the video market, such as the phone companies, 
are given a fair shot to compete. And third, how can we assure 
that independent voices have room to be heard in today's media 
world?
    We continue to witness increased consolidation in the 
industry. The latest deal is the purchase of Adelphia by 
Comcast and Time Warner. Once the acquisition is complete, 
Comcast and Time Warner intend to swap local cable systems to 
greatly expand their regional presence. This clustering will 
lead to a very high market share, in several regions of the 
Nation as high as 70 percent, from the East Coast to 
California. Such clustering greatly increases the ability of 
the local cable franchise to gain exclusive rights to ``must 
have'' programming, effectively freezing out competitors.
    Increasing concentration also makes it much more difficult 
for independent programmers like our witness from America's 
Channel to obtain carriage on major cable systems.
    Our democracy depends on the ability of independent voices 
to be heard. We should be deeply concerned when only 
programmers affiliated with cable companies or the broadcast 
networks seem to get carried on the cable giants,
    There is one significant piece of good news. The entry by 
the regional Bell companies into the video market. By 
challenging the cable monopoly, the efforts by companies like 
SBC and Verizon creates the exciting prospect of a real new 
competitive choice for millions of consumers. But we must 
ensure that undue roadblocks to the entry of the phone 
companies into video are removed.
    Therefore we should consider the following actions:
    First a careful review of the Adelphia deal by the Federal 
Trade Commission and FCC to ensure that it does not lead to 
excessive market concentration in local geographic markets. 
Central to this review should be a serious consideration of 
conditions to ensure that competitors have access to 
programming that consumers demand, as was done in News/Corp-
DirecTV.
    Second, closing loopholes in the program access law to 
ensure that competitors have access to essential programming 
owned by the cable incumbents.
    And third, revising the existing rules so that independent 
programmers have a fair shot at getting carried.
    These and other similar ideas should be on the agenda as 
Congress looks to rewrite the landmark Telecom Act of 1996. 
These measures will help assure that consumers see the benefits 
of increased choice by giving new entrants the breathing room 
to compete.
    We have an outstanding group of me here to offer testimony, 
answer questions, and I think we are all looking forward to 
this hearing.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Kohl appears as a 
submission for the record.]
    Chairman DeWine. Senator Kohl, thank you very much.
    Senator Hatch.
    Senator Hatch. I have no statement I am going to make. I am 
just very interested in this hearing, interested in hearing 
from all of the witnesses. I may not be able to stay because of 
an Intelligence Committee meeting I have to go to, but I am 
certainly going to pay attention to what you have to say. These 
are very interesting areas to me, and we will just have to see 
how we can sift it all out.
    But I appreciate our leadership on this Committee.
    Chairman DeWine. I am going to introduce our witnesses. 
Before I do, let me just say that we really want to have the 
opportunity to get to questions. We appreciate your being here. 
We are going to stick very rigidly to the 5-minute rule. So 
when you see the lights, that is going to be it. So we are 
going to do 5 minutes because we do want to have time for 
questions, and we appreciate it.
    Glenn Britt is the Chairman and CEO of Time Warner Cable. 
He has served in that position since August of 2001. He has 
been with Time Inc. since 1972, and most previously headed Time 
Warner Cable Ventures.
    Kyle McSlarrow is the President and CEO of the National 
Cable & Telecommunications Association. He is certainly 
familiar to us here in the U.S. Senate. He has held many 
positions here in the Senate, including Chief of Staff to the 
late Paul Coverdell.
    Walter McCormick is the President and CEO of U.S. Telecom, 
a trade association representing the telecommunications 
industry.
    Doron Gorshein is the President and CEO of the America 
Channel, an independent cable network broadcasting, programming 
celebrating America. He has also worked at CNN, a channel owned 
by Time Warner. We welcome him back as well.
    Mr. Peter Aquino is the President and CEO of RCN, a cable 
overbuilder active in several markets. Before joining RCN he 
served as the Senior Managing Director at Capital Technology 
Advisers, a telecom restructuring firm.
    Mr. Scott Cleland is the CEO of Precursor, a market 
research firm. He has testified before this Committee several 
times in the past, and we welcome him back as well.
    Mr. Mark Cooper is the Director of Research for the 
Consumer Federation of America. He has also testified before us 
on numerous occasions, and we welcome him back as well.
    Mr. Britt, we will start with you. Thank you very much.

   STATEMENT OF GLENN A. BRITT, CHAIRMAN AND CHIEF EXECUTIVE 
       OFFICER, TIME WARNER CABLE, STAMFORD, CONNECTICUT

    Mr. Britt. Good afternoon, Mr. Chairman and members of the 
Subcommittee. My name is Glenn Britt, and I am Chairman and CEO 
of Time Warner Cable. I want to thank you for inviting me to 
appear here today to discuss Time Warner's role in the 
remarkable pro-consumer developments occurring in the cable 
industry.
    I respectfully request that my full written statement be 
included in the record.
    Chairman DeWine. It will be made a part of the record.
    Mr. Britt. Time Warner Cable is the Nation's fourth largest 
multi-channel video distributor, serving nearly 11 million 
customers in 27 States. It is an indication of how the 
competitive landscape has changed in recent years that the two 
companies immediately ahead of us are not cable operators. They 
are DirecTV and EchoStar, DBS operators who have used a 
combination of innovative service and cost effective national 
marketing to attract over 25 million subscribers.
    At Time Warner Cable we have long recognized and responded 
to the competitive challenges posed by the DBS operators and by 
others. Our history of innovation dates back to early 
experiments with interactive television in Columbus, Ohio in 
the 1970's. Our response to the changing competitive landscape 
was to invest billions of dollars rebuilding our systems, using 
an advanced two-way architecture. In fact, since 1996 we have 
invested more than $17 billion in our infrastructure.
    These upgrades allowed us to offer our customers a variety 
of new video services such as high definition television, 
digital video recorders and video on demand.
    In addition, our investment in upgrading our facilities has 
allowed us to take on the incumbent telephone companies, first 
by providing high-speed Internet connections in competition 
with dial-up service and DSL, and more recently, by offering 
voice over Internet protocol telephone service.
    The response to these new services has been fantastic. We 
are signing up thousands of new subscribers every week. Most 
importantly, our success and the success of other cable 
operators is triggering even more competition. The big 
telephone companies are rushing to invest billions so they can 
offer their own bundles of voice, video and data. And that is 
not all. Power companies and wireless providers are also 
innovating and investing, promising more competition in the 
days ahead.
    At Time Warner Cable we view this competition as creating 
new opportunities for consumers and for independent creators of 
innovative and attractive services and content. Our goal is to 
bring as many of these services to as many consumers as 
possible.
    As you know, Time Warner Cable recently entered into an 
agreement, together with Comcast, to purchase cable systems 
from Adelphia, which has been in bankruptcy for more than 2 
years. The Adelphia systems, not surprisingly, lag behind in 
the deployment and marketing of advanced services. The proposed 
transaction will allow us to bring advanced services such as 
VoIP to millions of new customers, including more than half a 
million customers in Ohio.
    We are also continuing our existing strategy of regional 
clustering by swapping certain systems with Comcast. AS the FCC 
has recognized, regional clustering creates cost savings 
efficiencies and economies of scale that enhance competition 
and promote innovation.
    It is not surprising that some of our competitors would 
like to impose new restrictions on our clusters, but even with 
the proposed transactions, Time Warner Cable's regional 
footprints will be dwarfed by the national reach of DBS and by 
the contiguous multi-state territories of the incumbent 
telephone companies.
    We believe that the new super-competitive landscape 
requires a new way of thinking about regulation. And the 
foundations for that debate should be that like services are 
treated alike and that Government should not play favorites 
among competitors. If those principles are followed, we are 
confident, and you can be confident, that the clear winner will 
be the American public.
    [The prepared statement of Mr. Britt appears as a 
submission for the record.]
    Chairman DeWine. Thank you very much.
    Mr. McSlarrow.

  STATEMENT OF KYLE MCSLARROW, PRESIDENT AND CHIEF EXECUTIVE 
   OFFICER, NATIONAL CABLE & TELECOMMUNICATIONS ASSOCIATION, 
                        WASHINGTON, D.C.

