SPEAKERS CONTENTS INSERTS Tables
Page 1 TOP OF DOCSTATE OF COMPETITION IN THE CABLE TELEVISION INDUSTRY
WEDNESDAY, SEPTEMBER 24, 1997
House of Representatives,
Committee on the Judiciary,
The committee met, pursuant to notice, at 10:00 a.m., in Room 2141 Rayburn House Office Building, Hon. Henry Hyde, [chairman of the committee] presiding.
Present: Representatives Henry J. Hyde, F. James Sensenbrenner, George W. Gekas, Bob Inglis, Ed Bryant, Steve Chabot, Bill Jenkins, John Conyers, Rick Boucher, Robert Scott, Melvin Watt, Zoe Lofgren, Sheila Jackson Lee, Martin Meehan, and William Delahunt.
Also present: Joseph Gibson, chief antitrust counsel; Thomas E. Mooney, staff director/general counsel; Perry Apelbaum, minority chief counsel; and Julian Epstein, minority staff director.
OPENING STATEMENT OF CHAIRMAN GEKAS
Mr. GEKAS [presiding]. The hour of 10 o'clock having arrived, the committee will come to order.
The chairman of the Judiciary Committee, the Honorable Henry Hyde of Illinois, is presently occupied on the Senate side in a confirmation hearing and will join us at a later point in these proceedings.
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In the meantime, we note the presence of a hearing quorum, and we will proceed with opening statements and follow through with the statements of the witnesses as they accumulate.
Most people in my district, and in every other district, I would have to assume, across the country, are interested in the lowest cable rates possible, and for some strange reason they prefer low cable rates as compared to higher cable rates. And they would also like to have a choice, when they purchase, who provides that cable television. So the Telecommunications Act of 1996 was passed in part, ostensibly, to provide that choice. Today we will learn how that is working and what may be emerging as either good signs or bad signs.
Once people have a choice, the market will work to bring down prices and to increase the quality of service. Everyone knows that. However some barriers still prevent a full choice for many people. So this hearing will focus on two types of barriers: those that face local governments and those that face new entrants.
Chairman Hundt will give us a broad overview of the situation. Then several local government officials who are trying to get new entrants to compete in their communities will tell us about their experiences. Finally, we will hear from a variety of new entrants and incumbents who will give us their varying perspectives on the competitive issues, including program access.
We will limit ourselves to the Communications Act and antitrust aspects of the program access issue. The intellectual property aspects, including topics like compulsory licensing, will be covered in a separate hearing before the Subcommittee on Courts and Intellectual Property later in the fall.
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So with that brief introduction, I will yield to the gentleman from Michigan, Mr. Conyers, for an opening statement.
Mr. CONYERS. Good morning, Chairman Gekas and members.
We're delighted to have Chairman Hundt here. It may, unfortunately, be his final appearance before the committee. He's served with great distinction, and we appreciate your tenure.
In the course of your career you've attracted your share of controversy here in the Federal arena. We assumed that is due to the nature of the enterprise in which you were put in charge of. Newer, bigger, more complex issues seem to keep coming out of the FCC. We'd be interested in your little crystal ball of projection of things to come. I think we're on an exciting era.
I also want to commend the chairman of the full committee for calling these hearings and making sure that the Judiciary Committee is in the front of the issues that develop in the cable industry.
Now cable faces the same circumstances that the rest of the telecommunication industry faces. The age of the old regulated monopolies is ending. In Detroit we have Comcast. They've got exclusivity. Should that continue? In Harper Woods we've got a different story, and we want to find out what that is. We're honored to have our mayor of that city in Michigan with us today.
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And so that old era is being replaced with a competitive industry and harmonic convergence, if you will, of technology, which now allows for numerous methods of sending communications signals. Now as this old age ends, we have some incumbents that enjoy competitive advantages as a result of their control over the physical infrastructure. And these advantages often, I regret deeply, survive the scrutiny under antitrust laws that they richly deserve. This then requires Congress to step in to ensure fair rules of competition.
In the local telephone industry, the new sections 251 and 271 of the act ensure that the local loop is truly open up to vigorous competition. And by the way, echoing Subcommittee Chairman Gekas, whatever happened to those lower rates that were predicted for cable with the passage of the bill? Anybody remember that everybody from the President on down predicted that the rates would be lower?
Today we look at competition in the cable industry with a focus on program access provisions under the 1992 Cable Act. Under that provision, Congress said that only vertically-integrated cable programmers, the Time Warners, who own programming and who have an appreciable interest in the operations side of the industry must provide other cable careers with access to programming. This was to prevent monopolistic control of programming by vertically-integrated companies. Did that happen?
Well, today we look at whether such requirements should be extended to non-vertically-integrated programmers. New entrants into the cable industry, like Ameritech, believe that exclusive contracts between programmers, like Viacom's TV land, and incumbent carriers represent control over an essential facility without access to which they cannot competitively compete. These 1992 Cable Act program access provisions do not apply to fiber.
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So it's my belief that we should try to put an end to all the competitive barriers in the telecommunications industry and ensure that consumers derive the full benefits of real competition which they haven't received so far. And so, I find a little economic efficiency and exclusivity of programming see real benefits for the people that use TV by ensuring real program access.
Is there any basis for distinguishing between satellite delivery where program access does apply and fiber delivery where provisions do not?
Finally, I believe that we should also require program access for the direct-broadcast satellite exclusive programming, particularly if we're going to modify the Satellite Home Viewer Act to allow DBS broadcasters the flexibility in copyright law they seek. I hope to see the cable architecture, the HFC lines, providing competition for local telephone markets and as a more efficient access line for Internet.
Now this, Chairman Hundt, are some of the issues that play on my mind as we meet here today for the finalmaybe the finaltime. You may come back in another life form, who knows? This may not be your last time before us. But we welcome you, and we hope to have a free and frank discussion on these considerations. And thank you, Mr. Chairman.
Mr. GEKAS. We thank the gentleman. The gentleman from Wisconsin is recognized for an opening statement.
Mr. SENSENBRENNER. Mr. Chairman, thank you for holding this hearing into the status of competition in the cable TV industry.
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Congress has an obligation to monitor the cable marketplace to ensure competition is emerging nationwide and to make sure that the established players in this marketplace are not posing unreasonable barriers to entry for new comers.
From looking at the data, it appears that this committee is holding this hearing in the midst of an unprecedented growth spurt by cable's competitors. DBS, 85 percent growth to date this year. This impresses upon me both the success of this new medium and the regulatory environment which permitted it to enter the marketplace. At the same period of time, cable saw its market share decline 2 percent.
It is now almost universally accepted that competition and deregulation are the driving forces behind a dynamic marketplaceone that promotes ingenuity and technical innovation as well as providing with choice and economy.
In the metropolitan Milwaukee area, a cable company is responding to the new dynamics of the telecommunications marketplace by unveiling interactive television services and high-speed Internet access to its customers, all built around a fiber-optic network the company is in the process of building.
In other large cities in the Midwest, the local regional Bell company, Ameritech, is providing cable service in direct competition with the established cable providers. The phone companies expect 1 million new subscribers for their video programming services by next year.
Page 7 PREV PAGE TOP OF DOC It appears that we are in the initial stages of an invigorated and competitive video-programming marketplace stimulated by deregulatory legislation and technological innovation. It is my hope that the industries represented before us today prosper in this emerging marketplace, so that consumers benefit from greater innovation, more choice, and competitive rates.
Again, I'm delighted that the chairman has called for this hearing because it is essential that Congress monitor the cable marketplace to ensure that the deregulatory and pro-competitive framework we have mandated through legislation is working to provide a direct benefit for the consumer. While progress does need to be made, I believe that we are moving in the right direction.
[The prepared statement of Mr. Sensenbrenner]
PREPARED STATEMENT OF F. JAMES SENSENBRENNER, JR., A REPRESENTATIVE OF CONGRESS FOR THE STATE OF WISCONSIN
Mr Chairman, thank you for holding this hearing into the status of competition in the cable television industry. Congress has an obligation to monitor the cable marketplace to ensure competition is emerging nationwide and to make sure that the established players in this marketplace are not posing unreasonable barriers to entry for newcomers.
From looking at the data, it appears the committee is holding its hearing in the midst of an unprecedented growth spurt by cable's competitors. Direct Broadcast Satellite Service's 85% growth rate to date this year impresses upon me both the success of this new medium and the regulatory environment which permitted it to enter the marketplace. In the same period of time, cable saw its market share decline 2%.
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It is now almost universally accepted that competition and deregulation are the driving forces behind a dynamic marketplaceone that promotes ingenuity and technological innovation as well as providing consumers with choice and economy. In the metropolitan Milwaukee area, a cable company is responding to the new dynamics of the telecommunications' marketplace by unveiling interactive television services and high-speed internet access to its customersall built around a fiber optic network the company is in the process of building. In other large cities in the Midwest, the local regional bell company is providing cable service in direct competition with the established cable providers. The phone companies expect one million new subscribers for their video programming services by next year. It appears we are in the initial stages of an invigorated and competitive video programming marketplace, stimulated by deregulatory legislation and technological innovation. It is my hope that the industries represented before us today prosper in this emerging marketplace so consumers benefit from greater innovation, more choice, and competitive rates.
Again, I am delighted the Chairman has called for this hearing because it is essential that Congress monitor the cable marketplace to ensure the deregulatory and pro-competitive framework we have mandated through legislation is working to provide a direct benefit to the American consumer. While progress needs to be made, I believe we are moving in the right direction.
Mr. GEKAS. The committee will now stand in recess pending the completion of the vote now pending on the floor. We will return to this chamber at 10:25.
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Mr. HYDE [presiding]. In an effort to move along expeditiously even though the vote is still on, Mr. Conyers is here and so isMr. Conyers and I, I guess. [Laughter.]
But two men with courage make a majority.
I think that I will read my opening statement, and then when Mr. Boucher comes back, we'll go to his. But meanwhile, we will be accomplishing something here, other than just sitting here. So I will proceed.
I want to thank my friend George Gekas for filling in for me, and I'm sorry that I couldn't be here sooner.
Today the committee holds antitrust oversight hearings on the state of competition in the cable television industry. I certainly am no expert on cable television. And I, like many in the room, are here to learn what we can. One thing that I do know is that my constituents do not like high cable rates offered by only one cable operator. They would like to have a choice. I know that because I hear from them on that point with some regularity.
Some part of the problem stems from the 1992 Cable Act and its attempts to re-establish rate regulation. To say the least, that has not been a very satisfactory experience for anyone. Fortunately, the Telecommunications Act of 1996 opens the cable market to many new competitors, and we'll hear from some of them today.
Page 10 PREV PAGE TOP OF DOC I believe that robust competition is the answer to high cable rates and lack of choice. I believe that competition has taken hold, but it is not progressing fast enough.
Today we will focus primarily on the barriers that continue to impede that progress and what can be done to eliminate them. We'll consider two kinds of barriers.
First we'll hear about the problems that local government officials face in trying to get new entrants to compete in their communities. Several local officials from my district and Mr. Conyers's district will tell us what has been happening in their specific situations.
Secondly, we'll hear about the problems that new entrants face in obtaining access to the programming necessary to operate competing cable systems. On that issue we'll hear from competitors with various perspectives within the industry.
[The prepared statement of Chairman Hyde]
PREPARED STATEMENT OF HON. HENRY J. HYDE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS, AND CHAIRMAN, COMMITTEE ON THE JUDICIARY
I want to thank my friend Mr. Gekas for filling in for me, and I am sorry that I could not be here sooner. Today, the Committee holds antitrust oversight hearings on ''The State of Competition in the Cable Television Industry.'' I make no claim to be an expert on cable television, and I am here to learn as much as I can today.
Page 11 PREV PAGE TOP OF DOC One thing that I know for certain is that my constituents do not like high cable rates offered by only one cable operator. They would like to have a choice. I know that because I hear from them about it with some frequency.
Some part of the problem stems from the 1992 Cable Act and its attempts to reestablish rate regulation. To say the least, that has not been a very satisfactory experience for anyone.
Fortunately, the Telecommunications Act of 1996 opens the cable market to many new competitorswe will hear from some of them today. I believe that robust competition is the answer to high cable rates and lack of choice. I believe that competition has taken hold, but it is not progressing fast enough. Today we will focus primarily on the barriers that continue to impede that progress and what can be done to eliminate them.
We will consider two kinds of barriers. First, we will hear about the problems that local government officials face in trying to get new entrants to compete in their communities. Several local officials from my district and Mr. Conyers's district will tell us what has been happening in their specific situations.
Second, we will hear about the problems that new entrants face in obtaining access to the programming necessary to operate competing cable systems. On that issue, we will hear from competitors from various perspectives within the industry. So, with that brief overview, let's turn back to our witnesses.
Mr. HYDE. So with that brief overview, and Mr. Boucher is not here yetwell, I think that we will proceed with the first panel, which is Mr. Reed Hundt, the Chairman of the Federal Communications Commission.
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Chairman Hundt is a graduate of Yale University and Yale Law School. And after a judicial clerkship, he was in private practice in the Washington office of the law firm of Latham and Watkins for many years. He became Chairman of the Federal Communications Commission in November 1993 and has served there since that time.
Chairman Hundt has announced his intention to step down in the near future, so this will probably be his last appearance before us in his capacity as Chairman.
I just want to say that we do appreciate your service to the country. You've led the Commission through a period of unprecedented change, and you certainly are to be commended, and we wish you the very best in your future endeavors, and we'd be pleased to hear from you, Mr. Hundt.
Your full statement will be made part of the record, and if you can condense it to five minutes, we'd be grateful, but that's not mandatory.
STATEMENT OF REED E. HUNDT, CHAIRMAN OF THE FEDERAL COMMUNICATIONS COMMISSION
Mr. HUNDT. Thank you very much, Mr. Chairman.
It is an honor to appear in front of this committee. It's been an honor to be a public servant. I've enjoyed every bit of it, and I appreciate the chance to come and talk to you about it at the end of my term, about the matter that was the subject on the very first day of my term.
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When I arrived in this job, if I remember the number correctly, 286 Members of Congress wrote me a letter saying that we had to lower cable rates. And that led to a lot of activity, and a lot of effort was expended not only in government but in the cable industry. I don't think that that effort was in any way wasted. I think, in fact, that there were some very, very positive accomplishments that we ought to stop for a second and talk about.
Mr. Chairman and members of this committee, we have given you a package of charts which look something like this. Hopefully, they are in front of you, because I would like to ask you take a look at the very top page of this package of charts which shows three line graphs. In the fading days of my time as Chairman, I've become a little bit slack, so I didn't prepare big charts, and I'm leaving the audience in the dark here, but I think they'll just have to forgive me, and we'll be happy to make the charts public to press and to everybody else as well.
But what this first page shows, Mr. Chairman, in the black dashed line labelled cable CPI pre-regulation trend, that shows the rate of price increases for cable measured according to the consumer price index. And I think that you can see in this chart that this black line was soaring at the time that the 1992 Cable Act was passed.
And then this blue chart here, the cable CPI, is what happened because of rate regulation. And what happened is that the price was taken off of this escalating curve, and in fact put into a period of flatness, and it made a dip downwards in 1994, when we had the second round of regulation that resulted from the letter that was sent to us by Congress. And then that curve has begun to go back up over the last several years.
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A couple of points: First of all, cable price inflation, in fact, was stopped by the Cable Act.
Second point is that, if it weren't for the Cable Act, one can reasonably presume that the pre-regulation trends would have continued. And if you look at the prices that have obtained in the industry relative to what would have happened, the difference is a $5 billion difference for consumers in the aggregate. That is the transfer benefit to consumers that Congress caused by the 1992 Cable Act$5 billion. I've read some statements in the press recently that have overlooked this particular fact and that have talked about how Congress didn't do anything at all with respect to the 1992 Cable Act and that it didn't achieve its purposes. That's not so. That's not so.
The cable industry was unhappy about the 1992 Cable Act, and they were not making up that unhappiness. They are not to be understood to have just been living a fantasy life. They did, in fact, have to charge less, and consumers benefitted by an aggregate that is roughly measured right now at $5 billion over the time period that that Act was put into effect.
What the various consumer groups are talking about right now is that this trend line for price increases is now again approximating the trend line that used to exist before the Cable Act. But the reason for that is a different reason, a very significantly different reason, than the reason for the price increases before the Cable Act, as far as we can tell. And we're at the FCC in the middle of a data survey that is not complete.
But as far as we can tell, the reason right now has got two parts. The first part is that the programmers are charging more money to the cable operators for the programs, for cable programs, for ESPN, the Disney Channel, et cetera, et cetera. I don't mean to be picking on those two services; I'm just giving you examples of programming.
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As they charge more money to the cable operators, there are only two choices here. You could have a rule that put the cable operators into a squeeze and didn't let them pass those prices on and eventually you'd put the cable operators into such a squeeze that they would not be able to have the money to invest in building their own infrastructures. That would be a bad policy. That is not our policy. We don't believe that was your intent.
The second choice is to let them pass on these price increases, and that is the policy, and that is what is going on. And it is pretty much the same as a 7-Eleven that has to pay more for its milk, and so the retail price on the shelf for the milk goes up. And you can't blame the 7-Eleven, you've got to go back to the farm where the milk was made, and the milk process there is really where the price increases are coming from.
The second thing that's going on is that the cable industry is spending a substantial amount of money in investing in its infrastructure. And let me just say that the 1996 Telecommunications Act says that we want them to do that, because the 1996 Telecommunications Act says that we want the cable industry to invest in going into the business in providing not only video, but voice and data services. And as a country, our policy is to have the cable industry build a competing infrastructure that can in fact compete with the telephone industry.
And so, the second place that you see price increases come from is the cable industry's need to raise the money to invest in its own facilities. And we at the FCC, back in 1994, told the cable industry that when that was what it was doing with the money that they could get price increases. And I don't think that we did the wrong thing, because I think that you, in fact, are going to see coming into the market late in 1997, this very year and successively in future years, you are going to see coming into the market a range of advanced services, voice, video, and data, that will be provided by the cable industry and they are going to be very, very effective means for providing competition to the existing telephone infrastructure.
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So I think that is good news, and I think that the facts that I have laid out are pretty much indisputable. It is the case, however, that, as you mentioned, Mr. Chairman, and some of the other members mentioned, consumers continue to be concerned about the fact that there is not choice for cable programming right now, and I think that we need to focusif I might, just in conclusionwe need to focus on the two different kinds of cable products that are under discussion when consumers are anxious.
The first is this first tier, also called basic, also called the primary subscription. This is the product that includes the retransmission of broadcast channels. That's not because the cable operators want to retransmit those channels; that's because Congress tells them they have to, and the Supreme Court said that it was okay for Congress to so order. And this first tier, this first product, costs maybe $8, maybe $10, maybe $12, something like that.
The second tier is a larger collection of cable channels, and this might be where you would find Nickelodeon, MTV, and CNN. And that might be another $10 or $15.
But those are two different products. And what consumers are usually complaining about is that, when you add the two together, they don't like the total price. Let me just say, Mr. Chairman, that it is really worth Congress thinking about the following, and that is making sure that we keep the price of the first product, the basic tier, very, very low. It is very useful to think about this because the lower that product, the more likely that a widespread distribution will occur; the more likely that you will have a very large number of subscribers. And I think that it is ideal for a lot of competition reasons, to have basic cable, that first tier, be a product that is in 8590 percent of the homes. If that is the case, with respect to that second tier, you can then count on satellite services and other technologies to deliver that second tier in competition.
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But why can't the satellite deliver the first tier in competition? Because the law doesn't allow it. Because the law says that the satellite companies cannot re-transmit the local broadcast stations. And as long as that is the structure, you aren't going to be able to get competition with respect to that basic tier.
So I would urge you, Mr. Chairman, on a long-range basis to really focus on the fact that the law has created two separate products in cable. That's not natural. That's not the market that's created it. That's what the law has done. And since the law has done that, it has, in fact, distorted the way that this market works. Therefore, we need to address the way it exists as impacted by the statute. And all I'm saying is that I think that the law's direction ought to be to have that basic tier be very low priced, so that it becomes something that is subscribed to by 8590 percent of the homes.
And you will see on page 12 of the package that I have given you that, in fact, the reduction of cable prices under the 1992 Act caused, and was part of the cause of the large increase of the number of subscribers. In 1992 there were 54 million subscribers to cable. There are now 65 million subscribers to cable. This is a very, very large increase. And the biggest single increase in the entire time period, the five years that I'm talking about, was the increase that came as the immediate result of the reduction in cable prices. Prices have something to do with getting more subscribers. And so if basic was lower-priced, and if we took a deregulatory approach to the upper tier, and let the market determine the prices with respect to the upper tier, I think that will be the best way to address the consumer concerns in the future.
Thank you very much.
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[The prepared statement of Mr. Hundt follows:]
PREPARED STATEMENT OF REED E. HUNDT, CHAIRMAN, FEDERAL COMMUNICATIONS COMMISSION
Mr. Chairman, Congressman Conyers and members of the Committee, I am pleased to appear before you today to provide the Federal Communications Commission's perspective on the status of competition in the cable television industry. The Commission, and the Commission's Cable Services Bureau, are working hard to promote the development of competition and consumer choice in the marketplace for multichannel video programming.
Mr. Chairman, on February 8, 1996, when President Clinton signed the landmark Telecommunications Act of 1996, a new course was chartered for the nation's telecommunications industry. After many years of vigorous debate, Congress, in approving the 1996 Act, rejected nearly 100 years of monopoly and restricted entry in communications and replaced them with a national commitment to open markets, competition and deregulation. Congress correctly determined that competitionthe cornerstone of our free enterprise economic systemin the communications markets will yield lower prices and more choices for consumers, rapid technological innovation and a stronger economy.
The Telecommunications Act of 1996 embraces the right principles, but it is not a perfect law. I recently had the opportunity to put forward and discuss a number of changes to the 1996 Act that would help clear away some of the legislative ambiguity and underbrush that I believe have served as a drag on competition, particularly in local telephone markets. Mr. Chairman, I will be happy to share and discuss those recommendations with the Committee this morning, and we may develop further suggestions in the future as we gain more experience with the statute and our implementing regulations.
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We also must understand that ''open to competition'' is not the same as ''competitive.'' Indeed, the removal of barriers to entry is just the first step toward full competition, not its achievement. I realize that when Congress broke down the legal and regulatory barriers to competition many expected an immediate, full-out, competitive war in the marketplace. That has not happened. But it will if we stay the course and stand by our commitment to a pro-competitive policy. All revolutions, even policy revolutions, take some time.
