[Senate Hearing 109-758]
[From the U.S. Government Publishing Office]
S. Hrg. 109-758
VERTICALLY INTEGRATED SPORTS PROGRAMMING: ARE CABLE COMPANIES EXCLUDING
COMPETITION?
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
DECEMBER 7, 2006
__________
Serial No. J-109-124
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
Michael O'Neill, Chief Counsel and Staff Director
Bruce A. Cohen, Democratic Chief Counsel and Staff Director
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 1
WITNESSES
Baller, James, Senior Principal, The Baller Herbst Law Group, PC,
Washington, D.C................................................ 8
Cohen, David L., Executive Vice President, Comcast Corporation,
Philadelphia, Pennsylvania..................................... 4
Cooper, Mark, Director of Research, Consumer Federation of
America, Washington, D.C....................................... 6
Goodman, John, President, Coalition for Competitive Access to
Content, Washington, D.C....................................... 2
Salinger, Michael, Director, Bureau of Economics, Federal Trade
Commission, Washington, D.C.................................... 9
SUBMISSIONS FOR THE RECORD
Baller, James, Senior Principal, The Baller Herbst Law Group, PC,
Washington, D.C., prepared statement........................... 30
Cohen, David L., Executive Vice President, Comcast Corporation,
Philadelphia, Pennsylvania, prepared statement................. 34
Cooper, Mark, Director of Research, Consumer Federation of
America, Washington, D.C., prepared statement.................. 56
Goodman, John, President, Coalition for Competitive Access to
Content, Washington, D.C., prepared statement.................. 72
Salinger, Michael, Director, Bureau of Economics, Federal Trade
Commission, Washington, D.C., prepared statement............... 76
VERTICALLY INTEGRATED SPORTS PROGRAMMING: ARE CABLE COMPANIES EXCLUDING
COMPETITION?
----------
THURSDAY, DECEMBER 7, 2006
United States Senate,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 10:03 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Arlen
Specter, Chairman of the Committee, presiding.
Present: Senator Specter.
OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM
THE STATE OF PENNSYLVANIA
Chairman Specter. Good morning, ladies and gentlemen. The
Judiciary Committee will now proceed with a hearing on the
subject of whether consumers are being fairly treated by owners
of sports franchises and cable and satellite companies with the
overriding question as to whether activities now being
undertaken violate the antitrust laws or whether the antitrust
laws ought to be amended to provide fairness to the consumers.
The backdrop is America's love affair, America's
infatuation with sports, a national addiction to which I
include myself, and we witness a rising cost of people watching
pay television on cable television.
We had a hearing earlier on the implications of the
activities of the National Football League on their practices,
and today we take up the question as to vertical integrated
sports programming, whether the consumers are being unfairly
treated.
When we talk about integration, there are quite a number of
situations where the cable companies own sports franchises--
Cablevision with the Knicks and the Rangers and Cox with the
Padres and Time Warner with the Braves and Comcast with the
Flyers and '76ers and Charter with the Seattle Seahawks and the
Portland Trail Blazers. And the issue is whether the failure to
provide programming to competitors is a violation of the
antitrust laws, with the Seventh Circuit decision in MCI
Communications v. AT&T holding that Section 2 of the Sherman
Act is violated if the so-called four-part test is met under
essential facilities.
The Congress legislated in 1992 to prohibit vertically
integrated companies, those that have ownership in programming,
sports programming specifically our hearing today, from
refusing to make their cable contact available to competitive
multi-channel video programming. And the Congress applied this
only to programming delivered via satellite. It is questionable
whether it ought to be applied to programming delivered by
cable, terrestrial transmission as well.
The Commerce Committee considered a change in that law, and
at least as of this time, Congress has not moved in that
direction but perhaps we should. There are some strong
arguments for moving in that direction.
In July of this year, the FCC required Time Warner and
Comcast to provide competitors with access to their sports
programming as a condition to their acquisition of the assets
of Adelphia. But the FCC did not impose this requirement on
Comcast SportsNet Philadelphia, and one of our points of
interest would be why the distinction there.
We do not have anybody from Cablevision with us today,
which I think is unfortunate. We gave Cablevision a lot of
notice, and no reason was advanced why Cablevision could not
cooperate with this Committee. And when we review the matter,
seek any further explanation at our next hearing, people should
know that the Committee does have the subpoena power. I do not
want to lecture to the choir here, preach to the choir. All of
you have come in on our invitation. But we do expect
cooperation from companies who are programming and who are
undertaking activities which affect consumers, affect the laws
of the United States within the jurisdiction of the Judiciary
Committee. We ought to have the cooperation from those folks
coming forward.
We have a very distinguished panel this morning, and our
lead witness is Mr. John Goodman, who is President of the
Coalition for Competitive Access to Content. He was Executive
Director of the Broadband Service Providers Association. He had
operating roles in Astound Broadband and also served with
Motorola, holds an MBA from Northwestern University and a
bachelor's degree from Bethel College in psychology.
Thank you for joining us, Mr. Goodman, and we look forward
to your testimony.
STATEMENT OF JOHN GOODMAN, PRESIDENT, COALITION FOR COMPETITIVE
ACCESS TO CONTENT, WASHINGTON, D.C.
Mr. Goodman. Good morning. I want to express my
appreciation to you and other members of the Judiciary
Committee for the opportunity to participate today. I am
pleased to represent the Coalition for Competitive Access to
Content. It is a very diverse group of companies, including
DBSs, BSPs, telco entrants, trade associations, and consumer
groups that are all committed to expanded competition. These
member organizations disagree on many public policy issues,
but, nonetheless, they have come to the same conclusion
regarding program access reform: assured access to content,
particularly regional sports programming, is essential to the
development of high-capacity networks that provide not only
video but broadband competition.
Congress has long recognized the direct linkage between
access to programming and additional video competition. In
1992, Congress did promulgate the original program access rules
that required that video content owned by cable operators be
made available to new entrants on fair and nondiscriminatory
terms.
Access to content today is every bit as important as it was
then. The FCC reviewed the application of certain program
access rules in 2002 and concluded they were still essential,
and they extended them for 5 years. More recently, Senators
Kohl and DeWine have sponsored several valuable GAO studies
that document both the need for more wireline competition and
the relationship between access to content and the ability to
compete. Regulators reviewing media mergers, as you referenced,
also came to the same conclusion. Proceedings for DirecTV/
NewsCorp and for Comcast, Time Warner, and Adelphia
transactions were both approved with program access conditions
both related to sports and other programming. While we applaud
the FCC's vigilance in this area, the CA2C believes that a
statutory mechanism--not piecemeal adjudication--is necessary
and justified to assure access to content.
The current level of vertical integration continues to be
significant and expanding. Incumbent cable operator ownership
of professional sports franchises and sports programming has
actually expanded since 1992. In addition, a substantial
portion of current vertical integration is concentrated in
programming that has the highest viewership and, therefore,
value. The CA2C has attempted to document the current level of
vertical integration. As we submit some summary profiles today,
we ask the Committee to feel free to share this information
with all parties involved so that this information can be
validated, corrected, and expanded as may be appropriate. And I
have these here if you want to see them.
Unfortunately, Congress's program access provisions,
written in 1992, have not kept pace with today's technology and
market structure. Cable operators can control exclusive rights
to programming delivered over their headends by fiber as
opposed to satellite. This is called the ``terrestrial
loophole.'' That is why a DBS subscriber in Philadelphia cannot
receive Comcast's Sports Network with Flyers, Phillies, and
'76ers games. It is why a DBS subscriber in San Diego cannot
receive Cox's sports network for Padres games. The FCC has
looked at this issue several times and concluded it has no
authority to deal with terrestrially delivered content unless
there are changes to the current law.
Accordingly, the CA2C provided input for the ``Sports
Freedom'' provisions in the telecommunications legislation
introduced by Senators Stevens and Inouye. These provisions
closed the terrestrial loophole and enhanced the framework
related to sports programming by, among other things, applying
binding arbitration proceedings to certain disputes. These
provisions were similar to the conditions created in the
DirecTV/NewsCorp merger.
We supported new legislation because it will have equal
applications to all MVPDs, and it will sustain the right market
structures to promote competition. We should not rely on
mergers, acquisitions, or other market events to address these
industry-wide matters. Moreover, the FTC and the FCC should be
directed and empowered to deal with anticompetitive issues. In
short, we do not seek for Congress to establish an entirely new
legal framework of economic regulation or price controls, nor
should particular players in the market be singled out. Rather,
a rational and measured updating and extension of the rules is
in order.
Opponents to program access legislation have publicly
acknowledged that the existing rules have been effective within
their current application. However, they now oppose program
access rules. They claim these rules are not needed because
current markets are fully competitive and that there are
limited examples of abuse or denied access. But the market
reality of key programming, especially local and regional
sports, is that it is concentrated in the hands of a few cable
operators, and that undermines this view.
Even incumbent cable operators have asked for conditions
guaranteeing access to content. The DirecTV/NewsCorp merger was
the first time that an incumbent video provider faced a
potential threat of some other network operator having control
of essential content. Suddenly, they were asking for merger
conditions that sounded a lot like the standards CA2C members
have promoted to bring video competition to the market.
I want to again thank you for this opportunity to be with
you this morning, and I look forward to your questions.