    Mr. McSlarrow. Mr. Chairman, thank you very much for 
inviting me here. With your permission, I will submit my full 
testimony for the record, and just make a couple of 
observations.
    My testimony is really a continuation of the conversation 
that you and Senator Kohl and I have already had. We are 
focused on video competition, quite properly, but the truth is, 
if you go by the statements that each of you made and that all 
of us will be talking about, this is part of a bigger picture 
which is really about broadband and competition in America. 
Video is a hugely important piece of that, but it is just one 
piece.
    Mr. Britt just now mentioned the idea that as Congress 
takes a fresh look at the Telecommunications Act, it is 
important that we keep a couple of principles in mind. One is, 
as he mentioned, treating like services alike. We would also 
add that when we think about video competition, we should think 
more broadly about not just a level playing field for all 
competitors, but what is it we want in the future, 5 years, 10 
years down the road? I would submit the kinds of questions that 
we have been asking over the past 5 years, maybe even last 
year, are already becoming stale this year.
    Things are happening so fast. There is so much dynamism in 
the telecommunications industry. We have already mentioned the 
telephone companies getting into video. We have the spectacular 
success of two satellite providers with national footprints. We 
have all kinds of content owners figuring a million different 
ways to get video and other forms of content into the hands of 
consumers, whether it is through pipes into the home, or mobile 
devices, or the Internet.
    So this is a great time to step back and think about, No. 
1, what are the problems we are trying to solve, and number 
two, how do we keep the kind of investment and innovation that 
has been flourishing over the last couple of years--as well as 
competition--going?
    One additional point, even though it may not squarely fit 
within this topic: if you are thinking more broadly about video 
competition, we have to think about the kinds of investments 
that I would suspect you want to encourage and that the cable 
industry, for one, has been focused on making. We have spent 
close to $100 billion over the last 10 years, partly because we 
made an agreement with Congress that if we were deregulated, we 
would build out our plant with fiberoptic technology. We would 
deliver all these two-way services in video and voice and data.
    I think because of that success, there is an opportunity 
and probably a risk that others will want to take advantage of 
the kinds of investments that other people have made. I will 
give you one example. Right now before Congress is the issue of 
the digital transition. While that bill is going to be marked 
up in another committee, one of the issues that has come up is 
called multicasting, which is the broadcasters' claim for 
mandatory carriage--in addition to the mandatory carriage they 
already have--of up to six channels of our capacity.
    One reason why I say we cannot just focus on video is that 
the pipe we provide into the home is a broadband pipe. We do 
not just do video. So if somebody comes along and takes our 
bandwidth--which we would submit is properly within your 
jurisdiction as the taking of private property--then you are 
not just hurting other independent voices, as you said Senator 
Kohl, who might be out there wanting carriage on our pipe, you 
are also hurting our ability to deploy other broadband 
services.
    So I think this hearing is timely. I know that you are 
going to be doing others down the road. We welcome and would be 
delighted to participate in that process, and we thank you for 
having the hearing.
    [The prepared statement of Mr. McSlarrow appears as a 
submission for the record.]
    Chairman DeWine. Thank you very much.
    Mr. McCormick?

  STATEMENT OF WALTER B. MCCORMICK, JR., PRESIDENT AND CHIEF 
     EXECUTIVE OFFICER, UNITED STATES TELECOM ASSOCIATION, 
                        WASHINGTON, D.C.

    Mr. McCormick. Thank you very much. I too would ask that my 
full statement be included in the record.
    Mr. Chairman, our membership ranges from the smallest rural 
telecom companies to some of the largest corporations in 
America, and we are united in a single belief, that it is time 
to update the Nation's telecommunications laws to reflect the 
dramatic technological and marketplace changes that are taking 
place today.
    As the Subcommittee examines the state of video 
competition, let me highlight three aspects that we believe are 
worthy of examination. First, broadband deployment. As my 
colleague Kyle McSlarrow said, broadband deployment is 
critical, and video is going to play a significant role in the 
widespread deployment of advanced broadband technology. It is 
video services that local telecom companies will deploy over 
the new broadband networks that will drive subscriber growth 
and thus network deployment.
    For example, SBC Communications is planning to offer 
services with interactive features that go far beyond those 
provided with video programming today. Verizon Communications 
has already started deploying fiber optics to the home with the 
intent of offering subscribers new and innovative video 
offerings. And across this Nation there are scores of 
small,independent, local telecom companies that are investing 
in new infrastructure to deliver video choice and innovative 
services to consumers.
    Second, price. Mr. Chairman, I should not have to convince 
this Subcommittee that competition is a good thing and a check 
on inflation. There are few areas where there is greater price 
inflation than in the delivery of cable television services. 
According to the GAO, even with the presence of two satellite 
competitors, cable operators have been increasing their prices 
at a rate that is nearly three times the rate of the consumer 
price index. This hurts every consumer, but especially the 
economically disadvantaged and those living on fixed incomes. 
Indeed, in Keller, Texas the local cable operator has responded 
to Verizon's entry by dropping its price by 50 percent.
    Third. We urge this Subcommittee to consider the effect of 
unnecessary governmental barriers to competitive entry. The 
current franchising process imposes substantial delay in 
transaction costs, and thereby, the uncertainty raises the cost 
of capital. Some U.S. telecom companies are reporting that it 
is taking as long as 3 years to get franchises. And aggressive 
cable opposition to the granting of competitive franchises in 
local area suggests that the cable industry itself sees the 
franchising process as a barrier to entry that it will use to 
insulate itself from competition for as long as possible.
    Build-out requirements are another barrier to entry. 
Indeed, the very notion of imposing build-out requirements on 
competitors is virtually unheard of in our country, and the 
same cable operators who argue for build-out requirements on 
our industry, vigorously oppose any requirement that they build 
out to match telephone service territories when they offer 
voice telephone service. Build-out requirements do not protect 
consumers. In small communities like Lakedale, Minnesota, 
companies have invested to build out infrastructure to offer 
voice video and Internet access. At the petition of the local 
cable operators, these companies have been told they cannot 
offer video over these facilities unless it is built out beyond 
the voice network to match the cable footprint.
    So we have areas where facilities have been deployed and 
consumers are being denied the service simply because it is now 
economically impracticable to do so.
    We are seeing this use of governmental processes by the 
cable industry to slow competitive entry, everywhere. Cable 
operators in Texas have sought to enjoin the newly enacted 
State franchise law. And this is not just aimed at stopping 
entry by large companies like Verizon and SBC, it is aimed at 
small entrepreneurs as well. In Texas, the first certificate 
granted under the new law was to Guadalupe Valley Telephone 
Cooperative, which is a small company seeking to compete with 
one of the Nation's largest cable operators.
    So in conclusion, Mr. Chairman, we believe it is time to 
update the laws. Rapid advancements have eliminated 
technological barriers to entry. We believe it is time to 
eliminate the regulatory barriers into entry into video 
competition as well.
    Thank you again so much.
    [The prepared statement of Mr. McCormick appears as a 
submission for the record.]
    Chairman DeWine. Thank you very much.
    Mr. Gorshein, thank you for coming.

   STATEMENT OF DORON GORSHEIN, CHIEF EXECUTIVE OFFICER, THE 
            AMERICA CHANNEL, LLC, HEATHROW, FLORIDA

    Mr. Gorshein. Mr. Chairman, members of the Subcommittee, 
thank you for the opportunity to testify today on behalf of the 
America Channel. I am here to share our perspective on the 
state of competition in the video space based on our 
experiences as an independent channel seeking access to the 
consumer.
    The America Channel is a nonfiction programming network, 
set to explore and celebrate America, profiling its diverse 
communities, local heroes, ordinary people who accomplish the 
extraordinary. It is not a channel about celebrities or the 
latest fashion, but about the every day heroics and stories of 
real political, their struggles, aspirations and achievements.
    The America Channel was founded in the months following 9/
11 when television no longer resonated with my sensibilities as 
an American consumer. Indeed, our stellar market research 
results confirmed that many Americans share this view. We 
discovered that Americans want more relevant programming, more 
programming about what makes America special, more community, 
more connectivity and more authenticity on television. This is 
why we believe the America Channel could be the most powerful, 
most resonant new product to come along in quite some time.
    We then spent 18 months and a million dollars from 
investors on planning, development, market research before 
approaching the cable operators. As part of our efforts, I 
traveled to dozens of cable systems across America which are 
owned by the top cable operators. The reception was 
overwhelmingly positive. We believe our level of diligence was 
a strong as any new channel's.
    The key to viability is distribution to a sufficient number 
of households and access to certain key markets. Because of the 
market power of the largest cable operators, access through 
them is absolutely essential. If they say no, the viability of 
a new channel is in peril. Today the America Channel has 
distribution relationships with the majority, the vast majority 
of what will become the telco video space, including Verizon, 
SBC and others, and productive discussions with both satellite 
players.
    But after nearly 2\1/2\ years we have had virtually no 
progress getting carriage from the dominant cable operators. 
Why is this? One reason is the cable operators are vertically 
integrated. They own channels. The telcos do not. This is 
relevant because an independent channel is a direct competitor 
to a cable-affiliated channel on several fronts, for viewers, 
ad dollars, technical capacity, and the asset value is 
independently owned. New independent channels, typically free 
to the cable operator for several years, also create downward 
pricing pressure on affiliated channels. A review of Kagan's 
Reports reveals the average fee for a cable-affiliated net is 
more than three times the fee for the few independents.
    One major cable operator derives 40 percent of its 
operating income from its television networks, only 28.6 
percent from cable subscriptions. That operator has strong 
incentive to exclude the less expensive and better products to 
protect increased rates for its own channels.
    A fully distributed channel is typically valued in the 
billions of dollars and generates annual revenue in the 
hundreds of millions. Thus, vertically integrated cable 
operators must choose between owning 5 percent of the revenue 
and asset value when launching an independent channel, versus 
100 percent when wholly owned. It is an easy decision and an 
inherent conflict of interest that prevents the best value 
products from reaching the market.
    The GAO confirmed that cable operators are much more likely 
to carry affiliated networks over independents, and we found 
that each of the top two cable operators over a 2\1/2\ year 
period, carried on a non-premium wide basis only one of 114 
channels with no media affiliation. Meanwhile, most affiliated 
channels are carried.
    John Malone recently said that an independent channel has 
no chance whatsoever if Comcast does not carry it, and Cable 
World Magazine reported that VC funding of entrepreneurial 
cable networks has died because of the gatekeeping power of the 
top cable operators.
    Of the 92 channels that have reached the critical viability 
threshold of 20 million homes, not a single one did so without 
at least two of Comcast, Time Warner and Adelphia. The Adelphia 
transaction, with its geographic rationalization, if 
consummated without conditions, could mean the end of new 
independent channels. Though we believe the public would 
embrace the America Channel, this hearing is not about any 
single product, it is about free competition for content and 
for services. We believe the telcos, in contrast to the largest 
cable operators, are squarely focused on free market 
competition with better channel selection, lower price and 
higher quality customer service. Their success is critically 
important, and they should be helped to deploy their services 
and have fair access to content.
    Foreclosure of opportunities for independent channels has 
adverse effect on competition, consumer choice, consumer 
pricing, and the diversity of ideas in the marketplace. We must 
have an environment which permits free competition on the 
merits. It is my hope that our experience will help you address 
these systemic problems that play out to the detriment of all 
Americans.
    Thank you.
    [The prepared statement of Mr. Gorshein appears as a 
submission for the record.]
    Chairman DeWine. Thank you.
    Mr. Aquino.