Today, we find ourselves in a period of transition in most of our communications markets. We are moving from communications markets characterized largely by monopoly to a more dynamic and competitive environment. This trend is slower than many of us desire, but it is irreversible. We are beginning to see signs in virtually every sector of the marketplace that competition is taking hold and consumers are starting to see benefits.
In the marketplace for video programming, the Commission's 1996 Annual Competition Report to Congress on multichannel video programming distribution competition tells us that while incumbent cable operators continue to be the dominate distributors of multichannel video programming, other video providers continue to increase their share of subscribers in many markets. Last year, subscribership for non-cable distributors accounted for 11% of the total multichannel video programming subscribership. And the data show that non-cable subscribership has been increasing at an average annual rate of 22% since 1990. Preliminary analysis for our 1997 Competition Report indicates that these trends are continuing. For example, it appears that cable's total market share declined to 87% over the past year.
Page 20 PREV PAGE TOP OF DOC However, even with the cable industry's decrease in its overall share of subscribers, the actual number of cable subscribers continued to increase in 1996. In fact, between our 1995 Competition Report and the 1996 Report, the number of cable subscribers increased by two million compared to the 2.3 million increase in combined subscribership for all multichannel video programming providers. Again, our preliminary research for the 1997 Report shows this trend continues.
We also know that, as a result of acquisitions and trades, cable operators continue to increase the extent to which their cable systems form regional clusters. The number of clusters of systems serving at least 100,000 subscribers increased approximately 40% in 1996, and these clusters now account for service to 50% of the nations's cable subscribers.
Our 1996 Report also found that vertical integration of national programming services between cable operators and programmers declined in 1996, primarily due to the sale of Viacom's cable systems. Of the 16 programming services launched in 1996, 10 are not vertically integrated.
Notwithstanding the imperfections of the 1996 statute and the slow pace of competitive developments in the market, I remain absolutely convinced today that we have the right policy. And the Commission and its staff have been hard at work developing rules to make this policy transition work for consumers and the American economy.
Marketplace for Video Programming
In the market for multichannel video programming, the Commission has been particularly prolific since the adoption of the 1996 Act. We have put a number of rules on the books in record time to foster the growth of competition and give American consumers greater choices in video products and services.
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Over-the-Air Reception Devices (OTARD)
When Congress approved the Telecommunications Act of 1996, it asked the Commission to promulgate regulations that would prohibit restrictions on so-called ''over-the-air reception devices'' such as small satellite dishes, wireless cable antennas, and traditional TV antennas. Well before the Telecommunications Act became law, the Commission had been working on revising its existing regulations on satellite dishes, both large and small. Congress and the Commission recognized that local governmental and non-governmental restrictions were standing in the way of competition among alternative forms of video reception and denying consumers the option of choosing a new service provider.
We had heard from the satellite equipment manufacturers, from the satellite programmers, and from video distributors that local zoning ordinances and homeowner association restrictions were preventing consumers from selecting alternative video providers. Specifically, we heard from the direct broadcast satellite industry that potential purchasers of small satellite dishes and programming packages were deterredeffectively preventedfrom buying and using 18 satellite dishes because of local zoning rules and home owner association rules and restrictions. We also learned that although theoretically it is possible for associations to change restrictive covenants, it is often difficult, if not impossible, to do so because a near unanimous vote is needed. It became clear that many of these local restrictions were based on largely outdated concerns about large satellite dishes and had not been updated to recognize that many dishes were no larger than a pizza pan.
In August 1996, the Commission implemented section 207 of the 1996 Act, acting decisively to remove these restrictions by adopting the ''Over-The-Air Reception Devices'' rule. The rule (which took effect after OMB clearance in October 1996) prohibits the governmental and nongovernmental restrictions that were impeding competition in the delivery of video programming. The rule makes the necessary exceptions for bona fide safety restrictions as well as for restrictions needed to protect historic sites. The rule also allows restrictions that local governments or community associations want to impose for aesthetic reasons, provided the restrictions do not impair installation, maintenance or use of the antenna. Our rule applies to small satellite dishes (one meter [39.37 inches] or smaller, except in Alaska where there is no size limit), to wireless cable antennas that are one meter or smaller in diagonal measurement, and to TV antennas. Prohibited restrictions include those that impose unreasonable expense or unreasonable delay and those that would preclude reception of an acceptable quality signal. Currently, the rule applies in those cases where the consumer owns the property where the antenna would be installed (like a single family house or a townhouse) and has exclusive use or control (like a condo owner's balcony or deck, but not the roof that is shared by other unit owners). The rule also provides that local governments or associations may seek a waiver from the Commission if there are special circumstances that justify an exemption from the rule. And the rule permits any interested party to seek a declaratory ruling from the Commission or a court to decide whether a given restriction is or is not in compliance with the rule.
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Rental property and common areas are not covered by the rule in effect today. The Commission has a proceeding underway to consider whether, and to what extent, the rule could be expanded without violating the Constitution and without causing serious practical problems. The Commission received more than 1600 formal and informal comments on these issues, and we expect to make a decision on these matters in the near future.
Our experience in the 11 months the rule has been in effect has been extraordinary and has borne out the wisdom of the Congress and the Commission in removing these restrictions. We have had a phenomenal level of interest from consumers, industry, local governments, and community associations. 8,000 inquiries have come into the Commission since we adopted the rule. Many of the callers (and e-mailers) are individuals who want to install a dish or other antenna and have encountered resistance from their homeowner associations. We provide them information on the new rule and describe how the rule works.
Most of the time, arming the consumer with information about the rule is enough. Sometimes a homeowner association needs a little more explanation. So the Commission's staff, from our cable contact representatives to attorneys, will contact the association and explain how the rule works and help to resolve the dispute. Many disputesin fact mostare resolved informally. When a dispute is not resolved, the antenna user can file a petition with us seeking a formal ruling on whether the restriction in question should be preempted by the Commission's rule because it impairs installation, maintenance or use of the antenna.
The Commission has reviewed or is currently considering 24 petitions for declaratory ruling. But even after a formal petition is filed we continue to try to resolve the dispute quickly and informally. To date, we have informally resolved seven petitions and are currently attempting to resolve another eight. Nine petitions have gone or are going through the formal process. We issued an Order ruling on one of these formal petitions in July. In this Order, the only one concerning a local governmental restriction, we found that the Commission's rule preempts a Meade, Kansas ordinance because it impaired installation, maintenance or use of antennas covered by the rule. The ordinance required permits and prior approval of installation, compliance with unspecified placement restrictions, and provided for a $500 a day fine for violations.
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We also have heard, informally, from the satellite and wireless cable industry that this rule and the way we are enforcing it is working and helping to promote competition. Now satellite retailers and wireless cable distributors can compete with cable on the basis of which offers the best service and most appealing programming at the most reasonable price.
The Commission also is proposing to modify our cable inside wiring rules to more effectively promote competition and consumer choice in the video programming marketplace. One area of particular concern is the situation in apartment complexes and other so-called multiple dwelling unit buildings (''MDUs'') which comprise approximately 28% of the nationwide housing market. Currently, alternative service providers often have difficulty competing to serve these buildings because the owners do not want additional wires running through the hallways and want the new provider to use the existing wiring. This resistance to multiple sets of wires can deny MDU residents the ability to choose among competing service providers. In addition, the incumbent provider often claims an ownership interest in the wiring and may refuse to sell the wiring to the new provider or to cooperate in any transition. The impact of these competitive barriers is very real and substantial. Access to these facilities is critical if new entrants are to compete effectively with incumbent video providers.
The Commission recently adopted a Further Notice of Proposed Rulemaking where we proposed to establish procedures that would provide a timely and reliable way for an alternative video provider to determine whether and how it will be able to use the existing inside wiring upon a change in service. These procedures would cover both the situations where the owner decides to convert the entire building to a new video service provider, and where the building owner is willing to permit two or more video service providers to compete for customers on a unit-by-unit basis. The Commission believes that these proposed procedures will encourage competition and consumer choice by bringing order and certainty to the process of changing service providers in apartment buildings and other MDUs.
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The comments on the Commission's Further Notice are due tomorrow and reply comments are due next week. We intend to act quickly on these important issues.
In enacting the program access provisions of the 1992 Cable Act, Congress recognized that potential competitors to incumbent cable operators often face unfair hurdles when attempting to gain access to the programming needed to provide a viable and competitive alternative to cable. The Commission's program access rules prohibit unfair and discriminatory practices in the sale of satellite cable and satellite broadcast programming and prohibit or limit the types of exclusive programming contracts that may be entered into between cable operators and vertically-integrated programming vendors. In accordance with the 1996 Act, the rules have been extended to apply to common carriers or their affiliates that provide video programming, as well as to open video system operators.
The Commission's program access rules have been used as a tool to promote competition in the multichannel video programming distribution marketplace. Indeed, they have been credited as an important factor in the development of both the direct broadcast satellite and wireless cable industries.
To date, the Commission has resolved 28 program access matters. These include exclusivity petitions and complaints, unreasonable refusals to sell, and price discrimination complaints. For example, the Commission has resolved two complaints in favor of new entrants in the video marketplace that alleged vertically integrated programming providers unreasonably refused to sell them programming. The Commission's actions in these matters have helped to open the video marketplace to emerging competitors such as CellularVision (an LMDS licensee) and Bell Atlantic Video Services (an Open Video System operator).
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Some alternative video providers have suggested that the Commission should modify its program access rules in a number of areas. For example, Ameritech New Media has filed a Petition for Rulemaking, asking the Commission to amend its program access rules to (1) impose a mandatory right of discovery to enable complainants to obtain information necessary to prove program access violations; (2) impose damages for violations of the program access rules to create an economic incentive to discourage violations of the program access rules; and (3) impose specific time deadlines for resolving program access cases.
Still other video providers have recommended that the Commission consider additional changes in our program access rules. The Commission is currently reviewing its program access rules and procedures, and may soon issue a Notice seeking public comment on the Ameritech Petition and other recommendations.
Open Video Systems
The open video system framework established in the 1996 Act provides a new alternative for local telephone companies and others to enter the market for the delivery of video programming. In accordance with Congress' statutory mandate, the Commission established final open video system rules in the six months following the adoption of the 1996 Act, including a reconsideration of those rules. The Commission's rules were designed to promote the competitive benefits that Congress sought to achieve: market entry by new facilities-based service providers, enhanced competition, streamlined regulation, investment in infrastructure and technology, diversity of programming choices and increased consumer choice.
Page 26 PREV PAGE TOP OF DOC Since the Commission finalized its rules, we have certified nine open video system applications. Each applicant that has applied for open video certification has been certified. Two open video systems are now operational and providing direct competition to the incumbent cable operators in their areas.
We are aware that some concerns have been raised about the OVS model as a viable alternative and our rules. For example, some have suggested that the Commission's rules have failed to address or resolve issues associated with the payment of fees to local authorities, the control of the OVS platform, and how telephone companies are to allocate their costs between telephone and video services.
In the 1996 Act, Congress did not require open video system operators to obtain a cable franchise. However, in return for this, the 1996 Act requires an open video system operator to make 2/3 of its capacity available to unaffiliated programmers, pay up to 5% of its gross revenues to the local government in lieu of a franchise fee, provide public, educational and government channels, and carry local broadcast signals. Congress intended the proposition to be either/or: either obtain a cable franchise and be regulated as a cable system operator, or operate an open video system and accept the requirements set out in the statute. Video providers have the option of complying with the cable franchise requirements or the open video system rules. It seems that some potential video providers want to have it both ways.
High Penetration Basic Cable Service
I also continue to believe that a high penetration basic cable service tier would produce several competitive and consumer benefits.
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First, a high penetration basic tier would mean that cable service was affordable for most consumers. Second, by making it possible to extend the cable wire into an increasing number of households, the cable industry will find itself in a better position to exploit its network to compete in new markets for nonvideo communications services. Thus, increased cable penetration is likely to enhance competition in the markets for internet access and telephone services.
This is particularly true with internet access services where the cable industry's networks are tailor-made for the new emerging world of data services. No competitor currently has the advantages of cable's existing networks; cable's co-ax network to the home is 30 times faster than the fastest telephone-line connection. Current estimates indicate that cable modem service is now available to 2 million U.S. households, and the cable industry will have 300,000 internet access subscribers by the end of the year. Increased market penetration can only make the cable industry a more formidable competitor in the market for internet access services.
While more challenging from a technical standpoint, the same can be said for other nonvideo services like telephony. A two-wire worldwhere cable networks reach into an increasing number of householdswill enhance the prospects for meaningful facilities-based competition in the market for local telephone service.
Finally, a high penetration basic cable service also may permit some cable operators the pricing flexibility they need to respond to new pressures in an increasingly competitive market for video programming. At the same time, by making a service tier that contains the over-the-air broadcast signals more widely available, many consumers will, for the first time, have a realistic option to subscribe to a second video provider for other programming services. This could give a boost to some of cable's competitors which currently do not provide local broadcast signals as part of a programming package.
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The Commission's Cable Pricing Flexibility proposal was designed to promote these policy objectives. While the Commission has not acted on the proposal, we should continue to pursue policies that will promote the increased penetration of basic cable service.
Social Contracts and Rate Resolutions
The Commission is aware that some concerns have been raised about the use of social contracts and rate resolutions. The Commission has found social contracts to be a useful tool for providing for the upgrade of cable facilities allowing operators to expand service offerings. It has found rate resolutions to be a fair and cost-effective way to deal with thousands of cable rate complaints. In some cases rate resolution provisions have been incorporated in social contracts. Both social contracts and rate resolutions have worked to provide certainty to operators about the operation of the rate regulation rules.
The Commission entered into social contracts with MediaOne (formerly Continental Cablevision, Inc.) and Time Warner, and has proposed to enter into a social contract with Comcast Corporation. These contracts arise from determinations the Commission made shortly after the adoption of the Cable Television and Consumer Protection and Competition Act of 1992. At that time, the Commission noted that one of the policy goals Congress established in the 1992 Cable Act was ensuring that cable operators continue to expand their capacity and the programs offered over their systems, where economically viable. The Commission stated that the goal of promoting economically justified system upgrades, as well as the goals of the 1992 Cable Act, could be advanced by the development of an incentive regulation approach to upgrading cable services, similar to the incentive plans the Commission had previously implemented for telephone carriers. The Commission determined that it would consider entering into social contracts where the contracts would permit operators to recover the cost of their upgrades, while continuing to provide stable and reasonable rates for their customers.
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The Commission's social contracts with cable operators are designed to carry out this objective. The Commission has entered into social contracts with cable operators after it determines first, that the upgrades proposed by an operator are significant capital expenditures to be used to improve the quality of service or to provide additional services, and second, that the cost of the proposed upgrades attributable to rate regulated service equals or exceeds the additional charges that the social contract would allow. The Commission has not sought to determine what technology an operator would select for its upgrades, which specific franchise areas would be upgraded under a contract, or the time at which any particular upgrade will take place within a contract's term. Importantly, the Commission's social contracts have allowed recovery for upgrades only through adjustments to rates charged for cable programming services tiers, the tiers that are within the Commission's exclusive jurisdiction. They do not permit adjustments to pay for the contracted upgrades to rates for basic service tiers, equipment or installation.
The social contracts adopted by the Commission specifically state that they do not supersede any previous upgrades committed to by an operator and do not preclude any franchising authority from seeking upgrades in excess of those mandated by a social contract. Throughout the social contract process, the Commission has preserved the discretion of local communities to negotiate with cable operators as to the nature and amount of expenditures appropriate for their communities.
The Commission also has approved eight Rate Resolutions and Rate Resolutions with two companies are currently pending. The final Rate Resolutions have resolved more than 3000 rate complaints and have provided $29 million in total refunds to 17 million subscribers. The pending Rate Resolutions provide for approximately $6.7 million in refunds to more than 1.2 million subscribers. The rate resolution provisions of the two social contracts have resolved approximately 2,660 rate complaints and have provided nearly $16 million in refunds to more than seven million cable consumers. In total, the Commission's Rate Resolutions and social contracts will provide more than $50 million in consumer refunds and reasonable future rates.
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In considering the adoption of social contracts as well as Rate Resolutions, the Commission has used procedures designed to maximize input from affected franchise authorities. Before adopting a social contract, the Commission issues a Public Notice summarizing its terms, specifying how copies of the proposed agreement can be obtained and announcing the commencement of a public comment period. Copies of proposed social contracts and Rate Resolutions have been mailed to the franchise authority for each affected franchise area. In addition, any time rate complaints are proposed to be resolved a copy of the resolution document has been mailed to each non-governmental complainant with an explanation of the comment period and how comments can be filed.
Comment periods have been for a minimum of 30 days for initial comments and 10 days for reply comments. However, in each case in which a franchise authority has asked that the comment period be extended, the Commission has granted the request for additional time. The Commission received extensive comments from franchise authorities and others in connection with each social contract and several Rate Resolutions and has made changes to proposed agreements to reflect those comments.
Cable Television Rates
The rates charged for cable television services also have been the focus of attention in recent months. Like most consumer products and services, the price for some cable television services has increased over the last year. Some measures suggest that cable rates are again rising much faster that the general rate of inflation.
Page 31 PREV PAGE TOP OF DOC To determine the behavior of cable rates and the reasons behind the changes in cable rates, the Commission initiated its annual Cable Price Survey in June. As directed by the 1992 Cable Act, the Commission will use the data collected in the Price Survey to compare rates charged by competitive cable systems with rates charged by systems that are not subject to competition.
The Cable Services Bureau is just beginning to assemble and review the data and information collected through the Price Survey. It is too early to draw any definitive conclusions from the information collected, but we believe the Survey will help us better understand the behavior of cable rates over the last 12 months.
A preliminary review of the information suggests that the bulk of the increase in cable rates in the past year can be attributed to the following four factors:
the addition of new channels;
increases in costs of programming already on the system; and
system upgrades (including upgrades required for conversions to digital service).
Mr. Chairman, this may be my last appearance as Chairman of the Federal Communications Commission before a Committee of Congress. I have mixed emotions about my imminent departure. I will always cherish this experience but do look forward to spending more time with my family, particularly my children.
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It has been the highest privilege of my professional career to serve as Chairman of the FCC. I have often said that this is the best job in Washington that you don't have to be elected to. I really believe that.
There has never been a more exciting or eventful time to be involved in the communications policy arena. It has been a great honor, over these past four years, to work with the President, Vice President Gore, many Members of Congress, and the Commission staff to help shape and then implement the landmark Telecommunications Act of 1996.
Thank you for the opportunity to provide the Commission's perspective on these important matters. I will be happy to answer any questions.
Mr. HYDE. Thank you, Chairman Hundt.
The Chair will now turn to Mr. Boucher, the gentleman from Virginia, for an opening statement.
Mr. BOUCHER. Thank you, Mr. Chairman.
I appreciate your convening the hearing today on what is a very timely subject, the provision of access to programming for multi-channel video providers.
I have had a very longstanding interest in the promotion of competition in the multi-channel video marketplace. In fact, in 1988, I introduced with then-Senator Al Gore legislation to repeal the cross-ownership restrictions that were a feature of the 1984 Cable Act that prohibited telephone companies from offering cable-TV service inside there telephone-service areas.
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In 1996 when we passed the Telecommunications Act, that provision was included. That ban was repealed. And today, I'm very pleased that on our second panel of witnesses we will hear from a telephone company about its experience in seeking to offer cable-TV service in competition with the incumbent cable company.
While cable competition is in fact now emerging from telephone companies, from wireless cable systems, and from open video system operators, the viability of this competition will only be assured if the new competitors have access to the well established programs that subscribers of cable service will demand.
In 1992 in the House Commerce Committee, we were successful in putting forward and subsequently enacting legislation that provides program access for competitors to what was at the time the most popular and most-in-demand television programs. The 1992 law ensured that cable competitors that obtain access to programs produced by companies that also owned cable interests. In other words, companies that both produced programs and had distribution within a single umbrella were subject to the program access requirements. Those vertically-integrated companies in those days provided almost all of the very popular shows, ESPN and the Disney Channel being among the rare exceptions.
But the landscape today has changed dramatically. Much programming currently in demand is produced by companies that have no cable properties and are therefore not subject to the program access requirements of our 1992 law. Viacom, for example, owns MTV, Nickelodeon, the Movie Channel, and a new offering called TV Land. Other independently-produced programs are proving to be very popular with cable subscribers, and it is exceedingly difficult for a competitor to the existing cable company to succeed and be viable today unless it can offer this program as well, the program that is produced by companies that are not vertically integrated and do not own cable properties.
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While we may need to address some of these concerns in the House Commerce Committee by amendments to the Communications Act, there is a current practice involving non-vertically-integrated programmers that has significant antitrust implications and that is fully deserving of the attention of this committee. It is a problem that may call for a legislative solution, and in fact might even suggest itself to the Department of Justice for an investigation.
This morning, Ms. Lenart, from Ameritech, will detail the anti-competitive arrangements which are being formed between cable companies and non-vertically-integrated programmers for exclusive terrestrial carriage of the programs on cable systems. In other words, the large cable, multiple-system operator is making a pact with the non-vertically-integrated programmers that the program will be carried on the many cable systems around the country that that multiple system operator owns and controls, but only in exchange for a promise from the programmer that the program will not be carried on terrestrial competitors to that cable systemmeaning that telephone companies, OVS system operators, and wireless cable concerns will not be given access to those programs. That collusion freezes out the very competitors that it was the purpose of the 1996 legislation to encourage. It thwarts congressional intent, and it hurts consumers.
Mr. Chairman, in future hearings, the committee might want to consider calling before this committee for more in-depth questioning the very cable companies that are parties to these anti-competitive contracts and the programmers that are parties to these anti-competitive contracts as well. We do not have those interests represented here today. But it might provide a foundation were we to get information directly about the extent of the formation of these contracts and the intentions of these companies with regard to their future conduct to pave the way for a legislative solution under the anti-trust laws or to inform the Justice Department under its auspices might be required.
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In the meantime, Mr. Chairman, I join with you and others in welcoming Chairman Hundt here today, a good friend whose advice we will miss as he departs the chairmanship of the Commission, and I'll look forward to hearing the testimony of the other witnesses.
Mr. HYDE. Well, I thank the gentleman from Virginia. I was just engaging in a discussion with our chief antitrust counsel about the omission that the gentleman perceives. We feel that panel three does represent the people that you are concerned about, but we can talk about that later.
Do Mr. Meehan or Mr. Delahunt have an opening statement?
Mr. MEEHAN. No.
Mr. HYDE. Mr. Delahunt.
Mr. DELAHUNT. No.
Mr. HYDE. No. Mr. Gekas? Do you have any questions?
Mr. GEKAS. Yes. I have one, please. I thank the Chair.
