[Senate Hearing 109-553]
[From the U.S. Government Publishing Office]
S. Hrg. 109-553
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
JANUARY 31, 2006
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED NINTH CONGRESS
TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana Chairman
TRENT LOTT, Mississippi JOHN D. ROCKEFELLER IV, West
KAY BAILEY HUTCHISON, Texas Virginia
OLYMPIA J. SNOWE, Maine JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada BARBARA BOXER, California
GEORGE ALLEN, Virginia BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire MARIA CANTWELL, Washington
JIM DeMINT, South Carolina FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana E. BENJAMIN NELSON, Nebraska
MARK PRYOR, Arkansas
Lisa J. Sutherland, Republican Staff Director
Christine Drager Kurth, Republican Deputy Staff Director
Kenneth R. Nahigian, Republican Chief Counsel
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Samuel E. Whitehorn, Democratic Deputy Staff Director and General
Lila Harper Helms, Democratic Policy Director
C O N T E N T S
Hearing held on January 31, 2006................................. 1
Statement of Senator Dorgan...................................... 44
Statement of Senator Stevens..................................... 1
Fawcett, Daniel M., Executive Vice President, Business and Legal
Affairs and Programming Acquisition, DIRECTV, Inc.............. 26
Prepared statement........................................... 28
Gorshein, Doron, Chief Executive Officer/President, The America
Channel, LLC................................................... 33
Prepared statement........................................... 35
Lee, Robert G., President/General Manager, WDBJ Television, Inc.;
on Behalf of the National Association of Broadcasters.......... 13
Prepared statement........................................... 14
Polka, Matt, President/CEO, American Cable Association........... 6
Prepared statement........................................... 8
Pyne, Ben, President, Disney and ESPN Networks Affiliate Sales
and Marketing.................................................. 2
Prepared statement........................................... 3
Waz, Jr., Joseph W., Vice President, External Affairs and Public
Policy Counsel, Comcast Corporation............................ 18
Prepared statement........................................... 20
Ensign, Hon. John, U.S. Senator from Nevada, prepared statement.. 57
Feld, Harold, Senior Vice President, Media Access Project,
prepared statement............................................. 58
Goodman, John, President, Coalition for Competitive Access to
Content (CA2C), prepared statement............................. 64
Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared
Letters to Hon. Ted Stevens and Hon. Daniel K. Inouye from:
Brunner, Michael E., Chief Executive Officer, National
Telecommunications Cooperative Association (NTCA), dated
January 30, 2006........................................... 74
C. Michael Cooley, President and Chief Executive Officer, The
Sportsman Channel, dated January 31, 2006.................. 72
Keith A. Larson, General Manager, Dakota Central
Communications, dated January 30, 2006..................... 70
Luis Torres-Bohl, President, Castalia Communications, dated
February 2, 2006........................................... 73
TUESDAY, JANUARY 31, 2006
Committee on Commerce, Science, and Transportation,
The Committee met, pursuant to notice, at 2:30 p.m. in room
SD-562, Dirksen Senate Office Building, Hon. Ted Stevens,
Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
The Chairman. Good afternoon. This is a strange day around
this place, State of the Union day. I'm sorry to proceed with
the hearing, but we feel it's necessary to keep going, get
these hearings that we have scheduled through so we can start
the markup process on the bills that are before us.
We do appreciate your all being willing to come and join us
today in this hearing. My colleagues are involved--have sent
word to me that they're involved in some meetings. They should
be along in a few minutes. I want to start and just make a few
comments myself and then we'll see how many people can be here
by the time we start listening to your presentations.
Retransmission consent allows broadcasters to negotiate
compensation for their popular over-the-air content. And the
big-four broadcasters--ABC, NBC, CBS, and FOX--have used
retransmission consent to negotiate carriage for both their
over-the-air programming and programming of cable channels in
which they have invested.
Some small cable companies have contended that the
broadcasters use retransmission consent to go further than
Congress intended. And some of the small cable companies want
to offer family tiers, but the contracts the programmers offer
would require them to air content not appropriate for children
and for the majority of their viewers. Other rural providers
have told us the price they are asked to pay programmers for
the content is substantially higher than their urban
counterparts. And we have been asked to hear from an
independent programmer who states that his ability to get
carried on cable is affected by this concept.
We want to give cable and satellite providers a chance to
respond and detail how they carry out this retransmission
Some satellite carriers have argued that the so-called
``terrestrial loophole'' allows larger cable companies to lock
up exclusive rights to sports programs, and we want to listen
to comments about whether or not these lead to anti-competitive
rates for those programs.
I'm told that exclusive contracts are not allowed for any
sports delivered by satellite, but that rule does not apply to
content delivered by cable. And I expect we'll hear from both
sides of that issue today.
And we're well aware of the FCC's consideration of the
Adelphia merger. It's not our goal to focus on that transaction
here today, but, of course, you're free to comment, if you
We postponed the hearing for video franchises this morning,
and I am sorry that we had--felt compelled to do that. But the
hearing will be rescheduled for February 15th at 10 a.m. We've
invited the FCC to appear that day, but we have not yet
received the nomination for the fifth commissioner, so we
decided to reschedule that hearing and take up the one we
postponed for this morning. I apologize for that inconvenience
to those people affected by this change.
We really are trying, as I said, to proceed as rapidly as
we can with the Committee's agenda of hearings that have been
requested in order that we can get to the legislation which is
pending before us to update our communications laws.
Now, there is no one I can ask if they want to make an
opening statement, so we will proceed to the list of our
witnesses before us.
We do have a letter here from NTCA to me and Senator Inouye
which I have been asked to put in the record, and we'll do so,
because of the statement that it represents over 560 rural-
community-based telecommunications providers. It will be
printed in the record.
The Chairman. Now, I believe we'll just proceed in the line
that's just from left to right. We'd be happy to hear from you
first, Mr. Ben Pyne, the president of Disney and ESPN Networks
Affiliate Sales. And happy to have your statement. Thank you
STATEMENT OF BEN PYNE, PRESIDENT, DISNEY AND ESPN NETWORKS
AFFILIATE SALES AND MARKETING
Mr. Pyne. Mr. Chairman, thank you very much. My name is Ben
Pyne, and I am the President of Disney and ESPN Networks
Affiliate Sales and Marketing. In that capacity, I supervise
negotiations for the distribution of all of the Disney and ESPN
cable and satellite services, as well as retransmission consent
negotiations for the ABC-owned television stations.
This afternoon, I would like to make three simple and
First, there was widespread and authoritative agreement
that a la carte distribution of cable and satellite programming
networks would increase costs and drain revenues within the
distribution system, with the result that consumers would pay
more and get less.
Second, our company offers our ABC-station programming,
Disney Channel, and ESPN individually to cable and satellite
operators. And we do not require operators to take any other
services to get ABC, Disney Channel, or ESPN. And, again--this
is a very important point--our company offers our ABC-station
programming, Disney Channel, and ESPN on a stand-alone basis to
cable and satellite operators, and we do not require operators
to take any other services to get ABC, Disney Channel, or ESPN.
Third, retransmission consent represents the fundamental
American business principle that if another business wants to
sell content that we have created and assembled, they need to
first get our permission and then compensate us appropriately.
Our retransmission consent negotiations reflect our interest in
a fair exchange of value for either cash or carriage of our
other services or products in ways tailored to expand our
distributors' service to their customers and otherwise meet
Our opponents would have you believe the broadcast networks
dominate and abuse the retransmission consent process
nationwide, but this simply is not true. ABC owns only ten
television stations. The other 215 stations that comprise the
ABC television network are owned by other broadcasting
companies. As a result, our company is only involved in
retransmission consent negotiations with cable and satellite
operators in ten markets across the country. We are not even in
the room for the retransmission consent negotiations in the
other 215 markets.
In the ten markets where we do negotiate retransmission
consent, we strive to strike a fair bargain. ABC invests more
than $3 billion annually to create or acquire programming. It
is plainly unreasonable for any distributor to expect to take
that product and sell it to consumers without compensating us.
And we offer tremendous flexibility in the kinds of
compensation that we are willing to accept.
First, in the ten markets where we are part of the
negotiation, we always offer a cash stand-alone option for
carriage of just our ABC station. Attached to my testimony is
an economic study that would support a cash price as high as $2
per month, yet we charge less than $1 per month. We have made
it our policy to work particularly hard to accommodate the
needs of smaller cable operators. Although we had no legal
obligation to do so, we have negotiated agreements for all of
the Disney, ABC, and ESPN services with the National Cable
Television Cooperative. These co-op deals give small operators
the buying power of an 8-million-subscriber multi-service
We also work hard to accommodate the small operators on
retransmission consent. We have just completed negotiations
with more than 60 small cable operators. Some elected to pay
cash and have no obligation to carry any of our other services
as part of that process. The majority of these small operators
declined to pay cash, however, and we were extremely flexible
in crafting deals to meet their needs.
Our success in completing all of these negotiations belies
the assertion that there is a widespread problem requiring
government intervention in this process.
Thank you very much.
[The prepared statement of Mr. Pyne follows:]
Prepared Statement of Ben Pyne, President, Disney and ESPN Networks
Affiliate Sales and Marketing
Thank you Mr. Chairman, Mr. Co-Chairman and Members of the
Committee. My name is Ben Pyne and I am the President of Disney and
ESPN Networks Affiliate Sales and Marketing. In that capacity, I
supervise negotiations for the distribution of all of the Disney and
ESPN cable and satellite services as well as retransmission consent
negotiations for the ABC television stations.
This afternoon I would like to make three simple and direct points:
1. There is widespread and authoritative agreement that a la
carte distribution of cable and satellite programming networks
would increase costs and drain revenues within the distribution
system with the result that consumers would pay more and get
2. Our company offers our ABC station programming, Disney
Channel and ESPN individually to cable and satellite operators
and we do not require operators to take any other services to
get ABC, Disney Channel or the ESPN network.
3. Finally, retransmission consent represents the fundamentally
American business principle that if another business wants to
commercially exploit content that we have created and
assembled, they need to first get our permission. Our
retransmission consent negotiations reflect our interest in a
fair exchange of value for either cash or carriage of other of
our services in ways tailored to expand our distributor's
service to their customers and otherwise meet their needs.
Let's start with a la carte. Some would have you believe that a la
carte is a panacea for every perceived ill from cable rates to
indecency. In fact, it is not. The expanded basic bundle has emerged as
the most prevalent form of subscription television offering because it
provides great value to the consumer and is the most economically
efficient way to deliver the product. A la carte would both increase
costs and drain revenues from the system so that even consumers who
selected only a few channels would pay more than they pay today for
expanded basic. Costs would rise because of the need to provide
expensive addressable set-top boxes on every consumer television set
and because individual networks would need to dramatically increase
promotional expenditures. Revenues would be drained because advertisers
on both the national and local level would flee from channels with
significantly reduced distribution. The record in the a la carte
proceeding at the Federal Communications Commission contains letters
from leading advertising agencies confirming the likely drop in
advertising revenue. Of course, a model that increases cost and
decreases ad revenue inevitably leads to higher consumer prices. That
is why expanded basic is rightly, and so widely, perceived to be more
economically efficient and better for consumers.
There is a broad and authoritative consensus that a la carte is not
the answer. A completely independent study conducted by the General
Accounting Office did not embrace a la carte. The leaders of popular
American sports organizations including Major League Baseball, The
National Hockey League, The National Football League and The Big Ten
Conference all submitted letters to the FCC opposing a la carte. Ten
leading economists including Gustavo Bamberger, Michael Baumann, Jay
Ezrielev, John Gale, Tom Hazlett, Michael Katz, Kent Mikkelsen,
Jonathon Orszag, Bruce Owen and Robert Willig, representing a broad
cross-section of economic philosophy, filed with the FCC stating that a
la carte distribution ``would harm consumers, programmers, MVPDs, and
overall economic efficiency.''
Various financial analysts have similarly concluded that a la carte
makes little sense for consumers or as a business proposition. A
December 2005 Sanford Bernstein report noted that if Viacom's BET
service was offered a la carte and every African-American family in
America (17 percent of our population) subscribed to it, ``its monthly
price (i.e., affiliate fee) would need to rise by 588 percent for BET
to remain revenue neutral. If just half opted in--still a wildly
optimistic scenario--then the price would rise by 1,200 percent.''
It is for this reason that in addition to these groups, the
Congressional Black Caucus * and others concerned with the diversity of
voices in our media have also raised strong opposition to a la carte.
Niche programming services will clearly suffer or cease to be available
in an a la carte world.
* Letter has been retained in Committee files.
The Bernstein reports sums it up as follows:
``The result would be monthly cable bills similar to today's
but with each customer receiving a small number of channels for
roughly the same total price as the large number they get
today. Many niche programming options would cease to exist. And
new channel launches would likely stop altogether (who would
opt for a channel they never heard of ? ).''
But you don't need to rely on economic theory or analysis. Disney
has actual experience with a la carte distribution of the Disney
Channel and we can confirm that expanded basic distribution produces
far greater consumer welfare. Originally Disney Channel was offered a
la carte available only to those children and families who could afford
to pay an additional $10 to $16 dollars per month just for it. Despite
the strength of the Disney brand, penetration hovered on average in the
9-10 percent range. Subscriber turnover ran about 5 percent to 6
percent per month or more than 60 percent per year requiring massive
promotional expenditures to replace lost subscribers. Today, Disney
Channel is offered on expanded basic in more than 87 million cable and
satellite homes. This expanded distribution has enabled us to improve
our programming, increase our ratings and serve a broad and diverse
cross section of American families.
In sum, the GAO, America's major sports institutions, 10 leading
and diverse economists, Wall Street and Disney's own experience all
demonstrate that a la carte is not the answer.
Turning to the allegation of ``bundling'' channels, I want to
assure you that the most popular ABC, ESPN and Disney services can be
licensed individually by cable and satellite operators. An operator
that wishes to carry just ESPN or just ABC or just Disney Channel may
do so without any obligation to carry any other service or network that
we own. Of course, like any other American business, the more of our
services you buy, the more flexible we will be on pricing and the more
overall value we will bring.
Turning to retransmission consent, some have argued that
retransmission consent is a government intervention into the free
market that is causing unanticipated consequences. Nothing could be
further from the truth. The only requirement of this law is that before
one business entity commercially exploits the product of another
business entity, it must negotiate for permission. It is hard to
imagine a more fundamental principle of American business. In its
report on the Cable Television Consumer Protection Act of 1991, this
Committee observed that, ``cable systems use these [broadcast] signals
without having to seek the permission of the originating broadcaster or
having to compensate the broadcaster for the value its product created
for the cable operation.'' \1\ In explaining the new retransmission
consent requirements, this Committee stated ``cable operators pay for
the cable programming services they offer to their customers; the
Committee believes that programming services which originate on a
broadcast channel should not be treated differently.'' \2\ Further,
this Committee specifically anticipated that the compensation paid by
the cable operator to the broadcast station could take the form of
``the right to program an additional channel on a cable system.'' \3\
\1\ Senate Report 102-92, Cable Television Consumer Protection Act
of 1991 at 35.
Our opponents would have you believe that the broadcast networks
dominate and abuse the retransmission consent process nationwide. But,
this cannot be true. ABC owns only 10 television stations. The other
215 stations that comprise the ABC television network are owned by
other broadcasting companies. As a result, our company is only involved
in retransmission consent negotiations with cable and satellite
operators in 10 markets across the country. We are not even in the room
for the retransmission consent negotiation in the other 215 markets.
In the 10 markets where we do negotiate retransmission consent, we
strive to strike a fair bargain. ABC invests more than $3 billion
annually to create or acquire programming. It is plainly unreasonable
for any distributor to expect to take that product and sell it to
consumers without compensating us. We offer tremendous flexibility in
the kinds of compensation that we are willing to accept. First, in the
10 markets where we are a part of the negotiation, we always offer a
cash stand-alone option for carriage of just our ABC station.
Notwithstanding an economic study that would support a significantly
higher price, during the next retransmission consent cycle ending in
2008, our cash price remains under $1 a subscriber, an amount that is
exceedingly reasonable by any marketplace comparison. That study by
Economists, Inc. is supported by three different analytic approaches. *
* The information referred to has been retained in Committee files.
Unfortunately, immediately after the enactment of retransmission
consent, the major cable operators announced that they would not pay
cash retransmission consent fees to broadcasters. For example, on
August 18, 1993, the Wall Street Journal reported that ``nearly all of
the Nation's largest cable operators have vowed to forego paying cash
to local TV stations.'' This prospective refusal to pay cash for
retransmission rights was so uniform that the Co-Chairman of this
Committee, Senator Inouye, asked the Justice Department and the Federal
Trade Commission to investigate whether the cable companies had
violated anti-trust laws by improperly colluding with each other. Faced
with the refusal of cable operators to pay cash, broadcasters accepted
from operators the opportunity to program other channels as the
consideration for broadcast retransmission rights. Broadcasters bargain
for carriage of local news channels, local weather channels or other
channels that they own. The facts are clear. The practice of granting
broadcast retransmission consent in return for carriage of commonly
owned cable channels (1) is simply an alternative to the always
available cash stand-alone option; (2) was specifically anticipated and
approved in the Senate report; and (3) was insisted on by the cable
Finally, in our retransmission consent negotiations we have been
extraordinarily flexible with smaller operators. Currently, we have
over 100 separate agreements in place with small operators dealing with
over a dozen Disney or ESPN product lines, covering everything from
linear program services to broadband and pay per view. A couple of
small operators have even agreed to pay cash for retransmission
consent. Our mission is clear: to get these deals done using a
reasonable approach in each circumstance and we have been quite
successful in that effort. That is not surprising given the value of
the programming we produce and the very positive relationship we have
built with the small operator community and the National Cable
Television Cooperative (NCTC). While each retransmission consent
negotiation has traditionally been handled on an individual system or
company basis, the overall relationship we have cultivated with the
NCTC over many years is reflected in the umbrella purchasing agreements
we have with them for rights to our non-broadcast programming services.
Through those agreements, its members, representing 8 million
subscribers, get the same volume discount opportunities we offer our
large MSO customers in negotiations for our cable and satellite
products and services.
The Chairman. Thank you very much. And all statements will
be printed in full in the record. Sorry, I forgot the button,
myself. We will print all the statements in the record that you
have, gentlemen, but I appreciate the attachment to this. This
also would be kept in the record.
Our next witness is Matt Polka, president of the American
Cable Association. Thank you.
STATEMENT OF MATT POLKA, PRESIDENT/CEO, AMERICAN CABLE
Mr. Polka. Thank you, Mr. Chairman and Members of the
My name is Matt Polka, and I am the President and CEO of
the American Cable Association. ACA represents 1,100 smaller
and medium-sized cable companies providing video, data, and
telephone service in smaller markets and rural areas in every
State. Today, I will focus my remarks on retransmission
For ACA members and the rural customers they serve, the
main problem is this. Broadcasters' escalating retransmission
consent demands are resulting in higher cable costs, less
choice, and carriage of unwanted channels. Today, powerful
networks and affiliate groups are demanding ever-increasing
retransmission consent payments from smaller cable companies.
That payment may be in the form of cash-for-carriage. The price
is not determined by market forces; rather, it depends on the
size and market power of the broadcaster. When you're a small
cable operator, you get squeezed the hardest.
The price may also come in the form of unwanted satellite
programming channels tied to retransmission consent. To gain
access to local broadcast signals, we and our customers have to
pay for those unwanted channels. In the current round, we
estimate, in our service areas alone, that these demands are
adding between $500 and $800 million to the cost of basic
cable. This amounts to a transfer of wealth from our rural
customers to corporate headquarters in New York, Los Angeles,
Broadcasters claim that retransmission consent preserves
localism in this regard. But this is cynical, because how does
forced carriage of unwanted channels and sharply rising cable
costs preserve localism? It does not. Here is the part of the
problem that is not well understood. At the same time
broadcasters are demanding escalating retransmission consent
prices, they are using regulations and contracts to exclude
access to lower-cost substitutes. The results are predictable:
prices go up, consumers pay more for the same channels.
An example: Take one of our members in a market where
Disney owns the ABC station. The company serves a few thousand
subscribers on the outskirts of the market. Disney is
reportedly demanding either 85 cents per subscriber per month
or requiring that the company add, and pay for, multiple
Disney-controlled channels and Internet content. This small
company could pick up ABC from a neighboring market at a lower
price. The problem? Disney/ABC blocks access to the out-of-
market station. By contrast, in the rare circumstances where a
small cable operator can get access to an out-of-market
station, the price for the in-market station comes down.
More and more voices are calling for retransmission consent
reform, including smaller telephone companies represented by
OPASCO and the very important rural telephone co-ops
represented by the National Telecommunications Cooperative
Association. Two weeks ago, you heard from our biggest
competitor, EchoStar, saying the same. Just yesterday, an
independent study issued by Arlen Communications confirmed that
broadcasters are exploiting the current retransmission consent
regime. The study describes how broadcasters' use of
exclusivity and escalating demands are hurting consumers in
smaller markets, and, in some areas, are impeding the roll out
of broadband services.
Another key point from the Arlen study: Broadcasters gain
more than $4 per subscriber per month in advertising revenues
from the subscribers delivered by cable. This suggests that
broadcasters should be paying cable for carriage, not the other
To remedy these problems, we ask that Congress reform the
retransmission consent laws in several ways:
First, when broadcasters seek a price for retransmission
consent, allow us a right to shop. ACA members want to carry
local signals, but when the price is artificially inflated, we
should be allowed to consider neighboring markets. You need to
break down the barriers of exclusivity so that the marketplace
can moderate retransmission consent demands. As everybody
knows, it pays to shop.
Second, apply the FCC's News Corp conditions to all
broadcasters. Under the FCC's conditions imposed on the DIRECTV
deal, FOX cannot pull its signal during the course of
negotiations. This single condition has made those negotiations
more orderly and reasonable. This condition should apply to all
broadcasters when dealing with small- and medium-sized cable
Finally, ACA members would like to offer more choices to
consumers using tiers, including family-friendly offerings
which are important to this Committee. The problem is that we
can't. The tying and bundling practices of the media
conglomerates prevent it. We need your help to make this
In conclusion, ACA supports this Committee's work to
address concerns about content, cost, and choice. However, it
has become increasingly clear that without Congressional or
regulatory involvement, broadcasters will continue to use
scarce public spectrum, granted for free, to extract ever-
increasing profits from rural consumers.
[The prepared statement of Mr. Polka follows:]
Prepared Statement of Matt Polka, President/CEO, American Cable
Thank you, Mr. Chairman and Members of the Committee. My name is
Matt Polka, and I am the President and CEO of the American Cable
Association. ACA represents 1,100 smaller and medium-sized cable
companies providing advanced video, high-speed Internet access and
telephone service in smaller markets and rural areas in every state.
I appreciate the opportunity to speak to you today and will focus
most of my remarks on retransmission consent. As I will explain,
especially when dealing with smaller cable companies, broadcasters'
escalating retransmission consent demands are resulting in higher cable
costs, less choice, and, in some cases, required carriage of
objectionable content. I will also address the related problem of
forced bundling and tie-ins--how the major media conglomerates require
us to distribute, and our customers pay for, channels that our
customers do not want. We believe the current system of regulations
have unintentionally fostered much of the trouble. We also believe
practical solutions exist and look forward to sharing our ideas with
ACA brings a unique perspective to this hearing. Our members are
smaller cable providers that do not own programming or content, and
that are not affiliated with large media companies. This independence
enables us to see what's good and what's bad in the current video
market without being blinded by competing and conflicting interests
that many of the vertically integrated companies face. Our sole mission
is simple: we want to deliver high-quality advanced services and
desirable programming that our local communities want.
Obsolete Laws and Regulations
We believe that current laws and regulations inhibit our ability to
best serve our customers, who also happen to be your voters. After 20
years in the cable business, I have seen increasingly how
retransmission consent abuse and wholesale programming practices impede
our ability to best serve our local communities. To help remedy this, I
urge you to continue your inquiry into video programming, pricing, and
packaging. In doing so, I know Congress can benefit consumers by
spurring innovation, competition, and flexibility.
Mr. Chairman, the crux of our concerns comes from the unfortunate
and unintended consequences of the retransmission consent regime, a law
governing the carriage of local broadcast television stations that was
put into place in the 1992 Cable Act. In the 14 years since its
enactment, the world of media has fundamentally changed. Through
unprecedented consolidation, broadcasters and media companies have
become much more powerful. When dealing with smaller cable companies,
broadcasters no longer need the protection given them in 1992. Now,
broadcasters are using retransmission consent in ways that restrict
choice, raise costs, and force consumers to take channels they don't
want. Retransmission consent today as used by the media giants, hurts
``localism'' rather than enhances it. Retransmission consent continues
to be the root cause of the primary concern of so many: increasing
consumer rates for cable and satellite television.
Just yesterday, an independent study issued by Arlen Communications
confirmed that broadcasters are exploiting the current retransmission
consent regime when dealing with smaller providers. The Arlen study
describes how broadcasters use of exclusivity and escalating demands
are hurting consumers in smaller markets and, in some areas, impeding
the rollout of broadband. I encourage you and your staffs to give
careful consideration to the Arlen report.
Retransmission Consent ``Payment''
Under the current retransmission consent regime, powerful networks
and affiliate groups demand payment from cable providers for their
broadcast network. That ``payment'' may be in the form of cash-for-
carriage, which for ACA members is often an astronomical price
unfettered by any correlation with actual, identifiable market value,
or cable operators may ``choose'', and pay for, affiliated non-local
programming on their cable system. If cable operators opt to carry
affiliated programming on their system, programmers dictate channel
placement and set minimum penetration requirements that leave our
members with no option but to include the affiliated programming on the
expanded basic lineup. In other words, their ``must-have'' broadcast
network that has been granted extensive protections by Congress in
order to preserve ``localism'' now gives them leverage to force the
carriage of their affiliated programming onto our channel lineup and
into our consumers' homes.
Here is the part of the problem that is not well understood: While
broadcasters are demanding escalating retransmission consent prices, at
the same time they are using regulations and contracts to exclude
access to lower cost substitutes. Put another way, retransmission
consent ``prices'' are not disciplined by a competitive market. The
result is predictable, prices go up and consumers are harmed. In short,
broadcasters have gamed a system that has its roots in legal and
regulatory fiat, not market-based mechanisms. We urge you to change
Family Tiers/Programming Contracts
With regards to children's programming, I want to commend those
cable operators like Time Warner and Comcast who are working to offer a
family-friendly tier to answer this Committee's call to clean up the
airwaves. My members are ready and willing to offer the same service
option, offering packages of customized content based on the markets we
serve. However, our lack of clout with the programmers whose contracts
mandate carriage of their channels does not allow our members to offer
tiers and we are still trying to find a way to provide new tiers of
service that does not put us in legal jeopardy with our programming
partners. The programming conglomerates will have to loosen their vice-
grip on tying and bundling, and lower their penetration requirements
before more tiering choices can ever become the norm in the cable and
satellite pay-television marketplace.
I believe nothing exemplifies the severity of this problem more
than the fact that ACA shares the same views on this matter as
EchoStar, one of our biggest competitors. EchoStar has the same
unfortunate experience in retransmission consent negotiations as ACA
members because they, too, do not own programming, and therefore do not
have market leverage when negotiating with the media conglomerates.
In fact, contractual obligations have already had a negative impact
on the family-friendly tiers being rolled out by Time Warner and
Comcast. Members of this Committee noted at the indecency hearing held
just two weeks ago that while the tiers were a step in the right
direction, they were limited in the channels they offered. There was
concern among some Senators who observed the lack of marketability in
the tiers that offered G-rated programming only and eliminated sports
altogether from the package. What the cable companies who are offering
the tiers didn't tell you, most likely due to the non-disclosure
agreements in their contracts, is that these are the only channels the
conglomerates would allow them to offer on such a tier! Furthermore,
those companies offering family-friendly tiers are already saying they
will have to cap the number of subscribers that can sign up for the
family friendly tier. That is because if too many consumers want this
offering, they will not meet their contractual penetration obligations
dictated by the programming owners. I'm sure the programmers are not
about to waive their penetration requirements for us should family
friendly tiering become popular. However, if you can ask them if they
would release us from those obligations so that we can meet your call
for more family oriented programming tiers, we would be able to offer a
much more robust and appealing suite of programs to your constituents.
There was also question at the indecency hearing as to why the
market cannot determine what is offered on tiers. We at ACA have the
exact same question. We, who live and work in the communities we serve,
believe we should have the ability to answer our consumers' desires and
the market's demand by offering the channels our subscribers want to
watch. Instead, it is the tying and bundling of programming in the
take-it-or-leave-it contracts extended to us by the conglomerates in
Hollywood and New York that determine what is offered on the lineup of
the cable television in the 8 million, predominantly rural homes we
serve across America.
I know the issue of indecency on television has been one of recent
concern to this Committee, and in particular to you, Chairman Stevens.
Let me point out that the most objectionable and adult-oriented
channels on our lineup are carried because they are tied to one of the
must-have broadcast networks that is broadcast on public airwaves, or
even more alarming, are tied to the carriage of popular children's
programming, as in the case of Logo, the gay and lesbian network, being
tied to one of the Nickelodeon services.
Additionally, in many markets today a cable or satellite provider
that wants to carry family programming, such as Nickelodeon, must also
carry much more suggestive and sexually explicit programming on MTV and
Spike TV, AND must put that programming on the same tier as the
children's programs! Essentially, to get Spongebob Squarepants, a well-
known children's program, cable and satellite providers and their
customers have to also take Undressed or Stripperella, two highly
sexual, adult programs. Here's what MTV's website says about its
program, Undressed: ``Not getting enough action before you go to bed?