  STATEMENT OF PETER D. AQUINO, PRESIDENT AND CHIEF EXECUTIVE 
          OFFICER, RCN CORPORATION, HERNDON, VIRGINIA

    Mr. Aquino. Good afternoon, Mr. Chairman, Senators Kohl and 
Hatch. My name is Peter Aquino, and I am the CEO and President 
of RCN Corporation.
    RCN is a leader in facilities based broadband expansion in 
the United States. We bring voice, data and video to consumers 
through the triple play, since 1997, and before any of the 
other incumbents had embarked on the triple play. Now, we are 
asking you to help us to ensure a marketplace in which there is 
more consumer choice and one that fosters additional broadband 
expansion. Ensuring access to programming with fair rates is 
key.
    To allow us to expand our pro-competitive presence, we are 
asking you today to do the following.

1. To ensure that the FCC and FTC condition the Adelphia 
        transactions to require that competitors have access to 
        programming at rates and on terms equivalent to what 
        Comcast and Time Warner charges themselves.
2. Request that the FTC immediately open an investigation into 
        the rates and terms for video programming in general, 
        to illuminate the current discriminatory pricing 
        structure that favors large cable operators, and to 
        debunk the myth that these discriminatory rates are 
        justified.
3. Close the terrestrial loophole in the program access rules. 
        I think that is very important.
    And then finally, reject the former Bells' demand that 
franchise relief is necessary. In a fair, open and competitive 
marketplace with fair price structures, we can provide cable 
choice to even more consumes, and I hope you support this goal.
    I took the helm at RCN last year, and RCN today has more 
than 850,000 customer connections on the East Coast from D.C. 
to Boston, Chicago and some parts of California. Our current 
network passes about 1.4 million homes, and we have 6 million 
homes licensed. We do this with 130 franchise licenses and that 
is without any special concessions.
    I am especially proud of the fact that RCN's presence in 
the marketplace has produced documented benefits for consumers. 
As both the FCC and GAO have reported, this includes more 
choice, telecom infrastructure upgrades, better customer 
service, and a check on ever-rising cable rates. With fair 
practices and price structures we can do even more. We can 
expand competition and give consumers a choice, provided we 
have access to ``must have'' programming with rates that are 
fair.
    Comcast and Time Warner's proposal to acquire Adelphia and 
swap systems among themselves threatens our ability to access 
programming on a fair basis. A major concern with the Adelphia 
transactions is that these companies, which will control over 
47 percent of the market, are swapping system to consolidate 
regional clusters. The FCC has said that clustering will 
increase the incentive of cable operators to practice 
anticompetitive foreclosures of access to vertically integrated 
programming. At a minimum, conditions similar to those imposed 
on News/Corp's acquisition of DirecTV should be applied to the 
Adelphia transaction. These conditions would ensure access to 
vertically integrated programming with fair rates and terms, 
and would give us an arbitration process if disputes arise.
    We do not oppose the Adelphia merger, but this kind of 
market concentration is supportable only if pro-competitive 
conditions are imposed.
    Comcast also has a history of using the terrestrial 
loophole to foreclose competitors' access to regional sports, a 
``must have'' content. So this loophole needs to be closed.
    Although we currently have access to programming, companies 
like RCN are being placed at a significant price disadvantage. 
We brought a chart today, a chart that shows that we believe 
our programming costs as a competitor are double those of large 
cable companies. Roughly 32 percent of our programming dollars 
currently go to Comcast and Time Warner and their affiliates. 
As their control over ``must have'' sports and other 
programming grows, so does their ability to charge even more 
excessive rates.
    We believe an FTC investigation into discrimination in 
video programming rates and terms would both illuminate the 
problem and make clear the need for legislation to provide fair 
access.
    RCN is very innovative and we are broadband fiber leaders, 
and we want to be part of the continued broadband expansion in 
the United States.
    I thank you for this opportunity to speak today.
    [The prepared statement of Mr. Aquino appears as a 
submission for the record.]
    Chairman DeWine. Mr. Aquino, Thank you very much.
    Mr. Cleland.

    STATEMENT OF SCOTT CLELAND, FOUNDER AND CHIEF EXECUTIVE 
              OFFICER, PRECURSOR, WASHINGTON, D.C.

    Mr. Cleland. Thank you for the opportunity to testify, and 
I also request to have my full testimony in the record.
    Chairman DeWine. It will be made part of the record.
    Mr. Cleland. I want to commend Congress. In both the 1992 
Act and in the 1996 Act, there was vision and there was great 
success. I think that both video and telecom competition is 
increasingly vibrant and I think it is here to stay. I do not 
see it being reversed. I think the facts are clear that cable 
is no longer a monopoly.
    There are now 28 million Americans, or 30 percent of the 
market where they have taken their freedom that Congress gave 
them and they can tell their cable company to take a hike if 
they do not like the service or the offering at the price they 
are getting.
    And the cable industry has spent $90 billion to basically 
compete more aggressively, and so the marketplace is working. 
It now has the best plan and offering some of the better 
services in the marketplace.
    The other thing that is good is telecom and cable 
competition is finally happening. The cable industry is a good 
two to 3 years ahead of the telephone industry in entering the 
other's business, and I think that what you are going to see is 
you have seen a couple million cable customers take telephony 
from cable companies this year. It is going to be several 
million next year.
    And at that same time we expect, if there are a million or 
two that take video from the telephone companies, that will be 
a surprise. So for the next two to 3 years you are going to see 
the numbers, because cable got its act together two to three to 
4 years earlier, that they are going to be taking millions of 
customers from the Bells before the Bells are taking millions 
of customers from them.
    To just give you a little bit of insight, I think that 
Verizon is probably the most serious and quick about getting 
into video. I think SBC is the least serious. I would think 
that Bell South is very well prepared and is kind of under the 
radar, and I think Qwest really can only afford DBS resale.
    So briefly on the Adelphia transaction, I also do not see 
that as a competitive problem. In a sense there are two big 
things that transaction accomplishes. In 2002 the Department of 
Justice ordered that these two companies, Time Warner and 
Comcast, has to divest the cross-ownership between the two. 
This transaction accomplishes that and that was not easy to 
accomplish. The second thing it does it that it brings 5 
million American consumers under reputable and competent 
management. Those 5 million customers were operated by a 
criminal family enterprise, and this is a good development, 
getting these 5 million subscribers under competent management 
so that they can have better service.
    Now, Mr. Chairman, in the last couple minutes you asked in 
an opening statement for ideas of how to better promote more 
competition. Well, last April when I testified before the 
Committee I said the Bell mergers were not a problem, but I 
said there was a looming problem out there that I warned the 
Subcommittee about, and that was bitter interference.
    Well, 2 weeks ago something big happened. And that was a 
denial of access, which is what I was arguing, is the big fear 
to competition in the Internet. What happened is Level 3 went 
to Cogent, one of the providers, and basically denied access. 
And so about 5 percent of the Internet went dark for a couple 
of days about 2 weeks ago. Precursor was one of the companies 
that got turned off. We were not able to fully publish. We were 
not able to do our research, and many of our colleagues that 
had had voice over IP were not able to complete their phone 
calls.
    How this happened was a big company went to a small company 
and said, ``You are not paying us enough in this peering 
arrangement.'' The Internet is built on cooperation. The fabric 
of cooperation has been very strong to date, but what I want to 
point out here is if the big feel that they can take the small 
hostage by basically saying, ``If you do not pay us more money 
to transit, we will cut you off--heck with the consumers and 
the businesses that are relying on the Internet to do 
interstate commerce.'' That is what happened.
    So what I want to advise the Committee here is this is a 
case where an ounce of prevention can prevent a pound of cure, 
is the Internet functions exceptionally well right now in a 
cooperative way. I am by no means calling for a regulation. 
That would be a disaster. What I am advising is do something 
now so you will not have to regulate later. My advice is that 
the Committee and the FCC and everybody in Government should 
say, ``Look, if you have disputes on peering arrangements, 
these should be handled by private sector commercial 
arbitration disputes, but they should never devolve down to the 
level of cutting off people from the Internet.'' And so it is 
in everybody's interest for the Internet to be free and 
competitive.
    And so I just flag that issue. It will get worse if the 
Government does not flag it. Thank you.
    [The prepared statement of Mr. Cleland appears as a 
submission for the record.]
    Chairman DeWine. Very good.
    Dr. Cooper.