The witness, Mr. Hundt, you mentioned that you made it clear to the cable companies in 1994 that if they raised prices or increased revenues solely for the purpose of sequestering them towards reinvestment, that that would be approvedor is approvable. In reading the current status of the law, the Telecommunications Act, there is no mention of that in that, is there? In the act?
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Mr. HUNDT. In the 1992 Cable Act
Mr. GEKAS. I understand, but in 1996 is there any mention of that reinvestment potential?
Mr. HUNDT. Nothing comes to mind right now.
Mr. GEKAS. Nor in the previous act, is that correct?
Mr. HUNDT. It is in the 1992 Cable Act.
Mr. GEKAS. Oh, then I missed something.
Mr. HUNDT. The 1992 Cable Act clearly asks the FCC to strike a balance between the need to generate funds for investment in the cable industry while at the same time making sure that the product is affordable. And that was what I was trying to say was the balance
Mr. GEKAS. And so that the 1992 act authorizes the FCC to determine whether or not increased prices were going to be resulting in reinvestment or enhancement of stockholders's interests?
Mr. HUNDT. Yes, that is correct.
Page 37 PREV PAGE TOP OF DOC Mr. GEKAS. You believe that that has worked? Between 1994 and 1996 did you see a cycle of reinvestment?
Mr. HUNDT. Yes, I think that Americans will be seeing this in many communities starting in late 1997.
Now I think that the cable industry would probably agree that one problem that they caused is that they overpromised on their ability to quickly deliver the enhanced packages of voice, video, and data. And back in 1992 and 1993 and 1994, a lot of the Members, I'm sure, were told by the cable industry that rather quickly the industry would be able to deliver this package. And I believe you were probably told this as part of the discussions of the 1996 Telecommunications Act.
It didn't prove to be that easy. The technology proved to be trickier. The investment needs proved to be greater.
But that didn't mean that they were wrong on a long-term basis. The cable industry is right that, where the money is available and where it is committed to building their infrastructure and rebuilding their systems with a hybrid-fiber coax network, they will, in fact, be able to provide two-way communication combinations of voice, video, and data that will be very popular with a lot of Americans. And you are going to see that, in my view, over the next four or five years.
Mr. GEKAS. You did not perceive a cutoff in the reinvestment programs after 1996, did you? The ones that were in progress between 1994 and afterwards
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Mr. HUNDT. I think that the 1996 Telecommunications Act has only caused the
Mr. GEKAS. Spurring
Mr. HUNDT. Right. The need to invest to be spurred.
Mr. GEKAS. I have no further questions.
Mr. HYDE. I thank the gentleman.
The gentleman from Michigan, Mr. Conyers.
Mr. CONYERS. Thank you very much.
A little recent history. You supported the Telecommunications Act, right? You predicted that prices would go down, right?
Mr. HUNDT. Insofar as I had the power to order it.
Mr. CONYERS. Ah. You shook your head, but you didn't say yes. I mean us Yale and Wayne University law students have to get this on the record.
Mr. HUNDT. Insofar as it is within the FCC's jurisdiction, especially as the courts permit us to exercise that jurisdiction, I am confident that the prices will go down. And in fact, the prices in long distance have, in the last year, gone down more than ever before in history.
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Mr. CONYERS. Reed, come on now. I asked you if you promised that prices would go down, and you said, ''Yes.''
Mr. HUNDT. And they have.
Mr. CONYERS. Prices haveand they what?
Mr. HUNDT. And they have. Are we talking about telephone prices here?
Mr. CONYERS. Well, my complaints are coming from cable and telephone.
Mr. HUNDT. Well, as far as telephone is concerned, Congressman, long distance prices, which are the only prices which the FCC has the jurisdiction over, long distance prices have dropped more in the last 12 months than ever before in history. That is because access charges were reduced by us more than ever
Mr. CONYERS. Well, who are these people sending me letters? I mean, can I share this with you? I mean, maybe they don't read their bills right. Do you have staff that handles this sort of thing?
Mr. HUNDT. Yes, sir. I'd be happy to have your input
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Mr. CONYERS. Oh, boy
Mr. HUNDT [continuing]. And to respond directly to consumers. I mean, long distance priceswe all know this from just looking at the ads, five cents a minute
Mr. CONYERS. Well, like you say, cable overpromised. Could the telephone boys overpromise too? I mean, there is a lot of advertising that I won't care to describe right now going onI mean, you know, how in the world does a person sitting at his home choose between 15 ads with movie stars, experts, kids in college all telling you that my prices are cheaper than anybody else's?
Mr. HUNDT. Earlier this year for the first time in seven years, the FCC, because of the 1996 Telecommunications Act, lowered prices for long distance customers who have never, ever switched from AT&T since the breakup.
Mr. CONYERS. My congratulations. Now what is the answer to my question?
Mr. HUNDT. Long distance prices have never gone down faster or farther than they have in the last twelve months. You can see it on the TV every night. Five cents a minute for MCI, if you are calling on a particular night; days where you can call for free
Page 41 PREV PAGE TOP OF DOC Mr. CONYERS. Ok, don't answer the question. Ok, ok.
Now do you not believe that there is a dangerous possibility that large cable operators, some of whom are getting larger with mergers and acquisitions and some antitrust violations that almost everybody up here has indicated might be the problem, can demand exclusivity of a programming with a result being less competition and higher prices? In other words, as the big boys get bigger and bigger, they suck up all the competition. This is free market. The big guys swallow the little guys, and guess what? They set the rates.
Mr. HUNDT. I think that the problem with respect to cable prices is a very different one than the one with respect to long distance, but you can see from looking at the two industries the difference. In long distance there are 500 companies now that offer long distance service. There are at least four or five companies that have facilities-based long distance services in most major markets. In cable we still have, in almost every major market, just one company that has a means of delivering cable service, and that is the existing cable company.
The telephone industry has not provided an alternative. And the satellite industry cannot retransmit broadcast signals, and so it is not able to provide a competitive package to basic cable.
So you are right about cable. Cable is still a problem.
Mr. CONYERS. Reed, couldn't you answer one question going out the door that I asked? I mean, I love these lectures, but you didn't answer the question. What was the question? Ok, I'll tell you.
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Mr. HUNDT. I believe that you were asking whether the cable industry as a single provider has the ability to exercise market power over programmers and over consumers.
Mr. CONYERS. Yes, and what is the answer?
Mr. HUNDT. What I'm trying to say is, yes.
Mr. CONYERS. Oh, thank you very much.
Mr. HUNDT. And that will remain true as long as Congress does not permit broadcast channels to be retransmitted by any other device.
Mr. CONYERS. Ok. Well, thank you very much. I appreciate your response.
Mr. HYDE. The gentleman from Virginia, Mr. Boucher.
Mr. BOUCHER. Thank you very much, Mr. Chairman.
Mr. Hundt, one of the practices or problems that will be presented by some of the representatives of companies that are terrestrial competitors for the cable industry relate to the difficulty of getting effective remedies when an inappropriate provision of program access has been established.
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For example, at the Commission today there are no penalties, apparently, for violating the 1992 program access rules. The Commission may find a violation, but the answer to the aggrieved party is ''Well, try to go negotiate a better deal.''
The other problem that I would like you to address is that it apparently takes a very long time for the Commission to make a determination with regard to whether or not a violation actually exists.
And so, the combination of no penalty in the event that a violation and a very long time before the absence of a violation or the presence of it is determined means that programmers today can basically a violation just as a cost of doing business. And there really isn't very much of a sanction if any at all for violating the law.
I know that you are thinking about a rulemaking in this area, and I would simply like to encourage that when you put the rulemaking forward that you provide meaningful penalties for violations and perhaps some very early time frames and deadlines within which the complaints will be addressed and resolved.
And your comments with regard to that would be helpful.
Mr. HUNDT. I think that you are raising a newly important issue.
The program access provisions of the 1992 Cable Act are widely regarded as a success, and I think they ought to be widely regarded as a success. Those provisions were basically followed without serious complaints, without even a large number of disputes by pretty much everybody for four or five years. There weren't very many people who sought to enforce those provisions. Really just DirecTV and a couple of other incidents. We've only had, as far as we can add it up, about two dozen complaints in five years.
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However, Ameritech is a new kind of provider with a cable overbuild. A very rare situation, but hopefully a situation that will occur and reoccur. And AmeriTech is saying that they are having new problems that really are distinct from the situation that the satellite companies have faced.
Well, we ought to take a new look at the situation which is, I think, what you are suggesting, Congressman, and I agree with you.
Mr. BOUCHER. Very good.
A question on a very different topic: I've gathered from your statement that you would support the availability of a basic tier that would include broadcast signals, perhaps superstations and perhaps public television for a very low price, maybe $7 or $8 a month. And I'm going to ask you about the most appropriate means to obtain that.
One possibility would be a rate-regulated basic tier made available nationwide and then satellite distributors or others could provide the premium tier on top of that. I happen to think that that is a very important approach to promoting competition. I'd like to see that occur.
One question of you is, do you have the power to provide that rate-regulated basic tier? If you do, I'd like to see you do it.
The second part of the question is this: I gather that you are concerned about the application of the copyright law and the section 119 compulsory license that effectively does, as you have indicated, the unrestricted retransmission of network broadcast signals including local station uplinks that could be redistributed even back into the local market. That is not clearly sanctioned by the law.
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So what is the thrust of your suggestion to us? Is it that the proper steps be taken either legislatively or regulatorily through your own act to provide a rate-regulated basic tier? Or is it that that basic tier be made available by amending the copyright law to remove all restrictions on the ability of satellite companies to retransmit broadcast stations?
Mr. HUNDT. As you know better than I, Congressman, this is a very complex issue because it also raises serious questions about the viability of broadcast as a separate entity in markets, and I am sensitive to the importance of that.
Let me say that I read in the trade press today that my friend Tom Rogers gave a speech yesterday, from NBC, in which he said that broadcast and cable have effectively merged, and I take it that he meant from the perspective of the consumer.
But let me just say that for broadcast and cable to merge from the perspective of competition policies is not necessarily a good thing. And particularly if these digital-TV licenses are given to today's broadcasters, they are potentially an extremely viable and useful way of having competition against cable in a local market because it is essentially a local business, digital television.
What I would urge Congress to do is to tell everybody who has a digital-television license: ''You go out there and you put as many channels into that spectrum as you possibly can and create it as a group in a particular city with 50 or 60 channel packages and then go ahead and compete against the cable industry.'' That's what we want to see. For the consumer to be able to choose between an over-the-air reception of the quality signal, which is what digital would be, or down-the-wire means of giving the exact same programming because that still lets the cable industry have rights to acquire the network feed
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Mr. HYDE. The gentleman's time
Mr. HUNDT. That's the only way to have competition.
Mr. HYDE. The gentleman's time has expired.
Mr. BOUCHER. I ask unanimous consent for one additional minute.
Mr. HYDE. Without objection.
Mr. BOUCHER. Mr. Hundt, if you could perhaps respond to the question in these terms: How do we get that basic tier of service made available at the low price? Is it by rate regulation? Either statutorily or by your action? Or do we have to amend the satellite compulsory license in order to get it? Or do you have an opinion?
Mr. HUNDT. I think that Congress has to get a Commission that is willing to adopt a model that you and I are both talking about in positive terms which is a very low-price basic cable service, and a comparatively or maybe even a totally, deregulated enhanced basic. And to report to you honestly, you haven't had a full Commission that has had that particular sensibility in the last couple of years. But I think that it is probably the right way to go.
Now as to whether that low price should be obtained by price regulation, I would just throw one other idea out. Another way to do this is to say the following: ''We want the basic cable service to get 85 percent penetration. Any way you want to do that, cable operator, that's okay with us. If you don't do it, we're going to regulate the heck out of your prices. But if you do do it, we're going to assume that the consumers are happy because 85 percent were buying it.''
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Mr. BOUCHER. Thank you, Mr. Hundt. We'll take that up with the new Commissioners.
Thank you, Mr. Chairman.
Mr. HYDE. Thank you, Mr. Boucher.
The gentleman from South Carolina, Mr. Inglis. Do you have any question? No questions.
The gentleman from Massachusetts, Mr. Delahunt.
Mr. DELAHUNT. Thank you, Mr. Chairman.
You alluded earlier to turning on the TV every night and seeing ads for five cents a minute for long distance, and that is true. I mean, you pick up the paperit seems like just about every time I pick up the Boston GlobeI happen to be from Massachusetts, so I read the Globe and the Herald, if there is a Herald reporter here. You know, there is always a story, or it seems that at least once a month there is a story about a merger and acquisition of cable operators. And I wonder if you couldand I understand that a member of my staff just gave me a chart, but I haven't had a chance to review itcan you give us your impressions and review of the last two or three years of mergers and acquisitions of cable operators?
Page 48 PREV PAGE TOP OF DOC Mr. HUNDT. Yes. Cable as you know, Congressman, by Congress' action in previous decades, has been a very, very highly fractionated industry because it is regulated through franchises at the local level and there are, many thousands of separate franchises. So because of congressional action this industry grew up with very, very small geographic units and a great deal of dispersal.
Now that this industry is seeing that its major big competition is the telephone industry people in the cable industry are thinking, you know, ''We need to have geographic units that can really compete against our rivals. We need to have large geographic areas that are our footprint. And then we can advertise.'' They can buy advertisements in Boston and then everybody who sees it will have the same cable operator so it becomes more effective and more efficient to advertise the cable services
Mr. DELAHUNT. So how many major cable operators are there today in this Nation?
Mr. HUNDT. Well, I don't know the precise answer, but you are getting to a very important point if I could just jump right ahead in the direction that I think you are going.
Mr. DELAHUNT. Let's get to the point. I think that you anticipate my question.
Mr. HUNDT. I think that is a good thing for cable operators to consolidate in geographic units. The question is whether you want it to also be the case that on a national basis you only have two or three cable operators.
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Mr. DELAHUNT. Are we heading in that direction?
Mr. HUNDT. That's the direction that we're heading in. And what I would say to Congress is that the right answer is this: Absolutely let cable create these geographic units, but don't let the cable industry as a whole get reduced to just two or three major companies.
Mr. DELAHUNT. Are you concerned about what I perceiveagain without anything more than reading the daily paperas a trend towards monopoly among the cable operators?
Mr. HUNDT. To borrow an example, I don't think that there should be fewer than five Bell telephone companies plus GTE. That is six in the telephone industry that basically are about 90 percent of the telephone business. You don't want cable to have a smaller number than that. If anything they should have a larger number.
Mr. DELAHUNT. But that is the trend?
Mr. HUNDT. Yes, sir, and I think that Congress should focus on it.
Mr. DELAHUNT. And it has clear antitrust implications in your opinion?
Page 50 PREV PAGE TOP OF DOC Mr. HUNDT. Yes, potentially negative. I do want to reassert that the geographic clustering or consolidation I think is pro-competitive. But on a national basis you don't want to have the aggregate number of cable operators that have 80 percent share be much smaller than about five.
Mr. DELAHUNT. Thank you.
Mr. HYDE. The gentleman from Ohio, Mr. Chabot.
Mr. CHABOT. Thank you, Mr. Chairman. I'll be brief.
Mr. Hundt, in written testimony that I've reviewed, you mentioned that Ameritech has filed a petition for rulemaking regarding the program access rules. Could you please update us on the current status of that petition?
Mr. HUNDT. Yes, but is a very short answer. We put it out for comment. We're getting the comments. I don't have anything official that I can announce to you. Work is underway. I think that it would be inappropriate for me to go beyond that, and I don't know whether this Commission that exists right now will be in office long enough to actually vote on the outcome because the new batch of Commissioners will have their confirmation hearings next week.
Mr. CHABOT. Thank you.
Mr. HYDE. Mr. Wexler of Florida.
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Well, thank you, Mr. Hundt, very much for your
Mr. CONYERS. Can I just have one more question?
Mr. HYDE. Mr. Conyers wants a second shot.
Mr. CONYERS. I want to just try to get one response. I haven't given up.
Do you believe that program access provisions should also apply to the exclusive contracts with direct broadcast satellite operators?
Mr. HUNDT. I don't know of any reason to do that at this time.
Mr. CONYERS. Well, therewhen you talk about rebroadcast for satellite, I'm assuming that you are arguing for retransmission of network broadcast by these DBS operators. So shouldn't they give up something? I mean, does equity
Mr. HUNDT. I just don't know of any programming that DBS has that's exclusive to DBS, so I don't know of any market desire to have that be shared by anyone.
Mr. CONYERS. You think that they are doing some with NFLnobody knows about it. Well, okay, then this doesn't have application.
Page 52 PREV PAGE TOP OF DOC Mr. HYDE. The gentleman from Massachusetts.
Mr. DELAHUNT. Yes, just one final question.
Is your concern in terms of this trend towards monopolization at that level where you would recommend that the Department of Justice initiate a review of what's occurring in mergers and acquisitions in the cable industry?
Mr. HUNDT. I think that it would be very useful, and we don't have time to get into it, but there is a kind of tortured history of the horizontal ownership provisions that are in the law, and I think that it would be very useful to have the Department of Justice help us all here.
Mr. DELAHUNT. So we're at that point in time where you would recommend that?
Mr. HUNDT. Yes, I think that would be very useful.
Mr. DELAHUNT. Thank you.
Mr. HYDE. The gentleman from Virginia, Mr. Boucher.
Mr. BOUCHER. Thank you, Mr. Chairman.
Chairman Hundt, I have one additional question. One of the major antitrust concerns that will be presented to us by the next panel will be the emerging practice of some of the cable MSO's of essentially requiring that the programmers, the non-vertically integrated, independent programmers, refuse to sell their programming to terrestrial competitorsmeaning phone companies, OBS system operators and wireless cableas a condition of the willingness of the MSO to carry that programming on the cable systems.
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Now I know that in your previous life you were an antitrust lawyer. And given your extensive knowledge of the telecommunications market, I would welcome your opinion as to the antitrust implications of that practice. Something that will be of great concern to this committee, and your views would be valued on that.
Mr. HUNDT. Did you mean right now, Congressman?
Mr. BOUCHER. Yes, right now.
Mr. HUNDT. Or upon further deliberation?
Mr. BOUCHER. At the moment if you please.
Mr. CONYERS. How about next year?
Mr. HUNDT. I'm sure that you will be sympathetic when I say that I don't really know all the facts about the situations, and I have only a cursory knowledge of the allegations. But I imagine that the hypothetical to be concerned about is a cable firm that exercises market power so as to disadvantage its rivals. And that is a concern. And you can think of other examples, licensing practices in the software field come to mind as well, which have typically been discouraged by the Antitrust Division. And I don't mean to be putting the monkey on their back, but looking into that kind of issue is exactly what they historically have done and have done very, very well.
Page 54 PREV PAGE TOP OF DOC Mr. BOUCHER. If the facts are established as the question suggests and that pattern of conduct really is occurring, that would be an antitrust violation, would it not?
Mr. HUNDT. Well, again, you need to know a few more facts. But it certainly is enough to take a very, very hard lookthat by the way is not the same thing as whether there ought to be program access as to non-vertically
Mr. BOUCHER. No, I understand. It's a separate question.
Mr. HUNDT. We're talking about the exercise of market power by
Mr. BOUCHER. Yes, that separate question really resides within another committee.
Mr. HUNDT. That's right.
Mr. BOUCHER. The antitrust concerns are here.
Is the problem not worsened by the consolidation that is taking place within the cable industry which in fact enhances the market power of cable to make that kind of requirement?
Mr. HUNDT. Well it certainly isn't made any better. I think that the question is what is the geographic footprint of the MSO, and what is its rival geographic market. And if they overlap, and the existing incumbent who has 87-90 percent market share uses that market share to disadvantage its rival, then you have the issue.
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Mr. BOUCHER. Thank you, Mr. Hundt.
Mr. HYDE. Thank you, Mr. Hundt, very much for your testimony.
Mr. HUNDT. Thank you for having me.
Mr. HYDE. Our next panel consists of several witnesses representing local governments in my district and Mr. Conyers's district. They will tell us what is happening with respect to cable television in their communities.
Our first witness will be the Honorable Ronald Wietecha, the Mayor of the City of Park Ridge, Illinois. Mayor Wietecha is a graduate of St. Mary's College, the University of Iowa, and Loyola University Law School. He has been mayor since 1991, and before that he served as an alderman for several years. In addition to being mayor, he is a professor of speech communication at Wilbur Wright College of Chicago and an attorney in private practice.
Our second witness will be the Honorable James Petri. Mr. Petri is a Village Trustee of Elk Grove Village, Illinois and has served as a trustee since 1979. He's been active in cable television issues for nearly 20 years and has represented the village on the regional cable group, a group of communities that work together on cable issues. During his service there, he has had the opportunity to observe numerous changes in the cable industry.
Our third witness is the Honorable James Carr, the Mayor of Wheaton, Illinois. Mayor Carr is a graduate of Culver-Stockton College, Yale University, and the Yale Divinity School. He has worked as a pastor and a banker. For the last 18 years he's been an executive of the Produce Reporter Company, a credit and marketing service for the fresh fruit and vegetable industry. He has taught college courses, consulted for business, and published scholarly articles on a number of topics. He's been mayor of Wheaton since 1993.
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Our final witness is the Honorable Frank Palazzoloforgive methe mayor of Harper Woods, MichiganI should have let you handle that, John. Mayor Palazzolo is a graduate of the University of Michigan and the University of Detroit Business School. He has extensive experience in the health care field having been with the Henry Ford health system in Detroit since 1986. He has published scholarly articles, taught college courses, and holds a patent for a method for disinfecting toothbrushes. He's been the mayor of Harper Woods since 1995.
Any other commercials, we'll be happy to extend them. I'm very pleased to have you all here today, and we all look forward to your testimony.
Mayor Wietecha? Would you put the mike on, Ron? There is a little switch right there. That's it, now we can hear you.
STATEMENT OF HON. RONALD WIETECHA, MAYOR, PARK RIDGE, ILLINOIS
Mr. WIETECHA. Thank you, Congressman. And once again, good morning. I do want to thank the committee and Congressman Hyde for providing all of us with this opportunity to speak today.
My name is Ronald Wietecha, and I am the mayor of the city of Park Ridge, Illinois. Park Ridge is a residential suburban community bordering the city of Chicago with about 37,000 residents. It also happens to be a mostly Republican birthplace of our First Lady, Hillary Rodham Clinton.
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The city of Park Ridge currently has a cable television franchise with Telecommunications, Inc., TCI. And we have had that franchise for the last 16 years. In fact that franchise was a 15-year agreement which has expired. But TCI remains and resident complaints remain, and that is part of my reason for being here this morning.
