[Senate Hearing 109-553]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-553
 
                             VIDEO CONTENT

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                            JANUARY 31, 2006

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation



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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                     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 
                                Counsel
             Lila Harper Helms, Democratic Policy Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on January 31, 2006.................................     1
Statement of Senator Dorgan......................................    44
Statement of Senator Stevens.....................................     1

                               Witnesses

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

                                Appendix

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 
  statement......................................................    57
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


                             VIDEO CONTENT

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                       TUESDAY, JANUARY 31, 2006

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    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 
concept.
    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 
wish.
    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 
very much.

  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 
direct points:
    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 
their needs.
    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 
operator.
    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 
        less.

        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.
    \2\ Id.
    \3\ Id.
---------------------------------------------------------------------------
    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 
operators themselves.
    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.
    Thank you.

    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 
                          ASSOCIATION

    Mr. Polka. 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 video, data, and 
telephone service in smaller markets and rural areas in every 
State. Today, I will focus my remarks on retransmission 
consent.
    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, 
and elsewhere.
    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 
way around.
    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 
companies.
    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 
possible.
    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.
    Thank you.
    [The prepared statement of Mr. Polka follows:]

    Prepared Statement of Matt Polka, President/CEO, American Cable 
                              Association

    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 
you today.

Unique Perspective
    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 
that situation.

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 
themselves.
    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 
consent practices.

Price Discrimination
    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 
members face.
    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 
town.

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 
independent programming.
    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.

Remedies
    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 
        retransmission consent.

        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.

Conclusion
    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.
    Sir?

         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, 
Virginia.
    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 
competitors.
    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.
    Thank you.
    [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 
for compensation.

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 
rate.
    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 
35.
    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. 
44.

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 
Virginia.
    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.

Conclusion
    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.
    [Laughter.]
    The Chairman. Or maybe I want to run through faster than I 
can.
    [Laughter.]
    The Chairman. I apologize.
    Joseph Waz, Vice President of External Affairs at Comcast.
    Mr. Waz?

       STATEMENT OF JOSEPH W. WAZ, JR., VICE PRESIDENT, 
          EXTERNAL AFFAIRS AND PUBLIC POLICY COUNSEL, 
                      COMCAST CORPORATION

    Mr. Waz. Thank you, Chairman Stevens. I'll try to keep it 
moving, as well. And I appreciate the opportunity to be here 
this afternoon.
    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 
testimony today.
    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 
device.
    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-
carriage rules.
    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 
operators.
    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 
ever before.
    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 
cable networks.
    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 
programming choices:

   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 
        programming offerings;

   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 
---------------------------------------------------------------------------
        channel.

   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-
        language channel).

   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 
they purchase.

    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).
---------------------------------------------------------------------------
Program Access
    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 
success.
---------------------------------------------------------------------------
    \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 
economic reasons.
---------------------------------------------------------------------------
    \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 
it available.
---------------------------------------------------------------------------
    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 
that claim.
    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?
Program Carriage
    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 
business.
    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 
networks.
    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, 
page 73.
---------------------------------------------------------------------------
    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.
Conclusion
    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 
distribution options.
    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, 
California.
    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 
transaction.
    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 
an exclusive.
    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 
to competitors.
    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 
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. 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 
exorbitant rates.
    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 
        Programming
    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 
choice.
    Thanks to this increased competition:

   DIRECTV and others have invested billions in new 
        innovations.

   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 
        channels.

   Customer service and choice have improved throughout the 
        video industry.

   Rural customers now have access to the latest products and 
        services.

    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 
ground.
    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 
satellite.
---------------------------------------------------------------------------
    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 
YES.
    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 
        More Markets
    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 
``geographic rationalization.''
    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.

------------------------------------------------------------------------
                                                                   HHI
                          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/
DIRECTV merger.
    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 
described.
    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 
must-have programming.
    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 
public.
    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

Overview
    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 
this situation.

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 
subscribers.
    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 
        Manhattan.

   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 
analysis revealed:

    \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 
---------------------------------------------------------------------------
        revenue.

   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 
        advertising revenue.

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 
mainstream).
    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 
problem.'' \8\
---------------------------------------------------------------------------
    \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 
25, 2005.
    \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. 
Available: http://yelnick.typepad.com/technik/2005/06/
brian_roberts_c.html.
---------------------------------------------------------------------------
    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 
marketplace.

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 
income. \14\
---------------------------------------------------------------------------
    \12\ MB docket 05-192 Application 05-18-2005, Exhibit W.
    \13\ Time Warner Inc. 2004 Annual Report.
    \14\ Id.
---------------------------------------------------------------------------
    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.'' 
\18\
---------------------------------------------------------------------------
    \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 
        independents.

   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 
        mean basis.

    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 
        independent networks.

   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 
        independent networks.