   STATEMENT OF MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER 
            FEDERATION OF AMERICA, WASHINGTON, D.C.

    Mr. Cooper. Thank you, Mr. Chairman, Senator Kohl. My 
testimony outlines our concerns about the Adelphia merger 
transaction, and I want to focus on the second issue that you 
raised. A number of the other people have expressed similar 
concerns that we had. I want to focus on it, and I am going to 
do it in terms I think the Antitrust Committee it is relevant 
to.
    I certainly applaud the potential for the arrival of a new 
cable competitor that will end this persistent monopoly, but I 
must remind you that policymakers have been promising consumers 
cable competition for 20 years, and it never seems to quite get 
here. It is always someplace around the corner, and when it 
arrives, it is expensive bundles, it is very, very 
inconsistent, infrequent and does not serve the interest of the 
average lunch-bucket cable consumer. We never got the second 
wire. Satellite has not disciplined. Video dial tone 
disappeared. And so now they tell us, you tell us the telephone 
companies are coming to help us. I remind you that they have a 
miserable track record in both opening their own networks and 
entering other service areas as a competitor.
    As a result, cable consumers have been forced to buy huge 
bundles of packages in which they do not watch three-quarters 
of the programs they are forced to pay for. Cable ties the 
tiers together, so if you want to buy the second tier, you have 
to buy the first tier. The only exception is a Congressionally 
mandated one. They then bundle at each tier. They tie high-
speed Internet to basic video service with a negative $15 price 
on basic service. That is a predatory price. They then force 
consumers to buy their Internet service provider. It is a tie. 
And if you want to get your own service provider, you have to 
pay for two, pay twice.
    Telcos do essentially the same thing. Most refuse to sell 
stand-alone DSL service separate from their franchise product, 
voice. They are offering even bigger bundles for consumers, not 
more choice, just take it or leave it, all or nothing. Now, 
that is a choice, but it is not the choice consumers want. It 
is not real consumers' choice of picking the programs they want 
to pay for.
    The average monthly bill for cable service has doubled 
since the passage of the `96 Act, doubled the average monthly 
bill. It has been pointed out that there is only one other 
commodity dominated by a foreign cartel and a domestic 
oligopoly that matches that, and that is gasoline.
    Entry by the telephone companies into cable will not serve 
the consumer if they insist on bundles, if they do not open 
their networks, and of course, the price they want to impose is 
the complete abandonment of public policy and public interest 
obligations on their service territories. The build-out 
requirement there again means that they are not going to serve 
the poor people they promised to help and who their big bundles 
will not in fact do any good for.
    Of course, cable entry into voice will not do nearly as 
much good as it could if they can tie it together with their 
other products, if they can foreclose their network from 
competing service providers, which they can, in fact, are 
likely to do.
    So what are the big issues that this Committee needs to 
address and can address pro-competitively on an antitrust set 
of issues. One, Mr. Cleland has suggested the first one. You 
cannot interfere with the bids. Nondiscriminatory access to the 
means of communication have been a fundamental part of our 
society since its founding. Roads were open to all, canals were 
open to all, steamship lines, et cetera, have all been open. We 
have to preserve that principle of network neutrality.
    It has to be enforceable. The FCC had a charade of saying, 
it is a principle, we adopt it, but it is not enforceable. You 
cannot as policymakers accept that.
    Second of all, if you really want competition, then we have 
to have more last miles, and the way to get that, someone else 
mentioned, the DTV transition. We need unlicensed spectrum 
available for platforms to reach consumers in the lower bands 
so that we are not dependent upon centralized investments by a 
little duopoly or even a triopoly.
    Third, we need municipal broadband to be open. Congress 
said in the `96 Act any entity should be allowed to compete. 
Unfortunately, even a simple word like ``entity'' confused the 
court.
    So they have been eliminating municipalities from providing 
competition. That is a barrier to competition. That is 
something I think is within the purview of this Committee to 
look at. And so we need to make sure that any entity has access 
to the public, cannot be cutoff from access to the Internet, 
and that will create a playing field where multiple platforms 
can compete for the consumer's dollar.
    Thank you.
    [The prepared statement of Mr. Cooper appears as a 
submission for the record.]
    Chairman DeWine. Good. Thank you very much. We appreciate 
all your testimony.
    Mr. Britt, we will start with you. You are first. I live in 
Ada, Ohio, and I currently have Adelphia service. What is going 
to change for me? Will I still be able to walk across the 
street and sign up for service, or am I going to have to call 
some number and wait and punch in some numbers and do some 
things? Am I going to have to do that? Or am I going to get 
more cable choices, more channels? What is going to happen to 
my price? That is what people want to know, and it is not, of 
course, obviously, just Ada, Ohio. It is Chillicothe, it is 
Newark, it is Bryan, it is Cleveland. It is, you know, 800,000 
customers, I guess, in Ohio.
    Mr. Britt. Thank you, Mr. Chairman.
    Chairman DeWine. I used to live in Ada, Ohio.
    Mr. Britt. A few things will happen, I think all of them 
good.
    First of all, because Adelphia has been bankrupt, it has 
not been able to invest in upgrading its cable systems in much 
of its footprint. We are going to invest a great deal of 
capital so that the infrastructure can handle new services. We 
will then offer all the same services we have been offering on 
Time Warner Cable, services like broadband, voice over IP, 
high-definition TV, et cetera.
    We believe, to answer one of your questions, that this is a 
local business, so although we are very large company, we 
operate it as a local business. We provide customer service 
locally. Our employees live locally. We are part of the 
communities that we do business in. We do not believe in 
centralizing these things from very far away.
    So I think what the consumers will see is more services, 
better customer service, and local service.
    Chairman DeWine. When would people start to expect, though, 
to see kind of a change in the menu or a change in the options?
    Mr. Britt. Well, first, of course, we have to close our 
transaction--
    Chairman DeWine. Well, I understand. I mean assuming--you 
know, once the curtain comes down.
    Mr. Britt. Once it is closed, the answer will vary location 
by location. Some places that are more easily upgraded will get 
the new services very quickly. Others need to have the 
construction process of upgrading them, so that will take a 
longer time period. And I do not have a complete answer, but I 
would say in a couple of years, everybody will have all the 
services.
    Chairman DeWine. A couple years?
    Mr. Britt. Yes.
    Chairman DeWine. So it would be fairly uniform then at that 
point?
    Mr. Britt. Yes, as the Time Warner footprint is today.
    Chairman DeWine. Let me follow that up with another 
question. The Bell entrants--and Mr. McCormick argued that it 
is unfair to place the same regulations on phone companies in 
the video market as are placed on the cable incumbents, because 
in the video market the Bell Companies are new entrants with no 
market power, no market share.
    They also point out that when the cable companies offer 
telephone service as a new entrant, they are not forced to 
abide by all of the requirements and restrictions placed on the 
phone incumbents.
    Do you disagree with that, and why?
    Mr. Britt. First of all, when we enter the phone business, 
we have been going to PUCs and getting licenses. We have been 
submitting to all of the regulation that is applicable to 
CLECs, including things like paying into universal service, 
CALEA, 911, those sorts of things. So I am not quite sure what 
he is talking about.
    I think everybody has anecdotes of the other side trying to 
thwart them through regulation. We in our own case, in my 
written testimony, talked about experiences we have in South 
Carolina where some of the rural phone companies are trying to 
keep us out and have gotten the PUC to vote against us. So that 
is applicable to both of us.
    I think the larger question is what sort of regulation 
should we have for this industry, this converged industry. It 
is not just video. It is video, broadband, and telephone. What 
sort of regulation do we want for the long run? What is the 
role of the local municipality? What is the role of the State? 
What is the role of the Federal Government? And, really, that 
is the question.
    I do not believe that the franchise process is creating a 
meaningful impediment to the phone companies. Verizon is 
getting lots of franchises. Most cities are eager for 
competition. They are not interested in delaying competition.
    Chairman DeWine. Let me go back to the first question that 
I asked Mr. Britt and see, Mr. Aquino or Dr. Cooper, if you 
have any comments on that.
    Mr. Aquino. I do agree with--
    Chairman DeWine. My friends in Ada or Cleveland or any 
place else in the system, what are they going to see different? 
Do you agree with his answer?
    Mr. Aquino. I agree with Mr. Britt, first of all, on the 
franchise side. We have gotten a lot of franchises--
    Chairman DeWine. OK. You want to take that one then. OK.
    Mr. Aquino. I will take that one first.
    Chairman DeWine. All right. Go ahead.
    Mr. Aquino. The answer to your other question about, you 
know, upgrading Adelphia's network, I also agree with Mr. 
Britt. A system that is not taken care of for a long time 
requires fiber upgrade in order to offer voice services and 
high-speed data services. And certainly Time Warner and Comcast 
are well equipped to make that upgrade and ultimately bring 
consumers the choice of the triple play or products, you know, 
whether it is voice, data, or video.
    And when it comes to franchising, I would just reiterate 
that it is just not an impediment. As an entrepreneurial 
company, we haven't really had a big problem to get franchises.
    Chairman DeWine. Dr. Cooper?
    Mr. Cooper. This is an interesting case, and it frequently 
happens that the real bad guy is not in the room here in the 