One of the primary problems we have had with respect to cable television and cable television competition is Federal law which basically allows incumbent cable television operators to maintain their franchises unless we as a municipality can demonstrate that they are not performing as they should and demonstrating that they should have their franchise terminated is nearly impossible.
The city of Park Ridge entered into negotiations with TCI on a new franchise about one year before the old agreement was to expire. Since August of 1996, we have granted three six-month extension because TCI is the only game in town. Because of Federal law and a lack of competition, TCI has no incentive to negotiate and we are at a stalemate.
Complaints relative to the current franchise are many. We get complaints regarding rates. TCI has frequently raised rates with no improvement or expansion of service. We get complaints about service, and our residents feel that they are ignored. To that end, let me read to you a portion of a letter that I received from one of my residents. This letter is addressed to Mr. Steven White, regional vice president, TCI, Chicago.
''Dear Mr. White: My wife and I reside at 518 South Clifton, Park Ridge, Illinois, and subscribe to TCI cable services. Your manner of providing service is a classic and unfortunate example of what happens when a business operates a monopoly. We could recount many examples of the poor, non-consumer services we have suffered. Here are a few highlights:
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''First, there are a number of stations that are offered in the city of Chicago and neighboring suburbs which are not offered by TCI. When we called the TCI office to put in a request for some of these channels, we were told that the young woman who answered didn't take such calls and that you had no office, person or number where a customer might be able to let you know what programming he or she desired. Only a monopoly would not care what its customer wants to buy.
''Second, we recently had confusion with a bill where we thought we had already paid a portion of the bill and we had not. So when we deducted the amount from our payment, our payment was short of the full amount due. Our service was shut off without so much as a phone call or disconnect notice. You guys make the telephone company look positively fabulous.''
Signed, ''Sincerely, Bob Kustra, Lieutenant Governor of the State of Illinois.''
I think that Bob's letter clearly lays out an example of the kinds of problems we are experiencing in our town.
We are currently involved in discussions with AmeriTech New Media for a competitive cable system. The problem that we have had in these negotiations is again Federal law. Federal law requires that a level playing field be established for all franchises. But what is a level playing field? Does it mean that if TCI offers 60 channels that AmeriTech cannot offer more? Does it mean that if we have a public access system with TCI we have to have another one from AmeriTech even if we don't need one? Does it mean that we can negotiate for something other than a public access system from AmeriTech if we have one already with TCI? If so, how do we determine what the value of that is?
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The whole notion of a level playing field has made the negotiations for a competitor difficult and confusing. I would also suggest that providing a level playing field made out of artificial turf is not the American way of doing business nor is it in our consumers best interest.
As the mayor of a community whose residents are tired of having to deal with a monopoly cable television provider, I would ask you to review the laws you have created and revise them to better help us provide the highest quality cable television service at the best possible price.
[The prepared statement of Mayor Wietecha follows:]
PREPARED STATEMENT OF RONALD W. WIETECHA, MAYOR OF THE CITY OF PARK RIDGE, ILLINOIS
Good Morning. I want to thank the Judiciary Committee and Congressman Henry Hyde for providing us with this opportunity to speak to you today. My name is Ronald Wietecha and I am the Mayor of the City of Park Ridge, Illinois. Park Ridge is a suburban Chicago community, bordering on the City of Chicago with about 37,000 residents.
The City of Park Ridge currently has a cable television franchise with Telecommunications, Inc. (TCI) and we have had that franchise for the last 16 years. In fact, that franchise was a 15-year franchise and it has expired, but TCI remains, resident complaints remain, and that is part of my reason for being here this morning.
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One of the primary problems we have had with respect to cable television and cable television competition is Federal law, which basically allows incumbent cable television operators to maintain their franchises unless we as the municipality can demonstrate that they are not performing as they should. Demonstrating that they should have their franchise terminated is nearly impossible.
The City of Park Ridge entered into negotiations with TCI on a new franchise about one year before that franchise was to expire. It was to expire in August of 1996. Since August of 1996 we have granted three six-month extensions to the franchise and we are currently in the third six-month extension. To this point we have been unable to get anywhere near completion of these negotiations. In fact, at the current time, no negotiations are underway. TCI has been unbending and unwilling to negotiate. The City has no leverage which it can use in these negotiations as it cannot force them to move their operations because of the law mentioned above. Thus, TCI has no incentive whatsoever to negotiate and thus, we are at a stalemate.
As to complaints relative to the current franchise there are many. We get complaints regarding rates (TCI has frequently raised rates with no improvement in service). We get complaints about service and our customers feel that they are often ignored. To that end, let me read to you a letter we received from one of our constituents. The letter is addressed to Mr. Steven White, Regional Vice-President, TCI and he is located in Chicago. The letter reads as follows:
DEAR MR. WHITE: My wife and I reside at 518 South Clifton, Park Ridge, Illinois and subscribe to TCI Cable Services.
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By copy of this letter, we are encouraging the Park Ridge City Council to allow new cable franchises in the City of Park Ridge. Your manner of providing service is a classic, and unfortunate example of what happens when a business operates a monopoly. We could recount many examples of the poor non-consumer services we have suffered. Here are a few highlights:
1. There are a number of stations offered in the city of Chicago and some suburbs which are not offered by TCI. Included among these are the food channel; the history channel; the comedy channel; the home and garden channel; and on and on. People in Park Ridge deserve a better selection.
Worse, when we called the TCI office to put in a request for some of these channels, we were told that the young women who answered didn't take such calls and that you had no office, person or number where a customer might be able to let you know what programming he or she desired. Only a monopoly would not care what its customer wants to buy.
2. We recently had confusion with a bill where we thought we had already paid a portion of the bill and had not. So when we deducted the amount from our payment, our payment was short of the full amount due. Our service was shut off without so much as a phone call or disconnect notice.
We had wait four of five days to get the service reconnected and pay a reconnect fee. At the time we called your office to schedule the reconnect service, we were asked if we would like to add a premium channel. We requested HBO which costs approximately $15.00 per month. Your salesman encouraged us to take the Editor's Choice Package, including HBO, Starz, and Encore for $16.99 per month. We already had Encore but thought the extra $2.00 for Starz would be worth it.
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Subsequent to the installation (which we had to stay home for) we noticed that Starz was not operational. When we called your crack customer service officer, we were told that Starz will not work without a special box being installed which costs $3.00 per TV. In utter frustration we told her to cancel the whole package. She informed us that we would lose Encore. We told here we had had Encore from the first day our cable was installed. She replied, with no apology, that it was a mistake and that if we cancelled Editor's Choice we would lose Encore. Talk about bait and switch. Talk about a Scam! You guys make the telephone company look positively fabulous.
The letter was signed: Sincerely, Bob Kustra, Lieutenant Governor, State of Illinois.
I think Lt. Gov. Kustra's letter clearly lays out an example of the kinds of problems we are experiencing in our community.
Let me finish by talking briefly about bringing competition to the community.
We are currently actively involved in discussions with Ameritech New Media on a competitive cable system in the community. The problem we have had in these negotiations is Federal Law requires that a ''level playing field'' be established for all of the franchises. The issue is it is very difficult to define what a ''level playing field'' is. Does that mean that if TCI offers 60 channels, Ameritech cannot offer more? Does it mean that if we have a public access system with TCI we have to have another one from Ameritech even though we don't need one? Does it mean that we can negotiate for something other than a public access system from Ameritech if we have one already with TCI? If so, how do we determine what the value of that is? The whole notion of ''level playing field'' has made the negotiations for a competitor system very, very difficult. The notion of ''level playing field'' is confusing and I would suggest is not necessarily the American way. Would we suggest to all Americans that they must all drive Fords, or that all fords must be like Mercedes? I think not and I think this is an issue that needs to be looked at.
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As the Mayor of a community whose residents are tired of having to deal with a monopoly cable television provider, I would ask you to review the laws you have created and revise them to better help us provide the competition which is so sorely needed.
Thank you for the time and opportunity to present our views.
Mr. HYDE. Thank you, Mayor Wietecha.
We have just been notified that there is a vote on the floor, so we must race over there and cast our vote. I'm trying to find out what the vote is, but we're not getting through, so we'll have a complaint about our phone system here, too. I see a gentleman there from the phone company.
Mr. CHABOT. Mr. Chairman.
Mr. HYDE. They said that there would, in all likelihood, be followed by two or more procedural votes immediately after this vote also.
We'll return as soon as the final vote occurs. And I apologize. This is an occupational hazard here these days. Thank you.
The committee will stand in recess until shortly after the final vote.
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Mr. HYDE. The committee will come to order.
Normally, we don't have such a chaotic morning, but we're having a series of procedural votes on the floor. It's the House of Representatives version of a filibuster, and it keeps you going. So, that's what's happening, and some of the members get tired running back and forth. We expect to have more votes in about a half hour or so, but, meanwhile, I thought we would continue with the hearing. You gentleman have come a long ways, and the record will be established. The record will be studied, and so I think it's important that we proceed.
So, Mr. Petri, you are next, Mr. Wietecha having finished. So if you would, please, and would you try to confine your remarks to about five minutes?
STATEMENT OF HON. JAMES P. PETRI, VILLAGE TRUSTEE OF ELK GROVE VILLAGE, ILLINOIS
Mr. PETRI. I will do that.
Mr. HYDE. I won't hold you to it, but your full statement will be made a part of the record.
Mr. PETRI. Thank you. I appreciate that. I appreciate being here too. I'm James Petri. I'm a village trustee in Elk Grove Village, a town of 36,000 population, and we have the world's largest contiguous industrial park of 3,600 firms with a daytime population of 96,000.
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Mr. WATT. Mr. Chairman, could I request that he pull his mike a little bit closer? I'm having a little trouble hearing.
Mr. HYDE. You surely may.
Mr. PETRI. Ok. I'm here to represent not only Elk Grove Village, but also the five-town Regional Cable Group which consists of, in addition to Elk Grove Village, Buffalo Grove, Hoffman Estates, Rolling Meadows, and Palatine, and there is approximately 200,000 people with 49,000 plus cable subscribers and a cable penetration rate of 67.51 percent.
I wish to address the Judiciary Committee on three important topics: wireline competition, satellite competition, and franchise transfers. Unfortunately, five minutes is not sufficient time to do these topics justice. I would, therefore, encourage you to read my prepared statement.
In late 1995 and early 1996, the Regional Group solicited proposals for cable television following a detailed RFP that we published. As our existing franchise was nearing expiration, we believed this would be an appropriate time to negotiate duel agreements which would be competitively neutral and non-discriminatory. Despite sending this notice to many cable companies, only two indicated an interest in our RFP: the incumbent operator, Continental Cablevision, which is now Media One, and a potential overbuilder, Ameritech New Media Enterprises, now New Media. After extending the due date for the submission of the RFP's at the request of New Media, only one firm submitted a proposal, our incumbent operator, Continental Cablevision.
Page 66 PREV PAGE TOP OF DOC At the time, New Media indicated that they did not respond due to an exclusive agreement Continental had with HBO. This agreement would have prevented New Media from cablecasting five premium channels, and New Media felt it could not compete under those circumstances. The incumbent operator, Continental, claimed New Media did not respond, because New Media could not recoup the $20 million to $70 million investment to overbuild the cable plant. Since New Media would be charging the same price and offering the same services as Continental, because the exclusive agreement would have expired in January of 1997 before New Media could fully construct their plant, there appeared to be some validity to the statement made by Continental.
In any event, the creation of a duopoly cable system only appears to offer real advantages if the incumbent cable company is failing to meet the needs of the customers in terms of service, price or programming. Otherwise, there appears to be no real advantage to having two cable companies, nor does there appear to be sufficient customers to provide for third, fourth or fifth cable overbuilders.
Satellite competition, DBS, Direct Broadcast System, is providing some competition to cable. In Elk Grove, 66 percent of our residents have cable; a little over 2 percent have DBS, and the remaining take the on-the-air signal. In neighboring municipalities served by another cable operator, TCI, which does not appear to be fully meeting the needs of its customers, I've been told that DBS is approaching 4 percent and going higher. If this is true, this would substantiate the fact that DBS does provide a cable choice to some residents. Unfortunately, DBS does not provide the over-the-air television stations; it does not receive cable access channels like Government access, local access, or public access, and expensive supplemental equipment is necessary to carry from one set to another.
Page 67 PREV PAGE TOP OF DOC Finally, we have noticed a rather disturbing trend which requires congressional action: major cable companies are swapping cable franchises to gain control over the large metropolitan areas. While this practice may serve to benefit the cable operator, it may not benefit the local franchising authority who are helpless to prevent this practice. For example, it has been rumored that TCI is desirous of taking over the Chicago land market, first, by acquiring all of Media One's franchises, and then going after the few remaining franchises that are not under their control. To do this, all TCI has to do is submit an FCC form 394. After receiving that form, we, at the local level, have 120 days to determine the legal, financial, and technical abilities of the new operator to operate that system for three months. And this isevenno municipality has ever been successfully able to challenge this requirement.
I would close by noting that, we, at the local level, are in the best position to understand our local cable television needs. The Federal law governing the process for transferring systems needs to be updated and strengthened so that municipalities can reject a cable provider not meeting the needs of its customers. As I have noted, we cannot simply, realistically, expect competition to compel a cable provider to improve. Thank you.
[The prepared statement of Mr. Petri follows:]
PREPARED STATEMENT OF JAMES P. PETRI, VILLAGE TRUSTEE OF THE VILLAGE OF ELK GROVE VILLAGE, ILLINOIS
Qualifications of Village Trustee James P. Petri
James P. Petri has served as a Village Trustee for the Village of Elk Grove, Illinois since April, 1979. In 1980, prior to the establishment of cable television (CATV) in the northwest suburban Chicago region, Trustee Petri represented the Village of Elk Grove in the Northwest Municipal Conference (a regional Council of Government) subcommittee to establish a model CATV enabling ordinance for 33 municipalities representing over 1 million people. Trustee Petri further represented the Village on the Northwest Municipal Conference subcommittee which solicited proposals from firms to provide cable television to the region. At that time, over 15 proposals were received and evaluated by the council of government subcommittee of which Trustee Petri was an active participant.
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The proposal review effort led to the Village of Elk Grove joining a smaller group of municipalities now known as the Regional Cable Group (RCG). The RCG consists of five municipalities (Buffalo Grove, Elk Grove, Hoffman Estates, Palatine, & Rolling Meadows) located in northeastern Illinois, in the northwestern suburbs of Chicago. The local franchising authorities (LFAs) of the RCG are all served by one and the same cable operator, Media One. The RCG represents a population of 200,000; has over 49,000 CATV subscribers within in its boundaries, and has a combined CATV penetration rate of 67.51%.
While serving on the RCG for the past 18 years, Trustee Petri has had the opportunity to chair the RCG for a combined total of 8 years during several critical periods including: The awarding of the initial franchise to Warner-Amex; the transfer of that franchise to American Cable; the transfer again of that franchise to Continental Cablevision; the renewal of the franchise with Continental Cablevision; the transfer of the renewed franchise to Media One; the solicitation of proposals for a second CATV operator prior to the renewal of the franchise with Media One; and, the development of a revised cable television/telecommunications ordinance taking into account the impacts of the 1996 Telecommunications Act.
Trustee Petri has experienced first hand the many changes in the cable industry over the past 18 years. He has been involved in many cable television franchise transfers; and he has worked to bring wire-line cable competition to the Village of Elk Grove and other LFAs in the RCG.
The State of Wireline Cable Competition
Page 69 PREV PAGE TOP OF DOC In 1996, near the expiration of Elk Grove's cable television franchise agreement with Continental Cablevision (now MediaOne), the Village and municipal members of the RCG were approached by Ameritech New Media Enterprises. New Media is a wireline cable company functioning as a wholly owned subsidiary of Ameritech (a Regional Bell Operating Company formerly known as Illinois Bell). At the time, Ameritech New Media had only two franchise agreements executed with LFAs in Illinois (Glendale Heights and Naperville).
Since Elk Grove and the RCG were undergoing renewal of Continental's existing franchise, it appeared to be the appropriate time to develop a Request For Proposal (RFP) for cable television services. In this manner, cable television companies could submit proposals based upon detailed written guidelines to provide non-exclusive, competitive, head-to-head cable television service in the RCG municipalities. Since the incumbent franchise agreement would have expired, the RCG members were in a position to negotiate identical franchise agreements for multiple cable providers. This process would ensure competitive neutrality and nondiscrimination in the issuance of the franchise agreements, essentially creating a level playing field for all wireline providers.
The RCG advertised its RFP for cable television services. Unfortunately, the RCG only heard from two cable providers who expressed an interest in providing competitive wireline service. Those companies were the two noted previously; the incumbent cable operator, Continental Cablevision; and, Ameritech New Media, the lone overbuilder.
While disappointed that no other wireline providers expressed an interest, the RCG was encouraged by the prospects for head-to-head cable competition. New Media requested an extension to the RFP submission due date to complete their proposal. Their request was granted to them by the RCG.
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However, despite New Media's expressed written interest in supplying a proposal and the RCG's extension granted at their request, New Media never submitted a proposal. Only the incumbent operator provided the RCG with a proposal.
New Media publicly reported that they did not submit a proposal due to an exclusivity agreement on programming that Continental Cablevision had with HBO. Essentially, New Media would not be permitted to carry 5 channels until 1997 including: HBO1, HBO2, HBO3, Cinemax 1, and Cinemax 2. Without these five channels, New Media indicated that they would not be able to effectively compete for customers of the incumbent operator.
The incumbent operator expressed that New Media failed to submit a proposal because New Media did not offer any additional programming or higher quality customer service features, nor did they offer a better price. Therefore, it would not be cost effective for the competitor to spend between $20 million and $70 million to overbuild a system which would not be any more attractive to the customer than that of the incumbent.
It would appear that the incumbents' position may be reflective of the reality involving wireline competition. The creation of a two firm cable television duopoly (with an incumbent and one overbuilder) offers no real advantage to the cable customer unless one company provides higher quality service, additional programming, or lower prices than their competitor. In the Illinois franchises operated by New Media, New Media's price generally appears to be the same as or of no subsequent difference than the incumbent operator. The same generally holds true for programming availability.
Page 71 PREV PAGE TOP OF DOC In speculating, we can develop two hypotheses as to the long-term impact of a local franchise authority (LFA) having two wireline cable television providers: First, a duopoly situation will serve to hold down future increases, or, Secondly, cable companies may undertake short-sighted business practices which are not in the consumers or LFA's long-term best interests. This would be done in an attempt to run their competition out of town. Only time will provide the result to the overbuilder experiment.
However, one fact is certain: There are only a limited number of cable subscribers. With two wireline providers, multiple direct broadcast satellite (DBS) services, and microwave multi-point distribution systems (MMDS) services for multifamily dwelling units, we may have reached a saturation point where there is not enough return on investment for a second wireline provider.
With that in mind, New Media appears to have developed a new strategy in obtaining Illinois franchises; they are negotiating franchise agreements with municipalities served by Tele-Communications, Inc (TCI). In northwestern suburban Chicago, the prevailing opinion is that TCI is generally regarded as not always meeting the needs of their customers in terms of customer service, and the municipalities in which they operate, appear desirous of higher quality customer service and reliabilityservice which can only be obtained through competition from a second provider. Again, only time will tell if the duopoly cable television system offers enough competition to truly improve the performance of the incumbent operator.
Non-Wireline Cable Competition
Television consumers in northwestern suburban Chicago generally have three choices: Over-the-air television; Satellite Dishes; and, traditional wireline cable. In Elk Grove, approximately 66.3% of households subscribe to the wireline provider, MediaOne. A recent report published indicates that about 2.3% of its households subscribe to a satellite service. The remaining 31.4% are using over-the-air television or have no television at all.
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Judging from the DBS dishes which appear to be springing up all over Elk Grove, DBS appears to be an acceptable alternative to wireline CATV in some cases. The monthly subscription price of DBS service appears competitive with MediaOne. DBS dishes are available for as low as $99 with a one year subscription to the DBS service.
However, DBS is not a full substitute for CATV. First, DBS does not provide local access, governmental access, or public access programming. In addition, it does not guarantee the provision of local network affiliates such as the ABC, CBS, NBC or FOX affiliates in Chicago. This shortcoming may deter individuals from seeking DBS as an alternative.
The Village of Elk Grove is highly committed to utilizing governmental access. It dedicates 80% of its CATV franchise fees ($200,000 per year) toward the development of governmental access programming. That programming includes: a live television call-in show for various governmental bodies (Village of Elk Grove, Elk Grove Park District, and Elk Grove Library); cablecasting Village and Park Board meetings; airing traffic maps, a local public safety show called ''lights & sirens,'' a local economic development program entitled ''strictly business,'' and a host of other programming. To receive this programming, a DBS subscriber must pay for the ''lifeline'' basic cable service provided by Continental (under the FCC Social Contract) at an additional cost of less than $8.00 per month.
The second shortcoming of DBS is the need for high priced converters or signal splitters to receive the DBS signal on more than one television. This fact can push the true cost of DBS service beyond that which a reasonable consumer will pay versus the price of cable television.
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On the whole, DBS may offer effective competition for some of our existing wireline providers. However, due to the shortcomings associated with DBS, it may never experience a penetration rate of over 5% assuming the continuation of our current paradigms.
The Future: One Cable Television Company Controlling An Entire Metropolitan Area
Elk Grove considers itself fortunate to have an outstanding working relationship with the current cable operator, MediaOne. Upper management from MediaOne attends RCG meetings. When concerns arise, upper management in MediaOne is available to address the concern quickly and to the satisfaction of the customer. This is a relationship cultivated from the beginning of the franchising process back in 1980. It has worked successfully for the members of the Regional Cable Group.
For example, the Village of Elk Grove has never had to: fine its cable operator; seek liquidated damages from its cable operator; seek compensatory damages from its cable contractor; nor draw funds against the operator's letter of credit. In comparison to neighboring TCI communities, the number of outages experienced in Elk Grove are minimal, as are the number of complaints it receives (one every two or three months). This situation can be described as a high level of commitment to customer service and satisfaction on the part of the cable operator.
Unfortunately, this may all soon change. In order for cable operators to hold the line on costs, they are working to develop the control over franchises in an entire metropolitan area. This type of arrangement allows the cable operator to take advantage of the economies-of-scale associated with the sale of advertising over a large market place and the reduced levels of management personnel necessary to administer the companies affairs.
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However, given current federal law, the creation of these mega franchise areas may not be in the best interests of the customer or local franchising authority.
It has been highly rumored that Tele-Communications, Inc (TCI) is attempting to swap cable systems in Florida with MediaOne's cable systems in metropolitan Chicago. This swap would allow TCI to control the vast majority of franchises in the northwest and western suburban Chicago area.