[The prepared statement of Mr. Goodman appears as a
submission for the record.]
Chairman Specter. Thank you very much, Mr. Goodman. We now
turn to Mr. David Cohen, Executive Vice President of Comcast
Corporation; had been a partner and Chairman of the firm of
Ballard Spahr Andrews & Ingersoll, one of the largest law firms
in the country; served with great distinction as chief of staff
to Mayor Ed Rendell of Philadelphia; bachelor's degree from
Swarthmore and University of Pennsylvania Law School graduate
summa cum laude.
Thank you for coming in today, Mr. Cohen, and the floor is
yours.
STATEMENT OF DAVID L. COHEN, EXECUTIVE VICE PRESIDENT, COMCAST
CORPORATION, PHILADELPHIA, PENNSYLVANIA
Mr. Cohen. Thank you very much, Mr. Chairman, and thank you
for the opportunity to testify today on vertical integration in
sports programming. I would like to highlight three main points
from my written testimony, which I understand will be made a
part of the record: first, vertical integration is commonplace
in commerce and can have real consumer benefits; second, there
has been a dramatic decrease in vertical integration in cable;
and, third, competitors to cable are getting access to all the
programming they need, so there is no longer a need for special
Government rules on program access. Let me briefly expand.
When Congress passed the 1992 Cable Act, it was concerned
that cable operators that owned programming networks would have
the ability and incentive to withhold that programming from
competing distributors, particularly the then-fledgling
satellite operators. So Congress told the FCC to adopt special
program access rules to ban exclusivity and ensure that all
satellite-delivered, vertically integrated cable networks are
made available to all competitors.
Back then, many cable operators were vertically integrated.
They had an attributable financial interest in almost 60
percent of the 68 or so national cable networks then in
existence. But as our industry grew and as we built more and
more channel capacity the market for programming has exploded.
Today, of the more than 530 national cable networks, the FCC
reports that cable operators have an interest in approximately
20 percent of them, although our data shows that number is
closer to 12 percent. By any measure, though, vertical
integration today is substantially less than what it was in
1992.
I would also like to stress that Comcast is among the least
vertically integrated companies in the entertainment industry.
We have an interest in a total of only 22 networks. Half of
those carry sports, and eight of those would be considered
regional sports networks. On a typical cable system, we are
affiliated with only about 7 percent of the full-time networks
that we carry. In comparison, our biggest competitor today,
DirecTV, is owned by NewsCorp, which has a financial interest
in over 30 of the networks that it carries--26 of those are
sports networks, including 21 regional sports networks. The
number of affiliated networks that DirecTV carries is,
therefore, almost twice as many as Comcast carries.
In today's marketplace, as I explain in my written
testimony, there is simply no justification for the FCC's
current program access rules. Those rules were an unusual
exception to a well-established principle of law and economics:
that vertical integration can have very positive pro-consumer
effects. Vertical integration allowed cable to create
innovative programming when others would not. This led to
valuable networks like CNN, the Discovery Channel, TV One, and
C-SPAN, among others. Those investments helped to make cable
the preferred choice of American viewers.
Let me give you another specific example that I know is
near and dear to the Chairman's heart and that is near and dear
to my heart. Sports fans in our hometown of Philadelphia had to
settle for 2 second-rate regional sports networks until Comcast
acquired the Flyers and '76ers and bought out those two
networks in the mid-1990's. We then created Comcast SportsNet
Philadelphia, which is exempt from the program access rules
because it is terrestrially delivered. Congress permitted this
limited exclusivity for a reason--not to prevent competition
but because it did not want to deter investment in high-quality
local programming. In fact, Congress wanted to make sure that
it would continue to encourage such investments. In specific
reliance on this exemption, Comcast has since invested over
$450 million to build up SportsNet to the network that it is
today. And although we make Comcast SportsNet Philadelphia
available to every one of our terrestrial competitors,
including Verizon and RCN, we do not make it available to our
DBS competitors. However, in the seven other markets where
Comcast has subsequently created regional sports networks, we
make them available to all of our terrestrial and satellite
competitors.
We think that some exclusivity of programming can be a good
thing, because it permits competitors to distinguish themselves
from one another. And I realize that the satellite providers
are unhappy that they cannot provide SportsNet Philadelphia to
their customers. But I will admit to you that we are a little
unhappy that DirecTV has exclusive rights to the NFL Sunday
Ticket and that we cannot provide this service to our cable
customers.
The simple fact is that exclusivity can't simultaneously be
a good thing when our competitors have it but a bad thing when
we have it. It is one or the other.
So thank you for the opportunity to testify today. I want
to conclude by saying that it is past time to repeal the
program access rules, especially the ban on exclusivity that is
set to expire next year. Congress can reasonably rely upon the
antitrust laws to guard against any problems here, and I will
be happy to expand upon that in the question-and-answer
session.
Thank you.
[The prepared statement of Mr. Cohen appears as a
submission for the record.]
Chairman Specter. Thank you, Mr. Cohen.
Our next witness is Dr. Mark Cooper, Director of Research
for the Consumer Federation of America, also President of
Citizens Research, and a fellow at the Stanford Center on
Internet and Society; the author of four books; undergraduate
degree from CCNY, master's from University of Maryland, and a
Ph.D. in sociology from Yale.
We appreciate your coming in today, Dr. Cooper, and look
forward to your testimony.
STATEMENT OF MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER
FEDERATION OF AMERICA, WASHINGTON, D.C.
Mr. Cooper. Thank you, Mr. Chairman, and I appreciate the
opportunity to appear today to testify on one of the key
aspects of the continuing failure of competition to protect the
consumer in the cable industry. This continuing market failure
is evident in rising prices for monthly service, discrimination
in carriage of programming by cable operators, refusal to offer
critical marquee programming to competing delivery systems, and
anticonsumer and anticompetitive bundling.
Entry into the industry remains extremely difficult from
both the content and distribution sides. Satellite has been
unable to discipline cable market power, and it appears that
the entry of telephone companies is equally ineffective.
Monthly prices for basic and expanded service have just about
doubled since the passage of the Telecommunications Act of
1996. Just last week, the two largest theoretical competitors
in the Northeast each upped their rates dramatically, by 4 to 5
times the rate of inflation.
Intermodal competition and a cozy duopoly is not enough to
discipline the abuse of market power in this sector. Every
traditional measure of market structure--concentration ratios,
the Lerner index, Tobin's q ratios--indicates the existence of
market power in the cable industry. This market power stems
primarily from a lack of competition at the point of sale. The
market exhibits not only the classic barriers of entry, such as
high capital costs, specialized inputs, and economies of scale,
but cable operators have built barriers to entry with their
regional concentration, vertical integration, and bundling
strategies.
The topic of this hearing, the withholding of vital
geographically specific marquee programming from alternative
distribution platforms, is one of the elements in a tightly
woven web of business practices that have dampened competition
in the sector.
The incessant reduction in number of cable operators and
their increasing size has led to the aggregation of cable
systems into large regional clusters. Market power at the point
of sale to the public and monopsony power at the point of
purchase from programmers combine to undermine competition.
Large MSOs have come to dominate specific regions of the
country. They have moved into regionally specific sports
programming that is itself a monopoly. They embed this
programming in huge bundles, forcing consumers to pay for it
all. They then deny access to this programming to competing
distributors or make it available on anticompetitive and
unfriendly terms and conditions.
Their monopsony power is grounded in their market power at
the point of sale, and the huge regional clusters and
concentrated national market created over the past decade gives
them the ability to secure control over this regionally
specific programming. Since the programming is regional, it is
rarely distributed through terrestrial means, subject to the
so-called terrestrial loophole. Therefore, the programming can
be withheld from competing distribution.
As cable operators gain control of large contiguous
geographic areas, they also are more able to obtain exclusive
rights to programming they do not own. Restricting the flow of
programming to alternative distribution platforms blunts
competition at the point of sale. If the Congress intends to
rely on market forces to discipline the market power of cable
operators, it will have to break the stranglehold that the
handful of vertically integrated, horizontally concentrated
firms use to dominate the sector.
Antitrust-type structural remedies that apply to the supply
side and are very much in the tradition of antitrust and were
not well crafted in the 1992 and 1996 Acts including the
following: Congress should impose a strict horizontal limit on
cable ownership to diminish cable's monopsony power in the
programming market; Congress should ban the abuse of vertical
leverage, both by closing the terrestrial loophole and adopting
an effective policy to prevent discrimination in carriage;
Congress should prohibit contractual anticompetitive tying
arrangements by dominant media programmers that force
distributors to carry all of a network's or all parent owner's
cable channels just to receive the small number that the
consumers want.
We also think Congress should require cable operators to
make available to consumers on an unbundled basis all
programming that they choose to bundle. This will enable the
demand side of the market to discipline the cost of programming
and the size of their cable bill.
I appreciate the opportunity to testify and look forward to
any questions. Thank you.
[The prepared statement of Mr. Cooper appears as a
submission for the record.]
Chairman Specter. Thank you very much, Dr. Cooper. Without
objection, we will admit into the record the statement of
Senator Herb Kohl, who is Ranking Member of the Antitrust
Subcommittee.