sense that the creation of regional clusters, which is a really 
serious problem, is the other party to the merger; that is, 
Comcast has now created a tremendous set of clusters in a lot 
of larger markets. That is a great concern to us, as we 
outlined in our testimony. And so it is all those swaps that 
were around the rest of the transaction, that is a grave 
concern.
    Time Warner is also the smaller of the acquiring parties, 
so their footprint as a national actor is smaller.
    The simple answer is that a simple transfer of ownership of 
systems in Ohio from one party to another, divorced from the 
question of the regional clusters, divorced from the question 
of a national footprint, is not a bad thing for consumers, 
especially when, as was pointed out, it was run as a criminal 
enterprise.
    So I don't disagree with his statement as far as it went. 
It is all the other stuff that he is not the primary moving 
party to that is the source of our concern about this merger in 
terms of regional clusters and national footprint.
    Chairman DeWine. OK. Mr. Cleland?
    Mr. Cleland. Thank you, Mr. Chairman. Just real briefly on 
clusters, I have to disagree with Dr. Cooper on the fact that 
clusters--the cable industry was very fragmented, and clusters 
give you enormous efficiencies. Those efficiencies have been 
handed back to consumers by getting better plant, getting high-
speed access faster, getting more services faster. And so 
clustering, they are not anywhere near as clustered as regional 
Bell Operating Companies are. And so clustering is not by 
itself an evil. It is a benefit that has redounded to great 
benefit of consumers.
    Chairman DeWine. OK. Who else wants to jump in? Mr. 
McCormick?
    Mr. McCormick. Mr. Chairman, I would like to respond to a 
couple of the comments that have been made.
    First, with regard to the franchise requirement, Verizon 
has been at this for a year. It has obtained 14 franchises out 
of the more than 10,000 franchise areas that its region covers. 
If it gets one a day, it will take about 40 years for Verizon 
to achieve franchise agreements in all those franchise areas.
    Second, with regard to the cable industry's entry into 
video, I would like to submit for the record a list of a dozen 
key telephone industry regulatory requirements that are 
unapplicable to the cable industry when it provides voice 
services, but, most important is the build-out requirement. In 
no area has the cable industry been required to build out to 
match the telephone service area prior to its offering voice 
service to its customers. And one of the biggest impediments to 
our deployment is that the telephone service footprint does not 
often match the cable franchise, and yet we are being prevented 
from being able to offer video to our customers.
    In Ohio, we have 32 companies that are offering telephone 
service, and some of the most innovative companies in the 
country are moving into video: Horizon, Champaign Telephone 
Company, and SBC.
    Finally, SBC's commitment. SBC is very serious about 
deploying video. Its commitment is to have 18 million 
customers, 50-percent penetration, within 3 years. For purposes 
of comparison, it took the cable industry 35 years to reach a 
50-percent penetration. It took Internet service 9 years. SBC 
is investing billions of dollars today to reach a 50-percent 
penetration in its region within 3 years.
    Chairman DeWine. Senator Kohl?
    Senator Kohl. Thank you very much, Mr. Chairman. I would 
like to ask permission to insert the statements of Senators 
Leahy and Feingold into the record.
    Chairman DeWine. Without objection.
    Senator Kohl. Mr. Britt, I would like to ask you a couple 
questions about the Adelphia deal. As part of this transaction, 
Time Warner and Comcast, as you know, intend to divide up 
Adelphia and then swap local systems to increase their regional 
clusters. As a result, local market shares will go up 
significantly in many communities to as high as 70 percent in 
some.
    Mr. Britt, do competitors have to worry about what you or 
Comcast will do once you gain such high local market shares and 
also that you will be able to lock up ``must have'' 
programming, like regional sports programming? And will you 
then--or should they worry that you will then deny that 
programming to your competitors?
    Mr. Britt. Senator, on the question--the first question was 
really about clustering, and I think as somebody pointed out 
earlier, our big competitors are better clustered than we will 
be even after this transaction. So we have two satellite 
companies, who are both larger than we are, who have national 
footprints. So that is about as well clustered as you can be. 
And then we are competing against these very large multi-State 
phone companies that have much larger contiguous clusters than 
we have. So we are not quite sure we see what the issue is.
    We do understand--the question of program access has been 
brought up, and I think there is vigorous competition in this 
marketplace. We are in general, Time Warner, not an owner of 
regional sports networks, which seems to be the big focus. We 
are going to be a minority owner in a new Mets sports network 
in New York. That will be available to anybody.
    Actually, the irony of this to me is that the single 
economically largest example of exclusivity in sports is the 
NFL DirecTV package, the Sunday Ticket package, which is 
exclusive and has been unavailable to any other multi-channel 
video operator other than DirecTV. So I am not quite sure what 
the issue is in relation to clustering.
    Senator Kohl. Well, Mr. Aquino, what is your opinion? Does 
the Adelphia deal heighten your concerns about gaining access 
to programming?
    Mr. Aquino. I think the Mets is probably a good example. It 
is access to programming at affordable rates. I used to pay a 
certain rate when the Mets were part of the MSG Network. To go 
to a Comcast/Time Warner venture, my rate increase will be 
about 20 to 25 percent as they strip it out of one package and 
create another company. That type of programming access is 
really the problem that we are going to face as entrepreneurs, 
that the price is getting out of control. We certainly don't 
want to pass those types of rate increases on to consumers. 
There is a certain market rate in the marketplace that is 
acceptable, but when programming, regional sports in 
particular, begins to fall into only a few hands, those are 
``must have'' programs. And with those rate increases, that is 
just unattainable.
    So that is my main concern with the clustering.
    Mr. Britt. Senator Kohl, if I could just respond?
    Senator Kohl. Go ahead, Mr. Britt.
    Mr. Britt. In the case of the Mets network, the owners of 
the Mets were going to form that network whether we invested in 
it or not. We were very small investors. So we, unfortunately, 
are sharing the cost increase that RCN has, and I would say 
that the cost of sports programming is a big issue for all of 
us. It is unrelated to the structure of the cable operator 
business.
    Senator Kohl. What about you, Dr. Cooper? Do you believe 
that we do, in fact, have reason to worry about this deal, that 
it will enhance Time Warner's and Comcast's ability to lock up 
programming and deny it to their competitors?
    Mr. Cooper. Again, the important guy is not in the room, 
the one that controls the sports, that has withheld it from 
competitors, that invented the terrestrial loophole, so to 
speak, and saw it as a point of leverage. And that is the 
fundamental difference between the so-called clusters of the 
Bells and the clusters of the cable systems. The Bells could 
not leverage their cluster. They were subject to regulation and 
non-discrimination, and so it did not do them any good to have 
that cluster because they could not discriminate in access to 
their systems.
    Now, of course, as we go forward into the new broadband era 
where the Commissioners decided that they are not longer 
obligated to provide access to the networks, they may change 
that. But that is not the direction we should be going.
    So there are clear examples of sports programming that has 
been withheld through the terrestrial loophole. Those clusters 
are the leverage for it. If you live in Philadelphia and you 
cannot see the Phillies or the Sixers, what do you need 
somebody else for? You want that stuff, and that drives 
penetration, and that can be withheld. Closing the terrestrial 
loophole is one of the clearly competitive issues that this 
Committee can address.
    Senator Kohl. Mr. Cleland?
    Mr. Cleland. Yes, I would just like to add, you know, we 
have two different choices, and I think we chose a market-based 
solution in going forward with cable. And markets don't always 
provide for all consumer wants. There are some consumer wants 
that don't necessarily make economic sense, and so my point 
here is there are all sorts of instances where a marketplace 
delivers things consumers don't like.
    When I am on an airplane, I cannot get Coke. I can only get 
Pepsi products. That is because the marketplace has set up a 
regime where it makes sense to have a sole-source supplier and 
they pay for it.
    Now, is that something regulation is necessary? I don't 
think so. And so there are going to be lots of times in 
programming where consumers may not get all they want or may 
not get the best deal they want; however, the alternative of 
Government intervening and being the chooser rather than the 
marketplace I think is much, much worse. So it is the lesser of 
two evils.
    Senator Kohl. Mr. McSlarrow or Mr. Gorshein?
    Mr. McSlarrow. I am here representing the cable industry, 
but because a couple of assertions have been made about 
Comcast--even though I am not representing them specifically--I 
feel compelled to jump in here.
    First, it is false that Comcast Sports Net has done 
something with the so-called terrestrial loophole. What Comcast 
did in Philadelphia was acquire from Prism an existing 
microwave terrestrial distribution system, which had some 
sports programming on it, and they brought new sports 
programming to it. Sports Net is local in Philadelphia, and 
Comcast did not change what they had acquired. In every other 
instance, including here in D.C., Comcast Sports Net is 
satellite-distributed and is available to all other 
distributors.
    There is no such thing as the terrestrial loophole. That is 
a misnomer. The policy in the United States is that programming 
decisions should be left to the marketplace between programmers 
and distributors. There is an exception carved out for, I 
think, sound policy reasons. It says that where you have 
vertically integrated programming with distributors, you need 
to ensure that they are not discriminating against other 
distributors. And the Congress has defined that as satellite-