Undressed will definitely be changing that! This season is sure to
titillate your senses--so tune in!'' Did Congress intend to perpetuate
this type of situation and allow the use of the public airwaves to be
used as leverage to carry such programming?
A la Carte
I must say there is great irony in the recent announcement that
companies like Time Warner and Comcast will offer a family-friendly
tier. The programmers and MSOs have said for years that tiers and a la
carte offerings would destroy economic models, and have dismissed the
notion that offering such services could ever happen. With pressure
from this Committee and the real threat of legislative action, their
strident position managed to change within a week's time. Furthermore,
these same programmers, who were the strongest opponents of flexible,
market-based offerings, are now selling their individual programming on
iTunes, where customers can go online and download an individual
program and watch it on their handheld iPod device. I believe most
casual observers would call this kind of offering ``a la carte'' as it
allows consumers not to select just the network they want to watch, but
the specific program they desire. While ACA has called for greater
marketplace innovation and flexibility to distribute programming to
consumers, programmers have historically forced us to distribute the
one size, take-it-or-leave-it offerings because they claimed any other
model would destroy the fragile balance that they rely upon to stay
profitable. Hopefully, now Congress and the FCC realize that the market
is much more resilient than they had claimed and no longer has to take
our word for it, they can see it in the actions of the programmers
And certainly networks can't really fight to keep retransmission
consent in its current form for the sake of preserving localism: not
when they are selling their prime programming product they produce for
free over-the-air television and bypass their own affiliates. They are
selling their highest-rated programming stripped of any local
advertising and without giving the affiliate a share of the $1.99
charged to the consumer for the download. As the market moves toward
this model, there is no doubt affiliates' ad revenues will be reduced
as viewers no longer need to watch their station to view their prime
programs, which will eventually have an impact on the quality of local
news and services offered by those affiliates.
How does this approach protect ``localism?'' It appears to me that
nothing may imperil the financial viability of local stations more than
this new business model. The conglomerates have undermined their own
argument that they are for localism and they should no longer be able
to use the tool of retransmission consent to hide their interests. In
fact, the localism they worry so much about is safe due to another
regulatory tool that should be retained. The ACA believes that ``must
carry'' should remain the governmentally-granted tool to ensure that
local stations are not shut out from any market.
Cash or Tying
Today, programmers have two sources of revenue: one is the fees
they charge operators to gain access to the programming and the other
comes from the advertising fees they charge. For this reason, the
programmers demand channel placements on basic or expanded basic tiers
in order to get their offerings in front of the maximum number of
eyeballs possible, which helps drive up their advertising profit. The
largest programmers who have broadcast and cable channels effectively
bypass market forces and bundle their broadcast channels with their
affiliated programming, and force distributors to charge consumers for
channels they don't even want--and in many questions, channels they
find objectionable. If an operator opts out of the retransmission
consent agreement and wants to take a stand-alone channel, the cash-
for-carriage demand is most often an unreasonable price with no market
basis, and is significantly greater than the price of the bundle of
channels offered. To make matters worse, those programmers demanding
such costs, channel placement, and carriage of additional channels are
able to hide behind nondisclosure provisions in their contracts,
further complicating the ability to address the abuse of retransmission
Additionally, the wholesale price differentials between what a
smaller cable company pays in rural America compared to larger cable
operators in urban America have little to do with differences in cost,
and much to do with disparities in market power. These differences are
not economically cost-justified and could easily be replicated in the
IP world as small entrants are treated to the same treatment our
For instance, ACA members have reported wholesale programming price
differentials between smaller companies and major cable companies of up
to 30 percent, and in one case, 55 percent. In this way, smaller cable
systems and their customers actually subsidize the programming costs of
larger urban distributors and consumers! We even end up with worse
pricing than satellite companies DIRECTV and EchoStar, who are the main
competitors to our rural cable systems. Price discrimination against
smaller cable companies and their customers is clearly anti-competitive
conduct on the part of the programmers--they offer a lower price to one
competitor and force another other competitor to pay a 30-55 percent
higher price FOR THE SAME PROGRAMMING. The effect of these practices by
the programmers is that three MVPDs in the same town pay wildly
different rates for the same product that each is distributing in that
Forced Carriage Eliminates Diverse Programming Channels
The practices of certain programmers have also restricted the
ability of some ACA members to launch and continue to carry
independent, niche, religious and ethnic programming. The main problem:
requirements to carry programmers' affiliated programming on expanded
basic eliminate ``shelf space'' where the cable provider could offer
If video providers are to provide outlets for niche programming
that appeals in their markets (i.e., Spanish communities), you must
ensure that they are not subject to the handcuffs current law allows to
be placed upon them. The programmers argue that their affiliated
programming would not get carriage without retransmission consent,
which would minimize subscribers' viewing choices. However, there are
numerous independent channels that want to be carried but do not have a
broadcast network to bundle with their channel. Even if they present
programming a cable operator wants to launch in his market area, he
often does not have the ``shelf space'' to do so because of the forced
carriage of affiliated programming by the programmers. If the
programmers are so certain they have valuable programming, why are they
so relentless in their fight to preserve their right to tie their
affiliated programming to their broadcast network? Why not let the
market determine what is desirable? If the programmers produce must-
have content, consumers will demand it and cable operators will carry
it. They should not be allowed to use their leverage of public airwaves
to get carriage of affiliated programming.
To fix this situation, Congress must update and reform: (1) the
retransmission consent and (2) program access laws.
Retransmission Consent Reform
Smaller cable operators should have the ``right to shop''
for the most economical programming package to offer their
subscribers. Broadcasters use a combination of regulations and
contracts to block cable operators from retransmitting stations
from outside a broadcasters' market. Exclusivity is now being
exploited by broadcasters to raise the cost of retransmission
consent for smaller cable operators and their consumers. In
other words, the conglomerate-owned station makes itself the
only game in town, and can charge the cable operator a monopoly
``price'' for its must-have network programming. The cable
operator needs this programming to compete. So your
constituents end up paying monopoly prices.
ACA believes there is a ready solution to this dilemma. When a
broadcaster seeks a ``price'' for retransmission consent, give small
cable companies the ability to shop for lower cost network programming
for their customers.
Accordingly, in its March 2, 2005 Petition for Rulemaking to the
FCC, ACA proposed the following adjustments to the FCC's retransmission
consent and broadcast exclusivity regulations:
One: Maintain broadcast exclusivity for stations that elect
must-carry or that do not seek additional consideration for
Two: Eliminate exclusivity when a broadcaster elects
retransmission consent and seeks additional consideration for
carriage by a small cable company.
Three: Prohibit any party, including a network, from preventing
a broadcast station from granting retransmission consent to a
small cable company.
On March 17, 2005, the FCC released ACA's petition for comments. By
opening ACA's petition for public comment, the FCC has acknowledged
that the current retransmission consent and broadcast exclusivity
scheme requires further scrutiny. Before codifying a new regulatory
regime for video services utilizing IP, Congress should ask similar
questions and make the important decision to update current law to
rebalance the role of programmers and providers.
Tying through retransmission consent must end. The law
should prevent the media giants from holding local broadcast
signals hostage for monopolistic cash-for-carriage demands or
more carriage of affiliated media-giant programming, which was
never the intention of Congress when granting this power.
Codify the News-Hughes conditions made by the FCC when
approving the News Corp acquisition of DIRECTV. The FCC
acknowledged the disproportionate market power News Corp would
have as a programmer and a distributor when they sought to
acquire DIRECTV. The FCC imposed conditions on News Corp. to
apply during their retransmission consent negotiations. The
three key components of those conditions include: (i) a
streamlined arbitration process; (ii) the ability to carry a
signal pending dispute resolution; and (iii) special conditions
for smaller cable companies. ACA believes conditions like these
applied to smaller and medium-sized cable operators would
improve the current retransmission consent process.
Program Access Reform
Price discrimination must end. The programming pricing gap
between the biggest and smallest providers must be closed to
ensure that customers and local providers in smaller markets
are not subsidizing large companies and subscribers in urban
America. The programming media giants must disclose, at least
to Congress and the FCC, what they are charging local
providers, ending the strict confidentiality and nondisclosure
dictated by the media giants. Confidentiality and nondisclosure
mean lack of accountability of the media giants.
Transparency must be created if consumer rates are of
concern to you. Most programming contracts are subject to
strict confidentiality and nondisclosure obligations, and ACA
members are very concerned about retaliation by certain
programmers should they discuss the specifics of any deal. For
instance, if you ask me today what a specific ACA member pays a
certain programmer, I could not tell you without fearing legal
action by the media giant. Programmers could agree to waive
nondisclosure for purposes of this hearing or even in our
contracts, but they never do. Ask them today, and I'd be
shocked if they would disclose specific terms and conditions.
Ask them why this confidentiality and non-disclosure exists.
Who does it benefit? Consumers, Congress, the FCC? I don't think
so. Why is this information so secret when much of the infrastructure
the media giants benefit from derives from licenses and frequencies
granted by the government?
Congress should obtain specific programming contracts and rate
information directly from the programmers, either by agreement or under
the Committee's subpoena power. That information should then be
compiled, at a minimum, to develop a Programming Pricing Index (PPI).
The PPI would be a simple yet effective way to gauge how programming
rates rise or fall while still protecting the rates, terms, and
conditions of the individual contract. By authorizing the FCC to
collect this information in a manner that protects the unique details
of individual agreements, I cannot see who could object.
Armed with this information, Congress and the FCC would finally be
able to gauge whether rising cable rates are due to rising programming
prices as we have claimed or whether cable operators have simply used
that argument as a ruse. A PPI would finally help everyone get to the
bottom of the problems behind higher cable and satellite rates.
In conclusion, let me reiterate that ACA members are eager to offer
their customers more choices and lower costs. Today, broadcasters and
programmers prevent that. The roll-out of family-friendly tiers two
weeks ago proved that more consumer choice is achievable, and with help
from this Committee, I believe we as operators can do more to create
marketable tiers of programming. The retransmission consent and
broadcast exclusivity regulations have been used by the networks and
stations to raise rates and to force unwanted programming onto
consumers. This must stop. If a station wants to be carried, it can
elect must-carry. If a station wants to charge for retransmission
consent, let a true competitive marketplace establish the price.
Mr. Chairman, ACA members would prefer mutually beneficial carriage
arrangements with programmers. For this to occur, certain media
conglomerates would need to temper economic self-interest with a
heightened concern for the public interest in localism, consumer
choice, and reasonable cable rates. However, it has become increasingly
clear that without congressional or regulatory involvement, these
companies will continue to abuse retransmission consent using scarce
public spectrum granted them for free to extract ever-increasing
profits from rural consumers.
The Chairman. Thank you.
Senator Dorgan just arrived.
Did you have an opening statement, Senator?
Senator Dorgan. I'll wait for the witnesses, Mr. Chairman.
The Chairman. Thank you very much.
Our next witness is Robert G. Lee, President and General
Manager at WDBJ Television of Roanoke.
STATEMENT OF ROBERT G. LEE, PRESIDENT/GENERAL
MANAGER, WDBJ TELEVISION, INC.; ON BEHALF OF THE
NATIONAL ASSOCIATION OF BROADCASTERS
Mr. Lee. Thank you, Chairman Stevens.
My name is Bob Lee, and I am President and General Manager
of WDBJ Television, a family-owned station in Roanoke,
I'm testifying today on behalf of the National Association
of Broadcasters, of which I am also a board member. NAB, as you
know, is a trade association that advocates on behalf of more
than 8,300 free, local, over-the-air radio and television
stations, as well as the broadcast networks, before Congress,
the FCC, and occasionally before the courts.
Before the Cable Act, cable operators were not required to
seek the permission of a broadcaster before carrying its
signal, and cable was not required to negotiate for reselling
broadcasters' signals. Cable companies would just pick up a
local station's programming and leverage it to attract
subscribers. Then operators would use those subscriber fees to
create new cable channels that would directly compete with
local broadcasters for advertising dollars, our sole means of
support. In short, Congress and the FCC found that local
television stations were being forced to subsidize our
Congress corrected this imbalance by creating a marketplace
in which broadcasters could negotiate for cable's use of our
programming. The retransmission consent system is, in fact,
working, and consumers have been the ultimate beneficiaries.
But don't take that from me. Listen to the expert agency.
The FCC's report from September of 2005 recommended no changes
to the existing structure, and the Commission found that the
retransmission consent process is fair. The report states, ``As
a general rule, the local television broadcaster and the MVPD
negotiate in the context of a level playing field.'' In light
of this report, complaints from my cable friends ring hollow.
ACA, you see, wants it both ways. On one hand, operators
complain about paying broadcasters to use their signals. Yet,
in the next breath, these same companies say that negotiating
for carriage of additional programming is also unreasonable.
Ironically, it was the cable industry's resistance to cash
payments that resulted in cable companies carrying additional
programming produced by the broadcaster as a form of
consideration. And television viewers benefit from the
innovative local programming offerings that have resulted.
A good example is here in Washington, where the ABC
affiliate, Channel 7, through its retransmission consent
agreement, has been able to expand its News/Channel 8, a local
cable news network offering news, weather, and public-affairs
programming. And Belo uses retransmission consent to obtain
carriage of its regional cable news channel in serving viewers
in Oregon, Washington, Montana, Alaska, California, and
Virginia. And LIN Television uses retransmission consent to
provide local weather information on separate channels carried
by cable systems, just as my station does.
In short, retransmission consent enables broadcasters to
offer viewers more locally oriented programming. Again, this is
what Congress intended. In fact, this very Committee wrote, in
its report on the Cable Act, that while some broadcasters would
receive cash for their signals, other broadcasters would,
``negotiate other issues with cable systems, such as the right
to program an additional channel on a cable system.''
Now, before I close, let me address two misconceptions. ACA
contends that broadcasters wield inordinate market power in
these negotiations because of their size. Well, the facts belie
that argument, especially in smaller markets. And we're the
68th-largest market, so I can speak on this with some
experience. In the 110 smallest cable television markets, a
majority of cable subscribers are served by one of the four
largest cable companies. By way of contrast, only about 3
percent of the television stations in these markets are owned
by one of the top ten television groups. So, I ask, Who really
has leverage in these negotiations?
Second, Mr. Polka's group released a study yesterday, as he
said, arguing that broadcasters should pay cable operators for
carriage of our signals. This study is riddled with flaws, but,
in the interest of time, let me say this. On page 1, the study
notes how valuable and essential broadcast signals are to cable
companies. The rest of the study is then spent arguing that
broadcasters should be paying cable to carry it. ACA wants it
both ways. And that won't work.
In closing, Mr. Chairman, ACA would ask that we turn back
the clock to the ``bad old days'' when cable got their
broadcast signals for nothing and got their kicks for free.
Such an unfair arrangement would put free local television, our
viewers, your constituents, in very dire straits, indeed.
[The prepared statement of Mr. Lee follows:]
Prepared Statement of Robert G. Lee, President/General Manager, WDBJ
Television, Inc.; on Behalf of the National Association of Broadcasters
Good afternoon, Chairman Stevens, Co-Chairman Inouye, and Members
of the Committee, my name is Robert G. Lee. I am President and General
Manager of WDBJ Television, the CBS affiliated station in Roanoke,
Virginia. As a local broadcaster, I have firsthand experience with the
issues being discussed by the Committee at this hearing. I am also a
member of the Television Board of Directors of the National Association
of Broadcasters (NAB). NAB is a trade association that advocates on
behalf of more than 8,300 free, local radio and television stations and
also broadcast networks before Congress, the Federal Communications
Commission and the Courts.
From their hollow complaints about the alleged unfairness of
retransmission consent, multichannel video programming distributors
(MVPDs) clearly want to have their retransmission cake and eat it to.
In one breath, MVPDs complain that broadcasters are unreasonable in
negotiating cash payment for carriage of their local signals; in the
next, they claim that negotiating for carriage of additional
programming is also unreasonable. In essence, MVPDs argue that
retransmission consent is invalid simply because broadcasters should
give away their signals to MVPDs without compensation in any form. But
there is no reason that broadcasters--unique among programming
suppliers--should be singled out not to receive compensation for the
programming provided to MVPDs. This is especially true today, given the
rapidly increasing competition by MVPDs with broadcasters for national
and local advertising revenue.
Congress Established Retransmission Consent to Create a Marketplace in
Which Broadcasters Could Negotiate for Compensation for MVPDs'
Use of Their Signals
Because Congress created the retransmission consent marketplace
nearly 15 years ago, I begin my testimony by reminding us all here
today why Congress granted broadcasters retransmission consent rights
in the first instance. In short, Congress adopted retransmission
consent to ensure that broadcasters had the opportunity to negotiate in
the marketplace for compensation from MVPDs retransmitting their
signals. As the Federal Communications Commission (FCC) recently
concluded, retransmission consent has fulfilled Congress' purposes for
enacting it and has benefited broadcasters, MVPDs and consumers alike.
Prior to the Cable Television Consumer Protection and Competition
Act of 1992, cable operators were not required to seek the permission
of a broadcaster before carrying its signal and were certainly not
required to compensate the broadcaster for the value of its signal. At
a time when cable systems had few channels and were limited to an
antenna function of improving the reception of nearby broadcast
signals, this lack of recognition for the rights broadcasters possess
in their signals was less significant. However, the video marketplace
changed dramatically in the 1970s and 1980s. Cable systems began to
include not only local signals, but also distant broadcast signals and
the programming of cable networks and premium services. Cable systems
started to compete with broadcasters for national and local advertising
revenues, but were still allowed to use broadcasters' signals--without
permission or compensation--to attract paying subscribers.
By the early 1990s, Congress concluded that this failure to
recognize broadcasters' rights in their signals had ``created a
distortion in the video marketplace.'' S. Rep. No. 92, 102d Cong., 1st
Sess. at 35 (1991) ( Senate Report ). Using the revenues they obtained
from carrying broadcast signals, cable systems had supported the
creation of cable programming and services and were able to sell
advertising on these cable channels in competition with broadcasters.
Congress concluded that public policy should not support ``a system
under which broadcasters in effect subsidize the establishment of their
chief competitors.'' Id. Noting the continued popularity of broadcast
programming, Congress also found that a very substantial portion of the
fees that consumers pay to cable systems is attributable to the value
they receive from watching broadcast signals. Id. To remedy this
``distortion,'' Congress in the 1992 Cable Act gave broadcasters
control over the use of their signals and permitted broadcasters to
seek compensation from cable operators and other MVPDs for carriage of
their signals. See 47 U.S.C. Sec. 325.
In establishing retransmission consent, Congress intended to create
a ``marketplace for the disposition of the rights to retransmit
broadcast signals.'' Senate Report at 36. Congress stressed that it did
not intend ``to dictate the outcome of the ensuing marketplace
negotiations'' between broadcasters and MVPDs. Id. Congress correctly
foresaw that some broadcasters might determine that the benefits of
carriage were sufficient compensation for the use of their signals by
cable systems. Id. at 35. Some broadcasters would likely seek monetary
compensation, while others, Congress explained, would ``negotiate other
issues with cable systems, such as joint marketing efforts, the
opportunity to provide news inserts on cable channels, or the right to
program an additional channel on a cable system.'' Id. at 36.
Thus, even at the outset, Congress correctly recognized that, in
marketplace negotiations between MVPDs and broadcasters, stations could
appropriately seek a variety of types of compensation for the carriage
of their signals, including cash or carriage of other programming. And
while retransmission consent does not guarantee that a broadcaster will
receive fair compensation from an MVPD for retransmission of its
signal, it does provide a broadcaster with an opportunity to negotiate
The FCC Recently Recommended That No Revisions Be Made to
Retransmission Consent Policies
After some years' experience with retransmission consent, Congress
in late 2004 asked the FCC to evaluate the relative success or failure
of the marketplace created in 1992 for the rights to retransmit
broadcast signals. This evaluation shows that MVPDs' complaints about
retransmission consent disadvantaging them in the marketplace or
somehow harming competition are groundless. In its September 2005
report to Congress about the impact of retransmission consent on
competition in the video marketplace, the FCC concluded that the
retransmission consent rules did not disadvantage MVPDs and have in
fact fulfilled Congress' purposes for enacting them. The FCC
accordingly recommended no revisions to either statutory or regulatory
provisions relating to retransmission consent. FCC, Retransmission
Consent and Exclusivity Rules: Report to Congress Pursuant to Section
208 of the Satellite Home Viewer Extension and Reauthorization Act of
2004 (Sept. 2005) (FCC Report).
In its report, the FCC concluded that local television broadcasters
and MVPDs conduct retransmission consent negotiations on a ``level
playing field.'' Id. at para. 44. The FCC observed that the
retransmission consent process provides incentives for both
broadcasters and MVPDs to reach mutually beneficial arrangements and
that both parties in fact benefit when carriage is arranged. Id. Most
importantly, according to the FCC, consumers benefit by having access
to the broadcasters' programming carried via MVPDs. Id. Overall, the
retransmission consent rules have, as Congress intended, resulted in
broadcasters being compensated for the retransmission of their stations
by MVPDs and MVPDs obtaining the right to carry broadcast signals. Id.
Given these conclusions, the FCC recommended no changes to current
law providing for retransmission consent rights. Moreover, the FCC
explained that the retransmission consent rules are part of a
``carefully balanced combination of laws and regulations governing
carriage of television broadcast signals.'' Id. at para. 45. Thus, if
Congress were to consider proposals to restrict broadcasters'
retransmission consent compensation, the FCC cautioned that review of
other rules, including must carry and copyright compulsory licensing,
would be necessary as well ``to maintain a proper balance.'' Id. at
para. para. 33, 45.
MVPDs' Complaints About Retransmission Consent Are Groundless
Especially in light of this recent FCC report, the various
repetitive complaints of MVPDs about the alleged unfairness of
retransmission consent ring hollow. For instance, some cable operators
have complained about the retransmission consent fees purportedly
extracted from them by broadcasters. These complaints are especially
puzzling because, as the FCC recently reported, cable operators have in
fact consistently refused to pay cash for retransmission consent. FCC
Report at para. para. 10, 35. As a result, ``virtually all''
retransmission consent agreements have involved ``a cable operator
providing in-kind consideration to the broadcaster,'' and cash is not
yet ``a principal form of consideration for retransmission consent.''
Id. at para. 10. This in-kind consideration has included the carriage
of affiliated nonbroadcast channels or other consideration, such as the
purchase of advertising time, cross-promotions and carriage of local
news channels. Id. at para. 35. Given that cable companies rarely pay
cash for retransmission consent of local broadcast signals, this
Committee should reject any MVPD claims that broadcasters'
retransmission consent fee requests are unreasonable or are somehow the
cause of continually increasing cable rates. In fact, in late 2003, a
General Accounting Office study did not find that retransmission
consent has lead to higher cable rates. See GAO, Issues Related to
Competition and Subscriber Rates in the Cable Television Industry, GAO-
04-8 at 28-29; 43-44 (Oct. 2003).
Complaints from MVPDs that some broadcasters attempt in
retransmission consent negotiations to obtain carriage for additional
programming channels are ironic, to say the least. As the FCC found,
broadcasters began to negotiate for carriage of additional program
streams in direct response to cable operators' refusal to pay cash for
retransmission consent of broadcast signals. FCC Report at para. 10.
Certainly any claims that cable operators somehow have been forced to
carry unwanted programming as the result of retransmission consent are
disingenuous. Under the retransmission consent regime, no cable
operator is compelled to carry any channel, whether a local broadcast
channel or an allegedly ``bundled'' programming channel. And if a cable
operator prefers not to carry any channel beyond a broadcaster's local
signal, cash alternatives are offered in retransmission consent
negotiations. For example, EchoStar recently completed negotiations
with Hearst-Argyle Television for a cash-only deal at a marketplace
Clearly, MVPDs want to have their retransmission cake and eat it
too. In one breath, MVPDs complain that broadcasters are unreasonable
in requesting cash payment for carriage of their local signals; in the
next, they assert that negotiating for carriage of additional
programming is also unreasonable. In essence, MVPDs argue that
retransmission consent is somehow inherently invalid because
broadcasters should give their consent to MVPDs without compensation in
any form. But there is no legal, factual or policy reason that
broadcasters--unique among programming suppliers--should be singled out
not to receive compensation for the programming provided to MVPDs,
especially given MVPDs' increasing competition with broadcasters for
advertising revenue. Indeed, when enacting retransmission consent,
Congress noted that cable operators pay for the cable programming they
offer to customers and that programming services originating on
broadcast channels should be treated no differently. Senate Report at
Some cable operators have also presented an inaccurate picture of
the video marketplace by contending that, in rural areas and smaller
markets, powerful broadcast companies have undue leverage in
retransmission consent negotiations with local cable operators. This is
not the case. The cable industry as a whole is concentrated nationally
and clustered regionally and is dominated by a smaller and smaller
number of larger and larger entities. This consolidation will only
continue assuming that the pending acquisition of Adelphia
Communications by Comcast and Time Warner is approved. In contrast, a
strict FCC duopoly rule continues to prohibit broadcast television
station combinations in medium and small markets. In fact, a majority
of cable subscribers in Designated Market Areas 100+ are served by one
of the four largest cable MSOs, while only about three percent of the
television stations in these markets are owned by one of the top ten
television station groups. Thus, in many instances in these 100+
markets, small broadcasters--which are facing severe financial
pressures--must deal with large nationally and regionally consolidated
MVPDs in retransmission consent negotiations. In sum, local
broadcasters in medium and small markets do not possess unfair leverage
over increasingly consolidated cable operators.
Indeed, in small and large markets alike, nationally and regionally
consolidated MVPDs have been able to exert considerable market power in
retransmission consent negotiations, at the expense of local
broadcasters. In actual retransmission consent agreements, broadcasters
have frequently had to accept a number of egregious terms and
conditions, especially with regard to digital carriage.
For example, it is not uncommon for MVPDs in retransmission
agreements to refuse to carry a station's multicast digital signal that
contains any religious programming and/or any programming that solicits
contributions, such as telethons or other charitable fundraising
programming. MVPDs have refused to carry any digital multicast signal
unless the channel is broadcasting 24 hours a day, seven days a week.
This requirement is very difficult for most digital stations
(especially small market ones) to meet, and thereby makes it virtually
impossible for many stations to obtain carriage of digital multicast
signals. Under other retransmission agreements, the MVPD agreed to
carry only the high definition portion of a broadcast station's digital
signal, and the carriage of any portion of the broadcaster's non-high-
definition digital signal (including even the primary digital signal)
remained entirely at the discretion of the MVPD. Other MVPDs have
declined to carry the primary digital signals of non-big four network
affiliated stations, unless these stations achieved certain viewer
rankings in their local markets. Thus, the digital signals of many
stations, including WB/UPN affiliates, Hispanic-oriented stations,
religious stations and other independent stations, would not be carried
by these MVPDs. It seems highly unlikely that broadcasters would accept
such disadvantageous provisions in retransmission agreements, unless
the MVPDs were in a sufficiently powerful marketplace position so as to
insist on such provisions.
In light of these real-world examples, Congress should skeptically
view any complaints from MVPDs as to how they are at the mercy of
powerful broadcasters in marketplace retransmission consent
negotiations. The current retransmission consent rules also already
protect all MVPDs by imposing an affirmative obligation on broadcasters
to negotiate in good faith and providing a mechanism to enforce this
obligation. See 47 CFR Sec. 76.65. In fact, EchoStar was the
complainant in the only ``good faith'' case to be decided on the merits
by the FCC. In that case, the broadcaster was completely exonerated,
while EchoStar was found to have abused the FCC's processes. EchoStar
Satellite Corp. v. Young Broadcasting, Inc., 16 FCC Rcd 15070 (2001).
Unwarranted MVPD complaints about retransmission consent certainly
cannot undermine the FCC's conclusion that MVPDs are not disadvantaged
by the existing retransmission consent process. See FCC Report at para.
Consumers Benefit From the Retransmission Consent Process
Finally, I would like to elaborate on the FCC's conclusion in its
report that retransmission consent has benefited the viewing public, as
well as broadcasters and MVPDs. As the FCC specifically noted,
broadcasters' ability to negotiate carriage of additional programming
through retransmission consent benefits viewers by increasing
consumers' access to programming, including local news channels. See
FCC Report at para. 35. One excellent example is Allbritton
Communications Company's NewsChannel 8 here in the Washington
metropolitan area. NewsChannel 8 is a local cable news network launched
as a result of retransmission consent negotiations over the carriage of
Allbritton's television station WJLA-TV. It provides local news,
weather and public affairs programming, along with coverage of local
public events. Further, this programming is zoned separately to better
serve viewers in Washington, D.C., the Maryland suburbs and Northern
Similarly, Belo used retransmission consent to obtain carriage of
its regional cable news channel NorthWest Cable News (NWCN) on cable
systems serving over two million households in Washington, Oregon,
Idaho, Montana, Alaska and California. NWCN provides regional up-to-the
minute news, weather, sports, entertainment and public affairs
programming to viewers across the Northwest. These efforts are
coordinated with Belo's television stations in Seattle, Portland,
Spokane and Boise.
In addition to local news channels, broadcasters have used
retransmission consent to provide local weather information on separate
channels carried by cable systems. For example, LIN Television provides
these local weather channels in several markets, including ones with a
history of frequent weather emergencies such as Indianapolis. And
beyond this use of retransmission consent to gain carriage for local
news and weather channels, broadcasters have recently used
retransmission consent negotiations to obtain carriage of their digital
signals, thereby both benefiting viewers and, according to the FCC,
furthering the digital transition. See FCC Report at para. 45.
As my testimony makes clear, Congress intended in the 1992 Cable
Act to give broadcasters the opportunity to negotiate in the
marketplace for compensation from MVPDs retransmitting their signals.