Our next witness is Mr. James Baller, Senior Principal of
Baller Herbst Law Group, a firm specializing in
telecommunications; led the successful challenge to Virginia's
and Missouri's barriers to municipal entry into the
telecommunications field; graduate of Dartmouth and Cornell Law
School.
We appreciate your being with us today, Mr. Baller, and the
floor is yours.
STATEMENT OF JAMES BALLER, SENIOR PRINCIPAL, THE BALLER HERBST
LAW GROUP, PC, WASHINGTON, D.C.
Mr. Baller. Thank you very much, Chairman Specter. I
appreciate your invitation to testify, and I am honored to be
here today.
Since 1992, I have provided legal services to dozens of
public and private providers of competitive communications
services, and I have assisted several national and State
associations that support such endeavors.
Over the years, I have seen at first hand a wide range of
practices through which established cable operators have sought
to thwart competition from my clients and similarly situated
new entrants. At a hearing in this room in February of 2004, we
presented documentation of dozens of such practices. Many are
still occurring, and they need to be curbed once and for all. I
applaud you, Chairman Specter, for focusing on programming
access issues at this hearing, and I hope that the Committee
will focus on some of the other practices in the year ahead.
In my testimony, I would like to focus on three points.
First, I believe it is critically important not to treat
programming access just as a cable entertainment issue, but to
also see it as an infrastructure development issue that is
essential to America's local, regional, and global
competitiveness.
As the Committee knows, America's international ranking in
broadband deployment has fallen precipitously over the last
decade, from first in the world in the mid-1990's to as low as
21st today in some studies. The U.S. is also falling
increasingly behind the leading nations in access to high-
capacity Next Generation Networks and in cost-per-unit of
bandwidth, where we are now ranked sixth, according to the
International Telecommunications Union. These are alarming
trends because virtually everything that we do at home, at the
office, and at play will increasingly be done over broadband
platforms in the future. As a result, the nations that lead the
way in developing Next Generation Networks will be the ones
that are most successful in the emerging information-based
global economy ahead. I have given the Committee a handout that
documents this point in greater detail.
A century ago, when electricity was the must-have
technology of the day, the private sector alone could not
electrify America quickly enough to meet demand, particularly
in rural areas. Recognizing that electrification would
significantly enhance economic development and quality of life,
thousands of communities in underserved or unserved areas
stepped forward to form their own electric utilities. Most that
did thrived, while many that waited for the private sector to
get around to them, in some cases up to 50 years, did not.
Today the history of electrification is repeating itself in
the communications area, and many communities across the United
States are ready, willing, and able to do their part to help
America develop high-bandwidth Next Generation Networks as
rapidly as possible. In this, they want to stay abreast of the
most progressive municipalities abroad, and in my second
handout, I have presented information about what is happening
in some of the other leading cities in the world.
If we are to succeed as a Nation in developing Next
Generation Networks, these networks must be economically
viable. To do that, they must be able to provide all services
that they are capable of providing, including video
programming. And to deny access to key video programming has
implications not just in the entertainment field but in the
development of these systems.
Second, my second point is that the FCC has over the years
supported the safeguards in the 1992 Cable Act. I completely
agree with Mr. Goodman's testimony that it is essential that
these safeguards be preserved and extended. If Congress wants
to retain a competitive environment in the cable communications
field, it is essential that all entities have access to
critical programming. I can cite many examples where that need
still exists today and, in any event, it is important to
prevent such things from happening in the future. We cannot
allow established cable operators to create or remove access to
programming at their discretion.
My last point is that when we look at antitrust remedies,
it is important to recognize that for small to medium-sized
entities, antitrust remedies are illusory. The time, cost,
burdens, and risks involved make antitrust remedies essentially
worthless to small operators. What we need are clear,
unambiguous, enforceable standards that supply and provide
sufficiently onerous multiple damages, penalties, and
attorneys' fees to deter noncompliance. Also, we need help from
the major agencies to step in and provide service to provide
protection that small providers cannot provide for themselves.
Thank you very much, and I look forward to answering
questions that you may have.
[The prepared statement of Mr. Baller appears as a
submission for the record.]
Chairman Specter. Thank you, Mr. Baller.
Our final witness on the panel is Mr. Michael Salinger,
Director of the FTC's Bureau of Economics, currently on leave
from Boston University's School of Management, where he is a
professor of economics. He previously taught at MIT, Columbia,
and served as an economist with the FTC's Antitrust Division; a
magna cum laude graduate of Yale and a Ph.D. from MIT in
economics.
Thank you, Mr. Salinger, for your contribution here, and we
look forward to your testimony.
STATEMENT OF MICHAEL SALINGER, DIRECTOR, BUREAU OF ECONOMICS,
FEDERAL TRADE COMMISSION, WASHINGTON, D.C.
Mr. Salinger. Mr. Chairman, my name is Michael Salinger. I
am, as you said, Director of the Bureau of Economics at the
Federal Trade Commission. I am pleased to appear before you to
present the Commission's testimony on the FTC investigation
earlier this year into the acquisition by Comcast and Time
Warner Cable of Adelphia's cable assets and into related
transactions in which Comcast and Time Warner Cable swapped
various cable systems. After a thorough investigation, the
Commission closed the matter without taking any action. The
Commission's decision not to file an antitrust case was
explained in a statement by Chairman Majoras and Commissioners
Kovacic and Rosch and in a second statement, concurring in part
and dissenting in part, by Commissioners Harbour and Leibowitz.
I have submitted a written statement which represents the
testimony of the Commission. My oral presentation and answers
to questions represent my views and not necessarily the views
of the Commission or any of the individual Commissioners.
Neither the acquisition of the Adelphia assets by Time
Warner Cable and Comcast nor the system swaps between Time
Warner and Comcast represented the acquisition of a direct
competitor. In other words, this was not the kind of
transaction that gives rise to most of the merger challenges
under the antitrust laws. Moreover, several aspects of the
transaction were likely to be beneficial to competition and to
increase economic efficiency. Cable systems within a
metropolitan area can be complementary to each other, as
consolidation can make it possible to achieve economies of
scale in creating a second wireline communications network that
competes with the network of the incumbent local exchange
company.
To be sure, the transaction did raise some competitive
concerns, which the staff spent 7 months investigating. The
most important of these was that a cable operator with a
sufficiently large share of a metropolitan area might enter
into an exclusive contract with a regional sports network, or
RSN, that would make the RSN unavailable over competing media.
Using economic analysis, the staff concluded that the
transaction did not create an incentive to enter into such an
exclusive agreement.
Of course, economics is an inherently imprecise discipline,
so one must consider the possibility that developments could
run counter to the staff's prediction. If that were to happen,
however--that is, if Comcast or Time Warner Cable do enter into
exclusive agreements with RSNs--those agreements would
themselves be subject to antitrust review.
Exclusive agreements are not per se violations of the
antitrust laws. Even if we knew with certainty that exclusives
would be a likely result of the merger, the Commission would
have to evaluate whether they are harmful to competition. Such
a finding would require a showing of net harm to consumers, not
just harm to competitors. That is a very hard determination to
make without knowing the details of the agreement to be
considered. In my opinion, the opportunity to revisit the issue
if it does, in fact, arise was an important consideration in
the Commission's decision.
Thank you for your attention. I would be pleased to respond
to any questions.
[The prepared statement of Mr. Salinger appears as a
submission for the record.]
Chairman Specter. Thank you, Mr. Salinger.
We have a vote, which was just started a few minutes ago,
and I am going to recess the hearing for a short time to go
vote and come back, and we will then begin the questions and
answers.
Thank you. We stand in recess.
[Recess 10:35 a.m. to 11:05 a.m.]
Chairman Specter. The hearing will resume.
Mr. Baller, you say that the antitrust laws are worthless
as remedies. Would you amplify your view on that a bit?
Mr. Baller. Yes, I would be glad to, Chairman Specter. For
a small company encountering anticompetitive activity, the cost
involved--hiring expert testimony, engaging in time-consuming
and expensive discovery, the burden involved, the--
Chairman Specter. You are talking now about private right
of action and private litigation--
Mr. Baller. That is correct.
Chairman Specter. Seeking treble damages or injunctive
relief?
Mr. Baller. That is correct. If--
Chairman Specter. But how about if Mr. Salinger and the FTC
comes swooping in and provides these fancy economists with
their extraordinary pedigrees and high- priced lawyers to bring
justice to clients.
Mr. Baller. We would love for that to occur.
Chairman Specter. Then the antitrust laws would be
effective, wouldn't they?
Mr. Baller. Yes, they would. They would be more effective
but not entirely effective because, as Mr. Salinger said, the
demonstration--
Chairman Specter. Why not entirely effective? They get
equitable relief. They get court orders prohibiting the
inappropriate conduct. They bring you lots of money in treble
damages. What more do you want?
Mr. Baller. The showing of harm to competition as
distinguished to competitors makes the antitrust showings very
difficult and very complex and time-consuming, even if a
major--
Chairman Specter. To prove the case.
Mr. Baller. Correct.
Chairman Specter. But the cases can be proved.
Mr. Baller. But over what period of time? Assuming that a
small competitor--
Chairman Specter. What would you suggest as a preferable
remedy?
Mr. Baller. Well, I suggest, No. 1, strengthening the
antitrust laws. I am not suggesting that that alternative not
occur.
Chairman Specter. Move to No. 2. You have already told us
all the reasons the antitrust laws are not sufficient.