distributed networks. The FCC many times has looked at this 
issue and agreed that for very good policy reasons, you want to 
encourage terrestrial networks that can give you the kind of 
local and regional news and other local programming that you 
wouldn't otherwise have an incentive to invest in.
    Senator Kohl. Mr. Gorshein?
    Mr. Gorshein. Thank you. Just a couple of quick things from 
a clustering perspective. I heard the term ``national 
clustering'' earlier, but I think it is also important to look 
at the top DMAs in the country. And post-transaction, 38 out of 
the top 40 markets will be locked up or substantially 
controlled.
    Now, from my limited perspective as an independent 
programmer, what that means is that although other regions of 
the country may be available theoretically, I will be 
foreclosed from competing because the investment community, the 
advertising community will say, well, you don't have the top 
markets or most of the top markets or some of the top markets, 
and, therefore, you are not viable because the top markets are 
where disposable incomes are higher, product trends get set, 
and there is the presence of major press.
    One other point. Empirically, we looked at, on the ground, 
what the top 92 channels have done. These are the channels that 
are in 20 million homes or more. Twenty million is a key 
number, as everyone in the industry knows, because that is 
where Nielsen ratings are accurate and reliable and where, for 
most networks, profitability starts. Ninety out of the 92 
secured carriage from both Comcast and Time Warner, two from 
one of Comcast or Time Warner, but those two also secured 
Adelphia. So post-transaction, it will be, empirically at 
least, impossible for an independent channel to succeed without 
Comcast and Time Warner.
    Senator Kohl. Well, before I turn it back to the Chairman, 
is the man right, Mr. Britt?
    Mr. Britt. I think I am familiar with the study that Mr. 
Gorshein talked about earlier. He uses the word ``affiliated'' 
in a very interesting way. The proper concern and the concern 
of the existing rules is vertically integrated companies, so 
there is a set of regulations that requires Time Warner as a 
vertically integrated company to make its programming available 
to other people. And those rules apply to News Corp. also and 
any other cable operator that owns programming.
    Programming owned by other big media companies in my case 
is not affiliated with me. So the Disney Corporation as a third 
party is just as independent as Mr. Gorshein's company when I 
deal with them and our negotiations are very fierce.
    The only thing I would add to that is that it is true that 
there is a whole set of rules and regulations and laws around 
the broadcast industry that are called ``must carry'' and 
``retransmission consent.'' And it is true that the big 
broadcasters have used retransmission consent to foster 
carriage of their networks. And they do own a large number of 
cable networks, so that is a true thing and it does affect 
independence. And I would say--and Mr. McSlarrow referred to 
it--elsewhere there is discussion of the digital TV transition 
and multi-cast. If the Congress decides to go along with multi-
cast, that will further hurt the ability of independent 
programmers, that is, people not attached to a broadcast 
company, to get carriage.
    Senator Kohl. Last comment, Mr. Gorshein?
    Mr. Gorshein. Yes, I agree with everything Mr. Britt just 
said, but I will say that in addition to the extra leverage 
that the broadcasters have, what we define as ``independent,'' 
not affiliated with a top cable operator or a broadcaster, 
there is a significant competitive threat brought by newer and 
cheaper mousetraps to vertically integrated companies that have 
channels, compete for eyeballs, for capacity, for ad dollars, 
and there is foregone value.
    Senator Kohl. Absolute last comment, Dr. Cooper.
    Mr. Cooper. Senator, yes, it is very important and, again, 
it gets back to my central theme. This Congress creates rights 
of carriage, the ``must carry'' rights, and that determines 
success or failure. If you have got guaranteed rights through 
ownership or ``must carry,'' you will succeed. And if you 
don't, you will almost certainly fail. Make no mistake about 
it. And that is why I suggested the notion of unlicensed 
spectrum where no one has those rights, where we all find ways 
to use spectrum without declaring ``I am the only one who has a 
right to transmit in this space,'' whether it is inside a wire 
or through the air.
    You determine success and failure in this business by 
allocating those transmission rights.
    Senator Kohl. Thank you, Mr. Chairman.
    Chairman DeWine. Mr. McSlarrow, let me ask you a question. 
How will the digital TV transition impact television viewers? 
For example, will cable subscribers in Ohio need to do anything 
specific to make sure that their TVs keep working the same way 
after the transition?
    Mr. McSlarrow. It depends on what Congress decides to do. 
If nothing is done, potentially cable subscribers would be 
affected in the same way that over-the-air customers would be 
affected--that is, out of 66 million cable customers, 40 
million of them have analog-only TV service. So unless they get 
a set top box or some other converter, their screens would go 
dark on some channels.
    Now, there are two ways to solve that. You can either add 
all the cable customers into the big subsidy program that 
Congress is considering for over-the-air customers and buy them 
digital-to-analog converters. Or you can do what we have 
proposed to help the transition along, which is: we will spend 
our own money, we will re-engineer the cable plant, we will 
send a digital stream from the broadcaster down to the 
consumer, and we will send an analog signal down and make sure 
that everybody, no matter what kind of service they have, is 
taken care of.
    For some odd reason, the current law actually makes it a 
big question whether or not we could do that. So we have asked 
the Commerce Committees in both the House and the Senate for 
that clarification.
    Chairman DeWine. Mr. Aquino, you have told us that 
vertically integrated cable companies like Comcast and Time 
Warner are giving each other discounts and charging smaller 
cable companies more for the same programming. But you also 
claim that these discounts are not really based on volume or 
some other legitimate basis. You acknowledge you don't really 
have evidence of this because programmers' contracts are 
confidential. But you call for an FTC investigation, which 
obviously is a very serious thing.
    Is there anything specific you can point to that indicates 
they are doing anything to improperly discriminate?
    Mr. Aquino. Mr. Chairman, I don't know that it is improper 
or not. From a marketplace perspective--
    Chairman DeWine. You say you don't?
    Mr. Aquino. I do not.
    Chairman DeWine. OK.
    Mr. Aquino. I am not alleging that there is anything 
improper. I think the market forces basically state that if 
they can charge small entrepreneurs more money and they pay for 
it, they will continue to do so. But if you look at the chart 
that we presented today, if the MSOs are paying about 30 
percent, what we call expense-to-revenue relationship, expense 
of programming to video revenues, and the DBS providers pay 
about 40 percent of their expenses for that same service, the 
over-builders and the rural companies and the new entrants in 
broadband are paying close to 50 percent.
    Now, I would suggest that a premium of that nature is just 
out of bounds, and we provide fiber, you know, to 150 home 
nodes. We bring broadband at 10 megabits to the home. So we are 
part of the broadband movement in the country, but that price 
difference, that premium, I think is just unacceptable. So we 
are looking for some help--because I don't see the rates of the 
other players and we are only looking at public filings, there 
is no way to really know what kind of premiums we are paying as 
competitors and whether that kind of premium is justified.
    Chairman DeWine. Mr. Britt, do you have any response to the 
concerns Mr. Aquino is raising? And, you know, generally 
speaking, how should we evaluate if a deal with discriminatory 
or the differences in treatment are based on justifiable 
business or efficiency reasons?
    Mr. Britt. I guess my only response, I am on the purchasing 
side of this, too. I buy programming. I don't sell it. And when 
we negotiate with people, most of whom are not associated with 
our company, we negotiate the very best deal we can get.
    I believe, as with most things in the American economy, 
when you buy more, you get a cheaper price. If you buy a big 
box of Corn Flakes, you get a cheaper price per Corn Flake than 
if you buy a little box.
    So I suspect that that happens. Obviously, I am not privy 
to the details of what other people pay for programming, but I 
think all of us try to get as good a deal as we can.
    Chairman DeWine. Mr. Gorshein, Dr. Cooper, let me ask you 
this: You both raise the point that a large percentage of the 
channels carried by the cable companies are affiliated with 
either a large cable company or a network that has 
retransmission rights. It does seem that most of the channels 
that are carried are affiliated with other organizations, but 
with regard to a specific cable company like Time Warner, many 
of the channels they carry are not affiliated with Time Warner 
specifically.
    Is there really any reason for Time Warner to favor content 
that is affiliated with some other distributor, for example, 
Comcast? And let me just ask all of you--let me go to Mr. 
McSlarrow and Mr. Britt. Is there any significance to this 
fact? I understand that many channels are affiliated with large 
networks because often those networks can utilize the 
retransmission consent provision to obtain carriage for them, 
but really, why are so many of the other channels affiliated 
with other cable systems?
    Mr. Cooper, we will start with you.
    Mr. Cooper. Well, from our point of view, this is the dance 
of the elephants in which the mice in the grass get trampled. 
Essentially you have entities that have a lot of bargaining 
power--the networks and the cable operators who have 
programming--and essentially they have assembled suites of 
programs in which they have an offering in each of the major 
categories. We present that evidence in our testimony. And they 
fill the basic and expanded basic tiers up with that stuff. And 
if you are not one of those entities who has the leverage to 
get into that tier, you have almost no chance of succeeding. 
That is the stunning evidence before this Committee and the 
Commission.
    If you don't get carriage on those networks, past those--in 
the current model. Now, I would--if we were to have a la carte 