The FCC concluded less than six months ago that retransmission consent
has fulfilled Congress' purposes for enacting it, and recommended no
changes to either statutory or regulatory provisions relating to
retransmission consent. This Committee should accept the FCC's
conclusion and continue to let broadcasters and MVPDs negotiate in the
marketplace for retransmission consent. Especially in light of the
FCC's conclusion that local broadcasters and MVPDs generally negotiate
on a ``level playing field,'' Congress has no basis for altering the
retransmission consent marketplace. FCC Report at para. 44. Thank you
for your time and attention this afternoon.
The Chairman. Thank you very much.
The next witness is Dan Fawcett, Executive Vice President
for programming for DIRECTV----
What? Excuse me, I skipped you, Mr. Waz. I'm running
through this day faster than I want to, I guess.
The Chairman. Or maybe I want to run through faster than I
The Chairman. I apologize.
Joseph Waz, Vice President of External Affairs at Comcast.
STATEMENT OF JOSEPH W. WAZ, JR., VICE PRESIDENT,
EXTERNAL AFFAIRS AND PUBLIC POLICY COUNSEL,
Mr. Waz. Thank you, Chairman Stevens. I'll try to keep it
moving, as well. And I appreciate the opportunity to be here
Two years ago, the FCC said, ``The vast majority of
Americans enjoy more choice, more programming, and more
services than at any time in history.'' Today, that's an
understatement. Competition in video distribution and video
content is booming, and that really is the heart of my
Virtually every cable consumer in every community that
Comcast serves can choose from at least three multichannel
video providers, or MVPDs. Two DBS providers--DIRECTV, which is
on the panel with me here today, and EchoStar--now serve over
27 million American homes nationwide. Both companies are larger
than every cable company but Comcast. We also compete with
providers like RCN and Knology, and with phone companies like
Verizon and AT&T, which promise an aggressive entry into video.
Meanwhile, 15 to 20 million American homes still prefer to
rely on broadcast television. Most Americans also rent and buy
DVDs and videotapes in record numbers. And the competitive
distribution outlets keep growing. From iPods to mobile phones
to digital video recorders, everything is becoming a video
To respond to all of this competition, Comcast has invested
over $40 billion to expand capacity so we can offer over 200
channels or more to our customers. We've added dozens of
international, foreign language, and high-definition channels.
We are the leaders in video-on-demand, which lets our customers
choose what they want to watch, when they want to watch it,
over 3,000 different choices today and growing fast. And on-
demand is clearly the direction the world is heading.
This explosion of distribution outlets and channel capacity
has ignited a corresponding explosion in video content. When
the 1992 Cable Act was passed, there were only 68 national
programming networks. Most were vertically integrated--that is,
owned at least in part by a cable company. And that was largely
because no one else would risk investing in them at the time.
Fast forward to 2006. Now there are 388 national
programming networks and nearly 100 regional networks. Vertical
integration has plummeted from 57 percent in 1992 to 23 percent
today. And Comcast has a financial interest in only about 7
percent of the networks that we carry. So, there's vastly more
competition in content and distribution than there was in 1992.
Against that backdrop, let me review two rules that
Congress adopted in that year: the program-access and program-
Program access was intended to help competitors to cable.
It ensured that vertically integrated satellite-delivered
programming services were available to competitors on terms and
conditions comparable to those that were available to cable
Program carriage was intended to help independent
programmers. It ensured that, in an era when cable had little
competition, cable companies could not unfairly block
independent programmers from reaching consumers.
In adopting program-access requirements, Congress did not
try to turn all programming into a commodity. The rules don't
apply to non-vertically integrated programming or to
terrestrially distributed programming. Congress consciously
limited the reach of the rules, and we think Congress knew
exactly what it was doing.
Those rules have worked. Or, more accurately, the
marketplace has worked. There have been fewer than 50
complaints on program access filed in 14 years. Almost none has
led to an adverse ruling. In fact, most have been settled. And
in recent years program-access complaints have dwindled.
Despite this record of success, DIRECTV and others have
spent most of the past decade insisting the sky is falling. For
a decade, they have warned that cable programming would be
moved from satellite delivery to terrestrial delivery to evade
the rules. For a decade, they've alleged that they would be
denied programming. But the truth is, it didn't happen. Today,
DIRECTV and every other competitor has access to more
programming--sports, news, entertainment, and otherwise--than
The program-carriage rules have almost never been used--
again, because the marketplace works. If you have an attractive
programming idea, a sensible business plan, a willingness to
negotiate terms that work for the programmer and the
distributor, and something unique to the marketplace, you have
the opportunity to build a business.
The America Channel has not filed a program-carriage
complaint with the FCC, but they have used every other
opportunity--and I think they'll be using this hearing today--
to get the government to force Comcast to carry it.
I've addressed both of these situations in my written
statement, but I would say, in brief, that there are so many
competitive alternative distribution outlets available today
that a carriage agreement with Comcast is not essential to
viability. Let me be clear. Comcast carries a huge amount of
independent programming. We want the best programming for our
customers, no matter the source.
Mr. Chairman, the video marketplace looks nothing like it
did in 1992. It's robust, dynamic, and irreversibly
competitive. And rules intended for a very different time and
place should be candidates for elimination, not expansion.
Thank you, sir.
[The prepared statement of Mr. Waz follows:]
Prepared Statement of Joseph W. Waz, Jr., Vice President, External
Affairs and Public Policy Counsel, Comcast Corporation
Chairman Stevens, Co-Chairman Inouye, and Members of the Committee,
I appreciate the opportunity to appear before you today to discuss
issues relating to video content.
Two years ago, the Federal Communications Commission (FCC)
concluded that: ``[T]he vast majority of Americans enjoy more choice,
more programming and more services than any time in history.'' \1\ Two
years later, that statement can be made with even more conviction. It
is undeniable that American consumers now enjoy access to an
unprecedented array of video programming delivered in a growing number
of ways by an ever-increasing number of competing providers. Comcast is
one of those providers. And in every community that we serve, we are
competing with DIRECTV, with DISH Network (EchoStar), often with
companies like RCN, Knology and WideOpenWest (WOW), and any day now
with companies like AT&T and Verizon.
\1\ In re Annual Assessment of the Status of Competition in the
Market for the Delivery of Video Programming, 10th Annual Report, 19
FCC Rcd. 1606 para. 4 (2004).
This competition has driven our company, and the entire cable
industry, to improve. But more importantly, it has given the American
consumer the richest cornucopia of video programming in the world, with
huge diversity of voices and content, meeting almost every conceivable
need and interest.
Competition in Distribution
When Congress and the FCC assess competition in video distribution,
they have tended to confine their analysis to what they call the
``multichannel video programming distributors,'' or ``MVPDs.'' These
include traditional cable television operators, ``broadband service
providers'' like RCN, WOW and Knology, direct broadcast satellite (DBS)
providers like DIRECTV and DISH Network, local exchange carriers like
Verizon and AT&T, providers of Multichannel Multipoint Distribution
Service, electric utilities, and satellite master antenna TV systems.
Taken as a whole, the growth of these competitors has been
extraordinary since Congress passed the Cable Television Consumer
Protection and Competition Act of 1992 (1992 Cable Act). At that time,
nearly 14 years ago, Congress foresaw the possibility of significant
potential competition from these providers of multichannel video
services, and it took measures to promote that competition. Today, that
competition is real, robust, and thriving, as the most recent data from
the FCC and other sources affirm.
The headline story is the extraordinary growth of DBS. DIRECTV and
EchoStar each offer their services to almost every household in the
United States, and they have captured over 27 million customers. Each
year for the past five years, the DBS companies have added two to three
million new customers, while the cable industry's basic subscribership
has remained flat. Each of those two companies is now larger than every
cable company in America except for Comcast.
The Bell Operating Companies are also making a large-scale entry
into the multichannel video marketplace, and we believe they, too, will
be formidable competitors.
Not every consumer chooses to take service from a MVPD, however.
Anywhere from 15-20 million households prefer to rely on over-the-air
television. And in several markets, local broadcast stations are
banding together to create a multichannel over-the-air alternative
offering dozens of cable networks to compete with cable and satellite.
U.S. Digital Television is now operational in four cities (Albuquerque,
Dallas, Salt Lake City, and Las Vegas), and for $19.95 per month
provides its customers with 25-40 channels, including all the local
broadcast stations (and their HD signals) and many of the most popular
We think that the rapidly changing video marketplace compels
Congress and the FCC to view ``video competition'' even more broadly.
Today, tens of millions of Americans also supplement their viewing with
DVD and videotape rentals and purchases, and Netflix has become a
national phenomenon. In addition, an increasing number of Internet
streaming and download options are emerging--witness the incredible
explosion of services and devices at the Consumer Electronics Show
earlier this month. From iPods to mobile phones to digital video
recorders, everything is becoming a ``video download'' device.
The problem with television in America is not lack of choice--the
problem is how a consumer can manage all of that choice!
In this unbelievably dynamic marketplace, neither Comcast nor
anyone else can rest for even a moment. Each and every day, we compete
to attract new customers and to keep our existing customers happy. This
is why we have spent over $40 billion since 1996 to add the capacity to
let us deliver 200 or more video channels to almost every home we pass
. . . and added dozens of international and foreign-language channels .
. . and added a dozen or more high-definition television (HDTV)
channels in every market . . . and have become the industry leader in
providing video-on-demand (VOD), offering our digital homes over 3,000
different programming choices any time, day or night, in every
conceivable niche, including more local programming. We have to work
hard to remain the first choice of our customers--and the way that we
do that is by constantly investing in more capacity so that we can add
new programming, new channels, and new features.
In short, the video distribution marketplace is more competitive
and diverse than ever. As Congress looks to the future, it's wrong to
view television as we viewed it in 1992--it's a fundamentally different
medium, and it has become fundamentally and irrevocably competitive.
Competition in Content
The explosion of distribution outlets has launched a corresponding
explosion in content. When the 1992 Cable Act was passed, there were
approximately 68 national programming networks (and only a dozen or so
regional networks) in operation in the U.S. \2\ The majority of them
were owned by cable companies (largely because independent programmers,
the broadcast networks, and the Hollywood studios were not very
interested in investing in cable programming at the time)--in fact, 57
percent of cable networks had ``some ownership affiliation with the
operating side of the cable industry.'' \3\ The average household did
not have cable at all, and those that did normally had access to about
36 analog channels of programming.
\2\ H.R. Rep. No. 102-628, at 41 (1992) (noting that there were
``68 nationally delivered cable video networks'' ).
\3\ Id. (noting that ``39 [of the 68], or 57 percent, have some
ownership affiliation with the operating side of the cable industry''
Fast forward to 2006--incredibly, there are over 388 full-time
national programming networks in operation today, and nearly 100
regional networks as well. The number of ``vertically integrated''
channels has dropped to 23 percent, and Comcast has a financial
interest in approximately seven percent of the networks that we carry.
Eighty-five percent of all American TV households take service from a
MVPD, and a typical MVPD household enjoys access to over 200 video
channels. In addition, many producers--both majors and independents--
are creating programming for video-on-demand, and some may use VOD
exposure as a springboard for the creation of new full-time channels.
There are three important reasons for this proliferation of
First, the cable industry's dedication to invest over $100
billion to expand our distribution networks and tens of
billions more to improve the quality and diversity of our
Second, the emergence of DBS and other distribution media to
provide additional outlets for programming;
And third, the freedom that the law has given us to package
and promote this programming in ``tiers,'' and to create tiers
and packages that respond to consumer demand, makes economic
sense for our industry, and allows us to respond to competition
from DBS and other providers.
To elaborate on the third point, it is important to note that
having the freedom to create programming tiers and bundles lowers key
costs and improves the economics of programming in ways that help to
support those hundreds of channels. Program tiers lower transaction
costs because it is easier, less confusing to customers, and less
costly to cable operators to sell a bundle of services in a tier with a
single transaction than to try to sell hundreds of different services
on an a la carte basis. Tiers reduce marketing costs because program
services sold in a tier do not have to spend as much to market the
service (or to retain subscribers) as they would if customers were
required to make (and could constantly change) individual purchase
decisions for each service. Tiers lower distribution costs because the
distribution cost per subscriber is the same regardless of the number
of channels delivered, so the more channels subscribed to, the lower
the average cost of distributing a channel. Tiers increase the value of
advertising because they expand viewership by capturing occasional and
spontaneous viewers. And tiers reduce equipment costs because the only
way in which to deliver services sold a la carte is to require
customers to purchase or lease addressable set-top boxes for every TV
in their homes.
The benefits of tiering in this fashion are widely understood and
appreciated by both network programmers and would-be programmers. That
is why so many of them have so vigorously opposed calls to require
distributors to sell programming a la carte. The fact that a la carte
would result in consumers paying more for less has been recognized in
virtually every informed analysis done to date, including studies by
the FCC's Media Bureau, the Government Accountability Office, Bear
Stearns, Boaz Allen, and Paul Kagan, among others.
Tiering and bundling of programming are entirely consistent with
promoting both consumer choice and the economic viability of
programming. Take Comcast's Arlington, Virginia system as an example.
Our customers today can choose from over 1,000 program and price
combinations to create a mix of services to meet any program interest
or financial requirement: \4\
\4\ A customer must purchase Limited Basic in order to purchase any
of the other packages listed here. This is because Congress prohibits
cable operators from providing any tier of cable service to any
customer who does not buy a tier that includes all local broadcast
channels, as well as public, educational, and governmental channels. 47
U.S.C. Sec. 543(b)(7).
Limited Basic: 32 channels, including all local broadcast
stations, C-SPAN and C-SPAN2, News Channel 8, TV Guide, ABC
Family, WGN Superstation, three Arlington Public School
channels, a local government channel, and a leased access
Expanded Basic: 45 services, including CNN, ESPN, Discovery,
Nickelodeon, Bravo, Food Network, Weather Channel, History
Channel, and BET.
Premium Services: services offered on a stand-alone basis,
including HBO, Showtime, Cinemax, The Movie Channel, STARZ, ART
(Arab Radio & Television), TV Asia, and Zee TV (an Indian-
Digital Classic: an interactive programming guide, VOD
access, 45 music channels, and 20 digital services, including
Discovery Kids, Noggin, Fine Living, and Toon Disney.
Digital Plus: Digital Classic services plus 23 additional
digital services including National Geographic, three Discovery
channels, Sundance, and 12 Encore channels.
Digital Silver: Digital Classic services, Digital Plus
services, and one premium service including the service's
multiplexed channels and subscription VOD service.
Digital Gold: Digital Classic services, Digital Plus
services, and three premium networks including the services'
multiplexed channels and subscription VOD services.
Digital Platinum: Digital Classic services, Digital Plus
services, and five premium services (HBO, Cinemax, Showtime,
The Movie Channel, and STARZ) including the services'
multiplexed channels and SVOD services.
Hispanic Tier--CableLatino: An add-on package for any
subscriber that has the Digital Classic or Digital Plus
services. This package is comprised of 18 Hispanic language
services, including Discovery en Espanol, CNN en Espanol, and
Toon Disney Espanol.
Sports Tier: An add-on package for any subscriber that has
the Digital Classic or Digital Plus services. The Sports Tier
is comprised of three out-of-market regional sports networks
and Gol TV, NBA TV, and FOX Sports World.
HDTV Channels: A package of 14 networks transmitted in HDTV,
including ABC, NBC, CBS, FOX, WB Network, two PBS signals,
iNHD, ESPN-HD, Comcast SportsNet-HD, HBO HD, Showtime HD,
Cinemax HD, and START HD. \5\
\5\ Comcast does not charge separately for this programming but
only for the HD-capable set-top box needed to receive it. With respect
to premium services, customers receive only the HD versions of services
Additional flexibility is provided by the ability to add premium
channels and services in various combinations, our pay-per-view and VOD
programming options, as well as the new Family Tier that we announced
in December and will roll out company-wide over the next few months.
The Role of Regulation in the Licensing of Program Content
Policymakers have always understood that market forces are superior
to government regulation in enhancing consumer welfare, and that is no
less true in the area of video content.
Back in 1992, when DBS had yet to launch its first satellite and
sign up its first customer, the cable industry faced little direct
multichannel competition. In response to consumer complaints, and in
the absence of meaningful alternative sources of programming, Congress
passed strict regulations governing the cable industry. But even then,
Congress expressed a strong preference for competition over regulation,
and put significant emphasis on encouraging competitive entry. \6\ In
the years since, multichannel video competition has taken deep root,
and today is irreversible. As a result, many of the regulations that
currently govern the cable industry were intended to address less
competitive market conditions that have long since changed.
\6\ See 47 U.S.C. Sec. 521(6).
Two of those regulations that are relevant to this hearing are the
so-called ``program access'' provisions of the 1992 Act, \7\ and the
``program carriage'' provisions of that Act. \8\ The relevant
provisions of the program access statute were intended to ensure that
national satellite-delivered cable programming services in which cable
operators had an attributable financial interest would be made
available to the industry's competitors on rates, terms, and conditions
comparable to those available to cable companies. The program carriage
provisions were intended to ensure that, at a time when cable companies
were perceived to be the sole providers of multichannel services, those
companies could not play a ``gatekeeper'' role through actions that
unfairly barred or conditioned distribution of independent programmers.
\7\ Cable Television Consumer Protection and Competition Act of
1992, Sec. 12, Pub. L. No. 102-385, 106 Stat. 1460 (codified at 47
U.S.C. Sec. 548).
\8\ Id. Sec. 19 (codified at 47 U.S.C. 536).
The program access provisions, implemented into rules by the FCC,
\9\ ensured that fledgling DBS providers and other competitors would
have access to programming perceived as critical to their success.
These provisions represented a major departure from normal competition
policy, which would encourage investment and innovation in exclusive
programming. Exclusive programming permits competitors to distinguish
themselves from one another. For example, DIRECTV has for several years
had exclusive rights to the complete package of National Football
League games, which has helped it to distinguish itself from both its
cable and satellite competitors and contributed to the company's
\9\ See In re Implementation of Sections 12 and 19 of the Cable
Television Consumer Protection and Competition Act of 1992: Development
of Competition and Diversity in Video Programming Distribution and
Carriage, First Report & Order, 8 FCC Rcd. 3359 (1993).
In adopting program access requirements, Congress clearly did not
intend to commoditize all video programming. The relevant provisions of
the statute do not apply to any programming in which a cable operator
does not have an attributable financial interest, nor does it apply to
terrestrially distributed cable networks (of which there were more than
a dozen in operation when the 1992 Act was passed). Nor does the
statute require that all programming be sold to everyone or sold at the
same price to all distributors. Thus, in adopting this striking
exception to freedom of commerce, Congress specifically limited its
marketplace intrusion, with full knowledge of what it was doing.
It can be said that the program access provisions have been a great
success--though it would probably be more accurate to say that the
marketplace is working. In the 14 years since Congress enacted these
provisions, there have been far fewer program access complaints with
the FCC than either the FCC or Congress envisioned (we estimate fewer
than 50 in total), and almost none of these complaints has resulted in
a ruling adverse to the programmer--in fact, most have been settled.
Importantly, as competition has grown, the number of program access
complaints has dwindled, not increased. What is clear in today's
marketplace is that national programming networks, whether or not
affiliated with a cable operator, desire broad distribution of their
services and have every incentive to ensure that as many consumers as
possible can see their programming, including the 27 million DBS
subscribers and the customers of other MVPD competitors.
Perhaps the most frequently reiterated complaint under the program
access rules concerns Comcast SportsNet (Philadelphia). The FCC (twice)
and the courts (once) have thoroughly considered and rejected
complaints by DIRECTV and EchoStar that Comcast's creation and
distribution of this high-quality regional sports network violated the
program access rules. All have concluded that Comcast was within its
rights to make the economically sound decision to terrestrially
distribute this network using a pre-existing terrestrial distribution
system. \10\ And while the DBS companies and others have cried wolf for
nearly a decade, claiming that the FCC's decision would encourage
companies to move their most valuable programming off of satellite (and
therefore beyond the reach of the program access rules), the fact of
the matter is that that has not happened. In fact, each of the four
regional sports networks launched by Comcast since it created the
Philadelphia network has been satellite-delivered, again for sound
\10\ For reasons known only to RCN, that company has claimed for
several years that it has not received access to Comcast SportsNet
(Philadelphia) on reasonable terms and conditions. However, RCN has had
the contractual right to carry Comcast SportsNet (Philadelphia) from
the day it signed on the air, and RCN still has those rights today, on
the same terms and conditions that Comcast and other cable companies
carry the network. And in fact, RCN has carried the network on those
terms since day one--even though Comcast is under no obligation to make
DIRECTV and EchoStar both claim that Philadelphia professional
sports programming is ``must-have'' programming and that they cannot
compete in that region without it. The facts, however, do not support
Since the mid-1990s, nearly a hundred local Philadelphia
professional sports events have been available on local broadcast
stations, but the DBS companies did not carry these signals (which are
available to them free of charge) until they were required to by
Federal law. It is difficult to understand why, if this is ``must-
have'' programming, they would not bother to carry it for free.
Moreover, based on the latest data from Media Business Corp. (as of
9/30/2005), it is clear that DBS penetration in Philadelphia is higher
than or comparable to that in many other urban markets. Philadelphia
has a DBS penetration of 12.04 percent--higher than Hartford (8.6
percent), Providence (9.39 percent), Springfield-Holyoke (8.65
percent), and Laredo, TX (7.92 percent); comparable to Boston (10.73
percent), Las Vegas (10.96 percent), El Paso (11.01 percent), and Palm
Springs (11.80 percent); and not significantly lower than New York
(15.24 percent), Tampa (14.03 percent), Baltimore (14.15 percent),
Milwaukee (15.08 percent), Norfolk (14.22 percent), or Harrisburg
(13.29 percent), among others. And in fact, in the last five years, the
DBS companies have tripled their market share in Philadelphia.
As I noted earlier, most programmers--including cable companies
that own programming--want maximum distribution for most of their
products. But that should not mean that cable companies, DBS companies,
and others should not have the freedom to create and invest in some
original and exclusive programming as well, in order to distinguish
themselves from one another in the marketplace. In fact, Congress and
the FCC should consider that the program access rules (and the
corresponding restrictions that now apply to DIRECTV as a consequence
of its merger with News Corp.) may now be having the perverse effect of
reducing investment by the beneficiaries of these rules (including two
of the three largest MVPDs in America, DIRECTV and EchoStar) in
original programming--why invest and create when you can have access to
someone else's work on the cheap?
The program carriage rules were intended to be a guarantee against
the ability of a cable operator, who 14 years ago might be presumed to
have ``monopoly gatekeeper'' status, to bar or handicap independent
programming networks from gaining distribution. These rules have almost
never been invoked, again largely because the marketplace works. Anyone
who has an attractive programming idea, a sensible business plan, and a
willingness to negotiate carriage terms that make sense for both the
programmer and the distributor, has had the opportunity to build a
In the past year, one company (Mid-Atlantic Sports Network, or
``MASN'' ) has filed a program carriage complaint, invoking these
little-used provisions of law--the first such complaint ever filed
against Comcast. A second company (The America Channel, or ``TAC'' )
has steadfastly refused to file a program carriage complaint, but it
has attempted to leverage every other opportunity to get the government
to force Comcast to carry it.
Let me address the MASN situation first. The Baltimore Orioles, as
part of a deal with their affiliate, TCR, and Major League Baseball,
created a new sports network (MASN) with the intention of carrying
Baltimore Orioles games in 2007. And in an unprecedented move, Major
League Baseball also granted to the Orioles organization control over
the television rights of the new Washington Nationals baseball club.
Comcast SportsNet (Washington/Baltimore) (CSN) has the television
rights to Orioles games through the 2006 season, and it paid millions
of dollars for the right to negotiate exclusively for renewal of those
television rights and for the right to match any third-party offer
received after that period of negotiation expired. For the Orioles'
organization to agree to transfer to MASN the rights to Orioles games
for annual license fees, and to declare that the Orioles games would be
available only on MASN starting in 2007 without providing CSN the
opportunity to match this deal, was a blatant breach of CSN's
contractual rights. CSN is pursuing its rights in court. Meanwhile, TCR
filed a complaint at the FCC alleging that Comcast's decision not to
carry MASN violates the program carriage rules. Without detailing here
the lack of merit of TCR's filings (we would gladly provide to the
Committee upon request copies of relevant public documents filed at the
FCC), it should be noted that some of TCR's allegations at the FCC were
so frivolous and so outrageous that a consultant for Major League
Baseball--which is the business partner of the Orioles--intervened on
his own motion to denounce and refute those allegations.
Comcast wants to carry Orioles and Nationals games. But Comcast
also wants to protect the contractual rights negotiated and paid for by
CSN. We hope for a timely resolution that is in the best interest of
our company, our customers, and the teams' fans.
Now let me briefly address the complaints by TAC. This is a would-
be network that asserts that its inability to negotiate a carriage
agreement with Comcast is an absolute bar to its viability. The fact is
that TAC has done none of the things necessary to establish a viable
network. It lacks a secure source of financing; it has not assembled
any programming expertise; it has no coherent business plan; and--most
importantly--it has created no programming. Not surprisingly, with a
single exception, no established cable or DBS operator has entered into
a carriage agreement with TAC.
TAC asserts that independent program networks cannot succeed
without a carriage agreement from Comcast and Time Warner, and it
claims that those companies will not work with independent program
In response to the first point, I am attaching to my testimony a
column by C. Michael Cooley of The Sportsman Channel, which appeared in
the October 3, 2005 edition of Multichannel News, whose headline sums
it up: ``How I Started a Network Without Comcast.'' * Moreover, there
are many networks that have become viable with no cable carriage,
reinforcing the point that there are a sufficient number of U.S. MVPD
households served by competitors to support such programming.
* The information referred to has been printed in the Appendix,
In response to the second point, marketplace facts refute TAC's
assertion. Comcast carries scores of independent networks. In fact, it
has no choice but to carry a significant number of independent
programmers because customers demand it.
The fact of the matter is Comcast owns an attributable financial
interest (which, for purposes of the FCC's rules, can be as little as
five percent) in only about seven percent of the channels it carries.
In other words, 13 out of every 14 channels carried by Comcast are
owned by companies that are completely independent of Comcast. This
should not come as a surprise--it is our goal, and a competitive
necessity, to provide the best programming and the best value for our
customers, regardless of who owns or produces the programming.
TAC lacks any basis for invoking the program carriage rules, which
is the likeliest explanation for TAC's failure to file a complaint with
the FCC. In the meantime, we have had continuing discussions with TAC
over the past year, and we remain open to a meaningful dialogue. But it
is important to remember that TAC is entirely in control of its own
fate--and its failure to secure any meaningful carriage commitment from
any of our established competitors suggests that the problem lies not
with Comcast, but with TAC's business plan.
I anticipate that some parties at today's hearing may raise other
complaints or allegations regarding the operation of the program access
or program carriage rules, and I stand ready to provide information to
the Committee that would respond to any such complaints.
Over the past 14 years, competition in the video marketplace has
exploded. When the 1992 Cable Act passed, the majority of consumers had
little choice from whom they purchased multichannel video service and
comparatively limited programming choice. Today, almost every consumer
in America can choose from among at least three MVPDs, each offering
hundreds of programming services. And the number of viable programming
alternatives aimed at the consumer market continues to increase with
telephone company entry, innovations by terrestrial broadcasters, the
emergence of the Internet as a viable video medium, and other
The video marketplace is robust, dynamic, and hotly competitive. In
light of the changes in both distribution and content creation over the
past 14 years, this is the time for Congress to consider reducing, not
expanding, regulation of video content. I urge this Committee to demand
the facts from those on this panel who would argue otherwise, because
the facts do not support their calls for regulation.
I thank the Committee for this opportunity to appear today.
The Chairman. The next witness is Dan Fawcett, Executive
Vice President for programming of DIRECTV, in El Segundo,
Mr. Fawcett. Thank you----
The Chairman. Sixty years ago, I would have been delivering
your local newspaper.
Mr. Fawcett. Oh, really? El Segundo?
The Chairman. Right.
STATEMENT OF DANIEL M. FAWCETT, EXECUTIVE VICE
PRESIDENT, BUSINESS AND LEGAL AFFAIRS AND
PROGRAMMING ACQUISITION, DIRECTV, INC.
Mr. Fawcett. Chairman Stevens, Senator Dorgan, my name's
Dan Fawcett, and I'm the Executive Vice President for
Programming Acquisition at DIRECTV. Thank you for giving me the
opportunity to be here today.
My testimony focuses on program access and the threat to
video competition arising from the proposed Adelphia
Over the last decade, Congress has helped foster the
competitive video marketplace that exists today. With DIRECTV
leading the way, DBS has grown from fewer than 10 million
subscribers in 1999 to more than 27 million today. Increased
competition means consumers have more choices, customer service
is more responsive, and innovation is flourishing. But these
advances cannot be taken for granted. I am here to discuss how
this progress is now being threatened.
Comcast and Time Warner, the Nation's two biggest cable
companies intend to divide Adelphia's subscribers between them
and to swap many of their current subscribers. The sole purpose
of this transaction is to create concentrated regional
monopolies across the country. If allowed to proceed without
safeguards, Comcast and Time Warner will use this local
dominance to deny competitors key regional programming,
especially must-have local sports. And, in doing so, consumers
will be harmed and fair competition will be impossible.
I know this, because I've seen it all before. My job at
DIRECTV is to negotiate carriage deals with programmers,
including regional sports networks. Over the years, I've seen
how cable operators have managed to deny access to local sports
programming in their effort to undermine competition.