Mr. Baller. I believe that, in addition to strengthening
the antitrust laws, we should also have specific standards that
are easy to understand. For example, closing the terrestrial
loophole is very easy to understand. That can be effectuated.
We can remove exceptions that make it difficult to apply and
make the criteria more absolute, clear, give the Federal Trade
Commission, the Department of Justice, or the Federal
Communications Commission clear mandate and a sense of the
Congress that it seeks to protect the interests of small
competitors as well as the very large competitors.
Chairman Specter. Mr. Salinger, the 1992 legislation
enacted by Congress dealt only with satellite transmission and
not with cable, and the proposal was made earlier this year,
taken up by the Commerce Committee, which would have primary
jurisdiction on that issue, they did not pursue that, or at
least not at the present time.
What reason would there be for not including cable
terrestrial transmission under the prohibitions of the 1992
Cable Act?
Mr. Salinger. Senator, you are referring to a provision
that relates primarily to FCC regulations, so in general, we
would defer to our sister agency for their opinion on that. But
the specific answer to your question I do not know.
Chairman Specter. Well, the FTC has considerable expertise.
You have blue-ribbon credentials: a Ph.D. in economics from
MIT, magna cum laude from Yale. This is an antitrust issue. It
involves a provision that Congress prohibited vertically
integrated cable companies from refusing to make their contact
available to competitors. And it applied only to satellite
transmission and not to cable or terrestrial transmission.
What is the rational basis for that distinction?
Mr. Salinger. As a matter of economics, it is hard to
understand why there is any rational basis for distinguishing
between terrestrial distribution and satellite distribution.
Chairman Specter. Well, would you recommend that Congress
change it to include cable and terrestrial distribution?
Mr. Salinger. Well, I think they should be treated
consistently. As to whether the prohibition on exclusivity is
appropriate raises more general antitrust issues, which are not
so clear-cut.
Chairman Specter. So you are raising a question about
whether the prohibition really ought to be continued. But if
you did continue the prohibition, you say there is no
distinction as far as your economics training would say between
satellite and terrestrial.
Mr. Salinger. Yes, that is right.
Chairman Specter. Mr. Cohen, I notice you having some body
language in opposition.
[Laughter.]
Chairman Specter. You can expand on that.
Mr. Cohen. I was even going to volunteer to comment on
that, although I--
Chairman Specter. I was coming to you in any event.
Mr. Cohen. I figured I was not going to escape here
unscathed.
Chairman Specter. Because you already said there is good
reason for it, so tell us the reason.
Mr. Cohen. First of all, I would say this: I want to second
at least the implication of Mr. Salinger's comment that if we
are going to look at this, I actually think the fresh look
should be whether there should be any prohibition of satellite
or terrestrial delivery. I believe that a rigorous economic
analysis of the competitive situation today would lead to the
conclusion that the prohibition on exclusive arrangements with
respect to satellite-delivered programs should disappear, in
which case you would have your uniform treatment between the
two.
I do not want to compare my economics credentials to Mr.
Salinger's. I only majored in economics at Swarthmore College.
Chairman Specter. Wait, I do not understand that. You were
summa. He was only magna.
[Laughter.]
Mr. Cohen. He actually has a degree in economics. I do not.
Chairman Specter. I thought ``summa'' covered everything.
Mr. Cohen. Well, I will not say that. And, of course, he
has Yale on his resume, and I am missing that on mine, as you
have frequently observed in the past.
Chairman Specter. Having frequented both Yale and Penn, you
do not have to take second place in any respect.
Mr. Cohen. Well, I appreciate that, and so will Andy
Gutman. But there was a rational justification for the
distinction between satellite-delivered programming and
terrestrially delivered programming in 1992, and that is that
terrestrially delivered programming was viewed by the Congress
as being a more limited mode of distribution, a mode of
distribution that would be primarily used for local
programming. And there was a considerable legislative record on
this distinction and a considerable record, by the way,
supported by economists at the time that there would be a risk
of anticompetitive, anticonsumer, I guess I should say,
activity if you were to discourage investments in high-quality
local programming. And it, therefore, is a very conscious
decision to say we recognize that we are going to come in as
the Government and interfere with the market here. And so, in
interfering with the market, let's interfere with the market at
the level where we have the greatest concern, which is the
creation of national cable programming that needs to be
available to this fledgling industry that we are trying to
stimulate and we are trying to develop and we are trying to
encourage the development of. But let's not get in the way of
investments that cable companies might be prepared to make in
locally delivered content, which would presumably be delivered
over a terrestrial network.
I would say that Congress's judgment here proved not to be
terribly mistaken. This is not an exemption--
Chairman Specter. Congress's judgment was not terribly
mistaken?
Mr. Cohen. That is right.
[Laughter.]
Mr. Cohen. Well, I might quibble with the need to have had
the--
Chairman Specter. Do you know that that is the nicest thing
that has been said about Congress all week?
[Laughter.]
Chairman Specter. Go ahead.
Mr. Cohen. In fact, if we were sitting here today and there
were 67 terrestrially delivered networks that were being
provided exclusively on cable, and all around the country
satellite or wireline overbuilders were having difficulty
gaining access to all of this content, then I think there would
be a legitimate question about this. But the examples of where
terrestrially delivered programming is not available to
competitors are so few and so far between that it is hard for
me to accept that a credible, independent economist could make
the case that there is any significant impairment to
competition that is taking place as a result of the terrestrial
exemption today.
Chairman Specter. Mr. Cooper, I will come to you in just a
minute because I know you want to comment. But I want to follow
up in a couple of regards with Mr. Cohen before moving on.
Comcast has made available to Verizon Philadelphia
SportsNet, correct?
Mr. Cohen. That is correct.
Chairman Specter. Why did you do that on a voluntary basis?
Mr. Cohen. I think it is a question of looking at our
business and looking at the business model, and we have
consistently said in testimony before this Congress--
Chairman Specter. I commend you for doing it. I think it is
very good because it helps the consumers. They do not have to
make a choice based on Philadelphia SportsNet. But there is a
competitive disadvantage to you to give that to Verizon, a
competitor.
Mr. Cohen. That is correct.
Chairman Specter. And that obviously prompts the question
as to why you did it.
Mr. Cohen. We made an assessment based on the overall
balance of the expected size and scope of that competitor for
reasons that we can discuss in another hearing. We do not
believe Verizon is, for example, going to be providing service
in the city of Philadelphia anytime in the near future because
their business model is not to roll out their service in the
city.
Chairman Specter. Do you think there are really not going
to be real competitors to Comcast?
Mr. Cohen. No, they are going to be a competitor in the
Philadelphia suburbs and in South Jersey and in wealthier
communities surrounding the city of Philadelphia, but not in
the city of Philadelphia per se. But, more importantly, we--
Chairman Specter. But Comcast relies upon the areas beyond
the city of Philadelphia very heavily.
Mr. Cohen. That is correct. We have a number of ways in
which we competitively differentiate ourselves from our
competitors. Comcast SportsNet in Philadelphia is one of those
methods. It is not the exclusive method. The bottom line here
is that we have consistently represented in Congress and in
front of the FCC that it is not our intention to abuse the
terrestrial exemption--by the way, it is an exemption, not a
loophole, that we would make the content available to wireline,
facilities-based competitors, and that we do so in all of our
markets. And giving access to Comcast SportsNet to Verizon was
consistent with that position that we have taken.
What we say is that we have not made it available to our
satellite competitors because they aggressively distinguish
themselves competitively from us with their exclusive content.
And what is sauce for the goose is sauce for the gander. If
exclusive content on DirecTV, and in particular, the NFL Sunday
Ticket, which is the single most valuable piece of exclusive
sports content in the United States of America today--and if
that is permissible, if that is acceptable, if that is not a
problem for the United States Congress, for the Federal
Communications Commission, with all due respect for everyone on
this panel, then it should also be acceptable that in one
market in this country we have the right to competitively
differentiate ourselves with a network that we invested over
$450 million in building in reliance on an exemption created by
this Congress. And I would ask: What is the investment that
DirecTV has made in sports programming around the country? What
is the investment that DirecTV or EchoStar has made in any kind
of programming around this country? What is the investment that
they have made in jobs in Philadelphia? What is the investment
that they have made in the community in Philadelphia? The
investments that Comcast has made in programming, in jobs, in
community development, are the pro-competitive, pro-consumer
benefits that you get from the terrestrial exemption and from
the structure of the program access rules under the status quo.
Chairman Specter. Do you feel strongly about that?
[Laughter.]
Mr. Cohen. I feel passionately about it.
Chairman Specter. That is a big subject, and I intend to
come back to it because that involves the first hearing we had
on NFL, and I want to move through the subject of integration
and cable, but that is very much on the agenda for today. But
it comes in Phase 2.
As to Comcast making your sports programming available to
other cable companies, do you do that?
Mr. Cohen. We do.
Chairman Specter. No exceptions?
Mr. Cohen. There are no exceptions other than Comcast
SportsNet Philadelphia and there are no exceptions for
wireline, facilities-based competitors anywhere in the country.
There are no exceptions for satellite anywhere else in the
country other than Comcast SportsNet Philadelphia.
Chairman Specter. Okay. Dr. Cooper, you had a comment?