To consummate this swap at the local level, TCI would need only submit an FCC Form 394 to the LFA's. The LFA's would then have only 120 days to review the legal, technical, and financial qualifications of TCI to operate the franchised cable company for only 3 months. This requirement is so devoid of substance that, to our knowledge, no LFA has ever been able to prevent the sale or transfer of a cable franchise to another cable operator.
Now, lets take a hypothetical case in point. As noted above, MediaOne and the RCG have cultivated an outstanding customer service relationship to the benefit of both parties. This relationship reflects a strong commitment to customer service standards by upper management in MediaOne.
Now, MediaOne has the ability to transfer its ownership rights to another cable operator who may not have this same commitment. Hypothetically speaking, the new operator may have continually been fined by neighboring municipalities for violating terms and conditions of its franchise agreement; it may have terminated its entire management staff and restaffed with fewer and inexperienced employees; it may have a proven reputation for failing to meet basic customer service standards; it may have a reputation for failing to honor the commitments made to the municipality in the franchise agreement; it may have poorly maintained cable plant; poorly trained technicians; little commitment to customer service and a weak commitment to local cable access programming.
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Despite the fact of these shortcomings, it would be highly unlikely that the new cable operator would fail to meet the legal, technical, and financial ability to operate the franchise for the next 3 months. The LFA's would be required under Federal Law to effectuate the transfer even though it could be clearly documented that the transfer would not be in the best interests of the LFA.
If anything, the Judiciary Committee should concern itself with this problem. Overbuild competition may not be available to ensure high quality customers service standards, and DBS may not be an acceptable alternative to many customers due to the shortcomings noted previously.
With the trend of cable companies controlling large market areas, Congress should consider strengthening the power of LFA's to reject a cable ownership transfer, if the transfer will result in inferior customer service than currently exists. Those of us at the local level are most familiar with the strengths and weaknesses of our current cable operators. With that information, we should have more control over the transfer of our cable franchises to other cable companies, rather than allowing those companies to establish singular control over an entire metropolitan area.
These laws, in an effort to create a level playing field, end up limiting cable service quality to the lowest denominator. Furthermore, they require municipalities to bargain in good faith and to provide for modifications to existing franchises when a competitor enters the local market. As such, the entire ideology behind improved service and technology due to increased competition becomes diluted and less of a factor in the future of the cable television industry.
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Mr. HYDE. Thank you, Mr. Petri.
And Mayor Carr of Wheaton.
STATEMENT OF HON. C. JAMES CARR, MAYOR, CITY OF WHEATON, ILLINOIS
Mr. CARR. Good afternoon, Mr. Chairman and distinguished members of the Judiciary Committee. My name is Jim Carr, and I am the mayor of the Wheaton, Illinois. Thank you for inviting me to share our community's view on the issue of competition within the cable industry, and what it means for Wheaton and other local governments.
Wheaton is located 25 miles west of the City of Chicago. It is the county seat of DuPage County, and has approximately 63,000 residents. We are in Congressman Hyde's 6th Congressional District as well as the 14th Congressional District, and we've had cable television since 1984.
Our current cable operator, Jones Spacelink, offers a variety of cable programming and public access services on its 71-channel cable system. Public access programming is very important in our community, and has been the centerpiece of our cable system. I support competition in the cable industry if it results in greater choices and lower prices for our consumers. I believe that is a goal that everyone would share. At the same time, I believe it is essential that the benefits derived from public access must continue as competition increases. Wheaton has a cable operator that has taken an interest in our community, and has honored its public access obligations under the Cable Franchise Agreement.
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Currently, we have five public educational and governmental access channels on our cable system. One is a public access channel; two are used by local colleges; one is used for municipal purposes, and the new and innovative channel is used as an interactive bulletin board. Accessed by using a touch-tone phone, the interactive channel, which was the first of its kind in the State of Illinois, has provided answers to more than 44,000 callers who have sought information on the City of Wheaton ordinances, Wheaton Park district, local school district, public library, and the College of DuPage.
Jones has provided the city with facilities, funding, equipment, and training for our local residents. Over 1,100 of our local residents have been trained as certified producers during the 12 years of WCTV's operation. We have been able to achieve great diversity in our public access programming, particularly in community and governmental programming. As a result, our local residents have a good understanding and awareness of what the issues are within our city, and we are very proud that WCTV has won over 60 local, national, and international awards. These are some of the benefits which have come about as a result of local public access programming in the City of Wheaton.
In recent years, there has been a great deal of focus on increasing competition in the cable industry. Last year, Congress passed the Telecommunications Act, and several States, including Illinois, have passed what is known as level playing field statutes. We have noticed, however, that new entrants are now seeking to use deregulation and the level playing field statutes to bring down their level of public access support rather than rising to the level that the current cable operator provides.
Page 78 PREV PAGE TOP OF DOC While competition may be a plus for some cable subscribers, what will it mean for public access? Congress should be complimented on creating an environment in which competition can occur, and I applaud the concept of competition, but I urge, as well, that consideration be given to preserving the benefits which public access has made available to our residents.
Local governments need a period of transition to create flexible agreements with new competitors in order to provide similar or enhanced agreements that will ensure that our residents obtain the same or, perhaps, a greater degree of support for funding, equipment, and facilities. If we are unable to negotiate such benefits on behalf of the public with new competitors, it is likely that the incumbent operator will seek relief from past agreements that will threaten the gains made on behalf of our residents.
As an example, one of the communities near Wheaton is involved in a lawsuit with the current incumbent cable operator who wishes to reduce its public access support, because it claims that is necessary in order to be more competitive with the service offerings of a new entrant into the market. I believe this type of action is a concern. Companies which seek to use our public property to earn a profit have an obligation to contribute to the community in return.
I recognize that most subscribers do not choose their cable provider based on what public access services are offered, nevertheless, public access is very, very important in our community, and should not be lost or diminished.
Mr. Chairman, and members of the committee, a reduction of public access programming and support, as a result of new competition fostered by the Telecommunications Act of 1996, is not what Congress intended nor is what States, like the State of Illinois intended when the level playing field statutes were passed. As you and others consider the issues relating to competition, I respectfully urge that you consider ways to increase competition without losing the benefits which have been and can be achieved in franchise agreements negotiated between cities and cable operators.
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As we move forward, we can achieve for cable subscribers the best of both worlds. The benefits derived from competition in terms of the number of channels offered and lower prices, while at the same time, keeping in tact the public benefits which have accrued to local communities as a result of public access. Local municipalities need to retain the authority to make certain that the level of public access support remains status quo or, hopefully, is enhanced.
If cable companies intend to use public property to offer services for a profit, the companies should be expected to provide benefits to the community in return. Your constituents and the residents of Wheaton are better off because of public access programming. As we move into a more competitive cable environment, the possible tension between what competition can offer to consumers and what public access can and does mean to our residents must be studiously and carefully considered. Thank you.
[The prepared statement of Mayor Carr follows:]
PREPARED STATEMENT OF HON. C. JAMES CARR, MAYOR, CITY OF WHEATON, ILLINOIS
Mr. Chairman and the Members of the Judiciary Committee, my name is Jim Carr. I am the Mayor of Wheaton, Illinois.
Thank you for inviting me to share our community's view on the issue of competition in the cable television industry and what that means for Wheaton and other local governments.
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For your information, Wheaton is located about 25 miles west of the City of Chicago. It is the county seat of DuPage County and has approximately 63,000 residents. We are in the 14th Congressional District of Illinois and we have had cable television service since 1984.
Our current cable operator, Jones Spacelink, offers a variety of cable programming and public access services on its 71 channel cable system. Public access programming is very important in our community and it has been the centerpiece of our cable system.
I support competition in the cable industry, if it would result in greater choices and lower prices for our consumers. That is a goal everyone would share. At the same time, I believe it is essential that the benefits derived from public access programming must continue as competition increases.
Wheaton has a cable operator that has taken an interest in our community, and has honored its public access obligations under the cable franchise agreement.
Currently, there are five public, educational and governmental access channels on our cable system. One is a public access channel; two are used by local colleges; one is used for municipal purposes; and one new and innovative channel is used as an interactive bulletin board. Accessed by using a touch-tone phone, the interactive channelwhich is the first of its kind in Illinoishas provided answers to more than 44,000 callers who have sought information on City of Wheaton ordinances, Wheaton Park District activities, Community School District #200 activities, Wheaton Public Library, and the College of DuPage.
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Jones has provided the City with facilities, funding, equipment, and training for local residents. Over 1,100 of our residents have been trained as certified producers during the 12 years of Wheaton Community Television's operation.
We have been able to achieve great diversity in our public access programming, particularly in community and governmental programming. As a result, our local residents have a good understanding and awareness of what the issues are within Wheaton, and we are very proud that WCTV has won over 60 local, national and international awards for its programming.
These are some of the many benefits which have come about as a result of local public access programming in Wheaton.
In recent years, there has been a great deal of focus on increasing competition in the cable industry. Last year, Congress passed the Telecommunications Act and several states, including Illinois, have passed ''level-playing field'' statutes. We have noticed, however, that new entrants are now seeking to use deregulation and the level-playing field statutes to bring down their level of public access support, rather than rising to the level that the current cable operator is providing.
While competition may be a plus for some cable subscribers, what will it mean for public access?
Congress should be complimented for creating an environment in which competition can occur. I applaud the concept of competition, but urge that consideration be given to preserving the benefits which public access has made available to our residents.
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Local governments need a period of transition to create flexible agreements with new competitors in order to strike similar, or enhanced, agreements that will ensure that our residents obtain the same, or a better degree of support for funding, equipment, facilities, training and other opportunities for local programming. If we are unable to negotiate such benefits on behalf of the public with new competitors, it is likely that incumbent operators will seek relief from past agreements that will threaten the gains made on behalf of our residents.
As an example, one of the communities near Wheaton is now involved in a lawsuit with the incumbent cable operator. The incumbent cable operator wishes to reduce its public access support because it claims that is necessary in order to be more competitive with the service offerings of a new entrant into the cable market. I believe that this type of action is a concern. Companies which seek to use our public property to earn a profit have an obligation to contribute to the community in return.
I recognize that most subscribers do not choose their cable provider based on what public access services are offered. Nevertheless, as I have discussed, public access is very important to our community and it should not be lost or diminished.
Mr. Chairman and members of the Committee, a reduction of public access programming and support, as a result of new competition fostered by the Telecommunications Act of 1996, is not what Congress intended, nor is it what states, like Illinois, intended when the level-playing field statutes were passed.
Page 83 PREV PAGE TOP OF DOC As you and others consider the issues relating to competition, I respectfully urge that you consider ways to increase competition without losing the benefits which have been and can be achieved in franchise agreements negotiated between cities and cable operators. As we move forward, we can achieve for cable subscribers the best of both worldsthe benefits derived from competition, in terms of the number of channels offered and lower prices, while at the same time keeping intact the public benefits which have accrued to local communities as a result of public access. Local municipalities need to retain their authority to make certain that the level of public access support remains at the status quo or, hopefully, is enhanced. If cable companies intend to use public property to offer services for a profit, the companies should be expected to provide benefits to the community in return.
Your constituents and the residents of Wheaton are better off because of public access programming. As we move into a more competitive cable environment, the possible tension between what competition can offer to consumers, and what public access can and does mean to our residents, must be studiously and carefully considered.
Thank you Mr. Chairman, and I would be pleased to answer any of your questions.
Mr. HYDE. Thank you, Mayor Carr.
I will yield to the distinguished ranking member from Detroit, Mr. Conyers, to introduce our next guest.
Mr. CONYERS. Thank you very much, Chairman Hyde.
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Frank Palazzolo, Mayor of Harper Woods, a health expert, a finance expert, he's worked in the community, born and raised right in the Detroit suburb, Harper Woods, and a person that we think is real comer on the scene. He may be the next Governor of Michigan, and I don't want to get a political career started here, but he's a good person, and he works closely with the cities around him in Wayne County, and we're delighted that he's here today.
STATEMENT OF HON. FRANK PALAZZOLO, MAYOR, HARPER WOODS, MICHIGAN
Mr. PALAZZOLO. Thank you, Congressman Hyde. Thank you, Congressman Conyers.
Harper Woods, Michigan is a small city occupying 2.6 square miles with a population of approximately 15,000. It is located immediately adjacent both to the City of Detroit and the City of Grosse Pointe Woods in the northeastern part of Wayne County. Percentage-wise, it has the oldest population in Michigan and probably one of the oldest in the country with over 40 percent seniors. The median income
Mr. CONYERS. Frank, pull the mike up a little closer.
Mr. PALAZZOLO. The median income is $36,000. Being incorporated shortly after World War II, it attracted many young families. These families and the sense of community that they helped to build have spurred the development of an enormous educational infrastructure that, today, includes five high schools, one public, four private; four elementary schools, two public, two private; one middle school and two public school districts.
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In 1980, an entrepreneurial cable organization known as Teleprompter approached a local institution known as the Grosse Point War Memorial Association and enlisted their help in establishing a cable agreement with the five cities of Grosse Pointe and Harper Woods. In 1985, Teleprompter sold its interest to Group W Cable and in 1990, they in turn sold their interest to Comcast. In 1994, faced with a rebuild due to technological advances, the Grosse Pointe War Memorial Association sold its interest to Comcast, and each city received its beneficiary interest.
After 1984, many area cable companies had raised rates in response to deregulation. Gross Pointe Cable's rates did increase, but due to public ownership, we did so only to the degree necessary to fund our debt obligations effectively. There had always been a tiered pricing structure, but while the basic cable bill has gone from roughly $8.00 in 1984 to $32.00 today, the average cable bill is over $40.00. The rate of increase for basic alone is nearly 7 percent annually, and is much higher than the rate of inflation putting a significant burden on those seniors who may be living on a fixed income. It is my personal perception that the majority of this increase occurred since 1992, but I was unable to obtain the exact figures from Comcast prior to my testimony.
The Telecommunication Act from 1996 opened up the entire telecommunications spectrum to increased competition. In response to this act, the competition of direct broadcast satellite and the expected competition of our local phone company, Comcast began an extensive rebuild of the system nearly doubling the number of program channels and stabilizing its pricing at the lower end of the tiered pricing structure. It is my belief that this example testifies to the benefits of competition in the marketplace, and will allow consumers more choice at lower rates in the future. Just recently, the Wall Street Journal reported that in a neighboring community, St. Clair Shores, Michigan, consumers are very satisfied with the results of competition.
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But as my city begins negotiations with a second cable operator, I have some concerns. The Cable Act of 1984 endorsed the cable franchise process as a mechanism for obtaining community benefits, but under the Telecommunications Act of 1996, these powers are unclear. Read in context, the language appears to be intended to prevent municipalities from requiring cable operators to use specific converters or security technology, but it can be argued that this actually is broader in scope, and prevents municipalities from bargaining for increased system channels, programming or capacity.
While we may still require a cable operator under the Universal Service provision of the Act to provide public educational and Government access at special rates, so long as they are competitively neutral, we cannot require them to provide programming designed for a specific population. In the case of Harper Woods, I am referring specifically to seniors and students. Much like the funding for public broadcasting helped to develop educational programming for young children, another source may be needed to spur development of programming for these groups.
While a free marketplace and competition should ultimately determine what people want and are willing to pay for, it is the job of Government to provide those services which are in the public good that the people cannot secure for themselves. While the Telecommunications Act does prevent anti-competitive predatory arrangements to be established by municipalities for the benefit of any one telecommunications provider, it may also prevent municipalities from being responsive to some of the unique needs of their community. Thank you.
[The prepared statement of Mayor Palazzolo follows:]
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PREPARED STATEMENT OF FRANK PALAZZOLO, MAYOR, HARPER WOODS, MICHIGAN
Harper Woods, Michigan is a small city occupying 2.6 sq. miles, with a population of approximately 15,000. It is located immediately adjacent both to the City of Detroit and the City of Grosse Pointe Woods in the Northeastern part of Wayne County. Percentage wise it has the oldest population in Michigan and probably one of the oldest in the country with over 40% seniors. The median income is $36,000.
Being incorporated shortly after WWII it attracted many young families. These families, and the sense of community that they helped to build have spurred the development of an enormous educational infrastructure that today includes 5 high schools, one public, 4 private; 4 elementary schools, 2 public and 2 private, one middle school and two public school districts.
In 1980, a entrepreneurial cable organization known as Teleprompter approached a local institution known as the Grosse Pointe War Memorial Association and enlisted their help in establishing a cable agreement with the 5 cities of Grosse Pointe and Harper Woods. In 1985 Teleprompter sold its interest to Group W Cable and in 1990 they in turn sold their interest to Comcast. In 1994 faced with a 'rebuild' due to technological advances, the GP War Memorial sold its interest to Comcast and each city received its beneficiary interest.
After 1984 many area cable companies had raised cable rates in response to deregulation. GP Cable's rates did increase but, due to our public ownership, we did so only to the degree necessary to fund our debt obligations effectively. Their had always been a tiered pricing structure, but basic service has gone from roughly $18.00 in 1984 to nearly $40 today. This rate of increase is nearly 7% and is much higher than the rate of inflation, putting a significant burden on those seniors who may be living on a fixed income.
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The Telecommunication Act of 1996 opened up the entire telecommunication spectrum to increased competition. In response to this Act, the competition of Direct Broadcast Satellite and the expected competition of the local phone company, Comcast began an extensive 'rebuild' of the system, nearly doubling the number of programming channels and stabilizing its pricing at the lower end of the tiered pricing structure. It is my belief and this example testifies to the benefits of competition in the marketplace, and will allow consumers more choices at lower rates, in the future. Just recently, the Wall Street Journal reported that in a neighboring community, St. Clair Shores, Michigan, consumers are very satisfied with the results of competition in their community.
But as my city begins negotiations with a second cable operator, I have some concerns. The Cable Act of 1984 endorsed the cable franchise process as a mechanism for obtaining community benefits, but under the Telecommunications Action of 1996, these powers are unclear. Read in context, the language appears to be intended to prevent municipalities from requiring cable operators to use specific converters or security technology. But it can be argued that this actually is broader in scope and prevents municipalities from bargaining for increased system channels, programming or capacity. While we may still require a cable operator, under the ''Universal Service'' provision of the Act to provide public, educational and government access at special rates, so long as they are ''competitively neutral,'' we cannot require them to provide programming specifically designed for specific populations. In the case of Harper Woods, I am referring specifically to seniors and students. Much like the funding for public broadcasting helped to develop educational programming for young children, another source may be needed to spur development of programming for these groups.
Page 89 PREV PAGE TOP OF DOC While a free marketplace and competition should ultimately determine what people want and are willing to pay for, it is the job of government to provide those services which are in the public good that the people cannot secure for themselves. While the Telecommunications Act does prevent anti-competitive predatory arrangements to be established by municipalities for the benefit of any one telecommunications provider, it may also prevent municipalities from being responsive to some of the unique needs of their community.
Mr. HYDE. Thank you very much, Mr. Palazzolo. I yield to Mr. Conyers for questioning.
Mr. CONYERS. Thank you, Mr. Chairman. Gentleman, mayors, welcome.
TCI and Time-Warner just announced a series of consolidations involving two million consumers. TCI has been negotiating similar consolidations in Chicago. Doesn't this give the consolidated companies near monopoly power to demand exclusive programming, and is this anti-competitive? What do you think?
Mr. PETRI. I think it is anti-competitive. One of our problems is we've worked long and hard with Continental, currently Media One, to develop a really good, what we think, a really good television station. As in previous testimony, the low tier offer between $7 and $8 is available in our five towns, and provides access so that everyone can get cable television.
We havenow, TCI has threatened or promised to come in, and they have a company that's terminated its management; staff replaced by employees with less skill. They've been fined by other communities, 13 other communities in neighboring municipalities, for violating their franchise agreement as far as customer service; poorly maintained plant; no training for their technicians, and a weak commitment to local cable access programming. So, yes, if TCI comes in, they're the only game in town, and we would be at a real disadvantage.
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Mr. WIETECHA. I'd have to concur with my colleague, and simply add, obviously, TCI is too busy trying to buy up the Chicago market to come to a little town like Park Ridge and finish the negotiations for renewing our franchise agreement. Currently, there are no negotiations taking place. They don't seem to be interested in maintaining that franchise.
Mr. CONYERS. Well, it was Chairman Hyde and myself who got the anti-trust provision in the Telecommunications Act. They were about to throw that away for, from their point of view, a very good reason, and now, here we're back again on this subject matter with anti-trust looming large. That's why these hearings are important. This is the committee that has jurisdiction over all anti-trust activities in the United States, and that's what makes these hearings very, very important.
Now, second question: What do you make out of Chairman Hundt's presentation and response to the questions? Answer, he didn't know that the National Football League has exclusive rights with Direct TV, so when I asked him about making program access a provision that should apply, he said, ''I don't know anythingI don't have any experience with that.''
Mr. PETRI. DBS has been advertising, you can watch 13 games on a Sunday. They've been doing that for weeks.
Mr. CONYERS. Sure.
Mr. PETRI. They've even been using football players to say ''How many games are you in? I only play 1 this week; they play 13.'' So, there is an advantage, definitely, to that. They have other disadvantages, however, but they do have the contract sewed up on the NFL.
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Mr. CONYERS. Exactly, so that's why we need to consider extending program access across the board for everybody. In other words, we're not here tilting windmills for or against anybody, any corporation, any segment. We want to make a fair set of rules that everybody whether you're in a huge city that's attractive to the big boys or whether you're in a little town whose citizens have the same rights to as much TV as anybody else. That's all we're trying to do.
Mr. PETRI. And the FCC really precludes us from doing that with their form 394. To say that a company is not technically, legally or financially able for three monthsI think this room could put together a cable system for three months. You know, that's ludicrous. We have nothing to say about that.
Mr. CONYERS. Mayor Frank, what do you think?
Mr. PALAZZOLO. Well, I definitely believe that the restriction of programming is going to make it very difficult for other cable operators to enter any particular marketplace and compete effectively.
Mr. CONYERS. Yes.
Mr. WIETECHA. Well, I think the history bears out what Mayor Palazzolo also said which had to do with keeping the prices low on the quality service, and you cannot do that unless you're put in the position where you can negotiate for competitors and between competitors.
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Mr. CONYERS. Well, the Mayor of Harper Woods pointed out that they've gone from $18 bucks to $40 bucks, and yet we have the chairman of FCC telling us that since 1992 that they were re-regulated, they went down.
Mr. PALAZZOLO. Well, I think the reason is in small markets, without an effective competitor, you do have a lot of monopolistic approach to pricing.