   The average 2005 license fee for Comcast owned networks is 
        121 percent greater than the average 2005 license fee for 
        independent networks.

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 
        independent networks.

        --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 
        network.

        --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.

B. Competition
    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.

C. Diversity
    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 
MVPD.
    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 
network ownership.

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 
networks.
    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 
programming services.

    The Chairman. Well, thank you very much. And we appreciate 
your brevity.
    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 
programming?
    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 
cable company?
    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 
subscribers?
    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 
questions.
    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 
America's Channel?
    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 
this time.
    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 
channel.
    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 
that, even?
    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 
that decision.
    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, 
without conditions.
    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 
mentioned.
    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 
America's consumers.
    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 
crystal ball.
    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-
delivered programming?
    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 
programming?
    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 
cable operators.''
    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 
transacting parties.
    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 
take it?''
    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.
    [Laughter.]
    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.
    [Laughter.]
    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?
    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 
our installers----
    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 
the----
    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 
not.
    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 
carry.
    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.
    Thank you.
    [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 
market.
    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 
between companies.
    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 
1992.
    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 
                                Project
  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 
to competitors.
---------------------------------------------------------------------------
    \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 
competitors.
    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

        Vs=>Cs

    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 
service.
    The Switching Equation:

        Vi-Cin-SW-Cn

    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 
unaffiliated programming.
---------------------------------------------------------------------------
    \6\ GAO 2005 (observing lowest penetration of DBS in urban areas).
---------------------------------------------------------------------------
Implications for Pricing
    Recall the Switching Equation:

        Vi-Cin-SW-Cn

    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 
Vi-Ci<(Vn/U)-(SW*U)-(Cn*U), 
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 
market power.
---------------------------------------------------------------------------
    \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 
help?
---------------------------------------------------------------------------
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 
competitors.
---------------------------------------------------------------------------
    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 
network. \16\
---------------------------------------------------------------------------
    \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 
programming preferences).
---------------------------------------------------------------------------
    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.

Cable Replies
    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 Recommendations
    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 
action.
    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 
demand).
    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 
not emerge.
                                 ______
                                 
     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 
policy issue.
    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 
higher prices.

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 
2002.

Update Section 628, Close the Loophole, and Restore Congressional 
        Intent
    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 
                            Summary Overview

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 
that time.
    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 
competing networks.

Legislative Background
    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\
---------------------------------------------------------------------------
    \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 
attributable interest.
---------------------------------------------------------------------------
    \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 
jeopardized.'' \12\
---------------------------------------------------------------------------
    \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 
Order'').
    \9\ Id. at 12138.
    \10\ Id.
    \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 
technologies.
    (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 
        distributor; or

            (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.

        (3) Limitations.--

          (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 
        event.

          (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 
        MVPD programming;

          (D)  the effect of such exclusive contract on diversity of 
        programming in the multichannel video programming distribution 
        market; and

          (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 
        the broadcaster.

        (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 
        (i)(5)(B).

        (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 
        programming vendor.

        (7) The term ``MVPD'' shall mean multichannel video programming 
        distributor.

    (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 
such Act.]
                                 ______
                                 
                              Dakota Central Communications
                                                   January 30, 2006
Hon. Ted Stevens,
Chairman,

Hon. Daniel K. Inouye,
Co-Chairman,

Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

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 
opportunity.
    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 
broadband access.
    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 
arrangements.
    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 
accustomed to.
    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.
        Sincerely,
                                           Keith A. Larson,
                                                   General Manager.
                                 ______
                                 
                                      The Sportsman Channel
                                                   January 31, 2006
Hon. Ted Stevens,
Chairman,

Hon. Daniel K. Inouye,
Co-Chairman,

Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Chairman Stevens, Co-Chairman Inouye, and Members of the 
Committee:

    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, 
``Yes!''
    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 
tactics.
    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.
                               Attachment

          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 
providers.
    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.
                                 ______
                                 
                                    Castalia Communications
                                                   February 2, 2006
Hon. Ted Stevens,
Chairman,

Hon. Daniel K. Inouye,
Co-Chairman,

Senate Committee on Commerce, Science, and Transportation,
Washington, DC.
 Re: Senate Commerce Committee January 31 Hearing on Video 
                                                    Content

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 
DISH Network.
    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 
imaginable.
    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 
American values.
    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.
        Sincerely,
                                          Luis Torres-Bohl,
                                                         President.
                                 ______
                                 
                                                       NTCA
                                                   January 30, 2006
Hon. Ted Stevens,
Chairman,

Hon. Daniel K. Inouye,
Co-Chairman,

Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

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 
video service.
    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 
        extra networks.

   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 
        competitors.

   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 
        provide it.

   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 
        competitive offering.

   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 
consideration.
        Sincerely,
                                        Michael E. Brunner,
                                           Chief Executive Officer.

                                  
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