choice, then individual programs would have to stand on their 
own and consumers would get a chance to choose--not all or 
nothing or almost all or nothing, but individual programs--that 
would change the landscape because that would break the 
bundles. But as it stands now, you have six entities who simply 
match each other's suites, get into the basic and expanded 
basic tiers, and that is it.
    Chairman DeWine. Mr. Gorshein?
    Mr. Gorshein. Yes, sir. We certainly have no issue with 
some companies owning lots of channels, and there are six of 
them that own lots. Comcast in recent years has launched 20 of 
them, with more in planning and development.
    The issue for us is free and fair competition on a level 
playing field. The antitrust laws are supposed to prohibit 
discrimination on the basis of affiliation. The program 
carriage rules at the FCC are supposed to prohibit specifically 
discrimination on the basis of affiliation by cable operators. 
Those laws, to our knowledge, have never been enforced. The end 
result is that of the top 92 channels, there are only 9 that 
have no affiliation with a broadcaster or a cable operator. We 
did a study in the last 2\1/2\ years where less than 1 percent 
of independent channels secured broad-based, nationwide 
carriage, and most if not all affiliated channels get carriage. 
Some of those are watched and some of those are less 
successful.
    So what we are looking for is an enforcement, a greater 
scrutiny and an enforcement of the existing laws that will 
allow us to compete. Why is it important for us to compete? 
Competition is good. It is good for consumer pricing. 
Independent channels, according to Kagan, 130 of the top 
channels surveyed, independent channels are--sorry, affiliated 
channels are 300 percent the cost of unaffiliated channels. It 
is good for consumer pricing. It is good for consumer choices. 
It is good for diversity.
    Chairman DeWine. Mr. McSlarrow?
    Mr. McSlarrow. It is hard to unpack all of this because it 
is an odd thing. Here is the cable industry, at a time when 
most Americans just assumed it was a law of nature that we 
would get TV with only three stations, that invented diversity 
of programming. Without cable, there would be no opportunity 
for the hundreds of networks that are out there. Niche 
networks, big networks, sports networks, you name it. They are 
out there for every group in America with their individual 
tastes and interests. We have almost 390 networks that are 
getting carriage someplace--that are thriving better in other 
places than others, I suppose--but are a successful business 
model. And it is a business model that is working precisely 
because independents are actually getting carriage.
    Now, over the years--and I know this Subcommittee has 
delved into this--there have been studies about how many and 
what percentage of cable networks are actually vertically 
integrated with an operator. That number has dramatically 
declined. It was only a few years ago that it was above 50 
percent; 2 years ago it was 33 percent; and last year it was 
down to 23 percent. We don't know this year's numbers, but the 
fact is the trend is actually down.
    Now, I think Mr. Britt and others have made the point about 
retransmission consent, so I don't need to duplicate what they 
have said. But the point is people do get carriage. They get 
carriage on the basis of their content and whether or not their 
ideas are compelling enough. Somebody has to make a call on 
that. I vote for somebody who actually is worrying about 
whether or not their consumers like what they are offered and 
not what the Government or the FCC decide.
    A final point: it is an odd thing to hear somebody make the 
argument that it requires a certain base threshold of 
subscribers--call it 20 million, which is the number that has 
been thrown out--in order to survive and then turn around and 
argue that an a la carte model--which almost by definition 
guarantees that you will have some smaller universe of 
viewers--is going to allow you to solve this problem, because 
we know what happens in an a la carte world. What happens in an 
a la carte world is that the niche, perhaps marginal, 
networks--even if they have great ideas--are going to fall off 
the pipe because they won't have the viewership to sustain 
them.
    Chairman DeWine. Anything, Mr. Britt?
    Mr. Britt. I don't really have much to add to that except 
to say that our job is to put together the most attractive 
package of programming we can find that we think will appeal to 
the consumers. And there are literally hundreds of ideas for 
new channels that float around, and we try to do as good a job 
as we can of deciding what we should buy that will maximize 
consumer purchase of our product. And that is the role we play.
    Obviously, entrepreneurs may have what they think is a 
great idea and we might disagree, in which case they are 
disappointed. But I am not sure that the Government should be 
getting involved in that. I think it is the marketplace at 
work.
    Chairman DeWine. Senator Kohl?
    Senator Kohl. Mr. Britt, when News Corp. acquired DirecTV a 
couple years ago, the FCC imposed a merger condition forbidding 
DirecTV from getting exclusive rights to carry News Corp. 
programming. Would it be appropriate to impose a similar 
requirement on Time Warner Cable and Comcast with respect to 
this deal?
    Mr. Britt. That is actually an excellent question. The 
existing law actually has those same provisions for vertically 
integrated cable companies, so we live under those provisions 
today at Time Warner, because when that law was written, 
satellite was just starting. It didn't apply to satellite.
    So what happened in the case of News Corp. and DirecTV was 
a new vertically integrated entity was being formed of a very 
powerful programmer, News Corp., and a powerful distributor, 
DirecTV. So all that happened there was the existing rules that 
applied to cable were applied to News Corp. They weren't a new 
set of rules.
    There was the added twist that, unlike any cable operator I 
am familiar with, News Corp. also has a considerable number of 
broadcast stations, and there was the risk of them using 
retransmission consent in an adverse way. So there were some 
additional constraints put on that transaction, that are not 
really relevant to us. We don't own broadcast stations.
    Senator Kohl. Mr. Cleland, do you want to make a comment?
    Mr. Cleland. Yes, if I can make a comment just on program 
access. I think, you know, all these discussions, back in 1992 
program access was essential to launch a competitive video 
programming market. In 2002, I believe it was, when the FCC 
decided should they extend program access, I think at that time 
it was still necessary. But I think it will be 2007, maybe, 
when it is up again. That is the time when we may have reached 
a market threshold where program access may no longer be 
necessary to be mandated by the Government. It is going to be a 
close call because, you know, Rupert Murdoch doesn't need any 
protection from anybody and Comcast doesn't. I mean, these are 
large players. There are many people fighting. They have power 
on each side. It is not really--I do sympathize. This is not a 
land--this is the land of the giants. The smaller players, you 
know, may get trampled. But it is big business, and I think, 
you know, generally going forward the program access regulatory 
approach is going to be less and less justifiable based on 
market forces and the level of competition in the marketplace.
    Senator Kohl. Mr. Cooper, how do you feel about that?
    Mr. Cooper. Well, the interesting thing to me is that we 
have got all these good ideas floating around, and it is just 
dumb luck that the good ideas happen to stick, are 62 percent 
more likely to be found in the affiliates of the cable 
operators because they get on the air 62 percent more of the 
time. And they are 46 percent more likely to be found in the 
affiliates of the networks because they get carriage 46 percent 
more than the other people with good ideas.
    There is no doubt that there is a structural bias in favor 
of affiliated programming. There is a quid pro quo with the 
rights of carriage. And so rather than being--and maybe Scott, 
who is a straight talker, has put it exactly as it needs to be 
put to this Congress. All the little guys will disappear. That 
was not the purpose of the 1992 Act. That was not the purpose 
of the 1996 Act.
    We do not want a world in which the big dozen, half-dozen--
this is a fairly small number--decide what succeeds. And if you 
look at the numbers--look at the Government Accountability 
Office study. They found a bias in favor of affiliated 
programming. That creates a hurdle that you ought to care 
about. If you only care about the market, then we know what 
will happen. The big guys will succeed and, frankly, rather 
than have the executives of the cable companies decide what 
they think the American people want to see, I would like to 
have the American people decide directly what they want to see 
by having the opportunity to exercise choice. It will change 
the business model because there will not be blank TV screens 
for almost all of the channels. The people who pay for those 
channels will watch them, and those eyeballs will be valuable 
to the advertisers who want to reach that demographic.
    It is absolutely the case, as suggested, that is a 
different model, but it is a model that really can work because 
people will have said, ``I want to watch this show, I will 
watch this show,'' and the advertisers who want to reach those 
individuals will be able to find them. It is a different model, 
but it is one that gives consumers the real choice, and we 
think that is important. And it keeps a lot more little guys in 
the business than the current system in which only the big 
players will survive.
    Senator Kohl. Mr. Aquino, when our Committee looked at 
cable competition, we found that the presence of competitive 
cable companies like RCN helped keep cable rates down. Last 
year, Senator DeWine and I commissioned a GAO study on the 
issue, and the study found that in five of six markets it 
studied, the consumers' cable bills were lowered by between 15 
and 41 percent when an independent competitor was present. An 
earlier study found markets with wire-based cable competitors 
benefited by prices that were about 15 to 20 percent below 
average. But relatively few markets across the country have the 
benefits of an independent cable competitor.
    In your judgment, why is this? And what are the biggest 
obstacles to the entry of independent companies to challenge 
the cable incumbents?
    Mr. Aquino. Senator, it comes down to financing from Wall 
Street and the confidence that they have that entrepreneurs 