Let me give you some examples:
Philadelphia is the poster child. The city is served almost
exclusively by Comcast, which created an RSN with rights to the
Phillies, Flyers, and 76ers. It then denied this network to
Comcast competitors. For almost 10 years, satellite customers
have had to give up the right to root for their home teams.
Just this year, in Charlotte, Time Warner secured a cable
exclusive deal with the Charlotte Bobcats, meaning that, here,
too, local fans face a grim choice, giving up watching the
local team or give up the right to choose their video provider.
In Chicago, Comcast gained a regional monopoly by
purchasing AT&T's cable systems in 2002. Comcast next purchased
the rights of the Bulls, Blackhawks, Cubs, and White Sox, and
launched its own sports network. Comcast made it available to
DIRECTV, but at double the price DIRECTV had been paying to
carry the exact same games.
Time Warner and Comcast are trying to follow the Chicago
playbook for the new Mets channel. Both companies have an
ownership interest in this channel and want DIRECTV to pay the
astounding amount of over $17 million for one season of
baseball or forego the games and give Time Warner and Comcast
In Ohio, where Time Warner will gain a regional monopoly
from the Adelphia transaction, they are doing the same thing
for the Cleveland Indians channel.
There is one constant in each of these scenarios: the cable
operator obtains regional market power, which it then uses to
secure local sports rights, which then enables it to use this
must-have programming as a weapon against competitors. This is
why the Adelphia transaction is so troubling. This deal will
create regional monopolies all across America.
In Boston, Comcast will have over 75 percent of pay-TV
subscribers, 70 percent in Pittsburgh, 67 percent in West Palm
Beach. In Cleveland, Cincinnati, and Columbus, Time Warner's
market share will be 60 percent or more. These high levels of
concentration will allow Comcast and Time Warner to do the same
thing in these cities that they have done in Philadelphia,
Charlotte, and Chicago. Put simply, this plan puts at risk the
more than 10 years of progress that Congress set in motion with
the program-access statute.
To prevent this outcome, Congress can do two things:
First, we ask you to support DIRECTV's call for the FCC to
narrowly condition the Adelphia transaction. In particular, the
FCC should prohibit exclusive deals for RSNs in the regions
where the Adelphia transaction will create market power.
Distributors should also be permitted to seek an independent
third-party review to ensure nondiscriminatory and fair pricing
Second, we ask you to re-examine the program-access statute
to, number one, close the terrestrial loophole; two, address
discriminatory pricing schemes that circumvent the intent of
the law; and, three, make the ban on exclusives permanent.
Cable operators were once the only game in town. As a
result, prices were high, choices were limited, and customer
service was legendarily bad. But at least in most places
competition is now the order of the day, and the results are
remarkable: unprecedented innovation, service improvements,
more responsive pricing, and more choices than ever before.
On behalf of millions of Americans who benefit from the
competition that we and others provide, we ask you to ensure a
competitive video marketplace for the future.
Mr. Chairman, thank you for allowing me to present
DIRECTV's views on these important matters, and I'd be happy to
answer any questions.
[The prepared statement of Mr. Fawcett follows:]
Prepared Statement of Daniel M. Fawcett, Executive Vice President,
Business and Legal Affairs and Programming Acquisition, DIRECTV, Inc.
Chairman Stevens, Co-Chairman Inouye, and Members of the Committee,
my name is Dan Fawcett and I am the Executive Vice President, Business
and Legal Affairs and Programming Acquisition, at DIRECTV, Inc. Thank
you for inviting me to testify today on video competition, program
access, local sports programming, and the threats to competition
arising from the proposed Adelphia transaction.
A key development in the American economy over the past twenty
years has been the rise of a competitive video marketplace. Today,
competition means consumers have more choices; customer service and
pricing are becoming more responsive; technological innovation is
flourishing, and tens of thousands of jobs have been created.
This is no accident. Rather, it is the direct result of public
policies that promote competition. But today, this progress is being
Comcast and Time Warner, the Nation's two biggest cable companies,
intend to divide Adelphia's subscribers between them and to swap many
of their current subscribers. If allowed to do so, Comcast and Time
Warner will control access to approximately 6 in 10 of the Nation's
cable subscribers and almost half of all pay-TV subscribers. Of greater
concern, the proposed transaction will create concentrated regional
monopolies across the country where one of the two companies will
become the single dominant video provider.
If allowed to establish such regional monopolies, without adequate
safeguards, I can assure you that Comcast and Time Warner will deny key
regional programming--especially local sports--to their competitors.
Maybe they will do so directly, because the program access rules will
not prevent them. Or maybe they will do so indirectly by increasing the
price of this programming, which the program access rules also allow.
Either way, tens of millions of consumers will be harmed, and fair
competition will be impossible.
I know this because I've seen it all before. My job at DIRECTV is
to negotiate carriage deals with programmers, including the regional
sports networks (RSNs) that carry teams like the Indians and the Mets
and the Red Wings in their hometowns. Over the years, I've seen how
cable operators have managed to deny their competitors local sports
programming in places like Philadelphia, where DIRECTV subscribers
still cannot watch the Phillies, 76ers, and Flyers; and Chicago, where
the price DIRECTV pays for sports programming has increased at
This should not be the model for the rest of the country. To
prevent this, we have asked the FCC to place safeguards on the Adelphia
transactions and we also urge Congress to update and strengthen the
program access rules. Taken together, these regulatory and legislative
recommendations will help to ensure that the competitive video
marketplace that exists today will continue to flourish in the future.
I. Where Cable Operators Have Gained Sufficient Regional Concentration,
They Have Withheld or Raised the Price of Key Local Sports
Not so long ago, there was no such thing as video competition. If
you wanted multichannel programming, your local cable operator was the
only place to go. Over the past 15 years, however, sound public policy
decisions by Congress have helped foster the rise of a truly
competitive video marketplace. With DIRECTV taking the lead, DBS has
grown from fewer than 10 million subscribers in 1999 to more than 26
million today--proof that when it comes to video, Americans want
Thanks to this increased competition:
DIRECTV and others have invested billions in new
DIRECTV itself has invested billions to make local broadcast
signals available to more than 93 percent of television
households, and is investing billions more to create the
capacity to provide 1,500 high definition local broadcast
Customer service and choice have improved throughout the
Rural customers now have access to the latest products and
Because of the competitive marketplace this Committee helped
create, all Americans--not just DIRECTV subscribers--are enjoying a
better television experience.
But it almost never happened. Some Members of this Committee may
remember that, when satellite first appeared on the scene, cable
responded as any monopolist would--by trying to protect its monopoly.
One strategy was to deny key programming to its satellite rivals. \1\
Cable hoped that, if it could prevent satellite from carrying the most
desirable programming services, it could strangle competition in its
infancy. So cable operators refused to sell programming they controlled
to satellite and used their market power to secure exclusive contracts
with key unaffiliated programmers.
\1\ This, of course, wasn't the only strategy employed by cable to
retain its monopoly. Some Members of this Committee might remember
``Primestar,'' the cable industry's attempt to launch its own satellite
service as a ``stalking horse'' to block competitive DBS entry--in part
by obtaining scarce DBS licenses. In the end, the Department of Justice
and 45 states sued Pnmestar and obtained a consent decree curbing the
most obviously anticompetitive tactics.
But to cable's chagrin, Congress stepped in. In 1992, Congress
created program access requirements designed to prevent such abuses of
market power. Under these rules, cable operators were prohibited from
negotiating exclusive or ``sweetheart'' deals for cable-affiliated
programming. The idea was that, with a level competitive field, new
entrants such as DIRECTV could compete on the merits of their
offerings, and consumers would benefit from their efforts to win
customers from each other. The rules have been an unmitigated success:
without them, satellite television would never have gotten off the
In recent years, however, cable operators have devised increasingly
sophisticated ways around Congress's pro-competitive rules. The program
access rules no longer provide any real barrier to cable giants such as
Comcast and Time Warner. Thus, we now find ourselves in much the same
situation as before Congress enacted the program access rules--in
regions where a cable operator possesses market power, it will deny or
raise the price of key programming to its competitors. In particular,
cable will seek to withhold the kind of local sports programming that
the FCC has determined to be ``must-have'' for distributors.
Let me give you some examples:
A. Pure Withholding of Affiliated RSN--Comcast in Philadelphia
The poster child of local sports withholding is, of course,
Philadelphia. Because Philadelphia is Comcast's hometown, Philadelphia
was one of the first ``clustered'' markets. While some metropolitan
areas are served by many different cable operators, Philadelphia is
served almost exclusively by Comcast. Armed with such regional market
power, Comcast created ``Comcast SportsNet''--an RSN with rights to the
Philadelphia Phillies, Flyers, and 76ers. It then decided not to make
this network available to Comcast's competitors. \2\
\2\ In 2002, the last time Comcast had a big merger pending, it was
persuaded to make Comcast SportsNet available to cable overbuilders
such as RCN. But it has never made this programming available to
It was able to do this because of what has since come to be known
as the ``terrestrial loophole.'' The program access rules only apply to
programming delivered to cable systems by satellite. \3\ Because it
delivers Comcast SportsNet to its cable systems via fiber, Comcast
argues that Comcast SportsNet is not subject to the program access
rules and need not be made available to customers of their competitors.
\3\ When Congress was drafting the program access provisions in
1992, it wanted to allow exclusive deals for local cable news channels.
The idea was that, if a cable system spends a lot of money creating a
local cable news channel, it shouldn't have to make that channel
available to its competitors. At the time, local cable news was
primarily delivered to cable offices over telephone wires. Other
programming (such as ESPN, CNN, etc.) was delivered to cable offices
via satellite. So Congress decided to restrict exclusive contracts only
for ``satellite cable programming'' (that is, ``video programming which
is transmitted via satellite'' ).
DIRECTV has always thought this was, at best, an evasion of the
1992 Cable Act. But the FCC (and, later, the DC Circuit) concluded that
a plain reading of the statute's reference to ``satellite programming''
allows Comcast to freeze out its competitors in Philadelphia. And this
is exactly what Comcast has done. To this day, fans of the Phillies,
76ers, and Flyers must either give up the right to root for their home
teams or give up their right to subscribe to the video provider of
their choosing. Is it any wonder that satellite's market share in
Philadelphia is less than half of what it is nationally?
B. Pure Withholding of Unaffiliated RSN--Time Warner in Charlotte
Comcast found it easy to deny satellite subscribers local sports
programming in Philadelphia because it owned the RSN in that market.
But cable doesn't need to own a sports channel in order to deny it to
satellite subscribers--just ask DIRECTV subscribers in Charlotte.
In Charlotte, Time Warner controls a regional monopoly similar to
that enjoyed by Comcast in Philadelphia. In fact, Time Warner controls
so many subscribers in Charlotte that, when Carolina Sports and
Entertainment Television (``C-SET'') launched last season with rights
to the NBA's Charlotte Bobcats, Time Warner was able to establish an
exclusive deal to carry the team's games. Because C-SET was not
affiliated with a cable operator, the program access rules did not
prohibit this exclusive deal. Since then, C-SET has gone out of
business. But just a few months ago, Time Warner secured yet another
deal with the Bobcats (this time without C-SET). And the Bobcats are
still not available to satellite. And so here too, as in Philadelphia,
local fans face the same grim choice: give up watching the team, or
give up the right to choose video providers.
C. Uniform Price Increases--Comcast in Chicago
Cable operators have found that refusing to sell local sports
programming to competitors, although effective in boosting market
share, is a fairly blunt tool. Savvy cable operators have thus resorted
to more subtle--but equally anticompetitive--tactics.
Take Chicago, for example. In 2002, Comcast purchased AT&T, and in
the process established a regional monopoly in Chicago similar to its
dominance of Philadelphia (and similar to the level of concentration
that the Adelphia acquisition could create in markets across the
country). Comcast next purchased the rights to the Bulls, Blackhawks,
Cubs and White Sox and launched its own sports network, CSN Chicago.
When DIRECTV sought carriage of this critical programming, Comcast made
it available to DIRECTV--but at double the price DIRECTV had been
paying to carry these same games. Unwilling to forgo this must-have
programming, DIRECTV had no choice but to accede to Comcast's demands.
The program access rules do not prohibit this kind of behavior so
long as Comcast pays the same high price. But that restriction is of no
concern to Comcast because even inflated payments are simply a transfer
of money from one division of Comcast Corporation to another.
Comcast thus has every incentive to jack up the price of CSN-
Chicago (and similar RSNs) in the future. If DIRECTV doesn't pay the
higher prices, Comcast gets a de facto exclusive for the channel. If on
the other hand DIRECTV pays the artificially high price, Comcast
extracts a supra-competitive rate and drives up DIRECTV's costs. This,
in turn, makes it more difficult for DIRECTV to compete with Comcast on
price. Either way, Comcast wins--and consumers lose.
D. ``Stealth Discrimination'' of Affiliated RSN--Comcast in Sacramento
Sometimes, a cable operator with a regional monopoly doesn't even
need to ``officially'' raise RSN prices in order to distort
competition. In Sacramento and San Francisco, as in Chicago, Comcast
was able to establish a regional monopoly when it purchased AT&T's
cable systems. And, as in Chicago, it went out and created its own
Sacramento RSN, CSN West, with rights to only one professional team,
the Sacramento Kings.
In my experience, RSNs only offer their programming in the
territory established for the team by its league. But this is not the
case for CSN West. Comcast has mandated a service area for CSN West
much larger than the area in which the NBA permits CSN-West to carry
Kings games. Under Comcast's pricing scheme, however, DIRECTV must pay
for subscribers to whom it can't even show the Kings games. In fact,
DIRECTV pays for more subscribers who cannot watch the games than those
who can. These customers account for one-third of the total license
fees paid for the network. Cable operators, with much smaller service
areas, do not face this dilemma.
E. The Trend Continues . . .
One might think that, with a gigantic merger pending before the FCC
and the FTC, Comcast and Time Warner might at least slow down their
effort to undermine competition through the acquisition and withholding
of sports programming. But even the threat of government oversight does
not appear to faze them.
Time Warner stands to gain enormous market share in Ohio through
the Adelphia transactions. So it recently announced that it will help
launch a new RSN to carry Cleveland Indians games. Following the
playbook used by Comcast in Chicago, Time Warner has proposed a rate
for this single-team, part-time channel that is almost 90 percent of
what DIRECTV was paying for four teams: the Indians, Cavaliers, Reds
and Blue Jackets.
Time Warner and Comcast are trying to do the same thing in New
York, where they control many subscribers. Both have an ownership
interest in SportsNet New York, the new Mets channel. SportsNet New
York wants to charge DIRECTV a higher price than it pays on a per game/
per subscriber basis for the YES network--which carries the Yankees.
This is an astronomical rate, particularly considering the fact that
the ratings for the Mets games on FOX Sports New York/MSG have
historically been less than half the ratings for the Yankees games on
Again, Comcast and Time Warner have nothing to lose by this
behavior. They can set ``nondiscriminatory'' high prices, knowing that
they will recoup the cost through their ownership interest in the RSN.
If DIRECTV refuses to go along, DIRECTV subscribers will lose Indians
and Mets games. For Clevelanders and New Yorkers who want to watch
their local teams, DIRECTV will not be an option, to the delight of
Comcast and Time Warner. If, on the other hand, DIRECTV pays the
inflated price, our costs go up. Again, Comcast and Time Warner win,
and consumers lose.
II. The Adelphia Transactions Will Make This Behavior Possible in Many
There is one constant in each of the scenarios I've just described
to you. In Philadelphia and Charlotte and Chicago and Sacramento, a
single cable operator enjoys a very high market share. Thus, Comcast
could only withhold Philadelphia sports programming because it controls
a regional monopoly in Philadelphia. And it could only raise the price
of sports programming in Chicago after it gained a regional monopoly
there in 2002. This is for a simple reason--as a cable operator
controls more subscribers in a particular area, an RSN operating in
that area gains more from distribution on the cable system and loses
less if it denies distribution to the cable operator's rivals.
This is why the proposed Adelphia transactions are so dangerous.
Comcast and Time Warner propose to split up Adelphia's systems, and
swap systems among themselves, for the stated purpose of increasing
regional concentration. Indeed, they are selling this merger both to
Wall Street and to regulators as one that will increase what they call
One way to measure the extent of concentration that will result
from this merger is through a tool called the Herfindahl-Hirschman
Index (HHI), a widely used and accepted measure of market
concentration. Under the Department of Justice Merger Guidelines, a
merger resulting in an HHI greater than 1800 and a change of more than
100 is presumed to create market power. As described in the table
below, the HHI's resulting from this transaction would dwarf those
thresholds in the pay-TV markets in many RSN service areas.
RSN HHI Change
C-SET 4,210.6 403.7
Comcast SportsNet Philadelphia 4,156.7 376.9
FSN Florida 2,529.2 580.7
Sun Sports 2,515.2 578.0
FSN Ohio 2,395.7 837.8
FSN West/West 2 2,216.9 740.5
Mid-Atlantic Sports Network 2,168.7 358.6
Comcast/Charter Sports Southeast 2,148.6 325.8
Comcast SportsNet MidAtlantic 2,126.4 390.8
FSN Pittsburgh 2,080.1 576.9
In terms of market share, this means that Comcast will have over 75
percent of pay-TV subscribers in the Boston DMA, 70 percent in
Pittsburgh, and 67 percent in West Palm Beach. Time Warner's share in
Los Angeles will go from 9 percent to 48 percent and in the Cleveland,
Cincinnati and Columbus pay-TV markets, Time Warner's market share will
be 60 percent or more.
Think about what this means. In markets such as Philadelphia,
Chicago, and Charlotte where Comcast and Time Warner already have
regional monopolies, they have withheld sports programming from
competitors or raised its price to competitors. With the Adelphia
transaction, Comcast and Time Warner seek to create the conditions that
would allow them to do the exact same thing in Boston and Pittsburgh
and Cleveland and Los Angeles and West Palm Beach. Which means fans of
the Red Sox , the Pirates, the Indians, the Cavaliers, the Dodgers, and
the Clippers could all find themselves over a barrel--forced to either
give up the right to watch their home town teams or give up the right
to choose video providers. With the number of markets affected by the
Adelphia transaction, this threatens the progress Congress set in
motion over a decade ago.
III. The FCC Should Impose Conditions on the Adelphia Transactions
If Comcast and Time Warner are successful in their plans, we could
be looking at a return to the ``bad old days'' of cable monopoly.
DIRECTV has thus asked the FCC to impose narrowly-tailored conditions
on the proposed Adelphia transactions. These recommendations closely
mirror the conditions imposed by the FCC in the News Corporation/
First, the FCC should prohibit exclusive deals (including ``cable
only'' exclusives) for RSNs, regardless of delivery mechanism or
affiliation, in the regions where the Adelphia transaction will create
market power. This will prevent Comcast and Time Warner from taking
advantage of the ``terrestrial loophole'' (as Comcast has done in
Philadelphia). It will also prevent Comcast and Time Warner from
entering into exclusive deals with unaffiliated RSNs in highly
concentrated markets (as Time Warner has done in Charlotte).
Second, the FCC should prevent ``price discrimination'' by
permitting distributors to seek arbitration when negotiations break
down. This would simply allow a competitor to seek an independent third
party review to ensure nondiscriminatory and fair pricing to
competitors. An integral component of this recommendation is that
competitors must be permitted to continue providing this ``must-have''
programming to consumers while any arbitration is pending.
These conditions are not exceptional in the video service industry.
In fact, the FCC has consistently noted that the rise of regional
monopolies poses a threat to competition and that it is appropriate to
exercise regulatory authority to prevent such monopolies from
exercising their market power to the detriment of competition.
Only through these narrow conditions can the FCC address the very
real anticompetitive consequences of the merger that I have described
to you. I would thus ask this Committee to urge the FCC to approve this
transaction only with these or similar safeguards.
IV. Congress Should Re-Examine the Program Access Rules
For those concerned about competition in the video market, the
Adelphia transactions are plainly the immediate priority. In the longer
term, however, Congress should consider re-examining the program access
rules. In particular, it should close the terrestrial loophole and
ensure that the rules apply to the other forms of discrimination I have
As discussed above, the terrestrial loophole allows cable operators
to deny programming from their competitors so long as the programming
is not delivered to the cable systems. The rationale for this was to
encourage cable operators to develop their own local news channels. The
exception certainly was never intended to apply to local sports
programming, which was delivered at the time via satellite. There is,
moreover, simply no need for Congress to encourage the creation of
local sports programming. Such programming, as the FCC has determined
on several occasions, is among the most valuable on television. It also
cannot be ``created'' through Congressional encouragement--each team is
unique, and games involving that team cannot be duplicated in the way
that, for example, local news can.
When it created the program access rules, Congress surely never
expected regional sports programming to be subject to exclusive deals.
Congress should remedy this by closing the terrestrial loophole (at
least as for RSNs), and make it clear that the full panoply of the
program access restrictions in the 1992 Cable Act apply to RSNs,
however they may be delivered to cable systems.
When it examines the program access rules, moreover, Congress
should also consider how to address the other sorts of anticompetitive
activities that I have described, but that the existing rules appear
not to reach. There is simply no reason why cable operators should be
allowed to engage in the kind of behavior exhibited by Comcast in
Chicago and Sacramento. It should also ensure that the program access
rules will continue to apply beyond their current expiration date.
Cable operators were once the only game in town. As a result,
prices were high, choices were limited, customer service was
legendarily bad. But, at least in most places, competition is now the
order of the day and the results are remarkable: unprecedented
innovation, service improvements, more responsive pricing and more
choices than ever before.
But all that has been gained could yet be lost. If allowed to
proceed with the Adelphia transaction without adequate safeguards,
Comcast and Time Warner will have both the incentive and the ability to
undermine competition in market after market throughout the country.
This will undo the progress Congress set in motion with the program
access rules over ten years ago. On behalf of the tens of millions of
consumers who want continued access to their local teams at reasonable
prices, I ask you not to let that happen.
Chairman Stevens, Co-Chairman Inouye, and Members of the Committee,
thank you for allowing me to present DIRECTV's views on these important
matters. I would be happy to take your questions.
The Chairman. Thank you very much.
Our last witness is Doron Gorshein, Chief Executive Officer
and President, The America Channel, of Heathrow, Florida.
Press the button.
Mr. Gorshein. Are we on? OK.
The Chairman. I wasn't on. Now I'm on. We're going to get
one automated one of these years.
Mr. Gorshein. It works.
STATEMENT OF DORON GORSHEIN, CHIEF EXECUTIVE OFFICER/PRESIDENT,
THE AMERICA CHANNEL, LLC
Mr. Gorshein. Mr. Chairman, Members of the Committee, thank
you for the opportunity to testify.
The America Channel is a new nonfiction programming network
set to launch later this year. It will explore and celebrate
America, profiling its diverse communities, local heroes, and
ordinary people who accomplish the extraordinary.
The America Channel was founded after 9/11, when television
no longer resonated with my sensibilities as an American
consumer. Indeed, our stellar market research and consumer and
system feedback confirmed that Americans want more relevant
programming about what makes America special, more community,
more connectivity, more authenticity on television. We believe
that The America Channel could be the most resonant new product
to come along in quite some time.
In recent months, we've secured distribution with no less
than six telcos, close to 90 percent of the projected telco
video space, including Verizon, AT&T, and others. Channels that
have 90 percent of the cable space have been around for 25
years. In telco, we did it in 5 months.
In contrast to our success in telco, after close to 3 years
we've had virtually no progress getting carriage from the
dominant cable operators. Without distribution on the largest
cable operators in key markets controlled by them, a channel is
not viable. 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;
91 out of the 92 got both Comcast and Time Warner. John Malone
said that an independent channel has no chance whatsoever if
Comcast doesn't carry it.
We found that each of the top two cable operators, over a
two-and-a-half-year period carried on a nonpremium, national
basis, only 1 out of 114 channels with no affiliation--no media
affiliation. And that's less than 1 percent. The single one
that got carriage is the one referred to in Comcast's
submission. In contrast, most of the channels affiliated with a
cable or broadcast company got carriage on one or both of the
top cable operators. Comcast carries 100 percent of its own
channels, and almost all of them, if not all of them, on
analog. Affiliated channels are also typically given 11 times
the number of homes, on a median basis.
A number of studies, including one by the GAO, confirmed
that the top cable operators are much more likely to carry
their own channels than independent channels. Such disparities
cannot be explained on the basis of free-market considerations
alone. Affiliation is a major factor.
Why are independent channels locked out by cable? Because
independent channels are direct competitors to cable-affiliated
channels on several fronts--for viewers, ad dollars, technical
capacity--and the asset value is independently owned.
Independent channels apply downward pricing pressure on
affiliated channels. Cable-affiliated channels, on average,
cost more than three times the cost of an independent. One top
cable operator derives 40 percent of its operating income from
its television networks. That operator has strong incentive to
exclude 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. Cable operators want to own that. So,
there's an inherent conflict of interest that prevents the best
and cheapest products from entering the market.
The results? Cable rates have doubled in 10 years. Only one
other consumable has matched this: gasoline. Other telecom
services have all gone down--telephone, wireless, long
distance, broadband. If better and cheaper content competitors
are kept out of the market, consumer prices will rise, and
there will be adverse effects on consumer choice, competition,
diversity, and decency.
What are the solutions? On the distribution side, nothing
could be more important than expeditious enactment of telco
video franchise relief. Telcos must be allowed to compete in
local markets. And competitors, like DIRECTV, EchoStar, and
RCN, should have the same fair access to sports nets and other
The other half of the problem is on the content side. The
stifling of competition and abuse of gatekeeping power requires
urgent action. One solution is for the FCC to impose conditions
on the Adelphia merger, as we and others have urged them to do.
Congress might consider other solutions. For example, going
forward, 50 percent of all new channel capacity on Comcast and
Time Warner should be designated for independent networks with
no cable or broadcast affiliation. After all, Comcast and Time
Warner have indicated that capacity will increase if they are
permitted to acquire Adelphia.
Section 25 of the Cable Act of 1992 provides sound
precedent. There, Congress took steps to ensure access for a
valuable type of programming that had difficulty reaching the
Certainly, there are other creative solutions. We look
forward to working with you to craft fair remedies for all,
most importantly to the public. Foreclosure of opportunities
for independent channels is a detriment to competition,
consumer choice, consumer pricing, diversity of information
sources, decency, and the national discourse. We must have a
free-market environment which permits new market entrants to
compete on their substantial merits. It is my hope that we can
address these systemic problems that play out to the detriment
of all Americans.
Thank you, again, for the opportunity to testify.
[The prepared statement of Mr. Gorshein follows:]
Prepared Statement of Doron Gorshein, Chief Executive Officer/
President, The America Channel, LLC
The stifling of competition in the content space has led to cable
rates which have increased 60 percent in 5 years, and doubled in 10
years. Only one other consumable has matched this dismal record.
Virtually every other service to the home--for which there is
competition--has stayed the same or gone down, including broadband,
dial-up, long distance, wireless, etc.
In contravention of the clear intent of Congress and the FCC,
Comcast and Time Warner have become unreasonable gatekeepers with the
ability, and the incentive, to prevent competitive independent products
from reaching key thresholds of viability. This power will be enhanced
and consolidated by the proposed Adelphia transactions.
Existing FCC carriage laws, which prohibit discrimination against
channels on the basis of affiliation, have to our knowledge never been
formally enforced in 13 years since their enactment. Horizontal and
vertical ownership limits, mandated by Congress to protect the industry
and the public from the harms that would result in unchecked
consolidation, have proven ineffective--in part because of the severe
concentration of Comcast and Time Warner systems on a regional basis in
23 of the top 25 markets.
The evidence shows that, as a result of their size and dominance of
the top television markets, Comcast and Time Warner's market power is
severe and vastly exceeds their national market share. Carriage by both
is required for any ad-supported network to survive.
The major telcos are embracing video competition and have agreed to
carry The America Channel and other independently owned channels.
Unlike the telcos, the top cable operators are vertically integrated--
they own channels. Thus, independent channels are direct competitors to
cable-affiliated channels on several fronts--for viewers, ad dollars,
technical capacity, and the asset value which is independently owned.
New independent channels also create downward pricing pressure on
affiliated channels. The availability of independent channels promotes
competition, better consumer pricing, greater consumer choice, and
improves the diversity of ideas and the national discourse.
The record shows that the top cable operators have prevented
independent channels from competing, in favor of networks owned by
cable or broadcast conglomerates. This clear record of exclusion, along
with the top cable operators' power and economic incentive to stifle
competition, combine to create a ``perfect storm'' against independent
channels. The Adelphia transactions may lead to the permanent end of
new independent channels.
At stake is the health of competition, consumer pricing, consumer
choice, the diversity of ideas in the marketplace, and the quality of
the national discourse, all of which are damaged by the foreclosure of
opportunities for independent programming networks.
1. Severe Market Power in the Cable Marketplace--Two Gatekeepers
Control Channel Entry and Survival
``Basically, the consolidation of the business has got to the point
where I don't believe that an independent programmer has any chance
whatsoever of doing anything unless he's heavily invested in and
supported by one of the major distributors . . . There's no way on
earth that you can be successful in the U.S. distributing a channel
that Brian Roberts (of Comcast) doesn't carry, particularly if he has
one that competes with it.''--John Malone, CEO of Liberty Media.