Mr. Cooper. Well, with respect to the terrestrial loophole
and what Congress did in 1991, let us be clear that in 1992
regional clusters were a very small part of this industry. They
have increased many times over since then.
Second of all, the capacity to distribute content through
high broadband networks has increased dramatically, so what you
now have today on a regional basis is exactly the condition
that was perceived to be the problem for the Nation in terms of
satellite-delivered programming. So that these clusters have
grown to such an extent--we have gone from maybe 20 percent to
well over 50 percent, 60 percent of systems being clustered,
and those are clustered in major metropolitan areas--each of
which, by the way, has a monopoly sports franchise in each of
the major leagues.
So the problem that is identified here, in fact, has grown
to be a regional problem, and so if Congress were to revisit
this issue today, they might well look at that situation and
conclude that it is exactly the difficulty of distributing
content in an integrated network that they addressed with
satellite for the Nation, they now need to address with
terrestrial distribution for these massive regional clusters
that have grown in the past 15 years.
Chairman Specter. Mr. Goodman, at your request we will put
into the record, without objection, the documents which you
have presented captioned, ``Coalition for Competitive Access to
Content: Vertical Integration relevant to Program Access
Legislation Draft 1990-1994-2006 Comparison.'' That will be
made part of the record.
Mr. Goodman, the Court of Appeals for the Seventh Circuit
in MCI Communications v. AT&T dealt with the doctrine of
essential facilities and developed a four-part test to
determine whether there would be a violation of Section 2 of
the antitrust laws. And it would require first the control of
the essential facility by the monopolist; second, the
competitor's inability practically or reasonably to duplicate
the essential facility; third, the denial of the use of the
facility to a competitor; and, fourth, the feasibility of
providing the facility.
Is that essential facilities--and the Supreme Court of the
United States in Turner Broadcasting v. FCC implicitly endorsed
the application of that standard, and in a concurrence, Justice
Stevens makes a specific reference to it. The question with
that introduction so that there is an understanding of what it
is: Does the vertical integration sports programming arguably
run afoul of that doctrine?
Mr. Goodman. That is not a question I am prepared to answer
in the context of that. I am not an attorney per se. The
vertical integration in sports is clearly a condition that can
be used as leverage to deny access, and sports programming has
been declared by most of the consumers that are trying to make
a decision about when to buy a service that it can be
essential.
Chairman Specter. Mr. Baller, what is your legal judgment
on that? Is the integration we are talking about here today,
the vertically integrated sports programming arguably a
violation of the essential facilities doctrine?
Mr. Baller. I would argue it is arguably a violation, but
the essential facilities doctrine is not recognized by all
circuits, and as you say, the Supreme Court has not explicitly
adopted it as well.
Chairman Specter. So you do not think that this integration
runs afoul of that doctrine?
Mr. Baller. I would personally say I believe it is, but
that does not mean that the courts necessarily have recognized
the doctrine at all.
Chairman Specter. Well, okay. But you are a lawyer in this
field. You are a specialist in antitrust laws.
Mr. Baller. I have had experience, but I would not call
myself an expert in antitrust law.
Chairman Specter. What is your view of it, Dr. Cooper?
Mr. Cooper. If you look at the four tests, it clearly
qualifies in the sense that they control it, they have an
exclusive, it is irreplaceable. There is, you know, only one
baseball team in Philadelphia. And we looked--actually in my
testimony, I look around and you will discover that if you look
across all the major leagues, certainly in the top 25 markets
in which Comcast and Time Warner are now highly concentrated
and clustered, there are very few exceptions where you have
more than one team in each of those sports. So it does have
those characteristics that you mentioned: they control it on an
exclusive basis, it is irreplaceable, there is only one team
there, and if they deny the access to it, then, in fact, it
meets those four tests.
Chairman Specter. Mr. Salinger, what is your view? I am
coming to you, Mr. Cohen. I know you have a view on this.
Mr. Salinger. I am no doubt going to get in trouble with
the lawyers at the Commission for opining on the essential
facilities doctrine, but--
Chairman Specter. Well, there is one lawyer here you will
not get in trouble with.
Mr. Salinger. Thank you, Senator.
I do not think it applies to all sports programming.
It might apply to some sports programming.
Chairman Specter. What is your view--Mr. Cohen, you have
given a pretty good exculpatory statement already in addressing
this because you are making it available to your competitors,
except for DirecTV, for which you have a very strong economic
reason, strong factual basis. And I am sorry that we do not
have a broader panel to take a look at the other integrated
operations, the Padres, et cetera, the Braves. But would this
doctrine apply anywhere on the integrated line?
Mr. Cohen. I have two comments.
First of all, let's remember that under the essential
facilities doctrine, you ultimately have to have an umbrella of
competitive harm--harm to competition. It is not a per se
violation. And I think that for anyone to--I think you have to
look, and I was nodding when Mr. Salinger was talking--I think
it depends on the sport and the market to be able to answer
your question in an appropriate way because of the required and
appropriate analysis of the impact on competition.
No. 2, I think sports is a very interesting case, and this
will get me in a little bit of trouble in Philadelphia, but not
anywhere else, which is that the true integration here is not
the integration between the control of the network and the
distribution mechanism. The true integration here would be an
integration that runs from the control of the rights to the
network and the distribution mechanism.
So Dr. Cooper, for example, makes reference to one baseball
team being in Philadelphia. We do not own the baseball team in
Philadelphia. We do not own the baseball rights in
Philadelphia. And the Philadelphia Phillies, who are completely
separately owned, have their own rights and their own ability
to make their own programming deal. And, in fact, to require,
as teams like the Chicago Cubs in the Chicago sports market--in
making the deal require that that distribution be made
available to all competitors, all multi-channel video
competitors in the marketplace. So in the absence of what I
would call full integration from ownership of the rights down
to the distribution mechanism, I actually think that you
probably do not qualify under the Seventh Circuit's test as an
essential facility.
Chairman Specter. Your response, then, suggests that before
you can make an evaluation of, say, Cablevision with the Knicks
and the Rangers or Cox with the Padres, Time Warner with the
Braves, and Charter with the Seattle Seahawks and the Portland
Trail Blazers, you would have to have a market analysis, but
the essential facilities doctrine might apply in those areas?
Mr. Cohen. I think it could apply, depending on the market,
but it is interesting. You have ticked off a bunch of markets
with a bunch of different characteristics. Take the New York
market and Cablevision and its control of the MSG regional
sports network. MSG used to have rights to televise the Knicks,
the Mets, the Yankees, the Devils and the Rangers--had the
rights to control all of those teams. It goes to my point that
to have full vertical integration, you actually have to own the
teams, too, because what is happening in the New York market is
that the owners of the Yankees, the Mets, the Devils, and the
Rangers have all taken their sports rights elsewhere. They no
longer have carriage agreements with MSG. Each of them--the
Yankees, Mets, and Devils have a deal with YES, which is a non-
vertically integrated regional sports network, and the Mets
created their own regional sports network, which is partially
owned by Time Warner, Comcast, et cetera. So that would be a
vertically integrated regional sports network.
So Cablevision, which used to own the rights for all of
these teams, or used to control the rights for all of these
teams through contract, has now lost the rights for all the
teams other than the Knicks and the Rangers, who remain on MSG.
So it is a perfect example of the fact that the controller
of the rights ultimately has the ability to dictate the
distribution.
Chairman Specter. Dr. Cooper, in your written statement,
you indicate that during the dispute between Cablevision and
the Yankees Entertainment Sports, known as YES Network, which
owns the television rights to the Yankees, Cablevision demanded
an equity stake in the Yankees Network. Could you elaborate
upon what happened there?
Mr. Cooper. Well, it is interesting that he raises the
point of YES because, in fact, that was a fairly ugly--
Chairman Specter. I am not raising the point of YES. You
raised the point of YES.
Mr. Cooper. I mean Mr. Cohen did. As I understand it- -and
that is just a recounting of the allegations in the lawsuit
that was filed, and ultimately it went to arbitration. It was a
lawsuit over carriage on a cable operator who has substantial
market power in that market. And so as I understand it, I am
not entirely--you know, those were the allegations that that
had been demanded as part of the negotiation for carriage. And
in the end, I believe YES was substantially vindicated in its
court case and got carriage under terms that were favorable to
it.
The suggestion here is that maybe the Congress needs to
look at the exclusivity of the rights, which is something we
would encourage. In either event, Comcast would lose its power
to pick and choose which competitors through its distribution
network would have access to the programming it controls. He
has argued that, well, I do not own the team and, therefore, I
have made a deal with the team to carry its programming; they
did not require me to do it on a non- exclusive basis;
therefore, I cannot impose exclusivity. And then he will pick
and choose which competitors have access to this vital marquee
programming.
If you want to solve the problem by banning exclusive
rights in sports programming, that would do the job, too,
because then he could not make that anticompetitive choice. He
would be required by law to make that programming available to
the competing systems.
Chairman Specter. Well, would it be desirable as a matter
of public policy to prohibit exclusivity of rights?
Mr. Cooper. Where you have an underlying monopoly, it may
well be, absolutely.
Chairman Specter. What do you think, Mr. Cohen?
Mr. Cohen. I think that is the right question, and not
whether the terrestrial exemption should be continued or
eliminated.