Mr. CARR. Our goals, I think, would coincide locally with what's best nationally, and that is what's in the best interest of the public as a whole. I think cable is a very good means of communicating; that's what I tried to stress. It's a very important means in our community of communicating local governmental issues. I would say that, personally, I would hope that local programming could be shared across various lines, but, you know, I take America Online, and I also take Prodigyprobably wondering why I have bothbut America Online has the Chicago Tribune and Prodigy doesn't, so I guess there are certain factors within the marketplace that may dictate one or other. But, the question which you're probably asking is more a what's in the best interest of the public as a whole, and that's the big question.
Mr. CONYERS. Well, thank you very much.
Chairman Hyde, I complimented you for holding these hearings. It's very important that we get this ore in here before other committees start going for the sea on this subject matter. We have this little friendly competition going on in the Congress about whose jurisdiction is what, and I don't know why. It's been written in concrete that anti-trust is in our jurisdiction, and I think that this hearing may help reinforce that. I thank the Chair.
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Mr. HYDE. A preemptive strike. [Laughter.]
The gentleman from Tennessee, Mr. Bryant.
Mr. BRYANT. Thank you, Mr. Chairman, and I, too, would add my appreciation for holding these hearings. I would echo the remarks of our ranking member in that I represent a district that has some larger cities but also a substantial amount of rural areas. I had 42 town meetings in August and cable television was an important issue in many communities.
Mayor Carr, you dwelt a lot on public access, and I agree with you. How do you go about ensuring that all participants share in that cost of public access or bear some of the cost to have a level playing field?
Mr. CARR. Yes, sir. I appreciate the question, Congressman. Twelve or 13 years ago when we negotiated our contract with, then, Centel and now Jones, we developedwe negotiated very successfully and were very fortunate to get probably what is considered to be one of the finest, if not the finest, cable franchise agreements in the State of Illinois or the country. We're very proud of that. Our residents use it considerably. As I mentioned, over 1,100 of our residents have been certified. Over 3,000 hours of local programming took place last year by our local residents. We regularly show our school board; our city council meetings; we have call-in programs for our local mayor, for myself, the president of the school board, and others. It's a means of communicating, Congressman. It's a means of us reaching our residents, almost all of whom have cable so we appreciate that opportunity, but it is borne by the price in which they charge. I'm not sure I can tell you how they allocate it, but we're very fortunate to have been able to negotiate a very successful contract.
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Mr. HYDE. If I might interrupt, we have a vote; we're going to have two votes, are we, or three? Two votes, so we will recess while we go do that, however, ifyou have some questions, do you, Ms. Jackson Lee, and you have some, do you? All right, then we willI was going to release the panel, but we'll keep them.
If you gentleman, including you, Mayor Palazzolo, would step in the back, we're going to get a quick picture before you go, and then if you'll come back, we'll come back, and we'll continue the hearing.
Mr. BRYANT [presiding]. I had finished my questioning, and we we're going to recognize the gentlelady from Texas, Ms. Jackson Lee.
Ms. JACKSON LEE. Mr. Chairman, thank you so very much for this important hearing. Let me apologize to the witnesses and certainly to the chairman of the FCC who made his presentation earlier, for my earlier absence because of my duties in another hearing and on the floor of the House. This is a crucial topic. Mr. Chairman, I'd ask unanimous consent to have my written statement submitted in the record.
Mr. CHABOT [presiding]. Without objection.
[The prepared statement of Ms. Jackson Lee follows:]
Page 95 PREV PAGE TOP OF DOCPREPARED STATEMENT OF SHEILA JACKSON-LEE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. Chairman, I would like to thank you and Ranking Member Conyers for bringing us together with these distinguished witnesses to examine the state of competition in the cable television industry. This is a topic with which Congress has previously wrestled and one that is very important to the constituents of the 18th Congressional District of Texas.
In 1992, Congress passed the Cable Television Consumer Protection and Competition Act to address the relative lack of competition in the industry by regulating cable rates. The effect of the law was that almost all cable systems faced rate regulation.
The response, however, to the 1992 Act was widespread dissatisfaction. In response to that dissatisfaction, Congress passed the Telecommunications Act of 1996. The 1996 Act made some changes to the rate regulation scheme of the 1992 Act reflective of the notion that the cable market was in the process of moving toward real competition. Additionally, the 1996 Telecommunications Act removed an earlier prohibition on telephone companies entering the cable market.
Ensuring competition in the cable industry continues, however, to be an important issue. As local governments try to bring in new cable providers to compete with existing cable operators in their areas, they face several obstacles. First, existing cable operators have traditionally been reluctant to expand into one another's territories. Thus, local governments must look almost entirely to new entrants for ''overbuilding.'' While new entrants can overbuild, but they obviously require more time than to do so an existing operator. Second, new entrants have a variety of problems getting access to adequate programming. Without adequate programming, it is difficult for new entrants to become viable competitors. Finally, existing franchise agreements usually call for part of a franchise fee to be devoted to paying for facilities for the production of public access, educational, and governmental programming. When a new competitor comes in, questions arise as to how the costs for these facilities should be shared between the competitors.
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Public access programming (i.e. public, educational and governmental access channels) is very important to local communities. The danger exists, however, that cable operators will seek to reduce their public access programming claiming that such a move is necessary to remain competitive in the newly emerging cable market. It is essential that we ensure that public access programming continues as competition increases.
Ensuring adequate competition in the cable industry has been a very serious issue in my home city, Houston. Despite regulation, cable rates in Houston are quite high. Additionally, underservice to minorities and low-income neighborhoods has been a problem in Houston and other communities across the nation. Historically, more privileged neighborhoods have received cable service more quickly and have received better service in part due to higher subscription rate in privileged neighborhoods and the simple fact that it is easier to place cable lines in the suburbs than in the cities. This has resulted in the cable industry jumping over entire neighborhoods.
Mr. Chairman, Congress must ensure that competition in the cable industry continues in a manner that is fair and equitable to improve cable access for consumers. I look forward to hearing from these distinguished witnesses about how this might be accomplished and to hearing their responses to the concerns that I have raised. Thank you.
Ms. JACKSON LEE. Thank you very much.
I understand that Chairman Hundt mentioned that the telecommunications billof which I served as a member of the Conference Committeeof 1996 is one that we should let work, and we should give time. Let me acknowledge to the gentleman hereI look at the different locations where you are from, and I appreciate the chairman's emphasis on Illinoisbut I come from the fourth largest city in the Nation, and I would simply like to say to youand, Mr. Chairman, I'd also like to submit into the record a Houston Chronicle article dated September 22, 1997, authored by Julie Mason. I'd ask to have that submitted in the record, Mr. Chairman.
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Mr. CHABOT. Without objection.
[The information follows:]
INSERT OFFSET RING FOLIOS 1 TO 3 HERE
Ms. JACKSON LEE. The headline says, ''Boost Service or Be Unplugged, Cable Firm Told.'' City officials are recommending that TCI Cablevision of Houston area's second largest cable provider improve customer service and upgrade its system or risk losing its franchise. The report says TCI is not offering customers a state of the art system as required in the franchise agreement. This agreement is ages old and the commitments are ages old.
Having served as a member of the Houston City Council, and, as well, served as chairman of the Cable TV Committee, I am aware that Houston has some of the highest rates. My concern is the disparate treatment of rural areas. For example, I have a heavy minority population that has been in the dark, if you will, with the lights off for a number of years and certainly have been victims of poor service and high rates. I also raise the question of the treatment of employees in some of the larger units of the company.
My question, gentlemen, would be how do we juxtapose the calming suggestion, ''Let's see if our telecommunications legislation works.'' How do you juxtapose that, ''Let it work,'' with constituents crying out for service, and how can we effectively respond to conglomerates that are also saying, ''Let the telecommunications legislation passit's already passed, but let if function,'' when yet high rates are at a crescendo. Rural and minority communities, or inner city communities are desperately trying to get any kind of service. What have you brought to us?and I apologize if you've already elaborated, but help me as we proceed on this question of competition.
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Mr. WIETECHA. There are parts of the 1996 act which probably, given time, will be very beneficial, however, the anti-trust issues and anti-competition issues which I came to complain about before the committee this morning is something that stands over and above the limits of that act, and that's what we speak to, and no amount of time will answer that question or deal with those problems. The issues of competition and failure to respond to complaints; poor service in other regards; failure to expand service, whether to rural areasare issues that go beyond the act, and so I would respectfully disagree with the remarks of the commissioner this morning, and say the issues we're complaining about are those which supersede the act and are issues that this committee should address.
Ms. JACKSON LEE. I thank you for that. Mr. Petri? Mayor.
Mr. PETRI. We will really don't have any power, as you said, lack of service, poor quality, whatever; what do we do? We don't have any recourse. As I indicated earlier, we're looking at a potential franchise change that TCI would take over our Media One which is really good, but it's an FCC form 394; 120 days we have to prove that they're not financially, legally, or technically able to do that, and how can you do that? No municipality has ever been able to challenge that before, and our hands are tied. If they come in, we're stuck with them. We've worked long and hard with Media One to get a good system. We have good cable access. We have good service. We have rateswe have the low tier as was indicated earlier; we have a $7.35 basic tier. If TCI comes in, all that's gone. They're pulling out of public access. They have minimal service. I always give an example of their service: TCI pulls up to the door with a pick-up truck; Media One comes up with a van full of equipment. Which one do you want to service your house? And then it will be not in a timely fashion, but we have no recourse.
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Ms. JACKSON LEE. Mr. Carr.
Mr. CARR. I can't offer you an answer. I appreciate the question. We've been lucky in Wheaton to have had a cable provider which, on balance, has done a very fine job. Nevertheless, if they didn't do a good job, the residents would have complained sufficiently that I believe our cable operator would have responded. I believe in competition, as I said in my remarks. I also believe in the local municipality having the authority to deal with issues that are very germane to our residents. Competition, I think, will foster and answer some of the questions that you've just mentioned; that's the whole idea behind it, but it is a perplexing problem, and I did raise the issue of what is in the best interest of the public. I believe cable television falls in that area, in my opinion, in that you are speaking to people all over. People have a right, if you will, perhapsa right may be going too far, but certainly have an obligation to good service and good communication.
Ms. JACKSON LEE. Mr. Palazzolo, Mayor Palazzolo, if I got itPalazzolo.
Mr. PALAZZOLO. Close enough, Congresswoman. I would say that it's my belief that competition will answer most of those questions, but in the specific cases that you talked about for Houston, I believe that maybe some of the ideas expressed by Mr. Hundt this morning with regards to regulated low basic rates or mandated penetration rates of say 85 percent might address some of the concerns that you had in the community that you represent.
Ms. JACKSON LEE. Well, I thank you, and thank the chairman very much. I thank the instruction which is to have us get involved on this issue of competition, quality of service, and local powers.
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Mr. CHABOT. We're going to try to close this panel out before we leave, and the gentleman from Massachusetts is recognized.
Mr. DELAHUNT. Yes. Thank you, Mr. Chairman, and let me say thank you for your testimony. It has been extremely informative, and I think it really does underscore the need for these kind of hearings, and I do want to compliment my colleague and friend, the chairman, Mr. Hyde, for making this happen.
Listening here it sounds like, at least from my perspective, being a new member, and not being very familiar with the cable industry, that we have a mess on our hands. And I think, Mr. Petri, you used the term in response to the question by Representative Jackson Lee, that you don't have any power.
Mr. PETRI. Correct.
Mr. DELAHUNT. This is really all about economic power and an unlevel playing field, if you will. I mean, TCI has not been doing very well here this morning in terms of your testimony, but eventually if this tendency towards concentration continues, this tendency towards monopoly, whether it's TCI or Media One, we're not going to have a free marketplace. We're going to haveand you list a litany of problems: poor service, higher rates et cetera, et cetera. It's interesting, and it's very informative.
Let me just ask this question: In terms of trying to gain some leverage in dealing with these conglomerates, has regionalizationthe combining of various communitiesoccurred, and if so, has it proved successful anywhere?
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Mr. PETRI. Yes, we currentlyI represent five towns: Buffalo Grove, Hoffman Estates, Elk Grove, Palatine, and Rolling Meadows. We've been a consortium since day 1, 18 years ago when we started cable. We've had a very good success. We meet with our cable provider on a monthly basis, and this is high level people from the cable provider: their vice president and/or their general manager, so we don't let any problems get away from us. So, we've had really good service, but if a TCI comes in and takes over the Media One, now there is no competition in the Chicago area. So, it doesn't matter if we're a conglomerate or whatever, there's nobody else to go to.
Mr. DELAHUNT. You don't have sufficient economic power to deal with a large conglomerate.
Mr. PETRI. Correct, and as I pointed out, the transfer is simply, they file an FCC 394, and if you ever look at that form, you know, name, rank, and serial number is about all it requires.
Mr. DELAHUNT. So, you become a statistic.
Mr. PETRI. Exactly, and how do you prove that the number two cable company cannot provide the service, technically, legally or financially?
Mr. DELAHUNT. Well, I mean, it's a question, also, of resources.
Page 102 PREV PAGE TOP OF DOC Mr. HYDE [presiding]. The gentleman from Massachusetts will withhold. We have a vote on, and while he can sprint over there quicker than I, I would like to make the vote, and I wonder if the gentleman if could continue his correspondence with these gentleman by mail. We could let them go; we could go vote, and then return if your side will let us, and hear the rest of the panel. [Laughter.]
Mr. DELAHUNT. Since I'm the side, Mr. Chairman, and because of my great respect for you naturally, I'll terminate my questioning forthwith.
Mr. HYDE. I thank you from the bottom of my heart.
Mr. DELAHUNT. And I'll correspond by mail. Thank you, gentleman.
Mr. HYDE. I want to thank this panel very much for the sacrifice you made to come in. Believe me, your statements are important and are going to receive full consideration, and have a safe trip home. Thank you very much.
We'll take the next panel after we return from this vote. Thank you.
Mr. HYDE. The committee will come to order. I trust all the pictures are taken? All right. I'm sorry, but we're still in a vote. I'm going to go ahead with the hearing. This is going to go on all day, and it's very unfair to you who have been here all morning. This is another motion to adjourn. Were I the speaker, I would grant it. [Laughter.]
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And I would suggest when they're ready to legislate and do what they're paid to do and elected to do, then we'll reconvene. Meanwhile, your motion to adjourn is granted, and keep Saturday open. [Laughter.]
But we don't do that. We just run over and vote.
Our final panel consists of seven witnesses who represent a variety of perspectives on cable television. First, we have Ms. Deborah Lenart, the President of Ameritech's cable subsidiary, Ameritech New Media. Ms. Lenart is a graduate of the University of Illinois and the Loyola Business School. She has extensive experience in the telecommunications industry. Before joining Ameritech in 1991, she worked with MCI and Metropolitan Fiber Systems. Since 1991, she served in several positions with Ameritech, becoming president of the cable company in September, 1996.
Our next witness is Mr. Decker Anstrom, president and chief executive officer of the National Cable Television Association. Mr. Anstrom is a graduate of Macalester College. After tours of the White House and at a policy consulting firm, he joined NCTA in 1987. He served as executive vice president until January 1994 when he began his current job.
Our next witness is Mr. Joshua Sapan, the president and chief executive officer of Rainbow Media Holdings, the programming subsidiary of Cablevision Systems Corporation. Mr. Sapan has extensive experience in cable programming, and before coming to Rainbow, he worked at Visual Information Systems, Teleprompter, Manhattan Cable Television, and Showtime. He joined Rainbow in 1987.
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Our next witness will be Mr. Michael Mahoney, the president and chief operating officer of CTEC Corp., the parent company of RCN Corp. Mr. Mahoney is a graduate of Villanova University and is a certified public accountant. Before joining CTEC, Mr. Mahoney worked with Arthur Anderson & Company and Harron Communications. He joined CTEC in 1991. CTEC's subsidiary, RCN, is currently providing telephone, cable, and internet services in several major cities. In a joint venture with PEPCO, it plans to start providing these services in the Washington area in the near future.
Our next witness is Mr. Matthew Oristano, the chairman and chief executive officer of People's Choice TV. Mr. Oristano is a graduate of Rennselaer Polytechnic Institute. He and his family have been in the cable television business for more than 30 years, and they held a number of traditional cable franchises before getting into the wireless cable business in 1987. Wireless cable, that's an oxymoron, I would think. However, People's Choice now operates wireless systems in Chicago, Detroit, St. Louis, Phoenix, Houston, and Tucson. He appears here, today, on behalf of the Wireless Cable Association.
Our next witness is Mr. John Norcutt, the chief executive officer of One Point Communications, a company providing private cable systems. He's been in the cable business since 1972. He's worked at Gulf and Western, TCI, and Matrix Enterprises. He appears here today on behalf of the Independent Cable and Telecommunications Association.
And our final witness is Mr. Gene Kimmelman, co-director of the Washington office of Consumers Union, the publisher of Consumer Reports. He's a graduate of Brown University and the University of Virginia Law School. He served two years as the Chief Counsel of the Senate Judiciary Committee's Antitrust subcommittee, and he also worked with the Consumer Federation of America and Congress Watch. He's recognized as a leading consumer advocate on telecommunications issues.
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So, we look forward to your testimony. We certainly welcome you all, and I suppose we will start there, Ms. Lenart. If you could confine yourself to approximately five minutes, your entire statement will be made a part of the record, and, as I say, we won't be too abrasive if you go over.
Ms. LENART. I think we can do that. Thank you.
STATEMENT OF DEBORAH L. LENART, PRESIDENT, AMERITECH NEW MEDIA INC.
Ms. LENART. Good afternoon, Mr. Chairman and members of the committee. My name is Deborah Lenart, and I am the president of Ameritech New Media, Ameritech's Cable Television subsidiary.
Mr. DELAHUNT. Ms. Lenart, could you pleasethank you.
Ms. LENART. There you go.
Mr. DELAHUNT. And speak right into that microphone, because we're having difficulty, thank you.
Ms. LENART. Thank you for the opportunity to testify, and today I'd like to discuss the current state of cable competition and to suggest how it could be improved.
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Ameritech is constructing state-of-the-art cable systems that are totally independent and separate from our telephone network. We're what they call an overbuilder that competes head-to-head with the incumbent cable operators, and, today, almost 20 months after the passage of the Telecomm Act of 1996, Ameritech has 52 franchises in Illinois, Michigan, and Ohio, and we now provide service in 31 communities. Over 1,000 new jobs have been created, and we will continue to create more.
In these communities, consumers benefit completely from our competitive entry, and it was even recognized in Monday's cover of the Wall Street Journal. Where we compete, incumbent cable operators are dropping prices, upgrading networks, adding more channels exactly as Congress had intended.
While Ameritech is proud of the competitive inroads that we've made and the benefits that have been brought to consumers, I will be the first to tell you that we could be doing better. The reality is that Ameritech is being shut out of some popular cable programming. Now, in order to protect the non-competitive status quo, there has been a rising trend for the incumbent cable operators to enter into exclusive programming agreements, denying us access to such popular programming as the Fox News Channel, FX, and TV Land, and in some cases, the incumbent cable operators are demanding that exclusivity from programmers as a precondition to carry their networks. A matter of even greater concern is that some programmers have informed us that these arrangements apply to telephone companies, but they don't apply to DBS, like Direct TV and Prime Star who, coincidentally, is owned by the top five cable operators. Plain and simple, this is a refusal to deal; an example of blatant discrimination which illustrates that cable's playing field is not level at all.
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Now, I find it hard to see how these contracts can benefit consumers. I mean, the only beneficiary here is the monopoly cable operator who's able to gain an unfair competitive advantage over new entrants. Everyone else, including the consumer and the new entrant, suffers. Consumers are harmed the most, because they're being denied what real competition should offer which is choice and its resulting benefits.
Now, in 1992, when Congress enacted the Program Access law, it recognized right up front that full and fair access to programming was the key to a competitive marketplace. Now, in the five years since the enactment of those laws, numerous changes have taken place in the marketplace. While the industry was mainly vertically integrated in 1992, today, it's not. For example, the Viacom family of programming: MTV, Nickelodeon, TV Land are no longer subject to the law, simply because Viacom doesn't own cable systems like they did a little over a year ago.
For the same reason, the law doesn't apply to the broadcasters, and these broadcasters now own a number of very popular cable networks like MSNBC, FX and the Fox News Channel. Fox is now carrying Monday Night Baseball on FX, and Fox won't sell us access to FX. Soon, Mr. Murdoch is expected to bid on the NFL cable rights, and if he succeeds, our customers could be denied access to even more essential sports programming. I mean, how could you compete if you don't have the NFL?
Another marketplace change is the development of fiber optics as a viable delivery alternative. Cablevision, Comcast have all been cited in recent articles as potentially delivering their sports programming over fiber. One such recent article discussed this very issue by Brian Roberts and he was quoted, the head of Comcast, and I quote, ''We don't like to use the words 'corner the market,' because the market, the Government watches our behavior. Let's just say we've been able to do things before they're in vogue.'' And Mr. Roberts holds the exclusive rights to the Comcast Sports Network and owns many of the Philadelphia sports teams, and, in fact, Direct TV, just issued a program access complaint on this just yesterday.
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Now, we respect that the cable act amendments we are suggesting fall within the purview of another committee, but, nevertheless, given this committee's respected role in pro-consumer, pro-competitive legislation, clearly your support would be very helpful. I also understand your committee has an oversight hearing coming up with the Federal Trade Commission and the Department of Justice. Concerns about increased concentration in this industry could be raised at that time.
We are absolutely prepared to compete as long as the rules are the same for all competitors. My only concern is that the American consumers, your constituents, can get quality cable service at a fair price, and only fair competition is going to bring that result. So, thank you for your interest in cable consumers, and I'll be happy to answer questions.
[The prepared statement of Ms. Lenart follows:]
PREPARED STATEMENT OF DEBORAH L. LENART, PRESIDENT, AMERITECH NEW MEDIA, INC.
Ameritech New Media, Inc. (''Ameritech'') applauds Congress' efforts over the past five years to create competition in the multichannel video programming distribution (''MVPD'') marketplace. A relatively new entrant in this marketplace, Ameritech has responded quickly and decisively to Congress' repeal of the telephone company cable cross-ownership prohibition. Today, consumers in 31 communities in Illinois, Michigan and Ohio are enjoying the resultant benefits from a choice of cable providers and many more will be able to do so in the near future. Yet, as our experience demonstrates, Congress and the FCC need to do more if consumers are to receive the full benefits of cable competition.