Despite Congress and the FCC's clear intent to prevent such
consolidated market power, and to the detriment of competition,
consumer pricing, consumer choice, the diversity of ideas in the
marketplace and the quality of the national discourse, two cable
companies currently stand as gatekeepers to network viability. Time
Warner and Comcast already exercise extreme influence over the health
of competition in the marketplace, influence which far exceeds their
market share. The proposed Adelphia transactions will only exacerbate
A. Control of Subscriber Thresholds
Revenue for any advertising-supported network is dependent
primarily on distribution, both to a sufficient number of households
and to the top television markets. As such there are certain
``viability factors'' which must be achieved in order for a network to
survive. The first is to acquire (at a minimum) carriage into 20 to 25
million homes, at which point the network may be able to acquire a
rating by Nielsen Media Research. The second threshold is to increase
carriage to 50 million homes because, as many media companies have
stated on the record, most national advertisers view 50 million homes
as a minimum distribution base--networks with subscriber counts below
this level will receive substantially smaller allocation of these
advertisers' funds, or not be considered at all.
The inability of an advertising supported network to compete for
national advertising dollars severely impacts the long-term
survivability of a network. The New York Times on July 25, 2005
reported the following: ``Generally, the threshold of success for
aspiring cable or satellite channels is about 50 million homes, said
Tom Wolzien, a media analyst . . .'' \1\ A&E Television Networks (owner
of at least 5 ad supported networks) filed comments at the FCC which
put the long-term viability threshold even higher, stating ``In order
to attract sufficient advertising revenue to afford to pay for and
provide a meaningful quantity of original programming, the network must
reach approximately sixty million subscribers.'' \2\
\1\ New York Times. 07-25-2005. For Gore a Reincarnation on the
Other Side of the Camera.
\2\ MB Docket 04-207, Comments of A&E Television Networks
Reaching 50 million subscribers without carriage by Comcast and
Time Warner is virtually impossible, even today, and requires carriage
by nearly every single other cable provider and on each provider's most
widely distributed platform (i.e. analog basic). In addition, empirical
evidence demonstrates that carriage by both Comcast and Time Warner is
required for a cable channel to reach even half that amount--25 million
Looking at the 92 cable channels which we found to have reached the
first viability threshold of 20 million subscribers (required for
Nielsen ratings): \3\
\3\ Two CSPAN networks are distributed to more than 20 million
households. Because of the unique nature of CSPAN, we did not count
these networks as either affiliated or independent.
Only 3 of the top 50 cable channels are independent--they
have no ties to a cable operator or broadcaster.
Only 9 of the top 92 cable channels have no ties to a cable
operator or broadcaster.
91 of the top 92 channels secured carriage from both Comcast
and Time Warner.
1 of the top 92 secured carriage from only one of Comcast or
Time Warner--but it also secured carriage from Adelphia.
Not a single channel was able to reach even the critical
first viability milestone of 20 million homes, without 2 of the
3 transacting parties. After the Adelphia transaction, it will
therefore be empirically impossible for an independent channel
to be viable without both of Comcast and Time Warner.
That carriage by both Comcast and Time Warner is required for a
network to surpass even 25 million households, overrides a strict
market share analysis. Kagan Research estimates that there are
approximately 92.6 million multichannel households in the United
States. \4\ According to their joint filing for the Proposed
Transactions (MB Docket 05-192), there are nearly 70 million households
which Comcast does not serve and there are 53.4 million subscribers
which neither Comcast nor Time Warner serve. Therefore, theoretically a
sizeable ``open field'' exists from which cable programming networks
should be able to reach these minimum distribution thresholds without
carriage by Comcast or Time Warner. The fact is, however, that it has
not happened. Comcast and Time Warner's market power exceeds their
large market share. This aggregation of market power is due, in part,
to their regional dominance of top television markets.
\4\ Kagan Media Money. April 26, 2005 at 7. Multichannel households
is herein defined as any household which receives television
programming from an MVPD.
B. Importance of Top Markets in Market Power
Raw subscriber numbers alone do not guarantee network viability. In
order to compete effectively for advertising dollars, networks must
also be carried in the top television markets. There are 210 Designated
Market Areas (DMAs) in the U.S., but nearly 50 percent of all
television households reside in the top 25 DMAs. An advertising
supported cable channel which is unable to reach these households is at
an extreme disadvantage in the battle for national advertising dollars.
Similarly, a new advertising supported cable channel which cannot
project carriage over time to these top markets may not be able to
forecast the profitability needed to generate investment and enter the
marketplace as a competitor.
As a result of the Adelphia transactions,
Comcast and Time Warner will serve customers in 23 of the
top 25 DMAs and 38 of the top 40 DMAs. Comcast or Time Warner
will serve an average of 50.3 percent of the multichannel homes
in each of these 23 DMAs.
Comcast and Time Warner will serve more than 50 percent of
all multichannel households in at least 12 and perhaps as many
as 16 of the top 25 DMAs as well as a majority of households in
13 of the top 25 DMAs will see an increase in the percentage
of subscribers controlled by a single MSO. (This does not
include the several DMAs which will see change in system
ownership but not an increased consolidation, such as Dallas.)
Further, it is important to note that this regional dominance in
top markets is something which is not replicated by DBS providers who
may have substantial subscriber totals, but as a result of their
national dispersion do not share Comcast's and Time Warner's apparent
pocket monopolies and gate-keeping ability with respect to top markets.
In fact, DBS penetration in the top 25 DMAs is 18 percent lower than
the national average. \5\ Across the U.S., DBS has just over 23 percent
of television households. In the top 25 DMAs, DBS's share is only 19.3
percent. Therefore, carriage by both DBS providers on their most widely
distributed packages would at best enable a cable channel to reach one-
fifth of the households in the top markets.
\5\ Data source: the television advertising bureau, www.tvb.org.
Note: TVB's analysis grouped DBS with other ``alternate delivery
sources,'' which include Large Dish satellite, satellite master antenna
systems (SMATV), and multipoint distribution systems (MDS).
That the top 25 markets contain nearly 50 percent of all television
households makes them undeniably important to any advertiser. However,
research shows that these markets are disproportionately valued by
advertisers--that advertisers put more resources toward reaching a
viewer in a top television market than they do toward reaching the
average television viewer. Consequently, foreclosure of those markets
by Comcast and Time Warner is even more damaging to an advertising
supported network than the numbers would imply.
This preference of advertisers for top markets was proven by
researchers from Consumers Union and Consumer Federation of America,
who looked at the relationship between the share of television
households in a DMA and the share of overall television advertising
dollars spent on that DMA. \6\ Among other things, their independent
\6\ MB Docket 05-192, Reply comments of Consumers Union, Consumer
Federation of America at 22-23.
Television advertisers spend 20 percent more to reach each
household in the top 25 markets than they do the average U.S.
household. The top 25 DMAs were found to have 49 percent of
television households yet receive 59 percent of the TV ad
Television advertisers spend 32 percent more to reach each
household in the top 11 markets than they do the average U.S.
household. (The top 11 DMAs are all served by the transacting
parties.) The top 11 DMAs contain roughly 31 percent of the
television households but receive 41 percent of the TV
What Drives the Disproportionate Value Placed on Top Markets?
Factors which we confirmed with advertising industry veterans,
which contribute to the preference of advertisers for the top
television markets, include: population density (which provides the
opportunity for greater numbers of people to see the spots, see the
products in use, and for word of mouth to spread), the density of
retail outlets (urban areas give viewers significantly more
opportunities to act on the advertising messages they see), younger
populations (18 to 34 is the age bracket most desired by advertisers,
and this age bracket tends to live in the urban areas which comprise
the top markets), disposable income (the average household in a Top 10
DMA has 19 percent more disposable income than the national average;
the average household in a Top 25 DMA has 8 percent more disposable
income than the national average), and product adoption patterns and
the presence of major press (national trends are set in large urban
areas, where population density contributes to rapid word of mouth
exposure, and national press outlets can accelerate a product into the
Foreclosure from the top markets can also hinder a network's
survival by materially impacting its ability to be reliably rated by
Nielsen. The majority of Nielsen's National People Meters (which
collect ratings data) are located in the top DMAs. \7\ Networks that
are not available in these markets have a smaller population of meters
from which to derive the statistically significant data upon which
media buyers rely, and may not meet Nielsen's reporting standards.
\7\ Nielsen's National People Meters are dispersed according to
Census data. DMA ranking is done by the number of television
households. There is a positive but not perfect correlation between the
percentage of total U.S. television households in a DMA and the
percentage of national people meters located therein.
C. Impact of Market Power
As discussed in the above sections, Comcast and Time Warner,
because of their size and dominance of top television markets, wield
unreasonable power over network survival. A national cable network that
is denied carriage by Time Warner and Comcast cannot be economically
viable in the long term. Therefore, the denial of carriage by these two
market leaders signals to the market that a channel is unlikely to
survive, and hence has a preclusive effect on the ability and
willingness of other cable operators to embrace a channel. The majority
of smaller operators are hesitant to dedicate the channel capacity,
marketing and other resources necessary to distribute a product from a
programmer whose survivability is uncertain. Gary Lauder, who runs
Lauder Partners, a VC firm with a long track record in cable
investment, stated recently, ``Sure, there are other big MSOs and
plenty of small or midsize operators VCs could approach with a
promising enterprise. The problem is, so many of the other MSOs wait
until [they see] what Comcast or Time Warner does. So that creates a
\8\ CableWorld. April 4, 2005. ``How Come the Vultures Don't Flock
to Cable? '' by Simon Applebaum.
Others from the venture capital community share this assessment of
Comcast and Time Warner's market power. Richard Bilotti, the respected
cable analyst for Morgan Stanley recently stated, ``Without
distribution from Comcast, it would be virtually impossible for any
network to be profitable.'' \9\ And an April CableWorld article
reported on the Venture Capital community's hesitation to fund cable
startups, stating ``VCs are holding back. Their number one hurdle: Any
cable-related venture that seeks funding must have a deal in place with
Comcast or Time Warner Cable. If one or both multi-system operators
isn't on board, kiss the capital goodbye.'' \10\
\9\ Source: ``Is Comcast Too Big?'' Broadcasting and Cable, July
\10\ CableWorld. April 4, 2005. ``How Come the Vultures Don't Flock
to Cable?'' by Simon Applebaum.
If Comcast and/or Time Warner decline to permit access to a new
independent network, there is strong disincentive for other cable
systems, for competitors and for investors to embrace it--as they all
know the survivability of such a network is in doubt. Adelphia, which
is one of only ten cable MSOs with more than 500,000 subscribers (out
of more than 1000 MSOs total) has at times provided an important
pathway for independent channels to launch and reach at least the first
distribution milestone of 20 million homes. The absorption of Adelphia
into Comcast and Time Warner will exacerbate the existing market
imbalances to the further detriment of competition, consumer pricing,
consumer choice and the diversity of ideas in the marketplace.
2. Discrimination Against Independent Networks
``He (Brian Roberts) was then challenged on any room for new
[programming] services. He started with a story that CNN and other new
channels were pushed by entrepreneurs not the cable companies, and then
went on to essentially say Comcast was going to learn how to be an
innovator of services and not let that happen again.'' \11\
\11\ ``Brian Roberts Comes to Sand Hill Road,'' Technik: Thoughts
on the new New New Thing, Duncan Davidson Blog, June 17, 2005.
Section I demonstrated that a few large, vertically integrated
MVPDs have the ability to restrict competition in the marketplace and
impede the flow of diverse programming to the consumer. This section
addresses their strong economic and competitive incentive to do so, and
notes a track record which demonstrates that networks affiliated with
MVPDs and major broadcasters are routinely favored over those which are
independently owned. These interests and behaviors create for
independent networks a ``perfect storm,'' in which the sole companies
endowed with the power to bestow viability on an independent network
have a growing stake in preventing competition from reaching the
A. Incentives to Favor Affiliated Networks
Vertically integrated media companies have strong disincentive to
embrace new networks. New independent networks are competitors. They
compete directly with operator-owned networks on several levels:
competition for viewers, competition for advertising dollars (including
in local markets), and competition for channel capacity. And, cable
operators know that a fully distributed network can be worth a billion
dollars or more in asset value--and such value in the hands of
independent persons or groups is foregone value to an operator.
Time Warner and Comcast have incentive to prevent content
competition from entering the marketplace. Comcast Corporation
currently has an interest in at least twenty networks and is developing
additional ones. Comcast's attempt to acquire Disney, and its string of
recent channel launches, including TV One, G4, PBS Kids Sprout, and the
upcoming NY Mets regional channel and Sony-based networks, demonstrate
a strategy of augmenting its cable channel assets. Time Warner Cable's
parent company owns and operates at least 10 advertising supported
networks in the United States. \12\ While Time Warner does not break
out financial data for each network individually, overall its
television networks (which includes its ad-supported networks, premium
networks, international networks and WB broadcast network) contributed
40 percent of Time Warner's operating income. \13\ By comparison, Time
Warner's cable division contributed only 28.6 percent of operating
\12\ MB docket 05-192 Application 05-18-2005, Exhibit W.
\13\ Time Warner Inc. 2004 Annual Report.
One way to protect the value of these assets, would be for Time
Warner and Comcast to deny linear carriage to potential independent
programming competitors, in favor of affiliated program networks who
evidently either have the leverage to secure carriage, or have the
ability to grant carriage to the MSO's networks in return. Clements and
Abramowitz of the U.S. GAO, in their study of the impact of affiliation
on programming carriage write, ``Vertical integration between cable
networks and operators may be induced by transaction efficiencies, but
serve to foreclose opportunities for new independent entrants.'' \15\
\15\ Ownership Affiliation And The Programming Decisions Of Cable
Operators. Michael E. Clements and Amy D. Abramowitz. U.S. Government
Accountability Office, p18.
In addition, the value to an operator of carrying an independent
network, even a network which gives partial ownership to the operator
in exchange for carriage and shares advertising revenue with the
operator, cannot approach the value of carrying a channel which is
owned completely--100 percent of the equity and revenue of an
affiliate, versus approximately 5 percent of an independent.
B. Track Record of Preference
Preference by MVPDs for affiliated networks over independent
networks has been well documented by independent research. Clements and
Abramowitz of the U.S. GAO found that cable operators in general were
62 percent more likely to carry affiliated programming over independent
programming. \16\ Furthermore, of the ten variables tested in the
study, ownership by a cable operator had by far the largest marginal
effect on predicting carriage of a network. \17\ The researchers
concluded, ``These results can also indicate the foreclosure of
competition in the upstream cable network market, as independent cable
networks are less likely to be carried than are affiliated networks.''
\16\ Ownership Affiliation And The Programming Decisions Of Cable
Operators. Michael E. Clements and Amy D. Abramowitz. U.S. Government
Accountability Office, p16.
\17\ Id. at 14. Majority ownership by a cable operator added 27.78
percentage points to a network's likelihood of gaining carriage.
\18\ Id. at 16.
We reviewed the adoption of new affiliated and independent networks
by Comcast and Time Warner, based on publicly available information
during the period of January 1, 2003 to May 15, 2005 (a nearly 2\1/2\-
year period). \19\ Only networks which sought initial launch of their
programming service during the period were included in this study. The
results are stark and confirm severe dysfunctions in the cable
marketplace. Ultimately these lead to higher consumer pricing, lower
consumer choice, a stifling of competition and entrepreneurialism, and
an adverse effect on our democracy and the diversity of ideas in the
marketplace. Some highlights of the study are as follows:
\19\ This study is limited by the availability of public
announcements regarding channel launches. Sources of data: All launch
dates are according to company filings with the National Cable and
Telecommunications Association, as well as publicly available sources.
Ownership information, subscriber data and carriage information are all
from publicly available sources, including the National
Telecommunications Association, industry news sources such as
Multichannel News and Kagan Research, as well as corporate
announcements, filings and marketing materials.
Over a 2\1/2\ year study period, less than 1 percent of
independent channels secured national, non-premium carriage at
either Comcast or Time Warner (1 out of 114 independent
channels), and only 7 percent of independents received local
carriage by either operator. In contrast, Comcast and Time
Warner granted carriage to nearly two-thirds (63 percent) of
affiliated channels which launched during the study period.
Overall, 95 percent of networks affiliated with an operator
or broadcaster received carriage of some kind vs. 13 percent of
Affiliated networks launching during the study period also
achieved considerably greater distribution than independents--
11x greater on a median basis, and more than 2x greater on a
Furthermore, we believe that Comcast employs a different standard
for launching its own networks than it does for independents. In the
case of TV One (a Comcast affiliate), Comcast committed carriage to ``a
significant number of our markets'' and $60 million in financing prior
to the network hiring a CEO, hiring a head of programming and filling
other key positions, securing a carriage commitment from any other
operator, or (to our knowledge) producing or acquiring any programming.
All of the deficiencies cited above were addressed by TV One months
after Comcast made its commitment of carriage and financing. In fact,
the scheduled launch of the channel had to be delayed because key
management positions were still vacant, and TV One finally launched
without carriage from any operator besides Comcast.
When Comcast's and Time Warner's preference for affiliated networks
and behavior toward independents are considered in light of their
market power, a dismal picture for independent networks emerges. It is
the combination of these elements (ability to restrict competition,
powerful incentive to restrict competition, and observable patterns of
discrimination) within two vertically integrated MVPDs, which allows us
to fully understand the reluctance of the venture capital community to
invest in new independent networks.
3. Exclusion of Independent Channels Leads to Higher Consumer Prices,
Reduced Competition and Other Public Harms
A. Consumer Pricing
The dramatic increase of cable rates is a common complaint from
consumers, of which Congress regularly takes note, and a common
response from the cable community is to cite higher license fees
demanded by networks. Indeed, the GAO report on Competition confirms
that the increase in programming costs is a major contributor to
overall cable price increases. \20\
\20\ Government Accountability Office, ``Issues Related to
Competition and Subscriber Rates in the Cable Television Industry,''
October 2003, at 20.
Of course, one reason for this is that certain cable programming
networks are ``must-haves'' and their differentiation from other
networks puts upward pressure on the license fees that operators pay.
However, an examination of programming license fee data shows that
average fees and average price increases for affiliated channels, are
significantly higher than for unaffiliated channels. \21\ New channels
owned by large media companies are also more likely to charge license
fees in their first year(s) of operations. \22\
\21\ Economics of Basic Cable Networks 2006, 12th Annual Edition,
Kagan Research, p55.
\22\ NBC, for example, is launching a new linear channel, Sleuth,
in January 2006. Despite the fact that Sleuth has no original
programming, the Wall Street Journal reports a license fee of 13 cents
per subscriber per month, ``a high fee for a new cable network.'' (WSJ,
11/3/2005, NBC Plots a Crime Channel.) In terms of fee per subscriber,
this would immediately put Sleuth in the top 33 percent of the 123
networks ranked by Kagan's 2006 annual cable report.
The exclusion of independent channels therefore could directly
contribute to rising cable costs which are well in excess of the rate
of inflation. As such, there is a significant public interest in
protecting free competition from independent programmers, on the basis
of the merits without regard for affiliation. Among the findings:
Average License Fees
The average license fee in 2005 for networks affiliated with
MVPDs is 225 percent greater than the average license fee for
The average 2005 license fee for networks (excluding ESPN)
that are affiliated with a media company is 161 percent greater
than the average 2005 license fee for independent networks.
The average 2005 license fee for Time Warner owned networks
is 341 percent greater than the average 2005 license fee for
The average 2005 license fee for Comcast owned networks is
121 percent greater than the average 2005 license fee for
License Fee Increases, 2002 to 2005
Over the past three years (2002 to 2005), the license fees
charged by networks affiliated with an MVPD or broadcaster
increased more, on average, than did the fees charged by
--The average license fee increase from 2002 to 2005 for a
network affiliated with an MVPD was 88 percent greater than
that of an independent network.
--The average license fee increase for a Time Warner affiliated
network was 5.1 cents, more than double that of an independent
--The average license fee increase for a Comcast affiliated
network was 3.3 cents, more than 30 percent greater than that
of independent networks.
Excluding ESPN (which posted the highest increase in license
fees), the average license fee increase for a network
affiliated with any media company (MVPD or broadcaster) was 40
percent greater than that of an independent network. The
percentage was higher when including ESPN.
As discussed above, the addition of independent networks to a cable
system is less likely to increase cable rates than the addition of
comparable networks affiliated with MVPDs or broadcasters. In addition,
free competition from these independent networks for carriage, tier
placement, channel assignments and more would also put downward
pressure on the license fees which MVPDs are required to pay to many
comparable networks, affiliated and independent. The removal of
unreasonable barriers to entry for cheaper and more efficient
independent networks and the competition which such entry brings can
cause high-priced affiliated networks to become more efficient, reduce
their rates or otherwise improve their value proposition--all of which
would redound to the benefit of the consumer.
It is not the entry of one more Viacom or Time Warner network that
will create this downward pressure on consumer pricing. These and other
conglomerates who own the majority of widely distributed networks have
little incentive to encourage price competition among networks. The
public, however, has an interest in fair access for entrepreneurial
ventures--independent programmers--which will expand competition in the
marketplace and likely place downward pressure on license fees paid.
The continued restrictions on entry have had and will continue to have
the opposite effect: steady increases in programming costs and hence,
upward pressure on consumer pricing.
The top cable operators have purported that there are 196
independent networks (a number which has been deconstructed in various
FCC filings), and that this proves diversity. But the facts demonstrate
an increasingly narrow ownership structure, and a market which is
becoming increasingly off-limits to independently-owned ideas. A quick
look at the list of 92 networks distributed to more than 20 million
households reveals that roughly 76 percent are owned in whole or part
by one of six companies Disney, Viacom, NBC Universal, News Corp, Time
Warner and Comcast. In addition, only 9 of the 92, and only 3 of the
top 50, are not owned in whole or part by a large broadcast company or
In a typical marketplace, the preferences of the buyers determine
what goods will ultimately be created and offered by sellers.
Production companies will not invest resources to develop programming
for which there is no market. It is the network, the purchaser of the
content, which ultimately determines which content will be produced,
who will produce it and importantly, how the production will handle the
underlying subject matter. Network ownership brings control or
influence over the selection of top management, who, in turn, are
responsible for these editorial decisions. Hence, diversity of
television programming is ensured by increasing the diversity of
4. The Future of Independent Networks
Despite the best intentions of Congress and the FCC, two cable
operators have emerged as gatekeepers to network survival and the free
entry of competition into the marketplace. These two operators have
incentive to prevent additional competitors from entering the market,
and a track record of denying competitive opportunities to independent
Independent networks serve several crucial roles in the programming
marketplace. They introduce new competition among programmers and apply
downward pressure on programming fees. They can often create an
entirely new market for programming of a specific genre or niche, and
in doing so increase opportunities for independent producers; they also
increase the number of potential buyers for more mainstream original
programming concepts and existing content and this competition in turn
promotes investment in independent production companies and leads to
the creation of high quality programming.
The health of competition, consumer pricing, consumer choice, the
diversity of ideas in the marketplace, and the quality of our national
discourse depend on a level competitive playing field for independent
The Chairman. Well, thank you very much. And we appreciate
Mr. Polka, one part of your statement you did not read
pertained to the past discussions on this Committee of the
problem of decency on television, and you mentioned the
question of putting together packages that included items that
had high sexual content when you were trying to put together a
children's program. What was the outcome of that negotiation?
Mr. Polka. Well, sir, the outcome is that the program
services that you were referring to were carried, and that's
the nature and the function of the contracts today. When we
talk about cable programming and how it's packaged and priced
and dictated, in terms of contract, the wholesale programming
practices that we refer to, that is what is causing the
problem. Where you have situations where family-oriented
program that we want to carry is oftentimes bundled and
required to be carried with other program services.
The fact is that, at the end of the day, in most cases
those services are carried, because that is the best way to
carry that family-oriented programming at the cheapest price.
The Chairman. Do you use a rating system in your
Mr. Polka. We do not. We do not use a rating system. But I
can tell you that our customers tell us about what they think
about the programs on television. I can think of cable systems
where more than half of our subscribers walk into our cable
systems month after month to pay their bills, and I can tell
you, based on their rating system, that they're not happy. And
they're telling us--and we are here to say that we would like
to provide more choices to our customers, and that means
programs that we could package in tiers of service that we
could do today--it's not a mandated a-la-carte system, but
tiers and packages of services that we could put together in
our marketplaces today that would meet our local community's
needs, working with our customers to provide them more family-
oriented programming. The problem is that the contracts that we
have to take from the major media conglomerates force us to
carry those services, their services, on either the basic or
the expanded basic level of service.
The Chairman. OK. Thank you very much.
Mr. Pyne, do you charge the smaller cable companies more
for programming? When you say that you charge the price, is the
price for smaller cables larger than a price to the larger
Mr. Pyne. Mr. Chairman, there is something known as the
National Cable Television Cooperative, which conglomerates, or
is a co-ops of systems that represent roughly 8 million
subscribers. And through that co-op, we license smaller cable
operators, and we treat that group as if they were an 8-
million-subscriber MSO in an effort to bring price parity to
the smaller cable operators. And we do that across our
networks, from the ESPN side to the Disney Channel, ABC Family,
and so forth.
The Chairman. Mr. Lee, how would you be affected if
retransmission consent was changed to prohibit requiring
bundling of programming in the case of small cables with few
Mr. Lee. Mr. Chairman, in our world, the world of a local
television station, there's very little bundling involved. In
my negotiations with the MVPDs, there are companies that pay us
cash, because that's what they prefer, there are companies that
take one extra channel, there are companies that take two extra
channels, and, in that case, they do so because that works
better for them. In our part of the world, satellite
subscription is at almost 40 percent of television households,
and suddenly the cable operators have become my new best
friend. They tell me they want programming that is unique to
them. A cable operator will often say to me, ``What can you
produce for us that our subscribers won't be able to get on
DIRECTV or DISH Network? So, I think the marketplace is solving
this question rather efficiently.
The Chairman. I'm going to yield to my colleague, Senator
Dorgan, for comment or questions.
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you very much.
First of all, I thought the testimony was interesting and
very well done, from different perspectives. I'm not sure I'm
better informed as a result of it. It is really pretty
complicated, number one, and, number two, there are some very
significant competing interests. And I'm not sure where all the
merits exist at this point. And I want to ask a number of
First, Mr. Pyne, I suppose I would not purchase a cable
service if it didn't have ESPN attached to it, just my
preference as a consumer. I've had a fellow that runs a small
cable service in North Dakota for years constantly complain to
me about the increased cost of content coming up through, for
example, ESPN. I don't know what your price increases are year
to year, but he says, you know, ``I've got to pay whatever it
is, because I can't offer cable service without ESPN.'' So,
tell me--I mean, I assume that's the case, whatever it is you
pass along, that cable operator's going to have to pay in order
to have ESPN on their cable menu, because otherwise people are
going to say, ``Wait a second, we won't take your cable
service.'' What kind of inhibiting factor exists to keep your
prices down, on ESPN, for example?
Mr. Pyne. Well, over the last several years, we have
actually negotiated with virtually all of our major providers,
including the National Cable Television Cooperative, which
would represent smaller operators, cable operators. And, as
part of those negotiations, we actually are committed by
contract to certain price increases. And over a period of time,
those increases went from a level--20 percent down a level of 7
percent, through the aspect of these long-term agreements. So,
by law, I mean, we have an agreement with the National Cable
Television Cooperative that specifies exactly what our rate
increases or price increases each year are.
Senator Dorgan. All right, I will----
Mr. Pyne. And----
Senator Dorgan. Perhaps we can talk at some other point.
I'm kind of interested in this notion of--you're able to pass
along almost anything. I mean, I understand you have a contract
here, but we see these announcements of prices that are paid
for various events and so on, and it just gets passed along to
the consumer out there by a cable operator that can't afford
not to have ESPN. And I say that in a complimentary way,
because I think what you offer is something I want and many
other consumers want.
Let me get to this question of--Mr. Gorshein and Mr.
Fawcett, I guess, both--The America Channel. Is it America or
Mr. Gorshein. America.
Senator Dorgan. America Channel. You, in your testimony,
talked about the difficulty of getting access. Can you describe
your difficulty in getting access? And you're quoting others to
say, you know, there's just no chance for an independent to
start up here and have access and be successful. And then, let
me ask the folks on the other side of this transaction to tell
me about your difficulty or what they perceive is your ease of
getting access if you have the right programming, I suppose.
So, why don't you tell me, first of all, What are the
impediments for an independent?
Mr. Gorshein. The impediments for an independent are that
we compete with Comcast and Time Warner, in effect, today. So,
when they look to an independent, they say, ''Well, gosh, it
can give me incremental value, in terms of receptivity at the
consumer level. But their own networks give them 100 percent of
the equity, 100 percent of the revenue, 100 percent of the ad
avails, and their own networks are positioned in a way so
that--you know, we compete for viewers, for capacity, for ad
dollars; and because we're a free channel for several years, we
apply downward pricing pressure. So, there is an inherent
economic disincentive to work with an independent channel.
We have always said that this is not about us. Let's assume
that The America Channel isn't the best product in the world
and that the telcos are all crazy for embracing us. The fact is
that you cannot run away from the statistics, from the
empirical evidence on the ground. And the empirical evidence is
that less than 1 percent of independent channels over a two-
and-a-half-year study period got national carriage, most
affiliated channels--that is, affiliated with a cablecaster or
a broadcaster; and we have different definitions of what
independent is; they believe it's everybody other than
Comcast--they carry 100 percent of their channels. They carry
close to 100 percent, if not 100 percent, of their channels on
analog. So, the basic difficulty is that I'm a competitor.
Senator Dorgan. And, Mr. Waz, what are the standards that
Comcast would use to determine whether to carry an independent
network? And are they the same standards that you would use to
make a decision about carrying an affiliated network?
Mr. Waz. Senator, our standard is, we always want to offer
the best programming we can from whatever source it may derive.