Chairman Specter. Well, I am glad we got to the right
question.
Mr. Cohen. I think we have to be careful in answering the
question because there are clearly pro-competitive benefits to
exclusive arrangements. They do enable competitors to
differentiate themselves from each other. And I think that is
the balance of giving up the pro-competitive benefits of
competitor differentiation in the market as opposed to the
clear consumer benefits from an open access to what I think--if
there is anything that is an essential facility, by the way, I
would think that it would be the rights themselves, not the
carriage of those rights. And to open those rights up to all
competitors, I think, has a procompetitive benefit. And it is
the balance between those two elements that makes the policy
judgment difficult.
Chairman Specter. Mr. Cooper, coming back to your written
testimony, where you raise the issue of Cablevision demanding
an equity stake in the Yankees Network, can you amplify the
circumstances? What are the underlying factors of the
relationship and market power and distribution, et cetera,
which would enable a cable transmitter to make that kind of a
demand?
Mr. Cooper. Well, the general proposition I can address. It
was the details of what was asked, and you ought to get the
people from YES. But it is the experience in the video industry
that distributors, both on the cable side, which is why we had
the 1992 Act, and on the broadcast side, distributors control a
vital vertical lever here. And one of the things that
distinguishes this particular industry, and the
telecommunications industry as well, is that that lever is a
live-or-die situation for a local team to reach its local
market. Where you have a substantial market penetration of that
distribution mechanism, denial of access to the public gives
you tremendous market power over the team. If the Yankees
cannot get to the households that subscribe to cable, they have
a severe problem.
So the market power inherent in that bottleneck facility is
extremely strong, and it gives the owner of that facility--and
it has occurred in programming both broadcast and cable, to
demand unacceptable terms and conditions.
Chairman Specter. Okay. If Cablevision had the power to
make that demand on a realistic or reasonable basis, then you
are saying that the Yankees had no place else to go to have
their team shown?
Mr. Cooper. Well, that was one of the four tests. Cable is
the dominant medium for distributing video content in America
today.
Chairman Specter. Well, factually, did the Yankees have
nowhere else to go but Cablevision?
Mr. Cooper. In some of the market segments, they had that
problem. You know, the cable companies are franchises. At the
time there was no overbuilder. You have heard the proposition
here that one of the economic bases on which Comcast gave
Verizon the right to distribute their programming in certain
suburbs was the assumption that there would not be a competitor
in Philadelphia. That was the statement you heard today. It is
a wonderful statement. I am going to quote it and get the
record frequently, right? Because that has been our complaint.
So that was a business judgment, is that they gave them the
rights because they do not expect them to be a competing multi-
channel video delivery system in Philadelphia.
Chairman Specter. But Verizon could be a competitor in
Philadelphia if it chose to do so.
Mr. Cohen. Absolutely.
Chairman Specter. Do you want to adopt Mr. Cohen's answer,
Dr. Cooper?
Mr. Cooper. Frankly, we have been making this point.
Actually, in the other Committee that deals with this, we call
it redlining, you see? So, in fact, it is an interesting
observation. Our complaint--and, of course, Comcast was
required to build out throughout its service territory as an
obligation of its franchise. And Verizon has been trying to get
out of that. I was the expert witness in Montgomery County
where they recently agreed to very favorable terms from my
point--
Chairman Specter. You referred to a lawsuit. Would you
amplify that?
Mr. Cooper. The lawsuit in--
Chairman Specter. You just said you were going to utilize
what--
Mr. Cooper. Verizon sued Montgomery County claiming that
its cable ordinance violated the First Amendment, and the judge
ordered them--
Chairman Specter. Well, how are you going to use Mr.
Cohen's statement in your lawsuit?
Mr. Cooper. One of the conditions that was being argued
over was the build-out provision. Who are they going to serve?
And the local franchising authority--and Mr. Cohen has been
subject to this in his franchise agreements. The local
franchising authority requires the complete build- out across
the entire area of that franchise as part of his agreement.
Verizon is taking the position that they do not want to have to
serve everybody in the local franchising area. In the
settlement, we got almost 100 percent of that build-out
requirement, which is very important in the Commerce Committee.
Chairman Specter. I am advised that more than 3 million
subscribers had Cablevision as their only choice for cable
service, and in those areas, Cablevision had a 90- percent
market share. I am sorry that Cablevision did not send a
witness here. They were given a lot of notice, and they had no
understandable explanation as to why they did not, and we may
have to continue this hearing with a subpoena for Cablevision
so that we can find out what is going on here.
But the ramifications and tentacles of the market share and
the dominance so that Cablevision, the cable company, can make
a demand for an equity share in the Yankees to get a preferred
position as an ownership interest is surprising, to say the
least.
Mr. Cohen, you have your hand up.
Mr. Cohen. If I can, Mr. Chairman, I do not want to attempt
to speak for Cablevision, but I know a little bit about the
subject in general, so it might be a little helpful to make
some comments.
Chairman Specter. Please do.
Mr. Cohen. First of all, I do not believe that even the
allegation was that Cablevision was making a demand for equity
in the Yankees. I think what may have been under discussion was
whether Cablevision should get an equity interest in the
network itself on the theory that it was Cablevision's
distribution that was going to be bringing the value to the
network--not the team itself, but to the network.
I would note that recent press reports suggest that the
owners of Yankees Entertainment Sports, which are the Yankees,
the Nets, and principally Goldman Sachs and private equity
investors, are thinking about putting the network on the
market, and the asking price is on the order of $3 billion.
That is billion with a B. That would make the network worth
approximately three times what the Yankees are worth as a
franchise. And with all due respect, the value of that network,
although it comes in part from the value of the Yankees as a
franchise and the Yankees as something that people want to
watch, it also comes from the distribution that was required to
the YES Network from Cablevision, from Time Warner, from
Comcast, from DirecTV--and I forget whether EchoStar
distributes the YES Network or not. So there is some
justification from the distribution side of saying that it is
the distribution that is giving value to these networks in
addition to the franchises themselves.
Number two--and this is particularly important--if you look
at the whole YES Network area, when you have a statistic like
Cablevision had 3 million customers, I think Yankees
Entertainment Sports is in a metropolitan area with something
like 8 or 9 million customers. You have Cablevision, Comcast,
Time Warner all in that territory. So when you look at 3
million customers, you are looking at a sub-segment of the YES
Network's market, not the entire market.
With all due respect to that statistic, in virtually every
place where Cablevision was providing service, there were at
least two other competitors that were available for carriage of
the YES Network--DirecTV and YES. And I know that DirecTV--I do
not know about--
Chairman Specter. Carrying the YES Network, too?
Mr. Cohen. They were.
Chairman Specter. DirecTV and who?
Mr. Cohen. Well, EchoStar, the Dish network. I don't know
whether Dish was carrying YES. I know DirecTV was.
Chairman Specter. The consumers are going to have to go
to--
Mr. Cohen. They would go to a satellite.
Chairman Specter. To a satellite.
Mr. Cohen. Correct.
Chairman Specter. They would have to buy a whole new
system.
Mr. Cohen. Well, they did not have to buy a whole new
system because the YES Network and DirecTV ran a massive and
major promotion during the course of this dispute where they
offered a free dish and free multi-television set-top boxes for
any Cablevision customer who would switch to DirecTV; in
addition, offering discounted service for an entire year for
that switch. And--
Chairman Specter. Do you ever have any concerns about the
free offers and the discounted service for a time as to how it
is going to be made up later? Is there such a thing as--
Mr. Cohen. I think it--
Chairman Specter. Wait a minute. Is there such a thing as a
free lunch here?
Mr. Cohen. There probably--
Chairman Specter. Don't they have a plan to collect later?
Mr. Cohen. In the long run, that would definitely be the
case, but in DirecTV's case, in cable's case, there is
something called subscriber--it is called SAC charges. They are
the charges, the marketing costs you expend to get new
subscribers. All I can tell you is that YES publicly said that
they had switched somewhere between 25,000 and 30,000
Cablevision customers to become DirecTV customers, and that YES
has said that the ultimate resolution of this dispute, which by
the way, was not through the litigation because there was never
a decision in this litigation, was because of the pressure that
was put on Cablevision through the market, that is, customers
leaving and threatening to leave the DirecTV if Cablevision did
not pick up the YES Network.
So I believe that the bottom line here is the market worked
in the YES situation. That is why YES now has ubiquitous
distribution. That is why YES is now worth $3 billion.
Chairman Specter. Ubiquitous distribution?
Mr. Cohen. That is correct.
Chairman Specter. What is ubiquitous distribution?
Mr. Cohen. They are available on Cablevision, Time Warner,
Comcast, and at least DirecTV. They also have a deal with
Verizon, and, by the way, Verizon is an active competitor of
Cablevision's, and Cablevision's territory as well. So you have
now got at least five and maybe six multi-channel video
distributors that are carrying the YES Network.
Chairman Specter. Well, wait a minute. The question in my
mind is: Where does all this leave the consumer? Where does
this leave the consumer now? And where does this leave the
consumer down the road? These are only partial steps in what is
being undertaken. We are going to come to that in just a minute
going to the NFL issue. But I am trying to understand what is
happening here. A chart has been provided which shows at the
top George Steinbrenner, principal owner, and minority
partners, and that leads down into the Yankee Global
Enterprises. And that branches off into two lines. One is the
New York Yankees, and the other is the YES Network.