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Congress recognized in 1992, when it enacted Section 628 of the Communications Act, that full and fair access to programming is the key to cable competition. Yet, Section 628 is not broad enough to deal with the cable marketplace that exists today. As a result, cable operators today are increasingly demanding that programmers grant them exclusive access to programming in an effort to impede competitive entry by Ameritech and others. These exclusive arrangements are in some cases targeted exclusively against overbuilderstelephone companies and wireless cable providers.
In 1992, the vast majority of the most popular cable programming was owned by cable companies. Consequently, Congress crafted Section 628 specifically to prohibit anticompetitive practices by vertically integrated cable operators and programmers. Today, significant programming is owned by nonvertically integrated programmers and broadcasters who fall outside the reach of Section 628.
Another significant gap is that Section 628 does not apply to non-satellite delivered programminga means of distribution that was not as technologically viable five years ago as it is today. Non-satellite delivery now is being used by cable operators as a means to evade the requirements of 628 and to enter into exclusive programming arrangements for the delivery of regional sports programming.
Finally, in the last few years, the industry has been marked by mergers and consolidations among cable operators. These increasingly complex horizontal arrangements between the largest cable operators further increase the incentives and opportunities of these large cable operators to exercise their leverage over programmers and deny or restrict new entrants' access to programming.
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Exclusive contracts do not benefit consumers. The only beneficiary is the incumbent provider who is able to gain a unfair competitive advantage over new entrants. Everyone elsethe consumer, the programmer, the new entrantsuffers. Consumers are particularly harmed because they are being denied what real competition should offerchoice and its resulting benefits. Congressional action is needed to ensure that true competition can thrive in the cable marketplace.
Mr. Chairman and Members of the Committee, my name is Deborah Lenart and I am the President of Ameritech New Media, Inc.the cable television subsidiary of Ameritech.
Thank you for the opportunity to testify before you today. At the outset, I also want to thank you, Chairman Hyde, along with Congressman Conyers and the other members of the House Judiciary Committee, for the positive and constructive role you played in the formulation and passage of the Telecommunications Act of 1996.(see footnote 1) Because of its traditional role in the formulation of antitrust legislation and its oversight of federal antitrust enforcement, the Judiciary Committee has often been at the forefront of congressional efforts encouraging marketplace competition and protecting the American consumer.
Your Committee made many important contributions to the Telecommunications Act of 1996, which was intended by Congress to increase competition in various telecommunications markets and the cable television market. We at Ameritech sincerely appreciate your hard work and believe that consumers have benefited and will continue to benefit from your efforts. Yet, we believe further legislative changes are necessary if consumers are going to reap the full benefits of competition. Today, I will discuss the current state of competition in the local cable marketplace and make some suggestions about how it could be improved.
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Section 651 of the Telecommunications Act of 1996 repealed the telephone company/cable cross-ownership prohibition. That provision enabled Ameritech to become a new entrant into the cable television business. Ameritech quickly responded to this new opportunity.
We obtained our first franchise in June 1995 and provided service to our first customer on May 13, 1996. Today, I can proudly tell you that we've obtained 52 franchises in Illinois, Michigan, and Ohio for communities with an aggregate population of more than 2.1 million people. We currently serve 31 communities in the Chicago, Detroit, Cleveland, and Columbus areas.
Ameritech is an ''overbuilder''we are constructing new state-of-the-art cable systems to compete with the incumbent cable providers. I also want to point out that Ameritech is doing this by constructing entirely new cable systems that are totally independent of our telephone network. As a result, we are at this stage of our development making significant investments in infrastructure. We operate as a Title VI cable operator, subject to the same FCC rules and regulations as incumbent cable operators.
As is evident from our track record, Ameritech has responded vigorously to Congress' call for competition and, as a result, consumers have benefited. In those communities where Ameritech offers service, and thus a competitive alternative for consumers, incumbent cable operators have responded to Ameritech's competitive presence precisely as Congress had hoped: they are refraining from increasing prices and, in some instances, actually lowering prices. For example, last March, Jones Intercable raised rates for its expanded basic cable from $23.99 to $25.49, a 6.25% increase, in Aurora, Illinoiswhere Ameritech does not provide servicewhile it held its rates constant at $23.87 in neighboring Naperville where Ameritech has entered the market. This experience is markedly different than the national trend of sharply rising cable rates, recently determined to be exceeding the rate of inflation by more than 3 to 1.(see footnote 2)
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Consumers have also benefited from Ameritech's entry in other significant waysimproved service, better facilities and equipment and increased program choices. Just last month, following Ameritech's announcement that it planned to begin offering cable television service in Elgin, Illinois, Jones (the incumbent provider) announced plans to add seven new channels to its basic plus line-up at no additional charged.(see footnote 3) In Berea and North Olmsted, Ohio, the incumbent cable company, Cablevision, responded to Ameritech's entry into the market by making a number of operational changes. It upgraded the technical aspects of its cable system; added 20 new channels (increasing the total number of channels to 77); introduced a new advanced converter box with an Interactive Programming Guide; moved The Disney Channel from an a la carte premium service to its expanded basic tier, thereby saving customers who subscribed to The Disney Channel over $10 per month; decreased prices for its a la carte premium services from $11 to between $6.95 and $9.95; and offered a Tyson-Holyfield boxing match for free (a $49.95 value). Simply put, where we compete, consumers get more channels and better service for their cable dollar.
While Ameritech is proud of the competitive inroads we have made and the benefits we have brought to consumers, I will be the first to tell you that we could be doing much better if we were not encountering significant structural impediments, particularly in obtaining popular cable programming.
When Congress passed the Cable Act in 1992, it sought to end the existing system of one monopoly cable provider per locality by injecting competition and consumer choice into the video programming marketplace. The valid presumption was that competition in the local cable marketplace would restrain cable price increases and improve the quality of service experienced by cable customers. To that end, and recognizing that full and fair access to programming is the key to competition in the local marketplace, Congress passed a law (codified at Section 628 of the Communications Act of 1934) prohibiting unfair or discriminatory practices in the sale of satellite cable programming and satellite broadcast programming.(see footnote 4)
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As Congress implicitly recognized, consumers expect that certain ''core'' programming (e.g. CNN, ESPN, HBO, and regional sports) will be offered to them by any cable system seeking to serve them. But, despite the enactment of the procompetitive, antidiscriminatory provisions in the Cable Act, a new entrant like Ameritech continues to face difficulties obtaining access to popular, quality programming, particularly sports programming, at nondiscriminatory rates and on nondiscriminatory terms and conditions. These impediments result, at least in part, from changes that have taken place in the industry in the last five years.
In 1992, the vast majority of the most popular cable programming was owned by vertically integrated cable companies.(see footnote 5) That is, many programmers were owned by the local cable monopolies. Consequently, Congress was chiefly concerned with the amount of cable programming tied up in exclusive contracts or other arrangements involving vertically integrated cable companies and specifically crafted the program access provisions to address this concern.
Today, in contrast to 1992, it cannot be said that only, or even mainly, vertically integrated cable operators and cable programmers create program access problems. Rather, it appears that a growing number of significant cable programmers who tie up quality programming in exclusive or discriminatory contracts are not affiliated with cable operators or have recently sold their cable operations. The National Cable Television Association (NCTA) has reported that today 10 of the top 20 cable networks have no ownership affiliation with a cable operator.(see footnote 6) Thus, a large number of programs fall outside the Section 628 prohibitions, despite the obvious adverse impact such exclusive and discriminatory agreements have on competition in the video market.
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Moreover, in the last few years, the industry has been marked by consolidations among cable operators. These increasingly complex horizontal arrangements between the largest cable operators increase the incentives and opportunities of these large cable operators to exercise their leverage over programmers and deny or restrict new entrants' access to programming.
Viacom, which owns MTV, Nickelodeon, and The Movie Channel, among other cable networks, is an example of a nonvertically integrated programmer denying access to programming. Formerly a vertically integrated cable operator and programmer, Viacom has spun off its cable system holdings and now, despite its considerable market influence, is exempt from the prohibitions contained in Section 628. Viacom recently launched a new cable network, TV Land, after significant promotions on its other networks, including Nick At Nite and MTV. Viacom has admitted that it ''has entered into a few exclusive, short-term distribution agreements'' with certain cable providers who can guarantee a minimum number of subscribers.(see footnote 7) Viacom further admits these contracts are for ''terrestrial-only and geographically circumscribed exclusivity''in other words, only new entrants such as telephone company and wireless cable competitors are denied access to TV Land.(see footnote 8) Ameritech believes that Coaxial Cable and Cox Cable have exclusive agreements with Viacom for TV Land in their service areas, thus denying Ameritech access to that programming in Columbus and Fairview Park, Ohio.
Despite the fact that TV Land is not available to competitive cable providers in at least some communities, Viacom has been running spot advertisements on certain of its other networks, including Nick At Nite, encouraging subscribers to call their cable company and request that TV Land be added to their system. Following the running of such ads in late August, the Ameritech service center was inundated with customer calls requesting TV Land. Because Viacom has granted exclusive rights to at least some of our competitors, Ameritech obviously had to disappoint these customers. In some cases, these customers have left or will leave Ameritech to return to the incumbent cable provider or decide not to subscribe to Ameritech service at all because we do not carry TV Land. Obviously, the exclusive contracts are having the effect intended by cable operators. Customers are harmed because they are denied what competition should offerchoice and its resulting benefits.
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Another recent industry trend is also causing problems. Cable programmers owned by broadcasters fall outside the Section 628 prohibitions. In 1992, the major broadcast networks, with the exception of ABC which had an 80 percent interest in ESPN, were not heavily involved in cable programming. With TV viewership and advertising revenues increasingly moving from broadcasting to cable, however, broadcasters have become much more aggressive participants in cable programming.(see footnote 9) Rupert Murdoch's News Corp., the parent of Fox, has ownership interests in many regional sports networks, FX, the Fox News Channel and, as a result of a recent deal, The Family Channel. NBC owns CNBC and, together with Microsoft, MSNBC. CBS, which had been the last of the major broadcast networks to enter into cable programming, has significant ownership interests in The Nashville Network and Country Music Television and has launched its own cable network, Eye on People. Since none of these broadcast networks own cable systems, however, their cable programming networks are not subject to the Section 628 prohibitions.
In fact, some of these major cable programmers are entering into exclusive contracts with incumbent cable providers. In 1997, CBS announced its intention that Eye on People ''will be available to cable operators on a terrestrial-exclusive basis, which means that it will be available to satellite services but not to telephone or wireless distributors that compete with cable operators.''(see footnote 10) Just last month, TCI signed an agreement for CBS Eye on People giving TCI ''terrestrial exclusivity only.''(see footnote 11) Similar concerns regarding exclusive programming contracts exist with MSNBC.
In October of 1996, it was widely reported that Fox News Channel offered distributors carriage on an exclusive basis (against cable overbuilders and wireless providers) for five years within their operating areas, although at least some DBS providers were granted the rights to carry the network. Fox News Channel reportedly offered to pay a one-time fee between $10 and $12 per subscriber for carriage.
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There is some evidence that prior to the launch of the Fox owned FX network, TCI demanded that Fox grant not only TCI, but every franchised cable TV system in the United States, the exclusive right to distribute FX within its service area.(see footnote 12) Ameritech has not been able to gain the right to carry FX and will not be able to do so until at least 1999 when these agreements expire. There is currency nothing to prevent Fox from renewing those agreements on an exclusive basis at that time.
The increasing popularity of FX highlights how certain programming may evolve over time into ''must have'' programming. FX was launched in June 1994 to moderate success. Fox's decision to put Monday night baseball (and now potentially Monday night NBA games) on FX has increased its popularity with many viewers. The recent addition of ''The X-Files'' and ''NYPD Blue'' to the FX line-up has further added to its popularity.(see footnote 13)
The reality is that critical programming could increasingly be available only on an exclusive basis. For example, Rupert Murdoch's News Corp. is expected to bid on National Football League cable rights (the current rights expire after the 1997 season) in addition to its existing NFL broadcast rights. If he is successful, many in the industry speculate that, to boost FX subscribership (which currently has 31 million subscribers) and thus advertising revenue potential, he will carry non-Sunday afternoon NFL games on his FX cable network (as ESPN and TNT have done with Sunday night football) and FX already has done with Monday night baseball. Because incumbent cable operators have been given exclusive rights to FX, Ameritech and other competitive providers would be denied essential sports programming.
Page 117 PREV PAGE TOP OF DOC I can assure you that, as they acquire exclusive rights to programming, cable operators do not hesitate to use it as a marketing tool against their competitors. Cox Cable, which as I mentioned earlier we believe to have an exclusive agreement with Viacom for TV Land, states in the ads it runs in communities whale it competes with Ameritech that it offers ''exclusive programming like TV Land.'' Jones Intercable advertises the fact that it alone offers MSNBC. And Media One, taking advantage of a loophole in Section 628 for contracts entered into before the statute was passed, prominently advertises its exclusive rights to HBO in a number of Michigan communities where Ameritech competes.(see footnote 14)
The growing importance to cable operators of exclusive contracts was highlighted recently in a petition that Outdoor Life Network and Speedvision Network filed at the FCC. In their Petition, these two vertically integrated cable programmers (owned in part by Cox, Comcast, and Media One) seek the right to enter into exclusive contracts with cable operators, complaining bitterly that their inability to do so under Section 628 has put them at a severe competitive disadvantage to those programmers not subject to program access requirements and, therefore, threatens their viability.
Time and time again, cable operators who were ready to affiliate with the networks, or to substantially increase the number of systems on which they carry the networks, have chosen instead to carry other, often lesser quality networks that were able to provide exclusivity.(see footnote 15)
The Outdoor Life Petition is concrete evidence from an unexpected source that incumbent cable operators are demanding exclusivity from programmers as a precondition to their agreement to carry the programming. Indeed, incumbent cable operators have become so powerful in their negotiations with programmers that some are seeking a thirty-day right of first refusal to acquire programming on an exclusive basis. By this I mean that the cable operator demands the right to be informed when another cable provider wants a programmer's product in a particular market and has a thirty-day right to accept or refuse an exclusive contract to carry that program in that market.
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Ameritech is severely disadvantaged by this arrangement. We are unable to plan our programming line-ups with certainty. Customers are confused if the Americast programming line-up in one community includes a program, while in the adjoining community the program is not offered by Ameritech. And it adds significant costs for us if we are not able to launch a program in all markets in a geographic area. In such case, we have to incur the additional costs necessary for our equipment to accommodate different programming line-ups, as well as additional costs for differentiated marketing and customer materials in each market.
Ameritech has been told by certain programmers that their programs are exclusive against telephone companies. Viacom has admitted in writing to the FCC that its contracts offer ''limited, terrestrial-only and geographically circumscribed exclusivity'' (emphasis in original). The contracts are not exclusive against DBS providers (some of whom are owned in part by cable operators). They are, however, exclusive against overbuilders such as telephone company cable providers. These contracts are nothing more than a means to deter competitive entry. Contrary to the claims of programmers such as Viacom, I find it hard to see how these contracts benefit consumers.(see footnote 16) The only beneficiary I see is the incumbent cable provider who is able to gain a competitive advantage over new entrants. Everyone elsethe consumer, the programmers, the new entrantsuffers. Section 628 must be changed to prevent incumbent cable operators from demanding exclusive access to programming as a means of impeding competition.
Another significant loophole is that Section 628 does not apply to cable programming delivered by means other than satellite. Thus, for example, cable programming delivered by fiber-optic wire would be exempt from the statutory requirements for fair competition. In 1992, this fact was not significant. However, as fiber-optic technology improves, costs continue to drop, and cable operators increasingly cluster their systems, the efficiency of terrestrial distribution of programming by means other than satellite makes it increasingly attractive for vertically integrated programmers to switch to such a delivery scheme and circumvent the law. And programmers, particularly of regional programming, are beginning to utilize fiber-based technology.
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For example, Cablevision, which has substantial interests in numerous regional sports networks in New York, is reportedly delivering or seriously contemplating delivering programming in New York by using fiber-optic wiring as opposed to traditional satellite.(see footnote 17) Comcast, an incumbent cable provider in the Philadelphia area and the new owner of the Philadelphia Flyers and 76ers, as well as the Spectrum Arena, has announced plans to establish a regional sports network, Comcast Sports Net, and will not make the new network available to satellite or certain other cable operators.(see footnote 18) Brian Roberts, Comcast's President, was recently quoted as saying, '' 'We don't like to use the words 'corner the market,' because the government watches our behavior. . . . Let's just say, we've been able to do things before they're in vogue.' ''(see footnote 19)
The possibility that popular sports programming that is critical to the success of any cable provider may be delivered terrestrially is heightened by the recent announcement that News Corp. and Tele-Communications Inc. (TCI) have agreed to purchase a 40 percent stake in eight regional sports channels from Cablevision in an effort to form a new national cable sports network (Fox Sports Net) to compete with ESPN. This network will directly control 18 regional cable sports networks. In addition, Murdoch's News Corp. and TCI also have announced the acquisition of a portion of the New York Knicks and Rangers sports teams and Madison Square Garden and its network from Cablevision. And it was recently announced that Fox Sports paid $100 million for exclusive cable broadcast rights for the NBA Denver Nuggets and the NHL Avalanche. Fox Sports Net will obviously have the rights to carry significant sporting events. There can be little doubt that a cable system that is not able to offer such sports events to its customers will be at a significant competitive disadvantage. Under existing law, that could easily happen if Fox were to carry these regional sports networks over fiber, and thereby evade the Section 628 requirement.
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There is absolutely no tenable policy justification for permitting evasion of the essential procompetitive protections in the existing law simply because the vertically integrated cable company has changed the means of delivering programming. The technology used for delivery is irrelevant to the competitive implications. Congress should swiftly close this potentially significant loophole by extending Section 628 to cable programming delivered by whatever means.
Finally, the recent trend of horizontal arrangements, consolidations and mergers among powerful cable operators with programming interests bodes ill for competition in the video marketplace. The most noteworthy industry event is the stark shift in the posture of News Corp. from a self-proclaimed ''arch competitor'' to cable to one of the most powerful cable programmers with enormous leverage over cable operators, especially new entrants. The News Corp./Echostar direct broadcast satellite (DBS) deal announced in February 1997 promised formidable competition to came, even while it raised many concerns. Following the collapse of that merger, however, News Corp. apparently has traded in competition to cable for carriage on cable.
News Corp. and its DBS partner, MCI, now plan to trade some of their satellite assets, including an extremely valuable DBS orbital slot, in return for a minority stake in Primestar Partners, a DBS satellite broadcasting service, which is jointly owned in large part by the top five cable operators TCI, Time Warner, Comcast, Cox and Media One. There is very limited orbital capacity available to DBS providers who wish to provide a nationwide DBS service. If the Primestar/News Corp. transaction occurs and the necessary license transfers are approved, the newly structured Primestar will control a significant amount of this limited resourcefar more than any other DBS provider. As a result, Primestar will be in a position to dominate the DBS distribution of programming.
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While Rupert Murdoch earlier promised to compete directly with cable through the Echostar/News Corp. venture and offer consumers a choice between cable and DBS with ''two equivalent offerings,''(see footnote 20) Murdoch now plans to join forces with the Primestar cable partners (who serve over 66% of cable subscribers nationwide).(see footnote 21) Rather than DBS offering a strong competitive alternative to cable, the News Corp./Primestar deal threatens to transform DBS into a captive of the incumbent cable industry.
The new age of collaboration for carriage rather than competition is further evidenced by news that News Corp. dropped its antitrust suit against its former rival, but now partner, Time Warner. In exchange, Time Warner has agreed to give Fox News carriage on its New York City systems. In addition, Time Warner has agreed to add Fox News to 65% of Time Warner's cable systems around the country in the next five years, adding eight million subscribers (at a launch incentive of $10 per subscriber for Fox News).(see footnote 22) If you add to this the fact that Fox, TCI and Cablevision have announced the Fox Sports Net transaction and appear to be continuing to acquire sports teams, arenas and broadcast rights, the potential market power of this group is obvious.(see footnote 23)
That, however, is not the end of the story. These cable operators are also entering into deals to cluster their cable systems and, thereby, further enhance their power. In June, Cablevision gave TCI a one-third interest in Cablevision in return for control of TCI's cable systems in New York, New Jersey and Connecticut. The deal gives Cablevision ''almost total control of the New York'' area.(see footnote 24) TCI and Time Warner just announced a series of consolidations and swaps involving more than two million subcribers.(see footnote 25) And TCI has been doing deals in the Chicago area ''to gain control in the market.''(see footnote 26) These clusters will give one operator significant power over access to programming in a geographic area. For example, Cablevision's presence in New York will more easily enable Cablevision to demand that a programmer seeking carriage on Cablevision's systems in the New York area grant Cablevision an exclusive right to the programming. The clustering also makes the economics of delivering a regional sports network over non-satellite facilities exclusively to Cablevision's New York area subscribers very appealing.
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The combined effect of these transactions will be to give these titans of the cable industry even more market power than they already possess to the detriment of new entrants. The power of these large operators to leverage their power over programmers and demand that the programmers refuse to provide programming to new entrants will be enhanced. In addition, these transactions have resulted in an unprecedented level of concentration of ownership of critical cable programming assets which also hurts new entrants aspiring to bring competition to the video marketplace. Independent, competitive cable operators do not have cable programming affiliates which profit from higher license fees and, therefore, they bear all of the burden and none of the benefit of higher programming rates. New entrants also have smaller subscribership and thus probably cannot yet secure volume discounts (discounts, I should note, that often exceed corresponding cost savings). Their dependence on key programming controlled by this close-knit group of programmers also makes them particularly vulnerable to pressure to carry less popular or redundant cable programming as the ''price'' of carriage of more popular programming.
There is no indication that the trend toward consolidation will be reversed. If anything, it appears to be gaining momentum. Transactions such as these should be carefully scrutinized and the appropriate safeguards imposed to ensure they do not impede the development of genuine competition.
To ensure that Congress' objective of robust competition in the video programming market is achieved, Section 628 needs to be amended to reflect the changing realities of the industry. In addition, however, Ameritech believes that the competitive objectives of Section 628 can be furthered by changes to the existing FCC program access complaint rules and procedures implementing Section 628. In particular, changes are needed to address three problems: (1) the program access complaint process is not conducted in as expeditious manner as mandated; (2) it does not provide a right to discovery needed to obtain relevant information essential to proving a discriminatory pricing or practices case; and (3) it does not impose economic disincentives in the form of fines or damages for violations of Section 628. These shortcomings in the Commission's process combine to deter vigorous prosecution of Section 628 complaints and actually create business incentives that reward anticompetitive behavior, thus undermining the substantive protections conferred by Section 628. Ameritech has filed a Petition for Rulemaking with the FCC to ameliorate these problems.(see footnote 27) Comments on the Petition for Rulemaking have been filed and the FCC staff has indicated its support for moving forward. We respectfully request that Congress encourage the FCC to issue a Notice of Proposed Rulemaking in response to the Petition and to act expeditiously to adopt improved rules and procedures.