And if we don't, DIRECTV will. And if DIRECTV doesn't, EchoStar
will. And if they don't, as the telephone companies enter the
market, they will. So, we get scores of new ideas brought to
Comcast every year, from large and small media companies, for
new programming concepts. The ones that succeed are the ones
that have a strong programming concept, something to show us,
actual content, which The America Channel doesn't have,
financing that's in order, programming talent--they show they
know how to operate a network, and they have operating
experience; if it's an existing network, we like to see that
they have some Nielsen ratings and a commitment to get the
product started. The America Channel, I know, has slipped its
starting date several times now, and I don't know when they
really intend to sign on the air. They're not on the air at
I would contrast The America Channel situation with
something called The Sportsman Channel, which is one of several
new independents we've had in the last several years. Michael
Cooley did an article in Multichannel News that I submitted for
the record, and I thought he stated the situation for
independent programmers very clearly ``it is incumbent upon a
programmer to make the case to a Comcast, a DIRECTV, a DISH
Network as to what the business reason is for them to be
carried.'' Interestingly, The America Channel has, with one
small exception, reached an agreement with no cable operator,
with no company, like RCN or Knology, or WOW! It has not
reached an agreement with DIRECTV and has not reached an
agreement with EchoStar. I think that says something about the
caliber of what's being sold.
Senator Dorgan. Mr. Gorshein, go ahead.
Mr. Gorshein. The letter from the channel that the
gentleman from Comcast is referring to--that's the one out of
114 channels that got carriage during our two-and-a-half-year
study period. Comcast and Time Warner have market power which
exceeds their market share. If you don't get carriage at
Comcast, you are viewed with skepticism elsewhere. And we've
been told that by other cable companies. Comcast will not fund
and produce and do all of the things necessary with one of
their own channels until Comcast commits to carry their own
channels. They know that. So, the critical barrier to entry is
for Comcast to say, ``We will let you in.''
Senator Dorgan. Let me ask--Mr. Lee, I think you've said
that the retransmission consent issue is working just fine. The
marketplace exists and is just fine. You----
Mr. Lee. I believe it is.
Senator Dorgan. You, I think, also said, you know, perhaps
in an agreement someone might ask that you carry another
Mr. Lee. Yes.
Senator Dorgan. Isn't it the case that sometimes it's more
than another channel? A couple of channels, more channels than
Mr. Lee. Senator, in the case of our own television station
in Roanoke, it is, in fact, a fact that, in addition to the
primary channel, we produce and offer to the MVPDs two other
channels, some carry both the other channels, some carry one
other channel, and some carry only the primary station.
Senator Dorgan. I'll follow up on that, but let me ask
about--I had some people come in to visit with me about the
question of whether someone who's providing content, a video
distributor trying to offer a channel, and whether the
distributor--if the distributor feels that channel is
inappropriate for that local market, whether they ought to be
able to determine it be on another tier. We've had some
complaints about that. Should a video distributor, for example,
be able to, in these negotiations, prescribe on which tier a
channel is aired, or a video programming is aired?
Mr. Lee. Senator, I'd be inclined to defer to my colleagues
who are in the MVPD----
Senator Dorgan. Mr. Polka?
Mr. Lee.--business to comment on that.
Mr. Polka. Yes, sir, we believe they do. We believe that
operators in the community who are closest to their customers
and who know their customers, would be the best ones to make
Senator Dorgan. And that is not now the case?
Mr. Polka. That is not now the case, because of the nature
of the contracts for those programs, which mandate that
carriage of channels are carried on either the basic or the
expanded lowest levels of service. So, despite the fact that we
receive numerous complaints from our customers concerning
content today on television carried on expanded basic, there is
nothing we can do about it as it relates to these contracts.
And there's one other thing I would say about your question
concerning rates and disclosure, particularly with the National
Cable Television Cooperative. There is no way for you to know,
unless you could actually someday see the contract. But, today,
that will never happen, because of disclosure and
confidentiality provisions in contracts that prohibit you, the
FCC, my consumers, local franchising authorities from finding
exactly what the price increases are year after year. And the
only thing I would suggest to that is that the FCC annually
surveys cable rate increases, why shouldn't the FCC also
annually survey programming rate increases, programming rates,
terms, and conditions? That way, you would be able to answer
that question. You can't answer that question today.
Senator Dorgan. Mr. Chairman, this is an interesting and a
complicated area, and I'm trying to understand more about it
and will. I read some about it last evening, and have some just
casual acquaintance. But, as a last question, we've had some
discussion about the Adelphia transaction, and I know that when
News Corp acquired DIRECTV, there were some conditions imposed
with respect to that acquisition, and I'm interested. Several
of you actually mentioned the issue of Adelphia and the
potential of a lockup of local sports arrangements. Perhaps we
could have a bit of point/counterpoint about that.
Who believes very strongly that need to be some conditions
imposed on the Adelphia? Mr. Fawcett?
Mr. Fawcett. Yes, the conditions that DIRECTV has been
suggesting on the Adelphia transaction are very similar to
those imposed on News Corp when it purchased the interest in
DIRECTV. The difference there is that News Corp--DIRECTV only
owned 13 percent, or controlled 13 percent of the households in
the U.S. In these local markets where Comcast or Time Warner
will become hugely dominant, they will control 70 or 80 percent
of the subscribers in a market, it's much easier for--when you
have that type of market share--to negotiate exclusive
contracts or to, you know, hold the competitors, DIRECTV or
EchoStar, which owns less than 20 percent of the market, up for
ransom and extraordinary rates, which, frankly, are passed on
to the consumers. And it's programming that has been deemed to
be must-have programming by the FCC, and we can show, in
markets where we don't have local sports programming, our
growth has been much slower than it has been in our--our market
share is much less than it would be had we had the sports.
Senator Dorgan. And who thinks Mr. Fawcett is losing sleep
over a nonissue?
Mr. Waz. I'll take a shot at that, Senator.
Senator, the Adelphia transaction deserves to be approved,
and it deserves to be approved in a timely fashion for several
good reasons. The first is----
Senator Dorgan. With conditions or without conditions?
Mr. Waz. Without conditions, sir.
The first is, the company is in bankruptcy and is not being
operated for the future. So, millions of cable customers in
Adelphia communities across the country are not getting video
on demand, they're not getting telephone service. Their systems
are not being managed for the future. Comcast and Time Warner,
between the two, are prepared to invest a $1.5 billion to make
the future happen. So, we would like to see timely approval,
The conditions that are being described by Mr. Fawcett are
unnecessary and are not relevant to the merger transaction. In
most of the markets that he talks about, Comcast is growing a
fraction of a percent or a few percent. There is not a
substantial change in the market share that Comcast has in most
of the markets where there are sports networks.
And I'd be delighted to speak to his point about the
inability of DIRECTV and DISH Network to compete in markets
where they don't have sports rights. There's exactly one market
that I'm aware of that--where Comcast is involved--where DBS
does not have the sports rights. That's Philadelphia.
In Philadelphia, DIRECTV and DISH Network have a market
share of about 12 percent. That's higher than Boston, higher
than Springfield, higher than New Haven, almost as high as
Baltimore, higher than several other major urban markets. So,
there has to be something else at work besides the absence of
sports programming on DIRECTV in that market to account for
those numbers. They're larger than many of the other markets I
And one additional point. Both DIRECTV and DISH Network had
available to them, in the late 1990s, over a hundred games of
the Phillies, the Flyers, and the Sixers for free if they would
carry the local broadcast station in Philadelphia that offered
those signals. They had the right to start carrying that signal
for free in 1999. They did not choose to carry that signal
until their version of the must-carry rule kicked in, in 2001.
So, you would think, if this is essential content, that they
would have carried the games that were available for free.
Senator Dorgan. Mr. Chairman, you and I, in years past,
have both expressed concern about concentration in broadcasting
and so on. I think the bottom line with respect to all of this
testimony and these discussions is about the marketplace. Is
the marketplace a marketplace that functions? Is there
competition? Are the normal forces in the marketplace working
to provide the best for the consumers in this country? Because
only in a marketplace that works will we have, I think, the
kind of opportunities that we would want to have exist for
And I don't know that I know the answers at this point, but
I think the testimony offered today is helpful, and I
appreciate very much, Mr. Chairman, your holding the hearing.
The Chairman. Well, thank you. I find, really, we're both
going to be the mouthpiece for questions that others would ask
if they were here. And sometimes I have difficulty
understanding the question I'm supposed to ask you. So, it
becomes a little bit of a problem.
But let me go to you, Mr. Waz. Exclusive contracts are
forbidden for satellite-delivered programming only. Now, why
should we not remove that and make the concepts that are
applied by FCC apply across the board?
Mr. Waz. Senator, again, when the 1992 Cable Act passed,
Congress did not apply these rules to all satellite-delivered
programming. A program network that is owned by a Disney or a
Viacom or NBC Universal or another company that's not in the
cable business is not reached by these rules. And terrestrial
programming, as you've suggested, is not reached by these
rules. There were about a dozen terrestrial networks in
operation when Congress passed this bill in 1992, so we think
Congress knew exactly what it was doing in exempting
terrestrially delivered programming.
The Chairman. Well, that's just because we didn't have a
Mr. Waz. Well, I think the crystal ball worked, sir,
because I think you were trying to place predominant reliance
on the marketplace. You said, ``We're not going to try to turn
every program into something that has to be given away, so that
no one can have any exclusivity.'' And, frankly, I think some
amount of exclusivity in programming is what permits us and
DIRECTV and EchoStar and the phone companies to distinguish
ourselves from one another. The terrestrially delivered
programming, in particular, tends to be local programming. It
can be news, it can be public affairs, it can be sports. And
Congress said, at the time, you did not want to chill
investment in better local programming.
The Chairman. What difference does it make, if they're
bundled when you get the programming out?
Mr. Waz. Well, Senator, I know there's been a lot of
discussion of how programming is sold in bundles this morning
with retransmission consent. We're not a broadcaster, so we
don't have a bundling issue of the sort you're describing.
The Chairman. Well, this is the so-called ``terrestrial
loophole,'' as I understand it--does not that affect cable-
Mr. Waz. It does. Terrestrially delivered programming that
is created by a cable operator or a phone company or anyone
else would be exempt from those rules.
The Chairman. Do you oppose eliminating this difference
between the satellite-delivered programming and all other
Mr. Waz. Senator, with so much competition in the
programming marketplace today, with DIRECTV having access to so
much programming, and we do, and all the other competitors do,
I think there's less reason for expanding regulation, and more
reason to reduce it.
The Chairman. Let me go back to the statement that you
made, Mr. Gorshein. You said, ``We have secured distribution no
less than six telcos, close to 90 percent of the projected
telco video spaces, including Verizon, AT&T, and others.
Channels that have been 90 percent off cable--of cable space
have been around for 25 years. In telco, we did it in 5 months,
in contrast to our success in telco, after close to 3 years, we
had virtually no progress in getting carriage from dominant
Now, my question to you is, Why do you need it, if you've
got all that other type of access?
Mr. Gorshein. The telcos have big names and lots of
customers. The problem is, they're not video customers today.
Our fate is inextricably linked to theirs, so that if they can
penetrate local markets quickly, that certainly helps us. And
so, we're very much in favor of telco relief. That will give us
more outlets, and independent competitors like us more outlets.
Statistically, empirically, if you look at the data, there
are 92 channels which hit the critical viability threshold of
20 million. That's the minimum you need to get Nielsen's. And
the cable operators and the broadcasters have gone on record at
the FCC to say 50 million is actually the bare minimum you need
to have a profitable venture.
Of the 92 channels that hit 20 million, 91 of them had to
secure carriage at Comcast and Time Warner, one secured
carriage at one of Comcast or Time Warner, but also secured
Adelphia, which suggests that, post-transaction, it will be
empirically impossible for a new channel to succeed without the
I will also say that there's no precedent for a satellite-
only channel reaching that viability threshold.
The Chairman. Well, as you know, we've been exploring the
concept of having some means to have a family tier offered, no
matter what the source of the programming. All right? And to
have, in connection with that family tier, a rating system so
that whether you're using the V-chip or whatever kind of thing
that's available to you, the family has a way to check what
they do not want their children to view.
Now, if we did that, tell me, right down the line, how
would that type of legislation affects your business?
Mr. Pyne, how would it affect you?
Mr. Pyne. I think we have come out to say that we support
the decency standards for broadcasts across all of our
networks, whether that's ABC Family, Disney Channel, ESPN, and
so forth. Sports and news are generally not rated, and we
support not rating sports, specific sports and news----
The Chairman. You'd support it, but it doesn't really
affect the way you do business.
Mr. Pyne. No, sir.
The Chairman. Mr. Polka?
Mr. Polka. Thank you, Mr. Chairman.
The more information, the better. That's very helpful--to
myself, as a parent who makes decisions for my children, as
well as for our customers. However, at the end of the day, even
with a different rating system, the channels still would be
coming into the home, and they would have to be blocked, they
would have to be kept away from those that parents might want
to keep it from, whether it's their children or otherwise. So,
the point is that the programming that you find most
objectionable is still coming into the home. The only way that
we can actually make changes to actually give consumers more
choices is to get them into the process. They are actually not
in this process of deciding what's on their television today.
And if they were, in conjunction with their operators, then
packages of programming services would be developed in local
communities that they would take and pay for.
The Chairman. Well, as far as this Senator is concerned, I
don't think we should mandate what happens. I think we should
mandate that there should be a system where parents can control
what their children have access to.
Now, having said that, the difficulty is, I don't know if
you went down to see this, Senator--when we went down to see
the rating system, guess what was left out? Sports. Sports
aren't rated. History concepts, they weren't rated. Now, how do
we get into the system so somehow or other we achieve the
objective I think we all want, and that is--no, I don't want my
grandchildren watching some sort of smut, but I don't object to
it being out there if someone else wants it. I want my children
to have the right to block it. OK? Now, why can't we get
together and find some way to do that? There seems to be a
resistance to the rating system. There's a resistance--there's
general agreement on the block. We haven't had a witness that
has--well, we did have one that came on. He represented,
really, the people who are providing the programming of very
highly sexual content, but he also agreed it should be rated.
But what's your solution for that? You say you'd like to do it,
but you don't want us to do it, right?
Mr. Polka. That's right. We don't think Congress needs to.
We think that--again, just as you said, I mean, you can look at
content, and you can make a decision. You can determine whether
or not you find it objectionable or not and whether you would
like to pay for it on this particular tier or not. And that's
essentially what we're suggesting. Rather than allowing the
content to continue to come into the home without any
accountability or change whatsoever, basically giving consumers
more choices, working with their operators, to be able to say,
as they say to us month after month, ``We would not--we would
prefer not to have this channel on expanded basic. Can you
please sell us that, or not sell it to us, so we don't have to
The Chairman. What do you think, Mr. Lee?
Mr. Lee. Mr. Chairman, I'll speak to this more as a parent
than as the operator of a local television station. I think a
solution may be in place already. We have a daughter who's now
24 years old, but in her youth there were a couple of cable
channels I found objectionable. And, to the credit of the local
cable company, when I called and made that observation, they
had, by the following day, come out to the house, taught me how
to block it on the set-top box, and then trapped it on the
pole, so the channels that I found objectionable were, within
24 hours, gone.
The Chairman. That required you to know in advance what
channels were bad, right?
Mr. Lee. Yes, but I could tell pretty readily.
The Chairman. Well, then you're better than I am, because I
remember sitting there and watching ``Rome,'' and I thought it
would be a great historical program, and suddenly I found out
to the contrary.
Mr. Lee. But, Mr. Chairman, if I could----
The Chairman. I enjoyed the program, but I would not have
wanted my granddaughter sitting next me.
Mr. Waz. Senator, David Cohen from Comcast came before this
Committee a couple of weeks ago and talked about the family
tier that Comcast has established with some great family-
friendly brand names, like National Geographic, Disney and
Discovery. So, we are trying to be responsive to those in the
marketplace who really want a family tier alternative.
To your broader point, absolutely, parents need to know
about ratings systems. And parents need to have the tools to be
able to act on ratings and to be able to decide what's
appropriate for their families. We are strong supporters of
making sure that people know what the rating system is, how it
works, and how to use the equipment we can make available to
them to make all television in their homes family-friendly.
The Chairman. My staff director reminds me that the
contract we had from our State was that it was not possible to
offer a family channel, because networks require that the vast
majority of the customers--that their customers receive, in
terms of channels, are all aimed at adults. And unless the
programmers agree to change the contract, there's not going to
be a family tier in Alaska.
Now, Mr. Fawcett, you said you go up Alaska, right?
Mr. Fawcett. Sorry?
The Chairman. Does your programming go to Alaska?
Mr. Fawcett. Sure. And--I mean, on--just on this point, I'd
like to--you know, my testimony here in November revolved
around the fact that DIRECTV, since day one, has been 100
percent digital, and every subscriber to DIRECTV has the power
and the ability to block out channels through our locks-and-
limits feature, which is not just channels----
The Chairman. How do they know that in advance?
Mr. Fawcett. There's a channel on DIRECTV that shows that
information every half hour. It's in the owner's manual, and
The Chairman. That's how you block it, but how do they know
about the content?
Mr. Fawcett. Well, there are ratings that are passed
through by the programmers, so each program that is rated, that
information is passed through, and then, through the locks-and-
limits feature, that would be blocked, if that's what you
chose--if that's what you, as a parent, chose to do. If it's
not rated, our technology allows you to block unrated
programming or programming of--you know, on any specific
channel or at any specific time of the day. So, our subscribers
that are parents have full power to block any programming
coming through on DIRECTV.
The Chairman. We're informed that the meeting that our
colleagues are at, on both sides, will not end in time for them
to be here. So, I'm informed that they would like to have the
right, some of them, to offer questions that we would submit to
you. I would hope that you would give us the courtesy of
responding to their questions. I apologize for the problem
that's going on right now with regard to these meetings of the
two sides of the aisle.
The Chairman. My last question would be to you, Mr.
Fawcett. If Comcast says it maintains a competitive marketplace
for video content, and it's working, why aren't there enough
options for sports programs contracts available to DIRECTV to
respond to the large cable companies reaching sports networks?
Why aren't there enough there for you?
Mr. Fawcett. Well, as I said, we have been able, until
recently, to provide local sports programming. It's what's been
happening. In Philadelphia, obviously, we've never had the
ability to provide local sports programming, and our
penetration in Philadelphia is the lowest of any of the top 25
DMAs. And, contrary to what Mr. Waz says, in San Diego and in
New Orleans, where we also do not have local sports
programming, our penetration in those markets, as well as
EchoStar's, is much lower than it should be.
We have submitted a report to the FCC that has a regression
analysis and smooths out the differences in some of the markets
that he pointed out that we're also low in. In Philadelphia,
for example, when it's adjusted, our report shows that our
penetration should be twice what it is currently. And we--and
that's really because we haven't been able--been afforded the
right to carry the local sports team. There's no substitute for
local sports programming. And what they would like to do, and
what they have done over the past year, is not deny us access
completely, but give us the Hobson's choice of a very high
rate. And, if we choose it, great, everybody--they make out,
because they own the--they own the network, and, if we don't
carry it, then they have exclusivity. So, cable has a huge
market advantage in a market where they have 70 and 80 percent
penetration in market share.
The Chairman. Your discussion disturbs me a little bit,
because I've been one who believed, primarily, that the concept
of competition would ultimately lead to lower consumer prices
and to greater access for consumers. But the conclusion I get
here, that it's because of some of these concepts, which may be
exceptions to the rules that we try to lay down, are leading to
increased control of some entities over the marketplace and
denying access to some people who have selected one provider,
like for example, ESPN or to some program that they want. Now,
I don't know that we can legislate it, but I certainly would be
willing to look at any suggestion any of you have to level this
playing field so that we--how long are these contracts you all
enter into, by the way?
How long are the retransmission consent contracts? Who sets
Mr. Lee. In the case of broadcast, 3 years.
Mr. Polka. It's 3 years. The cycle is 3 years, that's
correct, Mr. Chairman. However, in case of the affiliated
programming contracts that are oftentimes tied to those, those
contracts are oftentimes for 5 years or more. And that's
typically a tactic that we see in wholesale programming
practices, where, in return for the carriage of the station,
we're required to carry an affiliated channel for more than 3
years. In 3 years, they can come back and ask for another
channel. So, more content then results on expanded basic that
consumers have to take and pay for, whether they want it or
The Chairman. Has anyone explored the possibility of a
provision in our law that says if you offer a contract to one
entity, you must, up to your capacity, be willing to offer a
similar contract to any other entity that seeks that service?
Mr. Polka. We would support that.
Mr. Pyne. Senator Stevens, can I----
The Chairman. Would you oppose that, Mr. Waz?
Mr. Waz. Well, Senator, I guess one good example is with
the NFL, which DIRECTV has exclusively. Comcast cannot get NFL
games. Its competitor, DISH Network, cannot get NFL games. One
could pass a law that says all the NFL games have to be
available to all competitors, just as one could pass a law
saying all Philadelphia sports has to be available to all
competitors. But I think we're at a point in the competition
among networks here where we're better off if DIRECTV can
compete with Comcast by having something unique, and Comcast
can compete with Verizon by having something unique, and so on.
The competition among those providers is a better way to make
sure consumers are served better, because we're differentiating
ourselves from one another.
The Chairman. Well, but doesn't it end up, as one of--I
think it was Mr. Fawcett who indicated that some communities
are shut off from their own team?
Mr. Waz. No, Senator. In Philadelphia, as I indicated in my
prepared testimony, there are over 100 Flyers, Sixers, and
Phillies games on broadcast television; games that DIRECTV
chose not to carry for 2 years when they were available to
them. And when we acquired the rights of the Philadelphia
76ers, the previous owners had taken all the games off
broadcast TV. We chose to put them back on because we wanted
all fans in Philadelphia to be able to see the hometown teams.
The Chairman. Mr. Fawcett, it looks like----
Mr. Fawcett. Can I respond to that?
The Chairman.--you want to respond.
Mr. Fawcett. I was astounded to see, in Comcast's
testimony, that we have the right to carry sports events on
local broadcast stations. We did not get that right until
SHVIA, in--so, we didn't have the right before, and once we
obtained the right, we launched satellites, at considerable
expense, and we carry all the broadcast stations that carry
those local sports events in Philadelphia. A lot of those
sports events, however, have left the broadcast television
stations and have migrated over to Comcast SportsNet
Philadelphia, which is a network they refuse to give--let us
And the distinction between NFL SUNDAY TICKET is one that
shouldn't go unnoted here. And that is, SUNDAY TICKET, which is
our exclusive service, enables you to, in addition to getting
your local team's games or the local games carried on the local
broadcast networks, to get every other game played in the NFL.
And that--you know, we negotiated that--for that right with the
NFL. The NFL had open negotiations. And Comcast was in there
bidding for the same rights. And, you know, as a--we had 13
percent market share, and the NFL wanted to grant exclusivity
to that. But, again, it's an enhancement to what customers
already receive. I'm from Pittsburgh, and if you said--if
you're a fan of a Pittsburgh team and you can't get Pittsburgh
sports on DIRECTV, you're never going to become a DIRECTV
subscriber; you're going to stay with Comcast. So, it's a
different--local sports are different than having this enhanced
package of all games.
The Chairman. Well, on behalf of our Committee, I thank you
very much. And, again, I'm sad that this has taken place at a
day when I think many people that have different questions than
I've asked you are not here, I urge you to give us your
response to their questions as quickly as you can. And I thank
you very much for your courtesy of appearing here today.
[Whereupon, at 3:50 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
Access to video content has become a particularly complicated
matter over the years. As the methods of distribution have matured so
have the rivalries and disputes. It appears that every party involved
has one grievance or another.
The issues we are examining today have wide-ranging impact.
Subjects like retransmission consent and contract exclusivity have the
potential to affect the digital TV transition, prices for video
programming, the future success of independent programming, and much
more. We must be vigilant to ensure that exclusive arrangements for
video content do not hinder robust competition and entry in the video
It is my hope that we can find a way to balance the competing
perspectives in a manner that gives consumers more options while
promoting full and fair competition.
Prepared Statement of Hon. John Ensign, U.S. Senator from Nevada
I want to thank Chairman Stevens for these hearings. I am excited
that we are embarking on an aggressive series of hearings to examine
all of the key issues related to telecommunications modernization. I
also understand that we postponed the hearing on franchise reform this
morning because of the Alito vote at 11 a.m. and my car accident
yesterday--thank you to Chairman Stevens and Co-Chairman Inouye for
thinking of me--I am pretty sore today. But I am very anxious to
participate in the video franchising hearing when it gets rescheduled.
I believe that the current system of requiring new entrants into
the video business to go city-by-city across the United States and
engage in lengthy, expensive negotiations is anti-consumer and anti-
competitive. We have heard loud and clear from the telephone companies
that they want to deploy an exciting new service--IPTV--and invest
billions of dollars and create jobs doing it. The problem is we have an
outdated monopoly-era regulatory structure in place in the form of
33,000 plus local cable franchise authorities that are stalling
deployment of these exciting new services. Presuming that we can pass a
bill to reform these outdated impediments to IPTV deployment, a
critical issue we must also address is the ability of these new
entrants to have programming to provide for their consumers to enjoy.
There is a precedent for Congress acting on this issue. In 1992,
when Congress successfully helped create new competitors in the form of
satellite providers (DISH Network and DIRECTV), we recognized the need
to help these new companies get access to the content of vertically
integrated cable companies. Congress understood in 1992 that the
incentives would be all wrong for a cable company that also owned video
programming--cable channels--to make them available to their new
competitors. So, in 1992, Congress implemented what is now Section 628
of the Communications Act.
In my legislation, the Broadband Investment and Consumer Choice
Act--S. 1504, I would include an modernized Section 628 to extend a
similar provision for any new entrants into the video space. To be
consistent with the rest of my legislation, we have taken the existing
Section 628 and amended it to eliminate the distinctions between cable
and satellite and IPTV wherever possible. This is a technology neutral
approach to ensuring consumers get the programming they want, to help
speed competition in the video sector. We do not prescribe rates, or
terms of the agreements, but rather encourage commercial arrangements
Just as Congress did in 1992, we have included sunset language (in
fact the same sunset language)--the thought being that IPTV and other
new video entrants will have 10 years to try to develop programming and
content of their own so they can negotiate fairly with vertically
integrated cable companies. If they are unable to develop market power
to be able to successfully negotiate, the FCC will have the same exact
authority to extend beyond 10 years that Congress granted satellite in
Franchising reform is the critical first step, and this video
content language will help ensure that competition is successful and
that consumers have the programming they want.
I look forward to working with Chairman Stevens and my colleagues
as we work to address these issues.
Prepared Statement of Harold Feld, Senior Vice President, Media Access
The ``Switching Equation'' and Its Impact on the Video Programming
Market and MVPD Pricing
One of the most frequently debated questions in media policy is
whether direct broadcast satellite (DBS), terrestrial cable
overbuilders, or potential new entrants such as the incumbent telephone
companies, provide competition to traditional incumbent cable
operators, such as Comcast. Specifically, competitors to cable say that
if Congress does not provide access to regional sports programming and
other programming not covered under the existing ``program access
rules.'' \1\ then cable will continue to raise rates and control the
programming market. Independent programmers say they have no chance to
get distribution unless they satisfy the demands of the two largest
cable companies, Comcast and Time Warner. Cable companies, however,
argue that if they raise prices too high or favor inferior affiliated
programming over better independent programming, customers will switch
\1\ These rules, put in place by Congress in 1992 when cable was
clearly a monopoly, prohibit certain anticompetitive practices.
Unfortunately, Congress phrased the law in terms of the practices and
distribution technology of 1992. In 1992, cable television operators
distributed programming via satellite to cable head-ends. As a result,
the 1992 Act made programming distributed in such a fashion subject to
the program access rules. When technology permitted cable operators to
distribute programming, particularly regional programming,
terrestrially, the FCC found that the program access rules did not
reach terrestrially distributed programming (the ``Terrestrial
Loophole''). It is also unclear whether new programming, like video on
demand, is covered under the existing rules. Finally, unless the FCC
takes action before February 2007, even the existing program access
rules will end.
Until now, the economic debate between parties has focused
primarily on the incentives of the programmers, competitors, and cable
incumbents. This white paper suggests that a focus on competition
should focus on the consumer. In particular, if Congress intends to
adopt policy on the basis of predicted competition between incumbent
cable operators and potential competitors, Congress must first
determine whether or not consumers are likely to switch to competitors.
If consumers are unlikely to switch, particularly if the incumbents can
use existing market power to prevent successful entry by competitors,
then a policy based on deregulation will fail. Cable incumbents will
not feel pressure to change either pricing or programming practices if
they can reliably predict that few consumers will switch to
The shift in focus to the consumer shows why large incumbent cable
companies continue to exercise market power over consumers,
programmers, and other related market actors. Briefly, the average
cable subscriber finds it too much of a hassle to switch to a
competitor. As long as the cable incumbents can reduce the value of
competing offerings by control of ``high value'' programming like
regional sports and drive up costs to competitors by controlling the
price of new services like video on demand, cable operators can keep
the bulk of subscribers from switching. Since the market power to
engage in these tactics derives from a combination of existing market
share and increased regional and national concentration, incumbent
cable operators can stymie effective competition indefinitely.
Without Congressional action to promote competition and reduce the
ability of incumbents to exercise market power, cable operators will
continue to raise prices above competitive levels and make programming
decisions based on affiliation rather than quality.
Defining Market Power
Parties in the ``cable wars'' frequently use terms that have
precise meaning to economists, but very imprecise meaning to non-
specialists. Before moving on to the basics, it is therefore useful to
define some terms for purpose of this paper. Market power means control
over so many customers or other valuable resources that the company
that has ``market power'' can tell other people ``take my terms or
else'' and everyone listens. In a monopoly ( i.e., where one company
controls everything), this is obvious. But it can happen in other
markets as well. For example, if one company controls most of the
customers, called market share, that company can have market power
because everyone wants access to its huge customer base. While market
share doesn't always give market power, it helps--particularly where
customers have a hard time switching to a competitor.