Now, it has been public knowledge for a long time that the
YES Network was more valuable than the New York Yankees, and
you say, Mr. Cohen, that they are going to rearrange with the
conglomerate, it is going to be worth $3 billion, which is
three times the value of the Yankees.
This is an extraordinarily complex structuring which I am
concerned places the consumer at considerable risk.
You had a comment, Dr. Cooper. Then I want to move on.
Mr. Cooper. Of the six entities that Mr. Cohen mentioned,
at least three of them do not compete with each other because
the cable operators have chosen never to overbuild and compete.
And so you are left with the satellite, which involves
significant switching costs, short-term promotion, as he
pointed out, as part of this commercial dispute. And, of
course, those are the competitors who he denies his programming
to. And he knows that the other major cable operators are not
going to overbuild him. So that list of places, what YES did
was they secured distribution throughout the region because
that region is splintered between a number of cable systems.
Many of Comcast's regions are not. They are the dominant
provider throughout the region, and, again, he has chosen not
to allow that key marquee programming to be available to the
one entity that actually could compete throughout the service
territory.
Chairman Specter. Mr. Cohen, you testified earlier with
considerable fervor about the Sunday Ticket. Do you believe
that that arrangement between the NFL and DirecTV is a
violation of the antitrust laws?
Mr. Cohen. Building on Mr. Salinger's comment about the
need to look at particular sports programming in particular
markets, I think if there is any sports programming about which
you could make a case that it is an essential facility, it
would be NFL programming. And so I am not prepared to say that
I think the NFL Sunday Ticket is an antitrust violation. You
are aware of the Shaw litigation in the Third Circuit, which,
again, the litigation never reached the ultimate question
whether the NFL Sunday Ticket was an antitrust violation, the
Third Circuit only finding that the Sunday Ticket was not
entitled to the antitrust immunity that was provided under the
Sports Broadcasting Act. I would note, though, that before that
case went to trial, it was settled. So there was at least some
risk perceived by the NFL and presumably DirecTV that the
Sunday Ticket could be found to be an antitrust violation.
Chairman Specter. Well, I know that it has not been
resolved, but I was asking one astute lawyer's opinion as to
whether he thought it was an antitrust violation. But I will
accept your answer.
The activities of the NFL are very extensive and definitely
ongoing in what they are undertaking to do. And a big question
is posed by what they have done as to whether it is a violation
of the antitrust laws and what is coming next. We now have the
NFL Channel, and we have this year, last month, the expansion
to the Thursday-Saturday Ticket, and we can expect more.
We have had the change from Monday Night Football from ABC-
TV to ESPN, which is an interesting transaction, raises a lot
of questions, especially since ESPN is owned by ABC- TV. And on
inquiry, we find that ESPN can pay the NFL more money because
ESPN has two revenue streams: one, the advertising, which is
somewhat less--how much less I do not know, but I am advised
not appreciably less--than over-the- air transmission by ABC;
but ESPN also has the revenue stream from subscriptions from
the subscribers. I am advised that it is $500 million more a
year, and what it appears to be is that the NFL makes an
evaluation as to how much they can extract, how much can they
extract from ESPN, a subsidiary of ABC, to carry the Monday
night games on ESPN. And ABC-TV on Monday night games, an
enormous demand. You would think if anybody could survive and
afford the programming, ABC-TV could. But they could not when
the NFL decided to raise the prices.
Now, the NFL enjoys all of this maneuvering room because
they have the antitrust exemption. The teams are not guilty of
conspiracy and restraint of trade because they got the
antitrust exemption. But if they did not have the antitrust
exemption, then the San Diego Chargers could negotiate, and if
you could not get them, you could get the Seattle Seahawks, or
you might get some other team. But the variety of distribution
chains are not free to negotiate because the NFL has it all.
What good reason, Mr. Salinger, is there for leaving that
antitrust exemption in place?
Mr. Salinger. Senator, as a general principle, I think that
special antitrust laws for particular industries are a mistake,
that we should use the same antitrust principles across
different industries.
As to whether it should be illegal for the NFL to negotiate
television rights, as a single entity--
Chairman Specter. Well, wouldn't the consumer be better off
if the sports teams were negotiating on their own so that there
would be competition as to what football team would be shown on
what network and what channel as opposed to having all the
bargaining rights in the NFL, which they can have because they
have an exemption under the antitrust laws? There is no doubt
that it is collusion if it is an agreement of two or more
parties, which has the impact of restraining trade. What is the
justification for that in this day and age with what the NFL is
doing?
Mr. Salinger. Well, it is two or more parties that are
engaged in a joint venture, and so that complicates the
analysis substantially.
Chairman Specter. Well, it is a joint venture.
Mr. Salinger. I don't know whether legally the NFL is a
joint venture, but the product that they are providing requires
the existence of the league. One team cannot provide that
product.
Chairman Specter. Well, they cannot provide the entire
product, but one team can provide rights to televise their
games.
Mr. Salinger. That is correct. But the league needs to make
joint decisions and joint investments, and that--
Chairman Specter. I know, and that stops individual cable
companies or individual distributors from negotiating with
teams.
Mr. Goodman, any reason to keep that antitrust exemption in
place?
Mr. Goodman. I am going to defer to the lawyers.
Chairman Specter. Why are you doing that? You represent the
consumers. I am not going to put you on the next panel, Mr.
Goodman. You represent the consumers.
Mr. Goodman. The NFL and the process of those negotiations
gets to prices that a lot of consumers do not want to bear, and
I think that is more the consumer issue than the antitrust
issue. You have in the current carriage deals today a
structure--
Chairman Specter. Is your microphone on?
Mr. Goodman. I am sorry. You have in the current structure
today bundling and carriage deals that cause professional
sports, NFL, et cetera, to be packaged in with what is called
the Expanded Basic. In that Expanded Basic, you have someplace
between 40 to 60 percent of the customers paying for that that
do not want that particular content, they do not particularly
want to pay for it. You have--
Chairman Specter. That is the whole basis of the
controversy that Comcast is having now with the NFL.
Mr. Goodman. Correct.
Chairman Specter. NFL wants it on the basic line. Comcast
wants to put it on the sports line for the people who want it
who can see it.
Mr. Goodman. Correct.
Chairman Specter. And this is the NFL exerting its power
right down to the last nub, right down to the last nickel. Go
ahead.
Mr. Goodman. Correct. I mean, it is interesting that they
are taking that position on that particular set of content when
they are involved in all sorts of other bundling arrangements.
One of the things I would encourage everybody to look at
long term is what happens to these kinds of contracts and
structures as we move to digital carriage. When we move to
digital carriage, then a lot of the technical and business
issues that have led to the bundling and packaging that we have
got today are not going to be as relevant. And hopefully we
will get to a different structure.
Chairman Specter. Dr. Cooper, I noticed you would like
recognition. On what issue?
Mr. Cooper. On this issue.
Chairman Specter. Good. Proceed.
Mr. Cooper. I mean, two of my four recommendations address
this fundamental problem. Disney maximizes the extraction of
rent because of two practices we think are anticompetitive and
anticonsumer in this case--that is, ABC ties its programming
together in big bundles, demanding carriage for a set of
programs, not negotiating individually for each, and then the
cable operators bundle those together and do not give the
consumer the choice.
If you break those two links, the study we saw is that 75
percent of the people would not pay the $2 a month or plus that
ESPN gets to be put into the Expanded Basic bundle. That is why
we believe breaking these ties would, in fact, begin to exert
consumer demand genuinely at the point of sale.
Chairman Specter. Breaking what ties?
Mr. Cooper. The ability of ABC to insist that their bundle
of programs be carried using the leverage of their must-carry
and retransmission rights. Remember, Congress gave them rights
to carriage. And, two, that cable operators be required to
offer consumers a choice to buy the individual programs that
they also offer in the bundle.
Imagine if consumers could choose not to pay for ESPN, just
as Comcast is saying maybe they should be allowed to choose not
to pay for MASN, right? The consumer would then be sovereign,
which is the objective here. In this current environment,
consumer elasticity of demand has been dulled dramatically by
these massive bundles--
Chairman Specter. How about the antitrust exemption? Should
that remain?
Mr. Cooper. The antitrust exemption would be one way to
diminish the market power of the league.
Chairman Specter. Should we eliminate the antitrust
exemption?
Mr. Cooper. I believe CFA has supported the elimination of
those antitrust exemptions across the major league sports.
Chairman Specter. Mr. Baller, should we eliminate the- -
revise the 1961 antitrust exemption for the NFL?
Mr. Baller. For all major sports. We have had problems with
Major League Baseball as well, and I think that it would be in
the consumers' interest to eliminate the exemption across the
board, if possible.
Chairman Specter. Well, is baseball engaging in the same
kinds of practices that the NFL is?
Mr. Baller. I cannot say for sure. My experience is limited
to a town named Bristol, Virginia, on the border of Tennessee,
not--
Chairman Specter. Is hockey doing what the NFL is doing?
Mr. Baller. I don't--
Chairman Specter. Is the NBA doing what the NFL is doing?
Mr. Baller. I have no experience.