like RCN can succeed. And they evaluate our cost structure, and 
they look at things that they think are fair and unfair.
    I get the question all the time about my programming rates 
relative to the other players, and I compete ferociously in 
these markets, and competition is good. Competition will keep 
both of us honest, will get to innovation. I have fiber almost 
to the curb in my markets. We have metropolitan fiber rings in 
major cities. We are offering services to commercial customers 
as well as residential customers. So competition is good. It 
really raises the level all around, and ultimately prices will 
be better for consumers.
    But it comes down to investment. If there is a sense that 
the small guys will disappear by the big guys taking over, that 
is a problem.
    So, you know, I plead before the Committee today to just 
basically hear some of the comments today. Consumers need to 
have a choice. We think we can compete. We have been very 
successful in our marketplace, and many franchises where we 
compete head to head, we actually win in some cases. So we 
would like the opportunity to continue to do so.
    Senator Kohl. Yes, Mr. McCormick?
    Mr. McCormick. Senator, I might add that the franchising 
process is a significant barrier to entry. We are an industry 
that began in the voice business. Once we began offering high-
speed Internet access, the technology makes it possible for us 
to provide video. The cable industry is an industry that began 
in the video business. Once it added high-speed Internet 
access, the technology made it simple for the cable industry to 
offer voice. But the franchising process is a significant 
barrier to entry.
    I had mentioned the situation in Otswego, Minnesota, where 
we have a small telephone company with 13,000 subscribers that 
goes out and invests to deploy a network capable of offering 
voice and Internet access and video to a set of customers. 
Those customers today are getting voice and Internet access, 
but they are not getting video, despite the fact that the 
facilities are capable of offering it, because the local 
franchising authority has said you must build beyond your 
telephone service area into a different service area to match 
the cable service area. It is wholly arbitrary. It is 
economically impractical. And all it results in is consumers 
being denied that choice.
    So we think it is important that Congress undertake an 
examination of how the franchising process is imposing a 
barrier to entry.
    Senator Kohl. Mr. McSlarrow?
    Mr. McSlarrow. If I could actually respond to the last two 
comments.
    First on the GAO report, let me just say very quickly for 
the record: That was, as you said, a study of a paired set of 
12 communities nationwide, half with overbuilds, half without. 
There are a total of 433 communities nationwide with 
overbuilders, and if you go and look at all the competition we 
have from two satellite providers, there is actually a total of 
10,000-30,000 communities, excuse me--that have competition in 
them. And in each case, if an overbuilder comes in, either 
because they bought the system for pennies on the dollar and 
got a cost break; or because they didn't actually have build-
out requirements, as we have been talking about, so they had a 
cost advantage over the incumbent; or because they just didn't 
get the market right and decided they will dive down on price 
and force competition with the cable guys; it turns out in most 
cases they just got it wrong. This was not actually a 
sustainable, competitive price model.
    If you look at the ins and outs, RCN has done a great job 
in the last couple of years, and I applaud that. But the 
history of this business has been one of financial instability 
because it is very hard. The assumption that there is not 
effective competition taking place today is belied by the fact 
that it is very hard--with cable and the two satellite 
providers--to get into the video market and dive down below on 
price. But we are going to see it again now with the Bells. 
This is their tried and true model on price. They have already 
done it on DSL. They are going to try to do it with video, and 
that is fine. We will see how this shakes out.
    But I would say that in terms of franchising--and Walter 
and I are friends outside this room--this is a complete 
fantasy. The only thing holding back the Bells from getting 
franchises has been the Bells themselves. The rules that are on 
the books today are the rules the Bells asked Congress for in 
1996. They actually acquired over 100, I think, franchises 
along the way and decided they did not want to pursue that 
business until recently. Now they have decided to get into 
video again. That is fine. We are going to have that kind of 
competition. But they want to change the rules and get a 
subsidy, in essence, by saying we should play by a different 
set of rules.
    When we were talking about phones before, everything that 
we have done, when we have rolled out our services, complied 
with the rules on the books. We have never come to Congress and 
said, ``Change the rules for us.'' And all we are asking is 
that the Bells be treated the same way.
    If you want to change the rules going forward, that is 
fine. Let's have that conversation. But do it for all of us.
    Senator Kohl. All right. Mr. Cleland, do you believe that 
the challenges that cable companies face, such as difficulties 
in gaining access to programming, and for the phone companies, 
gaining franchises, seriously harms the ability of these 
competitors to compete in the marketplace? And if you do, what 
legislative or regulatory changes do you believe will help 
solve some of these difficulties?
    Mr. Cleland. I think that you are going to see increasing 
competition and innovation. I actually am very much an optimist 
in this market, I think what is happening in this expanding 
pie. Essentially what you have is technology is enabling new 
services, and new services are being piled upon the basic ones. 
And so I look ahead and I think, especially in the video 
programming space, it is going to be a very rich competitive 
market. And I look at it and I kind of say, why are we so 
focused on prices? People are getting so much more value for 
their dollar out of entertainment than they did in the past. 
That is why it goes up. And, you know, value is going up, so 
price is going up. And when you compare entertainment pricing 
over TV relative to what you get when you go to a ball game or 
when you go out to eat, it is just, you know, still an 
incredible bargain. People will spend a lot more going forward 
on entertainment.
    The questions on legislation, I think that the laws on the 
books, whether they are telecom, they are cable, they are 
broadcast, they are ancient and they are an impediment to 
innovation, productivity, and economic growth. And Congress--
and in my testimony I lay out an approach which says we really 
should think about going back and doing a clean slate because 
the problem is all these rules and regulations and laws were 
based on technologies where we assumed there was market power 
and we assumed that people needed to be protected from 
technology. And now we are in a situation where technology can 
actually help people, and we have all sorts of impediments of 
essentially silo regulation.
    So I guess I am one of the view where I think Congress 
should take a really deep, hard look and say going forward in 
the 21st century, why do we have some of these 1930's laws. I 
am not saying have no law, but I think you can get rid of 90 
percent of it and protect 10 percent. And one of the things I 
think is mandated--you know, BIT cooperation so that people 
don't go dark, so you can make sure that the network stays to 
be powerful. That is the minimal level of regulation, and it 
can be outsourced to be arbitrated by private entities. But the 
law--telecom, broadcast, and cable, and all of these laws need 
to be completely pulled out at the roots and start over for the 
21st century.
    Thank you for asking.
    Senator Kohl. Thank you very much, gentlemen.
    Senator DeWine?
    Chairman DeWine. Well, we appreciate everyone's testimony 
very much.
    Mr. Britt, just one last question. I don't know if I asked 
you this before or whether you covered it. In regard to 
Adelphia, what would people expect in regard to their price per 
month? Are they going to expect a change? I mean, is that 
something that people can look for or--
    Mr. Britt. Mr. Chairman, I think that will vary by 
location. We price locally according to market conditions. We 
don't have a national price, so there really isn't a blanket 
answer.
    I would not anticipate major changes in price, though. They 
have been competing with some success, although, as we point 
out, they are bankrupt. We will be adding many new services 
that will have the prices they have, but I don't expect big, 
giant changes.
    Chairman DeWine. Well, we appreciate everyone's testimony. 
As we have heard today from, really, I think all of our 
witnesses, the video marketplace is in flux. We have seen major 
changes in the last few years in terms of new products, new 
services. Increasingly now we are seeing different players 
become involved in telephone service, video service, data 
service, all to the benefit of consumers as well as business 
customers. As we move forward, it will be increasingly 
important that the laws and regulations that guide these 
markets are clear, are consistent, and are drafted to promote 
the maximum amount of competition. The more competition we 
have, the more innovation and better products and prices we 
will all see.
    Accordingly, that will be the goal of our Antitrust 
Subcommittee as we look forward to rewriting the Telecom Act 
and reworking the various laws that impact on the 
telecommunications and video industries more broadly.
    Our witnesses today have provided us with valuable insights 
as we consider how to increase competition in these various 
industries, and this hearing has, I think, been an excellent 
first step in that direction. So we thank all of you very much. 
Senator Kohl and I thank you for being with us today. We look 
forward to talking with you in the future.
    Thank you very much.
    Senator Kohl. Mr. Chairman, I just need to make another 
comment. I had been inclined to be much more difficult with Mr. 
McSlarrow than I have been, and it is because, as you know, 
your wife, who is a good friend of mine, you brought along to 
stand in the back of the room to probably modify my approach. 
And it has had its effect.
    [Laughter.]
    Chairman DeWine. We thank you all.
    [Whereupon, at 3:42 p.m., the Subcommittee was adjourned.]
    [Submissions for the record follow.]
    [Additional material is being retained in the Committee 
files.]

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