In 1992, when Congress made a first pass at creating competition in
what the FCC calls the multichannel video programming distribution
(MVPD) market, Congress concluded that cable's monopoly power at the
local level gave it power over customers and that the power to prevent
video programmers from reaching customers (foreclosure) gave cable
operators power over programmers. Today, however. most people \2\
appear to have a choice between several MVPD providers. If that's true,
then how does cable retain market power?
\2\ Contrary to the claims of cable operators, not everyone has a
choice of competing MVPD provider. Many people lack an unobstructed
view of the portion of the southern sky occupied by DBS satellites. In
addition, exclusive contracts with landlords prevent many apartment and
condo dwellers from using a terrestrial overbuilder. See GAO, ``Direct
Broadcast Satellite Subscribership Has Grown Rapidly But Varies Across
Markets'' (2005) (GAO 2005).
The answer lies in the way consumers behave. For many consumers
``I'd rather pay than switch'' is, in fact, a rational decision even in
the face of high prices and better programming on rivals. This consumer
behavior lets cable keep customers and gives incumbent cable operators
market power over programmers.
Some Basic Cable Competition Math
Why does anyone buy a good or a service? Because they think that
what they get, what I will call ``value'' (or ``V'') is worth the cost
(or ``C'') of the service. We can write this as a mathematical
equation, which makes it easier to understand visually.
Generally, a consumer will buy a service where Value is greater
than or equal to Cost, or
Where Vs is the value of the service and Cs
is the cost of the service.
So I buy cable when it is worth it for me to have it. Since cable
is a subscription service, I theoretically make this calculation every
month I don't cancel the service. So, why don't I drop the service when
the cable company raises the price? In part, it is because I may
discover the service is more valuable when I use it, so I will pay more
for it. But it is also because turning off the service may have costs
of its own. whether in the form of money costs like a termination fee
or the cost of hassle.
But the equation is different when a competing service, like a
Direct Broadcast Satellite (DBS) company or overbuilder, is trying to
pull a customer away from cable. This introduces something called
``switching costs.'' A ``switching cost'' is any cost associated with
switching from one product to another that is over and above the actual
price of the new product. This includes not merely money (for example,
a termination fee if I end the contract early), but also the general
hassle associated with calling in a new provider, terminating the old
system, learning the new system, etc.
Let us assume that Vi is the value of the incumbent
service (the one the consumer already uses). Ci is the cost
of maintaining that system. Vn is the value of a comparable
service. Cn is the cost of the new, comparable service. SW
is the switching cost of moving from the old service to the new
The Switching Equation:
In plain English, it is not enough for the new service to be
``as good as'' the old one or even just a bit better. Either the new
service must be much better, or the cost must be lower, by more than
the difference of the switching cost. \3\
\3\ In theory, a tie will go to the current incumbent because an
``indifferent'' consumer will simply stay with the existing system. But
the average person does not weigh his or her choices in the neat
mathematical fashion these equations suggest.
This applies universally but doesn't impact most daily buying
decisions because the things we buy on a regular basis, like groceries,
have little or no switching cost. For example, when I decide to buy a
new box of cereal, there is no switching cost if both brands are in my
local supermarket because I am out of cereal and need to buy more
anyway. My decision about which brand to buy will be determined by cost
and whatever value I perceive in the brand I chose (do I want to try
something new? Do I perceive one brand as better for me? ).
But cable is a subscription service. Unless I move to a new house,
switching from cable to a competitive rival has significant non-
monetary switching costs to consumers. I need to deal with the cable
company to turn off the cable, deal with the DBS provider, waste a day
(at least) waiting for the install, and overcome my fear of learning a
new system when I don't know for sure I'll like it better. \4\
Statistics from the last few years of cable/DBS competition suggest
that consumers are much more sensitive to switching costs and network
value than they are to price. \5\
\4\ Some of these apply even if I am moving to a new house.
\5\ See, e.g., Andrew S. Wise and Kiran Duwadi, ``Competition
Between Cable Television and Direct Broadcast Satellite--It's More
Complicated Than You Think,'' FCC Media Bureau Staff Research Paper
(2005) (``Wise & Duwadi 2005''); GAO 2005. The issue of ``hassle'' as a
switching cost for consumers, and the need to impose a regulatory
solution to encourage effective competition, is well established in
telecommunications markets. For example, to make competition a reality
in the competing telephone market and cell phone market. Congress and
the FCC created rules to let consumers move phone numbers from one
service to another. Why? Because switching phone numbers was such a
hassle to consumers that if they had to change numbers to switch, not
enough of them would do so to bring about the benefits of competition.
This is the key to market power and competition in video. As a
matter of public policy, we want competition to keep down prices,
protect consumers from abusive service, and make sure that we have
enough diverse news and viewpoints in the media to maintain a healthy
democracy. But if competition is an illusion, because we can prove that
not enough consumers will switch to make a difference for these things,
then policy has to address the issue by making it easier for
competitors to get customers.
When Congress passed the 1992 Act, only 60 percent of the country
subscribed to cable and the largest cable systems controlled at most a
quarter of that number. Cable systems were scattered around the
country, minimizing the ability of any single cable system to block a
programmer from an entire geographic region. Today, 90 percent of the
country subscribes to cable or some other kind of MVPD (mostly DBS).
The remaining ten percent has been stable for some time, and is
unlikely to sign up with an MVPD in mass numbers anytime soon.
According to the most recent FCC Report on MVPD competition,
incumbent cable operators have approximately 70 percent of the total
MVPD market (with the five largest providers controlling the bulk of
cable subscribers). That means that any competitor must pull new
customers away from cable. That would be hard enough, given the problem
of overcoming switching cost and consumer uncertainty. But it gets
worse for two reasons. First, the national number marks the much higher
levels of regional concentration. Not all customers are equal, and
clusters of customers in the wealthiest urban areas subscribe to
incumbent cable operators, \6\ making the level of regional
concentration in areas dominated by large cable companies much more
concentrated than the 70 percent national figure. Because a few large
cable companies dominate these regions, these cable companies still
have market power. Using the market power of their existing
subscribers, they can take steps to make it much harder for these
customers to switch to competitors and can therefore raise prices, deny
programming to rivals, and favor affiliated programming over
\6\ GAO 2005 (observing lowest penetration of DBS in urban areas).
Implications for Pricing
Recall the Switching Equation:
We can now explain why cable can keep raising the
subscription price even in the presence of a competitor. The ``SW''
provides a cushion. The cable operator can raise Cn to just
about Ci+SW, unless a competitor offers a high enough
Vn. At the same time, the cable companies can use their
market power to increase the cost to the competitor or lower the value
of their competing network in ways described below. So the competitor
either can't raise Vn enough to justify the added expense of
the switching cost, or drop Cn enough to compensate for
switching cost, to attract a lot of new customers. \7\
\7\ The empirical data in GAO 2005 is generally confirmatory. GAO
2005 reported that an increase in incumbent cable capacity (offering
more channels) or offering additional services such as VoD or broadband
(all of which increase Vi) reduce DBS penetration.
Similarly, denial of local programming to DBS (reducing Vn)
significantly impacts competitor penetration. See also Wise & Duwadi
(2005) (finding that DBS demand is suppressed when DBS denied regional
sports programming). When considering the implications for policy, it
is important to remember these are aggregate trends. The specific
values, and therefore specific responses, change for each consumer. DBS
can attract some customers by offering steep discounts and free
equipment (cutting Cn), free installation (cutting SW), or free TiVo
(increasing Vn). But, because of the way cable can exercise
market power, it can keep DBS costs sufficiently high and network value
sufficiently low to avoid losing a critical mass of customers.
Positive and Anticompetitive Responses By Cable To Competition
Cable operators generally have not responded to DBS competition
with price cuts (in fact, they have raised prices faster than inflation
for the last five years) \8\ Instead, incumbent cable operators have
worked to increase the value of its network (the good response to
competition) and have leveraged market power to suppress the value of
rival MVPDs or drive up costs to rivals (the anti-competitive or
``bad'' response). For example, cable operators have increased the
value of their package by expanding capacity and introducing additional
services, such as video on demand (VoD) and broadband. At the same
time, DBS providers like DIRECTV respond by offering free TiVo service
(increasing their own Vn), offering free equipment
(decreasing Cn) and offering free installation (decreasing
SW). Terrestrial overbuilders respond by offering a combination of
video, voice and broadband for a ``triple play'' service. These are the
positive effects competition policy should encourage.
\8\ They have responded to terrestrial competitors with price cuts,
suggesting that consumer uncertainty diminishes when the service
``looks the same,'' making comparisons easier and consumers more likely
to switch. At the same time, they have also been more vigorous in using
regional market power to disadvantage terrestrial overbuilders. See
GAO, ``Wire-based Competition Benefitted Consumers in Selected Markets
(2004). The differences in the nature of competition from different
competitors goes beyond the scope of this paper. Given the state of
competition in the video marketplace, however, in which incumbent cable
operators continue to control the overwhelming share of the market and
where DBS is the most significant competitor by national market share,
the differences are not important for the basic competition math.
At the same time, however, cable operators leverage their market
power to reduce the value of new competitors, artificially suppressing
Vn. Withholding regional sports network programming is one
example of decreasing Vn. Another method is to raise costs
to the competitor, artificially inflating Cn. For example,
the cable owners of the iN Demand VoD service charge DBS four times as
much for programming as they charge other incumbent cable systems. DBS
can either not offer the service (reducing Vn) or offer the
service and eat the additional cost (since they must keep Cn
low to compensate for switching costs).
Lack of Information and Uncertainty
In addition to switching costs, lack of information and uncertainty
will prevent a number of consumers from switching. A new user has no
idea whether he or she will actually like a competitor better, or how
much hassle is involved in switching. This uncertainty and lack of
information will cause the consumer to devalue the competing network
and exaggerate the switching costs. \9\ The more ``risk averse'' the
consumer, the more impact uncertainty and lack of information has on
how the consumer assesses value and makes a choice. The most optimistic
(or ``risk indifferent'') will assign the highest potential value to
the new system and the lowest value to the switching costs. The most
risk averse consumers will assign the minimum value to the competing
network and the maximum value to the switching costs. Where folks fall
on this scale determines when they switch from one system to another.
\9\ We could therefore tweak our equation to reflect this, as
where ``U'' represents the uncertainty caused by a combination of less
than perfect information and risk aversion. But that starts to get too
complicated. It's enough to say that the less information a customer
has, and the less certain they are about the network value, the less
they will value the competitor's network and the more they will worry
about switching costs and actual costs.
Again, it is important to recognize that a cable operator does not
need to keep every customer to maintain market power. It only needs to
keep enough customers to maintain market power. In fact, a strategic
thinking cable operator will want enough competition in the market to
prevent an unavoidable appearance of monopoly and resultant regulation,
but not enough to pose a competitive risk. \10\ As long as cable
operators can consolidate regionally and nationally to keep control of
sufficient numbers of high value customers, slight changes in the
overall national numbers for MVPDs won't make much difference on real
\10\ For example, in 1997, Microsoft rescued its long-term rival,
Apple, from possible bankruptcy by investing $150 million.
The cable strategies of increasing their own value while
diminishing the value of competitors thus complement each other
synergistically. Although consumers can easily evaluate price, lack of
information or experience makes it hard to judge other kinds of value.
When DBS offered 200 channels and cable systems only offered 30, the
value difference for DBS looked more impressive than if DBS offers 200
channels and cable offers 125 channels. \11\ Again, it is important to
stress that, as with the ability to raise price, the switching cost
provides a cushion on how much a cable operator must improve service.
The cable operator does not have to make Vi=Vn.
It is enough that Vi>=Vn-SW. So 125 channels is
``close enough,'' especially when the uncertainty about the value of
the new networks makes the customer assign it an artificially low
value. (``Is getting Current really worth switching to DIRECTV? Nah, it
can't be that good . . . '')
\11\ The fact that most viewers only reliably watch a fraction of
the number of available channels also leads consumers to devalue
additional capacity. If I can't find more than five good channels with
125 channels on cable, why do I think adding 75 more channels will
Impact on Programming \12\
\12\ To keep things simple, I'm not going to talk about how local
broadcasters and broadcasting networks like CBS enter the equation. The
American Cable Association has recently (January 30, 2006) released a
study addressing this issue. For purposes of this paper, it is
sufficient to note that the presence of broadcast networks and local
broadcasters in the equation does not work to the advantage of cable
The Switching Equation and information problems allow cable
operators to control the access of independent programmers to the home.
Cable operators claim that if they consistently favored programming for
reasons other than quality, such as to force an independent to give the
cable operator an ownership interest, \13\ the cable operators would
lose customers to competitors with better programming. But the
incumbent doesn't need the ``best'' programming because the incumbent
doesn't need to maximize the value of its network. The switching cost
provides a cushion. As long as programming remains ``good enough,'' the
switching cost will keep the subscriber from following the ``better''
programming to a competitor.
\13\ This is an illegal practice alleged to be widespread in the
cable industry. The cable industry denies it has market power to force
such ``equity concessions'' as a ``price'' of carriage.
New independent programmers also have a serious information problem
that makes the threat that subscribers will ``chase it'' to a rival
almost non-existent. Let's say programming denied by the incumbent is
absolutely wonderful. The incumbent viewer is never going to see it,
because it is on the other system. Rival programming channels, oddly
enough, are unlikely to take advertising to help viewers discover
programming better than their own (unless, of course, the two networks
are owned by a single owner, an increasingly common event). How is the
incumbent viewer going to acquire an appreciation of the high value for
the ``superior'' programming network if he or she never sees it? Given
that the incremental value of anew network to any viewer is likely to
be fairly low, \14\ it is rather far fetched that the incumbent cable
operator will seriously fear that denying carriage to independents will
cost so many subscribers as to overcome the other economic advantages
of favoring affiliated programming. Or, more bluntly, as long as the
cable operator programming doesn't stink so badly it actively drives
viewers away. the cable operator can safely ignore new independents.
\14\ ``Incremental value'' means how much does this one change make
a difference in overall value of the service. For some programming this
may be very high, but for most, it is pretty low.
Regional Sports Programming and ``Marquee'' Programming
The argument that the incremental value of programming gives
programmers no leverage is not universally true. Some programming is
more ``high value'' than others. In general, local broadcast stations
and some well established cable networks, like ESPN or CNN, are so
valuable that any MVPD that wants to compete needs to have it. Such
high value programming also raises the question of substitutability. If
I can't have a specific network, is another similar network an
acceptable substitute for consumers?
The answer is, sometimes ``yes'' and sometimes ``no.'' Some
consumers will be happy with any 24/7 news channel. But someone who
values the perspectives and opinions of FOX News will not readily
accept the BBC World Report or CNN instead because they are both
``news,'' and certainly will not accept Comedy Central's ``Daily Show''
as a substitute even though both are ``video programing,'' \15\ In
economic terms, the person that regards CNN and FOX News as equally
acceptable regards them as close substitutes. The person that
grudgingly accepts CNN over FOX News if he or she has no choice regards
them as substitutes, but not close substitutes. Needless to say, not
being able to get the programming you want on the competing system,
even if it is a ``substitute,'' diminishes the value of the competing
\15\ This should also explain why Blockbuster, video iPods, and
free TV are not competitors to cable, as sometimes argued. The value
proposition between a system that provides hundreds of channels of news
and entertainment on a dynamic 24/7 basis, as opposed to the value
proposition of a service that merely rents movies and games (or stores
them for future play), is so different that no consumer would ever
consider them substitutes. Similarly, because free TV is offered as
part of the cable package, its value is completely captured in the
cable package. It does not ``compete'' in any usual sense of the word.
Rather, it is a question of whether the added value is worth the cost.
For the 10 percent of television homes that do not subscribe to cable
or other pay service, the answer appears to be ``no.''
\16\ See generally Wise & Duwadi (2005) (attempting to break out
numerous factors with regard to competition in MVPD markets, including
Which gets us back to sports. Cable likes to argue that ESPN (which
is owned by Disney, not a cable company) and things like NFL Sunday
Ticket (a football package on DIRECTV) neutralize any advantage cable
operators get from withholding regional sports networks or other local
programming. After all, sports is sports, right?
As a simple experiment, ask any Red Sox \17\ fan if he or she
thinks watching the Cleveland Cavaliers play the Los Angeles Lakers
\18\ is ``the same'' as watching the Red Sox play the Yankees because
they are both ``sports games.'' Then ask if watching the Chicago Cubs
play the St. Louis Cardinals \19\ is ``the same.'' Ask if the Red Sox
fan will give up watching Red Sox games in exchange for all the
football he or she can watch, including the New England Patriots. \20\
\17\ A baseball team in Boston. They have a longstanding rivalry
with the New York Yankees.
\18\ Basketball teams.
\19\ Both baseball teams. Like the Red Sox, the Cubs have a devoted
following despite consistently losing.
\20\ A football team popular in Boston.
Any Red Sox fan reading this knows the answer. Watching generic
``sports,'' or even another baseball team with a romantic ``curse''
doesn't cut it when the Red Sox are playing the Yankees. There are
plenty of sports fans who like to watch ``generic sports''; that's why
ESPN is such a popular network. But just because someone likes to watch
generic sports doesn't make it a substitute for a local team. For many
people, local sports and ``generic sports'' are not even substitutes,
never mind close substitutes.
Worse, the demand for popular local sports teams varies. I might
only watch the Red Sox when they play the Yankees or when they make it
to the playoffs. But when I want to watch them, I really want to watch
them. If I have to give up watching local sports to switch, that looks
like a huge loss of value to me, even if I only actually watch games
not carried on broadcast television (and retransmitted on the
competitor) a few times a year. Because many people appear to assign a
huge value to this loss of unique programming, denial of regional
sports programming seriously devalues the competing network despite the
presence of other ``generic'' sports packages.
Generally, cable operators argue that government regulation is
``bad'' and ``picks winners.'' By contrast, they maintain, deregulation
creates ``an open market'' that is ``competition driven.'' Finally,
cable operators they need ``a level playing field'' to compete
``fairly'' with would-be competitors.
The ``level playing field'' is a myth. Cable did not achieve its
current market share, and therefore its existing level of market power,
by winning any ``fair fights'' in an ``open, competitive market.'' It
got them because the government made cable a virtual monopoly in 1984
when it passed the first Cable Act. Congress tried to correct the
damage in 1992, then changed the rules back to ``fair'' in 1996. As a
result, any new entrant is already running uphill. If the government
lets cable companies slap on a pair of leg-irons by refusing to
regulate anti-competitive behavior, competition becomes impossible.
The second argument cable operators make is that they invested lots
of money in upgrading their systems, so they should be allowed to get a
return on investment. I agree. But, like the rest of us, cable
operators need to work for a living rather than just leverage their
market power. If I buy a shotgun in the expectation I can rob my
neighbors, I am not entitled to a ``return on investment.'' If I build
a cable network in the expectation I can use it to deny regional
programming to my competitors so I will be able to charge monopoly-
level prices to my subscribers, I'm not entitled to a monopoly-level
``return on investment.''
Policy must address the market reality. A preference for
competition over regulation may be a valid starting point for
consideration, but where competition does not emerge, or can be
predicted not to emerge, Congress and regulators must step in to take
As a Nation, we depend on the widespread availability of affordable
video distribution. The Supreme Court has said that ensuring to the
people of the United States a video distribution system that provides
needed news and diverse views to all Americans as ``a government
purpose of the highest order.'' \21\ If Congress intends to rely upon
competition to ensure that the Nation's video distribution systems are
affordable and provide innovative and informative programming
reflecting the diversity of our citizenry, then it must craft policies
that genuinely promote competition in the MVPD market.
\21\ Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622 (1997).
This paper provides a suitable framework for addressing regulation
to promote competition. In analyzing the existing MVPD market,
policymakers should consider policies that make competition viable by
limiting the power of incumbent cable operators to manipulate the value
of a competitor's offering, drive up the cost of a competitor's
offering, or increase the switching cost to a subscriber from a cable
network to a rival network. These policies should include, at the
least, limits on regional and national concentration by cable
incumbents (reducing market power directly) and enhanced program access
rules (extending existing rules beyond the February 2007 deadline and
including both terrestrially distributed programming (such as regional
sports) and new ``non-linear'' programming services (such as video on
In making these assessments, Congress and the FCC should reject
simplistic arguments about ``deregulation'' and ``level playing
fields.'' Unless subscribers can switch from one service to another
with reasonable ease, the expected benefits of competition--lower
prices, innovation, and diverse high-quality programming--simply will
Prepared Statement of John Goodman, President, Coalition for
Competitive Access to Content (CA2C)
The Coalition for Competitive Access to Content (CA2C) submits
three documents as reference to its position regarding assured access
to content for all current and future competitors regardless of the
technology used or network ownership.
The current program access rules have been successful and essential
for the development of satellite (DBS) and other new competitors that
resulted from the Telecommunications Act of 1996. The development of
new and expanded competition is still a primary goal of Congress.
However, the current rules have been outdated by massive technology
changes and continuing structural changes within the industry. Despite
these changes, assured access to content is still a necessary
foundation for the development of distribution competition that will
expand services and bring better choice to consumers.
Since their inception in 1992, both the FCC and Congress have
consistently endorsed the need for these rules. The FCC extended the
current rules in 2002, and has also imposed conditions that assure
program access as part of merger or acquisition proceedings. The FCC
has also determined, however, that new legislation is needed for it to
go beyond satellite delivered content that is also subject to vertical
integration. In addition, the current program access rules are
scheduled to sunset in 2007.
The CA2C has developed specific policy proposals to address these
program access issues. A copy of this proposed legislation is attached.
The CA2C firmly believes that Congress should update the current rules
as an essential part of telecom reform that is currently being pursued.
The CA2C has reviewed these documents with both committee and member
staff and look forward to our continuing discussions about this vital
Current members of the CA2C include: AT&T (formerly SBC),
BellSouth, BPLIA, BSPA, EchoStar, ITTA, Media Access Project, OPASTCO,
RCN, US Telecom, and Verizon.
Preserve Congressional Intent To Promote Viewer Choice
Access to Video Content Is Necessary for Effective Competition
The world of telecommunications is rapidly changing. The advent of
cable brought new competition to the broadcast networks and new choices
for the American viewing public. Digital Broadcast Satellite (DBS) did
the same. Now, broadband is bringing more competition and more choices.
At each stage, new competitors have depended on access to programming--
without access to the content that subscribers want, competitive entry
is foreclosed and the viewing public is left with fewer choices and
Congress Intended a Level Playing Field
In 1992, Congress recognized that the cable industry could use its
control over access to video programming to stifle competition. To
prevent this, and to ensure a level playing field, Congress prohibited
vertically-integrated cable companies--those that have ownership
interests in programming networks--from refusing to make their content
available to competitive multichannel video programming distributors
(e.g. DBS and non-incumbent cable companies). As a technical matter,
Congress tied this prohibition to how cable companies received cable
programming at the time--satellite feeds from video programmers to
``head-ends'' around the country. The legislative vehicle for this
requirement was the Cable Act of 1992, in which Congress added Section
628 of the Communications Act of 1934 (47 U.S.C. Sec. 548).
Technological Advances Have Opened a Loophole
Today, satellite transmission is no longer the only method of
transmitting programming to the head-end. Fiber-based terrestrial
networks have become economical alternatives, particularly for regional
sports and news programming controlled by regionally clustered cable
operators. The current version of Section 628 did not foresee these
developments, so vertically-integrated cable companies which distribute
their programming terrestrially are not covered by the legislation.
These cable companies have already demonstrated their willingness to
make use of this loophole to freeze out competition--the industry
vigorously fought reauthorization of Section 628 in its current form in
Update Section 628, Close the Loophole, and Restore Congressional
Section 628 protection was key to the development of satellite-
based competition like DIRECTV and EchoStar. It also supplied the
necessary foundation for early broadband development, allowing
[satellite- and ground-based] broadband service providers to offer
bundles of voice, video, and high-speed data/Internet services directly
to homes and small businesses across the country. Updating Section 628
to account for non-satellite methods of program distribution will close
the loophole opened by advancing technology, restore Congressional
intent, and preserve competition in the delivery of video services.
Coalition for Competitive Access to Content (CA2C) Background and
Coalition for Competitive Access to Content (CA2C)
The CA2C has been organized as a very broad-based Ad Hoc Coalition
to pursue legislation assuring fair access to content. The current
members of the coalition include the AT&T (formerly SBC), BellSouth,
BPLIA, BSPA, EchoStar, ITTA, Media Access Project, OPASTCO, RCN, US
Telecom, and Verizon. Many other businesses and organizations are
expected to join the CA2C in support of content access legislation.
Other parties that have expressed support for content access
legislation include ACA, Consumers Union, and NATOA. The support for
content access legislation is expected to include all the major parties
that lobbied to extend the sunset of the current program access rules
in 2002, and others who have developed an interest in the issue since
The CA2C believes that assured fair access to content is one of the
most vital strategic policy issues that must be addressed in new
telecom legislation. New competing networks must have fair access to
the content their potential subscribers want or they will fail. The
vertical integration of major MSOs into content ownership continues to
expand and the ability to use this vertical integration to foreclose
access to content stands as a growing and unique threat to the success
of competitive entry. The current legislation related to content access
has been historically effective but the existing language has narrow
application to satellite delivered content that does not relate to
today's new technology and the current rules are scheduled to sunset.
The CA2C believes that new legislation is needed to address program
access issues regardless of which distribution technology is used by
In 1992, Congress recognized that the cable industry could use its
control over access to video programming to stifle competition and it
enacted as part of the 1992 Cable Act \1\ the statutory prohibition on
exclusive cable distribution of vertically integrated programming and
other discriminatory conduct involving access to programming--Section
628 of the Communications Act of 1934, as amended. \2\ In doing so,
Congress recognized that ``vertically integrated program suppliers have
the incentive and ability to favor their affiliated cable operators
over other multichannel programming distributors using other
technologies.'' \3\ Representative Billy Tauzin, one of the principal
architects of the 1992 Cable Act has recalled that, in 1992:
\1\ Cable Television Consumer Protection and Competition Act of
1992, Pub. L. No. 102-385, 106 Stat. 1460 (1992) (1992 Cable Act).
\2\ 47 U.S.C. Sec. 548.
\3\ 1992 Cable Act, at Sec. 2(a)(5).
[Congress] awakened to the sad realization that we had forgot
one crucial element, and that was cable controlled programming.
And that controlling programming was a way of making sure that
there would be no competitors. If a competitor couldn't get the
programming, it certainly wasn't going to launch the [system].
\4\ Examination of Cable Rates: Hearing Before the Senate Commerce,
Science, and Transportation Comm., 105th Cong. (July 28, 1998)
(statement of Rep. Billy Tauzin) (emphasis added).
Through Section 628, Congress sought to break the cable industry's
unique leverage over programming, which had historically been exercised
through exclusivity arrangements and other market power abuses
exercised by cable operators and their affiliated programming
suppliers. These anticompetitive practices denied programming to
competitive technologies, or made programming available on
discriminatory terms and conditions. \5\ Section 628 contains the
general provision that:
\5\ See 138 Cong. Rec. H6540 (daily ed. July 23, 1992) (Rep.
Eckart) (cable operators ``know that if they maintain their
stranglehold on this programming, they can shut down competition--even
the deep pockets of the telephone companies for a decade or more.'');
138 Cong. Rec. H6533-34 (daily ed. July 23, 1992) (statement of Rep.
Tauzin) (``[My] amendment, very simply put, requires the cable monopoly
to stop refusing to deal, to stop refusing to sell its products to
other distributors of television programs. In effect, this bill says to
the cable industry, `You have to stop what you have been doing, and
that is killing off your competition by denying it products' . . .
Programming is the key . . . Without programming, competitors of cable
are . . . stymied . . . What does it mean? It means that cable is
jacking the price up on its competitors so high that they can never get
off the ground. In some cases they deny programs completely to those
competitors to make sure they cannot sell a full package of services.
So the hot shows are controlled by cable . . . It is this simple. There
are only five big cable integrated companies that control it all. My
amendment says to those big five, `You cannot refuse to deal anymore.'
'') (emphasis added).
It shall be unlawful for a cable operator, a satellite cable
programming vendor in which a cable operator has an
attributable interest, or a satellite broadcast programming
vendor to engage in unfair methods of competition or unfair or
deceptive acts or practices, the purpose or effect of which is
to hinder significantly or to prevent any multichannel video
programming distributor from providing satellite cable
programming or satellite broadcast programming to subscribers
or consumers. \6\
\6\ 47 U.S.C. Sec. 548(b).
Congress, through Section 628, also directed the FCC to adopt rules
to ``address and resolve the problems of unreasonable cable industry
practices, including restricting the availability of programming and
charging discriminatory prices to non-cable technologies'' and provided
further specific guidance. \7\ Section 628(b)(2) requires such rules to
prohibit, among other things, discriminatory treatment by programmers
in which a cable operator has an attributable interest between such
cable operator and unaffiliated competitors. Section 628(b)(2)(D)
specifically required the FCC to prohibit exclusive contracts between
cable operators and cable programmers in which such operators have an
\7\ H.R. Conf. Rep. No. 102-862, at 93 (1992), reprinted in 1992
U.S.C.C.A.N. 1231, 1275.