Chairman Specter. Well, I would be reluctant to use too
broad a swath here unless we see what they are doing, unless we
see that they are anticonsumer. But what we are getting with
the NFL, the raising of pay television through the add-ons and
extracting--not allowing the sports channel to carry it where
they could get a substantial amount of money.
Mr. Cohen, should we legislatively change the antitrust
exemption that the NFL has?
Mr. Cohen. I noticed you changed the form of the question
for me, which I appreciate, because I think the answer to that
question is yes. I think the answer to the question you asked
everyone else, which is should we eliminate the antitrust
exemption for--it is in the Sports Broadcasting Act of 1961 for
the NFL. I think that answer is no, and I think it goes in
part, again, to what Mr. Salinger said.
I do think that there is a proconsumer justification for
leagues negotiating certain television rights on behalf of all
of the teams. I think, however, in granting that type of an
exemption from antitrust scrutiny, it would be appropriate for
Congress in the NFL's case, which, unlike all the other sports,
negotiates 100 percent of the television rights in the league
on behalf of all of the teams. In all the other sports, there
are national rights, but there is a substantial chunk of rights
that are retained by the individual teams to be able to market
and negotiate over. So the NFL is a distinct case because, No.
1, it controls all of the rights of its teams, and, No. 2,
because of the market power that I believe the NFL has in
television rights, sports television rights, as compared to the
rest of the teams. And I believe it would be appropriate for
this Committee and this Congress to look at appropriate
conditions to be put on a continuing exemption--on a continuing
immunity from the antitrust laws as opposed to the blanket
immunity that exists in the current legislation
Chairman Specter. Well, Mr. Cohen, this Committee and this
Senator has considered conditioning the antitrust exemption on
a variety of factors. It is very difficult for the Congress to
anticipate and understand all the potential ramifications as to
when we start to deal with part of it and not all of it. If we
take away the antitrust exemption for the NFL to deal jointly,
then the market comes in. And there are very powerful reasons
to allow the market to govern, which we do not anticipate.
Nobody since Adam Smith has been as smart as the market. So if
we take away the antitrust exemption, you have the market
coming in.
I introduced legislation in the 1980's to condition the
antitrust exemption of the NFL on limitations of franchise
moves. When they wanted to move the Philadelphia Eagles to
Phoenix, I introduced that legislation. We had a very spirited
debate at that table in about 1982 between Pete Rozelle, the
Commissioner of Football, and Al Davis when they moved the
Oakland Raiders to Los Angeles, and they had antitrust
litigation that Mr. Davis won. And then the NFL has permitted
franchise moves with the Colts, in the middle of the night
Irsay going to Indianapolis, the Browns coming from Cleveland,
disrupting fan loyalties in a major way.
Of course, baseball is not immune either, taking the
Dodgers from Brooklyn in 1958 because Walter O'Malley got a lot
of prime real estate in Los Angeles, and the Giants joined. The
fans be damned. And now it is the consumers be damned with what
is happening.
But as I look at what the NFL is doing today, with the NFL
Channel, with the DirecTV, which you spoke about passionately
and eloquently, in terms of limiting--a lot of people,
including myself, would like to be able to have that ticket.
But I have got to have a dual system. I have got to go to
satellite. And what is coming next?
When you look at ESPN taking over Monday Night Football,
the NFL decides how much they can extract. And then the
structure is reworked between ABC-TV and ESPN.
I am going to introduce legislation in the next session to
take away the antitrust exemption from the NFL, and I think
that they are building a very, very strong case--the NFL is
building a very, very strong case to have Congress take away
the exemption that was granted in the 1961 legislation. If
someone is wise enough to tell us how to condition it, we would
certainly be interested in considering that. But the market
is--you do not have to be very smart to be smarter than the
Congress. But the market has demonstrated its wisdom, and that
is where my inclination is.
But as I take a look at what is happening here, I like the
competition that is coming in with Verizon and the competition
that is coming in, and satellite competition is good. But I am
not sure we do not have to make some changes legislatively on
integration, but before we do, we have to understand it. We are
a good ways away from that. I know there are a lot of charts a
lot more complicated than this one in the offing.
I will give each of you a chance to make a closing
statement. Mr. Baller, you have your hand up. You are first.
Mr. Baller. Okay. Thank you very much. As I heard you say
that you are considering introducing legislation, I had--
Chairman Specter. I am not considering it. I am going to do
it.
Mr. Baller. All right. I had a flashback to the hearing
that I mentioned at the outset of my testimony that occurred in
this room in February of 2004. At that hearing Senators Kohl
and DeWine announced that they were going to introduce
legislation to eliminate the terrestrial loophole. And after
that hearing, Comcast announced that it was going to fix this
problem everywhere. It was only then that some of our clients,
including the Borough of Kutztown, Pennsylvania, were able to
get Comcast programming--sports programs in that case.
Now, Kutztown could not have brought an antitrust action.
It has a population of only 5,000. That kind of litigation
would have been impractical. And it seems to me that having
rights of that kind cannot be left to coming to the Senate and
having a Senator or two Senators say they are going to
introduce legislation. If it is a good idea--and I believe it
is--it ought to be put into a statute so that everyone
understands it and everyone can live by it. And I think that it
is solutions of that kind that we need and not solely reliance
on antitrust remedies. That may work for Verizon, but it does
not work for the small to medium-sized competitors who we want
to succeed.
Chairman Specter. Mr. Salinger, do you have a closing
statement you would like to make?
Mr. Salinger. Senator, no, I do not.
Chairman Specter. Dr. Cooper?
Mr. Cooper. I think you have heard a number of reasons why
consumers continue to be very upset about their cable bills.
There are sources of market power in this industry in both
distribution, in carriage rights, and I honestly believe that
the NFL would not be able to extract those rents if this
structure were not set up the way it is.
You have identified the antitrust exemption underlying the
franchises and the leagues. We also have a terrible problem of
market power in the distribution and the rules that were set up
about the bargaining power that programmers and cable operators
have, all of which is being used and has been used for a couple
decades to the detriment of the consumer. And the competition
we see is not sufficient to alleviate the problem.
Chairman Specter. Mr. Goodman, a concluding statement?
No, Mr. Goodman, I am the Chairman. Mr. Goodman, a
concluding statement? Senator Kennedy made that mistake.
Mr. Goodman. I think that Mr. Cohen has put the context of
what is going on, on the table. Their specific goal is to get
the current laws repealed. The goal of the group that I
represent is to highlight the fact that the current vertical
integration, as we submitted, is actually more powerful and has
the ability to affect the market as much today as it did in
1992.
The access that we have has only come through very constant
confrontation, and as Jim Baller mentioned, we can give you a
list of specific moments in time related to mergers and
acquisitions or hearings here or other activities that resulted
in our finally getting access to content. It has not come
because of just willing give it to us.
When we look forward and we look at the new structure and
we look at the level of vertical integration, we believe that
you just are going to have to maintain these rules of access to
content with some expansion and clarification, or you are not
going to have the competition you want.
Chairman Specter. Mr. Cohen?
Mr. Cohen. Thank you very much, Mr. Chairman. Three quick
points.
Number one, the market is working. The video distribution
market is vigorously competitive. I controlled myself until the
very end, but I hold up today's Wall Street Journal with the
headline, ``Cable rate increases are smallest in years,'' and
making the case that consumers have more choice today than they
have had at any time in the--
Chairman Specter. Is 3.2 percent that I saw in the
Philadelphia headlines for Comcast the smallest in recent
years?
Mr. Cohen. It is the smallest in that market. But in many
of our markets, the increases are even lower. And, in fairness,
Mr. Chairman, you have to look at our entire package of
services. For the fifth consecutive year, we are not raising
the price on our high-speed data service. We are all around the
country offering a triple-play bundle of telephone, high-speed
data, and digital cable service for $99 a month. This market is
vigorously competitive and working.
Number two, the current program access regulations are
based on a 1992 model of the world. That model has changed.
Notwithstanding any general statements that can be made here
today, the indisputable statistical evidence is that vertical
integration in our space is dramatically reduced today--57
percent in 1992 to less than 20 percent in the world today.
And, No. 3, trust the antitrust laws. There is no reason
why this particular industry needs special regulation. Any
abuses that could arise can be handled through the antitrust
laws, and if they cannot be handled by individual plaintiffs,
the FTC and the Department of Justice and this Committee and
the House Judiciary Committee have plenty of capacity to be
able to influence behavior in the market where it is necessary
to do so.
Chairman Specter. So let the market govern without the
antitrust exemption.
Mr. Cohen. There is no antitrust exemption that applies to
us, so I think I gave my view on the antitrust exemption.
Chairman Specter. Mr. Cohen, staff has just handed me a
listing from Bernstein Research dated November 30, 2006, which
has a listing of Comcast in about a dozen markets, showing an
average of 5.4 percent. I would like you to take a look at that
and see if that is accurate.
Mr. Cohen. I have seen the Bernstein report, but I will
note that that report references our basic cable rate
increases. It does not reference what happens with our digital
packages, with our premium services, with our set-top boxes,
with our high-speed data, or with our Comcast Digital Voice
product.
The overall rate of increase that an average Comcast
customer will pay this year will be approximately 3 percent.
Chairman Specter. Gentlemen, thank you very much. It has
been a very illuminating hearing.
That concludes our hearing.
[Whereupon, at 12:15 p.m., the Committee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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