The current 628 rules were scheduled to sunset in 2002. Many
members of the CA2C successfully lobbied for extension of the current
rules. The FCC concluded on June 28, 2002, in the Program Exclusivity
Prohibition Extension Order, that the prohibition on program
exclusivity should be extended for at least another five years. \8\ In
that order, the FCC found that ``access to vertically integrated
programming continues to be necessary in order for [competitive] MVPDs
[multichannel video programming distributors] to remain viable in the
marketplace'' \9\ and that [f]ailure to secure even a portion of
vertically integrated programming would put a nonaffiliated cable
operator or competitive MVPD at a significant disadvantage vis-a-vis a
competitor with access to such programming.'' \10\ The FCC also
observed that ``vertically integrated programmers generally retain the
incentive and ability to favor their cable affiliates over
nonaffiliated cable operators and other competitive MVPDs to such a
degree that, in the absence of the prohibition [on exclusive contracts
with affiliates], competition and diversity in the distribution of
video programming would not be preserved and protected.'' \11\ Further,
the FCC found, ``[d]espite the progress that has been made in the 10
years since the enactment of the 1992 Act, a considerable amount of
vertically integrated programming in the marketplace today remains
``must-have'' programming to most MVPD subscribers,'' and that ``if
[competitive MVPDs] were to be deprived of only some of this ``must-
have'' programming, their ability to retain subscribers would be
\8\ Implementation of the Cable Television Consumer Protection and
Competition Act of 1992, Development of Competition and Diversity in
Video Programming Distribution: Section 628(c)(5) of the Communications
Act, Sunset of the Exclusive Contract Prohibition, Report and Order, 17
FCC Rcd 12124 (2002) (``Program Exclusivity Prohibition Extension
\9\ Id. at 12138.
\11\ Id. at 12125.
\12\ Id. at 12139.
Section 628 protection was essential for the development of
Satellite based competition and it was a necessary foundation for the
early development of BSPs and other new competition. However, new
technology has no protection under the limited and specific language of
the existing statute as it specifically applies to satellite delivered
content. Terrestrial distribution has emerged as a preferred and
pervasive alternative to satellite based distribution. Local sports and
news content that is not delivered by satellite has grown in
importance. Section 628 also has no application to any form of IP
technologies used to deliver video or other content to PCs, TVs or
other end use appliances. The CA2C members believe that the same basic
market conditions that existed in 1992 exist today but they relate to a
broader range of competing technologies and a stronger market position
of vertical integration and likely abuse if allowed.
Section 628 [47 U.S.C. Section 548]. Development of Competition and
Diversity in Video Programming Distribution
(a) Purpose.--The purpose of this section is to promote the public
interest, convenience, and necessity by increasing competition and
diversity in the multichannel video programming market, to increase the
availability of MVPD programming and satellite broadcast programming to
persons in rural and other areas not currently able to receive such
programming, and to spur the development of communications
(b) Prohibition.--It shall be unlawful for an MVPD, an MVPD
programming vendor in which an MVPD has an attributable interest, or a
satellite broadcast programming vendor to engage in unfair methods of
competition or unfair or deceptive acts or practices, the purpose or
effect of which is to hinder significantly or to prevent any MVPD from
providing MVPD programming or satellite broadcast programming to
subscribers or consumers.
(c) Regulations required.--
(1) Proceeding required.--Within 180 days after the date of
enactment of this section, the Commission shall, in order to
promote the public interest, convenience, and necessity by
increasing competition and diversity in the multichannel video
programming market and the continuing development of
communications technologies, prescribe regulations to specify
particular conduct that is prohibited by subsection (b).
(2) Minimum contents of regulations.--The regulations to be
promulgated under this section shall--
(A) establish effective safeguards to prevent an MVPD which
has an attributable interest in an MVPD programming vendor or a
satellite broadcast programming vendor from unduly or
improperly influencing the decision of such vendor to sell, or
the prices, terms, and conditions of sale of, MVPD programming
or satellite broadcast programming to any unaffiliated MVPD;
(B) prohibit discrimination by an MVPD programming vendor in
which an MVPD has an attributable interest or by a satellite
broadcast programming vendor in the prices, terms, and
conditions of sale or delivery of MVPD programming or satellite
broadcast programming among or between cable systems, cable
operators, or other MVPDs, or their agents or buying groups;
except that such an MVPD programming vendor in which an MVPD
has an attributable interest or such a satellite broadcast
programming vendor shall not be prohibited from--
(i) imposing reasonable requirements for creditworthiness,
offering of service, and financial stability and standards
regarding character and technical quality;
(ii) establishing different prices, terms, and conditions
to take into account actual and reasonable differences in the
cost of creation, sale, delivery, or transmission of MVPD
programming or satellite broadcast programming;
(iii) establishing different prices, terms, and conditions
which take into account economies of scale, cost savings, or
other direct and legitimate economic benefits reasonably
attributable to the number of subscribers served by the
(iv) entering into an exclusive contract that is permitted
under subparagraph (D);
(C) prohibit practices, understandings, arrangements, and
activities, including exclusive contracts for MVPD programming
or satellite broadcast programming between an MVPD and an MVPD
programming vendor or satellite broadcast programming vendor,
that prevent an MVPD from obtaining such programming from any
MVPD programming vendor in which an MVPD has an attributable
interest or any satellite broadcast programming vendor in which
an MVPD has an attributable interest for distribution to
persons in areas not served by an MVPD as of the date of
enactment of this section; and
(D) with respect to distribution to persons in areas served
by an MVPD, prohibit exclusive contracts for MVPD programming
or satellite broadcast programming between an MVPD and an MVPD
programming vendor in which an MVPD has an attributable
interest or a satellite broadcast programming vendor in which
an MVPD has an attributable interest, unless the Commission
determines (in accordance with paragraph (4)) that such
contract is in the public interest.
(A) Geographic limitations.--Nothing in this section shall
require any person who is engaged in the national or regional
distribution of video programming to make such programming
available in any geographic area beyond which such programming
has been authorized or licensed for distribution.
(B) Applicability to satellite retransmissions.--Nothing in
this section shall apply (i) to the signal of any broadcast
affiliate of a national television network or other television
signal that is retransmitted by satellite but that is not
satellite broadcast programming, or (ii) to any internal
satellite communication of any broadcast network or cable
network that is not satellite broadcast programming.
(C) Exclusion of Individual Video Programs. Nothing in this
section shall apply to a specific individual video program
produced by an MVPD for local distribution by that MVPD and not
made available directly or indirectly to unaffiliated MVPDs,
provided that: (i) all other video programming carried on a
programming channel or network on which the individual video
program is carried, is made available to unaffiliated MVPDs
pursuant to subsection (c)(2)(D), and (ii) such specific
individual video program is not the transmission of a sporting
(D) MVPD sports programming. The prohibition set forth in
Section 628(c)(2)(D), and the Commission's rules adopted
pursuant to that section, shall apply to any MVPD programming
that includes the transmission of live sporting events,
irrespective of whether an MVPD has an attributable interest in
the MVPD programming vendor engaged in the production,
creation, or wholesale distribution of such MVPD programming.
(4) Public interest determinations on exclusive contracts.--In
determining whether an exclusive contract is in the public
interest for purposes of paragraph (2)(D), the Commission shall
consider each of the following factors with respect to the
effect of such contract on the distribution of video
programming in areas that are served by an MVPD;
(A) the effect of such exclusive contract on the development
of competition in local and national multichannel video
programming distribution markets;
(B) the effect of such exclusive contract on competition
from multichannel video programming distribution technologies
other than cable;
(C) the effect of such exclusive contract on the attraction
of capital investment in the production and distribution of new
(D) the effect of such exclusive contract on diversity of
programming in the multichannel video programming distribution
(E) the duration of the exclusive contract.
(5) Sunset provision.--The prohibition required by paragraph
(2)(D) shall cease to be effective 10 years after the date of
enactment of this section, unless the Commission finds, in a
proceeding conducted during the last year of such 10-year
period, that such prohibition continues to be necessary to
preserve and protect competition and diversity in the
distribution of video programming.
(d) Adjudicatory proceeding.--Any MVPD aggrieved by conduct that it
alleges constitutes a violation of subsection (b), or the regulations
of the Commission under subsection (c), may commence an adjudicatory
proceeding at the Commission. The Commission shall request from a
party, and the party shall produce, such agreements between the party
and a third party relating to the distribution of MVPD programming that
the Commission believes to be relevant to its decision regarding the
matters at issue in such adjudicatory proceeding. The production of any
such agreement and its use in a Commission decision in the adjudicatory
proceeding shall be subject to such provisions ensuring confidentiality
as the Commission may by regulation determine.
(e) Remedies for violations.--
(1) Remedies authorized.--Upon completion of such adjudicatory
proceeding, the Commission shall have the power to order
appropriate remedies, including, if necessary, the power to
establish prices, terms, and conditions of sale of programming
to the aggrieved MVPD.
(2) Additional remedies.--The remedies provided in paragraph
(1) are in addition to and not in lieu of the remedies
available under Title V or any other provision of this Act.
(f) Procedures.--The Commission shall prescribe regulations to
implement this section. The Commission's regulations shall--
(1) provide for an expedited review of any complaints made
pursuant to this section, including the issuance of a final
order terminating such review within 120 days after the date on
which the complaint was filed;
(2) establish procedures for the Commission to collect such
data, including the right to obtain copies of all contracts and
documents reflecting arrangements and understandings alleged to
violate this section, as the Commission requires to carry out
this section; and
(3) provide for penalties to be assessed against any person
filing a frivolous complaint pursuant to this section.
(g) Reports.--The Commission shall, beginning not later than 18
months after promulgation of the regulations required by subsection
(c), annually report to Congress on the status of competition in the
market for the delivery of video programming.
(h) Exemptions for prior contracts.--
(1) In general.--Nothing in this section shall affect any
contract that grants exclusive distribution rights to any
person with respect to satellite cable programming and that was
entered into on or before June 1, 1990 or any contract that
grants exclusive distribution rights to any person with respect
to MVPD programming that is not satellite cable programming and
that was entered into on or before July 1, 2003, except that
the provisions of subsection (c)(2)(C) shall apply for
distribution to persons in areas not served by an MVPD.
(2) Limitation on renewals.--A contract pertaining to satellite
cable programming or satellite broadcast programming that was
entered into on or before June 1, 1990, but that is renewed or
extended after the date of enactment of this section shall not
be exempt under paragraph (1). A contract pertaining to MVPD
programming that is not satellite cable programming that was
entered into on or before July 1, 2003, but that is renewed or
extended after the date of enactment of this provision shall
not be exempt under paragraph (1).
(i) Definitions.--As used in this section:
(1) The term ``satellite cable programming'' has the meaning
provided under Section 705 of this Act, except that such term
does not include satellite broadcast programming.
(2) The term ``satellite cable programming vendor'' means a
person engaged in the production, creation, or wholesale
distribution for sale of satellite cable programming, but does
not include a satellite broadcast programming vendor.
(3) The term ``satellite broadcast programming'' means
broadcast video programming when such programming is
retransmitted by satellite and the entity retransmitting such
programming is not the broadcaster or an entity performing such
retransmission on behalf of and with the specific consent of
(4) The term ``satellite broadcast programming vendor'' means a
fixed service satellite carrier that provides service pursuant
to Section 119 of Title 17, United States Code, with respect to
satellite broadcast programming.
(5) The term ``MVPD programming'' means:
(A) Video programming primarily intended for the direct
receipt by MVPDs for their retransmission to MVPD subscribers
(including any ancillary data transmission); and
(B) Additional types of programming content that the
Commission determines in a rulemaking proceeding to be
completed within 120 days from enactment of this provision is,
as of the time of such rulemaking, of a type that is primarily
intended for the direct receipt by MVPDs for their
retransmission to MVPD subscribers, regardless of whether such
programming content is digital or analog, compressed or
uncompressed, encrypted or unencrypted, provided on a serial,
pay-per-view, or on demand basis, and without regard to the
end-user device used to access such programming or the mode of
delivery of such programming content to MVPDs; provided that in
evaluating the additional types of programming content to be
included within this definition, the Commission shall consider
the effect of technologies and services that combine different
forms of content so that certain content or programming is not
included within the foregoing definition solely because it is
integrated with other content that is of a type that is
primarily intended for the direct receipt by MVPDs for their
retransmission to MVPD subscribers.
(C) Any interested MVPD or MVPD programming vendor may
petition the Commission to modify the additional types of
programming content included by the Commission within the
definition of MVPD programming in light of the purpose of this
section, market conditions at the time of such petition, and
the factors to be considered by the Commission under subsection
(6) The term ``MVPD programming vendor'' means a person engaged
in the production, creation, or wholesale distribution for sale
of MVPD programming, but does not include a satellite broadcast
(7) The term ``MVPD'' shall mean multichannel video programming
(j) Common Carriers.--Any provision that applies to an MVPD under
this section shall apply to a common carrier or its affiliate that
provides video programming by any means directly to subscribers. Any
such provision that applies to an MVPD programming vendor in which an
MVPD has an attributable interest shall apply to any MVPD programming
vendor in which such common carrier has an attributable interest. For
the purposes of this subsection, two or fewer common officers or
directors shall not by itself establish an attributable interest by a
common carrier in an MVPD programming vendor (or its parent company).
[Uncodified provision: Within 180 days after the date of enactment
of this provision, the Commission shall prescribe such regulations as
may be necessary to implement the amendments to this section made by
Dakota Central Communications
January 30, 2006
Hon. Ted Stevens,
Hon. Daniel K. Inouye,
Senate Committee on Commerce, Science, and Transportation,
Dear Senators Stevens and Inouye:
I am the General Manager of Dakota Central Telecommunications
Cooperative located in Carrington, North Dakota. I would like to submit
a few comments in regard to the hearing you are holding January 31,
2006 concerning video content. In addition, I would like to thank
Senator Dorgan for his assistance in allowing us to submit these
comments as well as thank Senators Stevens and Inouye for the
Dakota Central is a small progressive cooperative that provides
telephone, high-speed broadband and video services to its customers
through a number of transmission mediums including copper, fiber and
wireless technologies. As a result of the RUS Broadband Loan Program,
Dakota Central was able to construct, over the past two years, a Fiber-
to-the-Home (FTTH) network in a nearby community that was lacking in
Since the FTTH technology has very large bandwidth capabilities, we
were also able to provide video over the network and incorporated this
service into our business plan. Although the FTTH technology
incorporates video rather seamlessly, there have been many obstacles to
overcome unrelated to the technology utilized.
In our situation, most of the issues revolve either around the cost
or the ability to acquire the video programming content. The cost of
the video content is the largest single expense we incur to provide
video service. It consumes in excess of 55 percent of the retail amount
we charge for the service. In 2006, our video programming costs overall
are increasing over 9 percent from the previous year with some of the
content providers raising their individual rates 20 percent. These
large rates increases are not just a one time occurrence but have been
occurring annually for a number of years throughout the marketplace.
These huge increases seem to be excessive when inflation has been
running less than 3 percent during these same periods.
As a small video provider, we have very little leverage to obtain
lower rates and believe the large incumbent cable operators receive
significant discounts from the rates we are charged. To make matters
worse, many of the video content providers offer suites of channels and
in order to obtain their best rates, it is necessary to subscribe to
channels that our customers may have no desire to view. Ultimately, the
end user customer ends up paying more as a result of the tying
As a result of deploying a FTTH network, we are able to offer a
multitude of channels to our customers without exhausting our bandwidth
availability. However, this is not the case with many small providers
that utilize other technologies. They are not able to carry hundreds of
video channels. Consequently, they pay higher rates because they are
not able to offer the content provider's full suite of channels to
obtain the best pricing.
In addition to the cost increases we incur from the national
content providers, we are now being asked to pay retransmission fees
from the local affiliates. With the expiration of our local
retransmission agreements at the end of 2005, some of the affiliates
have requested per subscriber transmission fees be paid going forward.
Exclusive video content contracts with incumbent cable providers
are an additional frustration when entering the video marketplace. At
this time, we have been unsuccessful in obtaining sporting event
content from a local content provider as the result of an exclusive
agreement with the incumbent. In this particular instance, it is the
end user consumer that loses as the customer who migrates from the
incumbents service has to be satisfied without the content he was
An additional issue we have been battling relates to video
transport. Since the beginning of 2005, we have been seeking
authorization from the content providers to transport the video content
we receive at our digital headend to adjacent telephone companies
entering the video business. The sharing of a digital headend facility
provides economies of scale that they would not achieve by constructing
their own headend. Sharing equipment and staffing requirements would
decrease their costs significantly to enter the video business.
However, this has been a difficult process with a number of the content
providers. Even though the closed transport network is secure and
encryption technologies would be deployed, many of the content
providers have been reluctant to provide authorization.
Based on our experience, I am hopeful the Committee will consider
the following in order that small video providers, such as we, are able
to enter to the video marketplace and provide affordable video service
to our telephone and broadband customers in rural America:
Excessive increases in video programming must be curtailed.
Program rates and terms should be non-discriminatory.
Exclusive programming contracts must be prohibited.
Shared head-ends must be allowed.
It seems the burden of passing along the continued excessive video
programming costs has been placed on the end-user video providers. To
our detriment, the public views the increases as being created by the
video providers and not the content providers who are at the root of
the problem. The content providers escape the negative publicity of the
rate increases as a result of their insulation from the public. We are
hopeful that this information sheds light on some of the unique
problems faced by a rural telecommunications carrier trying to enter
the video market. We also hope that these issues will be discussed and
addressed as the Committee looks to update our communications laws.
I respectfully request that this letter be submitted as part of the
official hearing record. Thank you for your consideration and please
feel free to contact me with any questions you may have.
Keith A. Larson,
The Sportsman Channel
January 31, 2006
Hon. Ted Stevens,
Hon. Daniel K. Inouye,
Senate Committee on Commerce, Science, and Transportation,
Dear Chairman Stevens, Co-Chairman Inouye, and Members of the
I was asked to comment on one of the issues up for discussion
during the video content hearing on January 31, 2006. Among the points
that are likely to be raised is the question: Can a cable network be
viable without securing a carriage agreement with Comcast? I write you
today to let you know that the answer to that question is an emphatic,
The Sportsman Channel is living proof that start-up networks can
survive and be successful without carriage on Comcast's cable systems.
While other start-up networks have tended to rely on the fiction that
obtaining a carriage agreement with Comcast is a prerequisite to
getting carriage contracts with other multichannel video providers, we
have taken a different approach: Provide a superior quality channel
that attracts subscribers, and charge affiliates lower subscriber fees
while providing quality customer service and first-class marketing
We also took the strategy of setting a launch date for The
Sportsman Channel and keeping to it, even when we did not have a single
carriage agreement signed by that date. It did not take long after our
launch for us to secure our first carriage contract, and soon others
followed. We successfully aired our network for over two and a half
years before just recently convincing Comcast to sign a carriage
agreement, the last large cable operator to sign.
For your convenience, I have attached an article I wrote last
October that provides more information about The Sportsman Channel and
how we successfully launched our network with quality programming, a
solid business plan, and an experienced management team, but without
Comcast. I hope you have an opportunity to see our programming some day
so that you too understand why quality programming is the key to any
successful network, and why we have been successful by taking the
approach of: ``If you can prove yourself, they will come.''
Very truly yours,
C. Michael Cooley,
President and Chief Executive Officer.
Multichannel News, Volume 26 No. 41, October 3, 2005
How I Started a Network Without Comcast
by C. Michael Cooley *
* C. Michael Cooley is president and CEO of The Sportsman Channel.
It has been said of late that if a network doesn't secure Comcast
Corp., the Nation's largest MSO, then it will have a tough time even
getting a foot in the door to start talks with the remaining cable
Perhaps these folks haven't considered The Sportsman Channel (TSC)
and how we had already secured the remaining cable operators: Time
Warner Cable, Charter Communications Inc., Adelphia Communications
Corp., Cox Communications Inc. and 14 other of the top 25 MSOs, all
without the security or assistance of having Comcast. We are living
proof that channels can survive without Comcast, contrary to the belief
of many. TSC has been around for over two years and our channel, which
is dedicated exclusively to hunting and fishing programming, is not
just surviving, but flourishing.
Other start-up networks tend to have the approach of ``If you have
Comcast, they will come.'' Securing carriage is the key, but there is a
formula: Provide a superior quality channel with lower subscriber fees
that draws subscribers. Our team focuses on quality customer service
and first-class marketing tactics to our affiliates, for an ``If you
can prove yourself, they will come'' approach.
Another successful method for an independent channel employed at
TSC was setting the launch date and keeping it.
The date never moved, even though we didn't have any agreements
signed when the champagne popped on April 7. Our team approached the
launch with 100 percent confidence in our product.
It certainly didn't take long after we drank the champagne for us
to secure our first contracts with the National Cable Television
Cooperative. This gained the attention of MSOs in the top 10--and
eventually deals were struck in 2004.
We just recently completed our agreement with Comcast, which makes
them the last of the top five MSOs to come on board, not the first.
This proves that we didn't need a deal with them to validate our
channel or secure distribution with other MSOs.
Some pessimists believe Comcast only launches channels if it is
financially involved. TSC is an independent, and Comcast is, after all,
still a business. It will launch channels that it believes will keep it
competitive and increase subscriber counts.
No one knows better than me that starting a new channel in this
market is a daunting and difficult task. But it can be done, and I am
not sure if holding Comcast responsible is entirely the reason for the
high level of complexity we experience as channel presidents.
That's especially true since there are 70 million other cable
subscribers, plus another 25 million DBS subscribers out there.
Just because you are unable to be first to reel in a big fish
doesn't mean the ocean won't provide you with a worthy catch.
February 2, 2006
Hon. Ted Stevens,
Hon. Daniel K. Inouye,
Senate Committee on Commerce, Science, and Transportation,
Re: Senate Commerce Committee January 31 Hearing on Video
Dear Senators Stevens and Inouye,
As the president of Castalia Communications, a company that was
created 16 years ago as an independent distributor and producer of
cable/satellite television channels, I have had the pleasure of
launching a variety of ethnic-based and general entertainment channels
in the U.S. and around the world. More recently, these channel
offerings have included services targeting the Mexican television
viewer as well as audiences interested in the cultures and programming
of Japan, China, Russia and Brazil, among theirs.
Recently, Castalia Communications has begun to work in
collaboration with Comcast Corporation to reach American audiences with
such channels as TV Globo Internacional from Brazil, Once Mexico,
Mexico 22 and CBTV. In addition to these four channels, we are also
exploring other opportunities to launch additional networks on Comcast
systems. Overall, our experience with Comcast has been a positive one.
Comcast has been very cooperative in giving us the opportunity to
launch distinctive multicultural channels in the U.S. marketplace.
We believe that if you study and understand a marketplace, you can
create and find opportunities. This is the approach that we have used
in our effort to launch the aforementioned channels on Comcast systems.
We did our homework, we shaped the concepts of our channel offerings to
suit the needs of the audience and the marketplace, and we were able to
make our channels attractive and valuable not only to Comcast, but also
to other distribution companies like DIRECTV Charter and EchoStar's
Suffice it to say, we have found that there are not barriers to
working with the largest video distributors if you deliver quality. If
you have programming that has value to audiences, Comcast, like every
other large and small distributor, will buy it or help you to get it to
the consumer. But if your programming is not in demand or has no
relevance to the viewer, or you don't have a business plan that makes
sense to the cable and satellite competitors, then you will not find
your role in the marketplace. That's the beauty of our democratic
commercial system--the marketplace decides.
At the same time, there are numerous technical changes afoot in the
entertainment business which open the door to a variety of delivery
systems, of which Comcast is only one. If your channel concept isn't
suited to Comcast's business model or distribution strategy, there are
many other delivery systems available to reach the intended viewer.
First, there are a plethora of other multichannel system cable
operators throughout the U.S. Second, there are satellite distribution
networks like DIRECTV and EchoStar's DISH Network. And with the advent
of broadband, online and wireless applications, you can now deliver
your programming direct to the consumer via Internet service providers
like Google Video and Yahoo!, as well as via video on demand offerings
available through iTunes and every wireless phone company. All of them
are eager to make content distribution deals for almost any programming
These technology innovations have made it possible for anyone who
has a compelling concept to break into the production and distribution
business in the U.S. and have a shot at the big brass ring.
I understand that a witness has appeared before your Committee this
week demanding that the government direct Comcast to carry their
services. We think that would be wrong. It is utterly inappropriate for
the government to skew the marketplace by involving itself in
determining what programming people will see and in what form or
package that programming will be delivered. That is offensive to
In our experience, Comcast is a forward-looking company that makes
programming decision in its customers' best interests, and is open to
working with independent programmers with viable ideas, sound business
plans and a win/win attitude.
Castalia Communication continues to operate as a successful
independent company. Our dealings with Comcast have also been positive
and mutually beneficial. This is why we oppose the efforts of those who
would have the government making the programming decisions for Comcast
or any other distributor in this marketplace.
January 30, 2006
Hon. Ted Stevens,
Hon. Daniel K. Inouye,
Senate Committee on Commerce, Science, and Transportation,
Dear Senators Stevens and Inouye:
I am writing as the representative of over 560 rural, community-
based telecommunications providers regarding the important hearing you
are holding on January 31, 2006 on video content.
Due to the fact that no rural community-based traditional
telecommunications provider was invited to testify, I thought providing
the perspective of this industry would be invaluable to the Committee
as it explores the issues surrounding content and access to content.
In addition to the basic and advanced telecommunications services
all NTCA members offer to their customers, the vast majority also
currently offer or are planning to offer video services. Our members
offer video services to their subscribers utilizing various methods
including traditional CATV coaxial, fiber cable, or Direct Broadcast
Satellite (DBS). However, more and more of NTCA's members are utilizing
the so-called Telco-TV model, providing video service via alternative
broadband infrastructures and technologies, such as Digital Subscriber
Line (DSL) over copper facilities.
Traditional telco entry into the video market is an exciting
prospect for rural Americans. NTCA member companies serve the most
rural segments of this country, where the cost and difficulty of
providing service is the greatest. In many areas, NTCA member companies
are the only providers of video service to these customers. For other
areas, the NTCA member company is a new competitor. Our members are
doing their best to ensure their communities have access to the most
advanced communications services there are.
Small video providers, however, face many obstacles when trying to
obtain video programming from content providers and attempting to enter
new markets. Unreasonable rates, exclusive dealing arrangements, abuse
of market power through non-disclosure agreements, tying practices,
predatory pricing, shared head-end reservations, and prohibitions on
Internet protocol (IP) and analog transport are some of the barriers
faced by small video providers. In addition, small providers lack the
leverage necessary to negotiate a better rate from the video
programmers, forcing consumers in rural America to pay a premium for
I have outlined for your consideration the barriers faced by rural
providers below. It is my hope that your committee will review these
barriers and take into account these situations in any legislative
remedies the committee may be considering.
Non-disclosure agreements must be prohibited. Virtually all
of the contracts negotiated between content providers and large
MSOs include non-disclosure agreements. By restricting the flow
of information, the content providers make it virtually
impossible to establish any semblance of ``market rates.''
Consequently, smaller carriers must enter into their
negotiations at a significant disadvantage, as they possess far
less information than the party with whom they are negotiating.
Automatic escalation clauses must be reasonable. Contracts
for programming typically contain automatic escalation clauses
forcing prices up by a certain percentage each year. Small
video service providers lack the leverage necessary to
negotiate a better rate from the video programmers, forcing
rural Americans to pay a premium for video service.
Tying arrangements must be prohibited. Many networks require
a carrier to take additional networks, as many as 12, in order
to have access to a flagship network. The end result is that
the small carrier must pay a higher price in order to ensure
access to the desired flagship network. This problem is much
more dramatic for a small carrier with limited capital
resources than for a large MSO that can afford to pay for the
Program rates and terms should be non-discriminatory.
Predatory pricing by large incumbent cable operators must be
prohibited. As new providers enter the market, the large
incumbent cable operator may drop its price for service way
below the cost in the areas where it faces competition, making
it impossible for the new entrant to gain a foothold. The
incumbent cable operator is able to afford this practice by
increasing the price for service in areas where there are no
Exclusive programming arrangements must be prohibited. Some
incumbent cable operators use their market power to make it
difficult for competitors to obtain programming. The incumbents
know that without access to certain programming, competitors
cannot make their service attractive to subscribers. Certain
large cable incumbents are known to have entered into exclusive
programming arrangements. Contracts are written in such a way
as to bar new entrants from access to local or regional sports
or news programming. Local subscribers expect programming and
are unlikely to switch to a new provider that is unable to
IP-transport must be allowed. New small Telco-TV/IP-TV
providers are facing discriminatory practices concerning their
ability to get into the video services marketplace and gain
access to video content because some content providers prohibit
their video content from being distributed through DSL or the
Internet. They claim that IP-transport prohibition is required
to prevent the piracy of their content on the Internet. This
concern however, is easily addressed through today's encoding
and encryption capabilities that enable IP-transport to be more
secure than traditional cable transport.
Shared head-ends must be allowed. Many small video companies
have created an opportunity to provide video services to their
communities by pooling their resources and jointly purchasing a
head-end or leasing a head-end from another head-end owner.
Sharing a head-end with several small companies substantially
reduces initial investment and allows small video providers the
opportunity to give consumers an affordable video services
offering. Without the shared head-end option, many rural
consumers would not have video service or would be limited to
direct broadcast satellite service (DBS) without any other
Encryption must not be mandatory for traditional CATV
providers. Some content providers are insisting that small
analog cable TV providers upgrade their systems to support
encryption. Many small rural video providers do not have the
economies of scale and scope to incur the cost of providing
encryption on their networks. Mandatory encryption would result
in such a substantial increase in rates to consumers that it
would effectively put the small company out of the video
business and leave the residents in the community with possibly
only one option for video services--DBS.
I respectfully request that this letter be made a part of the
official permanent hearing record. Thank you for your time and
Michael E. Brunner,
Chief Executive Officer.