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I respect that the Cable Act amendments I am suggesting fall within another Committee's jurisdiction. In fact, I have already testified before the House Telecommunications Subcommittee, requesting that they consider these needed changes. Nevertheless, given this Committee's respected role in pro-consumer, pro-competitive legislation, your support in this effort would be exceedingly helpful. The Commerce and Judiciary Committees cooperated closely on the Telecommunications Act in 1996. This is another opportunity for cooperation that would benefit the American consumer. Also, from your Committee's antitrust oversight perspective, you may want to request that the Justice Department report to you on the effects on competition of the mergers, consolidations and other joint activities occurring among powerful members of this industry.
I realize that I have talked about many large and successful players in the cable industry. I want to make clear that my concern lies not with any one or all of these providers. My concern is that the American consumers get what they deservethe right to a choice in a cable provider. That choice will be a viable one only if cable programming is available to all providers and is available on nondiscriminatory terms and conditions. Your constituents will be the beneficiaries of the changes we are advocating in the program access laws because they will reap the benefits of competitive choice.
In conclusion, I want to thank you again for the opportunity to testify. Ameritech applauds what Congress has done already to create an environment conducive to full and fair competition. I also appreciate your willingness to examine whether more needs to be done before there will be genuine competition. I truly believe that with decisive and swift action to correct the problems I have discussed today, true widespread and sustained competition can become a reality to the benefit of consumers throughout the country.
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HOUSE RULE XI CLAUSE 2(G)(4) STATEMENT
September 22, 1997
I, Deborah Lenart, President of Ameritech New Media, Inc. (''New Media''), certify that New Media is not currently a direct or indirect contracting party withthe Federal government nor has it been such a party in either of the two preceding fiscal years. new Media also has not received any Federal grants or subgrants from any agency or program over the same period.
|Deborah L. Lenart, President,|
|Ameritech New Media, Inc.|
PETITION FOR RULEMAKING TO AMEND 47 C.F.R. §76.1003PROCEDURES FOR AJUDICATING PROGRAM ACCESS COMPLAINTS
PETITION FOR RULEMAKING OF AMERITECH NEW MEDIA, INC.
Ameritech New Media, Inc. (''Ameritech''), pursuant to Section 1.401 of the Commission's rules,(see footnote 28) hereby submits this Petition for Rulemaking (''Petition'') requesting that the Federal Communications Commission (''Commission'') issue a Notice of Proposed Rulemaking to amend Part 76 of its rules, 47 C.F.R. §76.1003, to improve the Commission's administration and enforcement of Section 628 of the Communications Act of 1934. The proposed narrowly targeted changes, applying only to proceedings initiated pursuant to Section 628, are needed to conform the Commission's rules to the procompetitve letter and spirit of the law, as enacted by Congress. Specifically, in all Section 628 proceedings, Ameritech proposes that there be: (1) guaranteed expedited review achieved by imposing a short deadline for decisions on complaints; (2) a right to discovery to enable complainants to obtain the information needed to prove Section 628 violations; and (3) economic penalties in the form of fines or damages to create the needed economic disincentives to discourage violation of Section 628 by cable operators and programmers.
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I. Introduction and Summary
During this decade, the Congress has devoted an enormous amount of time and productive effort to bring competition to the multichannel video programming distribution (''MVPD'') marketplace and to restrain the price increases and improve the quality of service experienced by cable customers. In the 1992 Cable Act, Congress employed a mixture of rate regulation and the procompetitive provisions of Section 628 to achieve those goals. In the Telecommunications Act of 1996, Congress repealed the telephone company-cable cross-ownership prohibition in the hope of sparking competition to cable by local, wireline providers.
Notwithstanding these concerted efforts by the Congress, consumers continue to experience substantial cable rate increases, significantly exceeding the rate of inflation. Competitors to cable continue to encounter problems obtaining popular cable programming at nondiscriminatory prices, without which they are incapable of creating competitive programming offerings. Consequently, in 1997, there has been a resurgence of concern about the apparent intractability of the problems in the MVPD marketplace.
At an April 10, 1997 Senate Commerce Committee hearing on the status of competition in the video marketplace, Chairman John McCain (RAZ.) and other committee members expressed clear disappointment and displeasure with the slow pace of development of genuine competition to cable. Chairman McCain concluded his opening statement with the following observation: ''In sum, I remain concerned that competition in the multichannel video market today is not as vigorous as it will have to be to effectively constrain cable rates. Today, I hope to gain an insight on what must be done to assure that competition will measure up to the task by 1999.'' House Telecommunications, Trade and Consumer Protection Subcommittee Chairman Billy Tauzin (RLA) recently announced that his Subcommittee also will hold a hearing on the status of competition in the video market.''(see footnote 29)
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During the past year, Ameritech has been doing its part to bring the type of robust, head-to-head competition to cable that Congress sought to achieve when it repealed the telephone company-cable cross-ownership prohibition in Section 651 of the Communications Act. Since its decision to provide video programming services subject to Title VI of the Communications Act, Ameritech has been busily engaged in building out digital state of the art cable systems and currently has franchises with 37 communities having a total population of more than 1.7 million people. From a public interest perspective, Ameritech's competitive entry into the MVPD marketplace is yielding precisely the dividends consumers want and Congress expected when it enacted Section 651. For example, in Troy, Michigan, the monthly rate charged by the incumbent cable provider dropped from $28.08 to $23.95, a price decrease in excess of fifteen percent, after Ameritech entered the market. In the adjoining communities of Naperville and Aurora, Illinois, served by the same incumbent cable operator, cable prices of the incumbent cable operator in Naperville, where Ameritech is providing service, have remained the same, whereas cable prices in Aurora, not yet served by Ameritech, were increased earlier this year by 6.25%, more than double the rate of inflation. In community after community, Ameritech's entry into the MVPD market has triggered special offers by the incumbent cable provider, including discounts in promotional packages, free premium and pay-per-view channels, network upgrades and new channels, and upgraded converter boxes with interactive programming guides (IPG). In short, competition from Ameritech has translated directly and instantaneously into benefits for consumers.
Ameritech, however, has experienced and continues to experience difficulties in obtaining access to certain quality cable programming indispensable to its ability to compete effectively against incumbent cable operators. Of particular concern to Ameritech is its ability to obtain access to attractive sports programming.(see footnote 30) These difficulties are not unique to Ameritech. Other potential competitors to incumbent cable operators have also expressed similar concerns in regard to obtaining sports programming on non-discriminatory terms. See, TELETV Reply Comments at 1618, in the Matter of Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming in CS Docket No. 96133; Optel, Inc. Reply Comments in the Matter of Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming in CS Docket No. 96133; Bell Atlantic Video v. Rainbow Programming Holdings. Inc., CSR4983P (filed March 28, 1997 and still pending). Complaint at §13: ''[r]egional sports programming is among the most watched and most desired cable television programming. Any multichannel service that does not offer this programming will be at a significant disadvantage in signing up customers and winning over viewers.'' These examples illustrate vividly that access to programming remains an unfulfilled goal for many MVPDs and that the work of Section 628 is far from finished.
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Section 628 was designed to rectify anticompetitive conduct by the cable industry by prohibiting a broad range of unfair or discriminatory practices in the sale of satellite cable and satellite broadcast programming.(see footnote 31) Section 628 was intended to supplement this nation's antitrust laws, providing competitors in the MVPD marketplace with a forum at the FCC to resolve expeditiously complaints about anticompetitive abuses.(see footnote 32) In particular, Section 628 (f)(l) explicitly calls for the expedited review of all program access complaints because Congress recognized that competition delayed was competition denied in this especially dynamic sector of the market. Congress understood that access to quality popular programming is essential to an MVPD's success and, in Sections 628(b) and (c), crafted powerful remedies to enable competitors to incumbent cable providers to obtain that programming on nondiscriminatory prices, terms and conditions. In Section 628(e), Congress gave the Commission a full panoply of enforcement tools to carry out the intent of Congress.
Based on its own experiences(see footnote 33) with the FCC's rules implementing Section 628, 47 C.F.R. §76.1000 et seq., and an analysis of the FCC's decisions in Section 628 proceedings, Ameritech believes that the FCC's procedural rules for handling Section 628 complaints are inconsistent with the procompetitive thrust of the substantive law of Section 628. In a number of mutually reinforcing waysthe absence of a quick deadline for FCC decisions on Section 628 complaints, the failure to accord complainants a right to reasonable discovery and the failure to mandate economic penalties for violations of Section 628the current FCC rules encourage defendants in Section 628 complaints to protract and manipulate the process without providing any disincentives for them to engage in such dilatory tactics. Delays in resolving meritorious Section 628 complaints correlate directly with delays in bringing the benefits of meaningful competition to consumers and thus contribute to the very problem identified by Members of Congress on a bipartisan basis.(see footnote 34)
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Specifically, the Commission can play a constructive role in accelerating the pace of real competitioncompetition that actually restrains pricesin the MVPD market by making just three basic changes to Section 628 procedural rules.(see footnote 35)
First, a short deadline for FCC decisions on Section 628 complaints is needed. Section 628 requires the expeditious resolution of program access complaint proceedings. However, the Commission's rules implementing Section 628 provide no time frame within which it is required to render decisions. Consequently, the average one year period for initial FCC decisions on Section 628 complaints does not afford complainants the ''expedited review'' mandated by statute. Such delays impede the development of competition in the MVPD market . Therefore, Ameritech respectfully urges the Commission to amend its rules to require a Commission decision in Section 628 proceedings within ninety days from the filing of the complaint in cases where there is no discovery and within one hundred fifty days from filing of a complaint in cases where there is discovery.(see footnote 36)
Second, in the furtherance of justice, the Commission should permit reasonable discovery as of right at the election of the complainant in Section 628 cases. Discovery is often vital to a complainant's ability to make its case. For example, it is virtually impossible to establish a price discrimination case, absent an admission by the defendant, without discovery of the rates, terms, and conditions a programmer is charging an incumbent cable operator or other MVPD. Congress intended Section 628 to be an accelerated and substantively more advantageous alternative for complainants to initiating an antitrust action for obtaining relief from anticompetitive practices.(see footnote 37) Just as discovery is integral to private antitrust actions, it is most important to ferreting out the facts in Section 628 proceedings. To be consistent with expedited Commission review, the time for conducting discovery should be limited.
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Third, the Commission's rules should be amended to provide explicitly for the imposition of forfeitures and/or the award of damages for all Section 628 violations. Section 628 cannot realize its full potential as an antidote to anticompetitive behavior by cable operators and programmers unless there is a significant economic disincentive, i.e. fines and/or award of damages to complainants in addition to the equitable remedies, e.q. cease and desist, reformation, etc., provided by the rules. The absence of a monetary penalty is encouraging defendants in Section 628 complaints to engage in dilatory tactics because there is no penalty for not resolving the complaints expeditiously. The unavailability of money damages leaves complainants uncompensated for injury suffered during the entire time they were suffering harm because of Section 628 violations. Forfeitures or damages should be assessed retroactive to the date of the notice of intent to file a complaint under Section 628. Such changes will foster robust competition in the video marketplace.
II. The Commission Must Amend Its Rules To Provide For A Short Deadline For Issuance of Decisions on Section 628 Complaints
The 1992 Cable Act requires that: ''[t]he Commission's regulations shall(1) provide for an expedited review of any complaint pursuant to [Section 628].''(see footnote 38) In response, the Commission developed adjudicatory rules purporting to enable the Commission to settle uncomplicated complaints quickly while still resolving complex cases in a timely manner.(see footnote 39) Significantly, the Commission did not, however, create a time frame within which it is required to decide Section 628 cases.
Under the current rules, least ten (10) days prior to filing a Section 628 complaint, an aggrieved MVPD must provide notice to the programming vendor or cable operator of its belief that behavior violating Section 628 has occurred.(see footnote 40) The Commission encourages program access dispute resolution through negotiations at this time because ''[s]uch a policy favoring private settlement and alternative dispute resolution conserves Commission resources and is thus in the public interest.''(see footnote 41) If the parties are unable or unwilling to resolve the dispute without Commission involvement, a complaint is then filed.
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The rules create a fifty (50) day pleading cycle following complaints filed under Section 628.(see footnote 42) The defendant programming vendor or cable operator has thirty (30) days to file an answer. The complainant has twenty (20) days to file a reply pleading. The fifty (50) day pleading cycle is then closed and the Commission staff reviews the pleadings. Discovery is not permitted as a matter of right, but rather the need for discovery is determined by the Commission on a case-by-case basis.(see footnote 43) Ameritech is unaware of any instance in which the Commission has ordered discovery. The Commission may, in its discretion, request briefs, including proposed findings of facts and conclusions of law, from both parties.(see footnote 44) In such circumstances, reply briefs are to be filed within twenty (20) days thereafter.(see footnote 45) The staff then rules on the merits.(see footnote 46)
Experience demonstrates that it was a serious mistake not to set a deadline for FCC decision in Section 628 cases. The average length of time it takes the FCC to render a decision on a Section 628 complaint appears to be slightly more than one year.(see footnote 47) The longest time it has taken the FCC to decide a Section 628 complaint was over thirty-two months,(see footnote 48) while the shortest time was just under six months.(see footnote 49) More program access complaints have been settled than have gone to a decision on the merits. Interestingly, the average time to resolve Section 628 complaints through settlement has been almost thirteen (13) months, almost one month longer than the average time it takes the FCC to decide a Section 628 complaint on the merits.(see footnote 50)
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This protracted period for program access complaint resolution, whether by FCC decision or settlement, does not afford the Congressionally mandated expedited review required by Section 628. The inordinately lengthy time for decision is particularly disappointing because it appears that there has been no discovery of which Ameritech is unaware in these Section 628 proceedings. Accordingly, the Commission staff has not been confronted with sifting through volumes of evidentiary material but has been deciding these cases on the pleadings. Moreover, it appears that no Section 628 cases have been referred to an administrative law judge, as contemplated by the Commission's rules in complicated cases. See 47 C.F.R. §76.1003 (m). In light of the Commission's seemingly exclusive reliance on its most streamlined procedures for resolving Section 628 complaints, it is inexplicable why the average processing time should be anywhere near as long as it is.
The prejudice to both complainants and the development of competition in the MVPD market resulting from this inordinately long review time is demonstrable. Every day that Section 628 complainants are unable to obtain programming or are paying discriminatorily high prices for such programming is a day they are suffering competitive harm. As Section 628 itself recognizes, their injury correlates directly with injury to competition because refusals to deal or price discrimination translate into less competitively attractive programming offerings. Moreover, delays in resolving Section 628 complaints create inordinate pressure on complainants to settle, perhaps on less favorable terms than they otherwise would, simply to improve their competitive position. For example, a complainant faced with a refusal to deal knowing that it likely will take more than a year to resolve its complaint, might be willing to settle by paying an excessive price for the programming as an alternative to not acquiring the programming at all.
Page 132 PREV PAGE TOP OF DOC To ameliorate the problems inherent in the current program access rules, the Commission should amend its rules to require that a decision on a Section 628 complaint must be rendered within ninety days of filing the complaint in cases where the complainant has elected not to take discovery and within one hundred fifty days of filing the complaint where there is discovery. This proposed change is completely consistent with the letter and spirit of the pending Common Carrier Complaint NPRM in which the Commission embraced the ninety to one hundred fifty day statutory deadlines established by Congress in the Telecommunications Act of 1996 for §208(b), 260, 271 and 275 proceedings and proposed that expedited, streamlined procedures be applied across the board:
We tentatively conclude that the pro-competitive goals and policies of the 1996 Act would be enhanced by applying the rules proposed in this Complaint NPRM to all formal complaints, not just those enumerated in the 1996 Act. Therefore, our goal in initiating this proceeding is to facilitate faster resolution of all formal complaints by eliminating or streamlining procedures and pleading requirements under our current rules.
Common Carrier Complaint NPRM, at 3, §2.
These proposed deadlines for Commission decision in Section 628 cases can be met without unduly straining Commission resources by requiring more complete information from the parties in their pleadings and requiring the parties to narrow and refine both the factual and legal issues in dispute to the maximum extent feasible prior to Commission decision.
Specifically, Ameritech proposes that answers to Section 628 complaints be filed within 20 days after the service of the complaint.(see footnote 51) Answers should be required to include copies of programming agreements and other documentary evidence of practices challenged in the Complaint.(see footnote 52) For example, in a Section 628 case alleging unlawful exclusivity or a refusal to deal, the contract(s) in question should be attached to the answer. In a case alleging price discrimination, the answer should include an attached copy of the contracts of all other cable operators serving the same area at issue and at least several representative contracts of an afflicted cable operator serving roughly the same number of subscribers. The time for filing a reply brief following the answer should be reduced to fifteen (15) days in cases where there is no discovery. Reply briefs following the answer should be eliminated where discovery is conducted. Within five days of the service of the answer, the FCC should convene a status conference to address all matters needed to prepare the record for decision. If the complainant elects discovery, which may be commenced at any time following the filing of a complaint, a discovery schedule should be adopted at the conference. Completion of all discovery and disposition of all discovery-related motions would be required within forty-five days following the status conference. Within twenty days following completion of discovery, both complainant and defendant would be required to submit briefs containing proposed findings of fact and conclusions of law,(see footnote 53) and, if possible, a joint stipulation of facts not in dispute. At the same time, they would be required to file any evidentiary exhibits. The parties would be permitted to file reply briefs within ten days of the service of the briefs containing proposed findings of fact and conclusions of law. At that juncture, the record would be deemed closed, giving the Commission ample time to render its decision within the proposed 150 day deadline for decision. Obviously, where the complainant does not elect to engage in discovery, forty-five days is shaved from the process and the record before the Commission is likely to be smaller and less complex. In that circumstance, the Commission should be required to render its decision within ninety days from the filing of the Section 628 complaint.
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Providing a deadline for completion of Section 628 Commission proceedings ensures fulfillment of the directive of Congress to resolve expeditiously all program access disputes. The elimination of delay in deciding meritorious Section 628 complaints will strengthen competitive programming offerings to consumers, leading to more robust competition and greater consumer choice in the MVPD market.
III. The Commission Should Amend Its Rules To Allow The Right To Discovery In All Section 628 Program Access Complaint Proceedings
When the Commission formulated program access rules it decided to adopt a system to promote resolution of as many cases as possible on the basis of a complaint, answer, and reply. 47 C.F.R. §76.1003(b).(see footnote 54) Currently, discovery is not a matter of right in Section 628 proceedings. 47 C.F.R. §76.1003(g). Rather the Commission staff makes a determination as to the appropriateness of discovery on a case-by-case basis. Id. However, a review of Section 628 cases indicates that apparently there has yet to be discovery ordered in a Section 628 adjudication.
When discovery is not routinely available, a complainant's ability to prove a Section 628 violation is dramatically reduced. A right to discovery is particularly important if a complainant is to have a reasonable likelihood of success in Section 628 price discrimination cases. Absent an admission by the defendant, it is extraordinarily difficult for a complainant to establish a price discrimination case, without discovery of the rates, terms, and conditions a programmer is charging an incumbent cable operator or other MVPD. Such a result is not what Congress envisioned when it directed the Commission to implement rules to ensure competition and diversity are realized in the MVPD market.
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The Federal Rules of Civil Procedure provide for discovery as of right.(see footnote 55) There is no reason why that principle should not be followed in Section 628 cases. In fact, discovery is especially necessary in these proceedings. Extensive discovery is the hallmark of private antitrust actions. Certainly, reasonable discovery should be available in Section 628 complaints which are designed expressly to address the very same types of anticompetitive practices addressed by the antitrust laws.(see footnote 56) The mere awareness of the possibility of a right to discovery has a deterrent erect on those contemplating engaging in anticompetitive practices.
Accordingly, the Commission should amend its rules to provide for a right to a full range of discovery in all Section 628 cases. Of course, the Commission itself would retain the right to require discovery in all Section 628 cases.(see footnote 57) As discussed above, to ensure compliance with its mandate to provide for expedited review, the Commission's rules should require that all discovery be concluded within forty-five (45) days following the initial status conference.
The Commission should vigorously enforce the right to discovery in Section 628 cases by punishing frivolous efforts to deny or obstruct discovery. To that end, it should, in addition to exercising its existing authority recently recognized by the Commission, (see footnote 58) amend its rules to incorporate the sanctions set forth in the Federal Rules of Civil Procedure.(see footnote 59)
IV. The Commission's Roles Should Expressly Provide For The Levy of Forfeitures and/or Award of Damages For All Section 628 Violations
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Congress sought vigorous enforcement of the important changes to substantive law embodied in Section 628. To that end, Congress gave the Commission plenary authority to provide for penalties under Section 628(e):
''(1) . . . [T]he 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 multichannel video programming distributor.''. . .
''(2) 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.''
The Commission concluded that ''this authority is broad enough to include any remedy the Commission reasonably deems appropriate, including damages.''(see footnote 60) The Commission reasoned that nothing in the statute limits the Commission's authority to decide what constitutes an ''appropriate remedy,'' and ''damages'' clearly come within the definition of ''remedy.''(see footnote 61) This interpretation of the breadth of remedial authority afforded to the Commission in Section 628 is consistent with its authority to award damages elsewhere in the Communications Act of 1934.(see footnote 62) Despite the Commission's expansive interpretation of the breadth of its authority, it declined, as a matter of prudence, to exercise its authority to award damages because it did not think it was necessary.(see footnote 63) However, the Commission reserved the right to revisit this issue should it be brought to the Commission's attention that ''the current processes are not working.(see footnote 64)
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The mounting public frustration and accompanying Congressional concern about the unacceptably slow pace of the development of meaningful competition in the MVPD marketplace dictates that the time is now ripe for the Commission to revisit this issue. The Commission should amend its rules to provide economic disincentives, in the form of forfeitures and/or award of damages, for all violations of Section 628. The reason is simple: it is more profitable for cable operators and programming vendors to violate the law than to obey it.(see footnote 65)
Under current rules, as a matter of policy, the Commission has limited the penalties it imposes on violators of Section 628. With respect to prohibited exclusive agreements, the Commission ''may order the vendor to make its programming available to the complainant on the same terms and conditions, at a nondiscriminatory rate, as given to the cable operator.(see footnote 66) In price discrimination cases, a vendor who engages in unlawful activity may be ordered ''to revise its contracts to offer to the complainant a price or contract term in accordance with the Commission's findings.''(see footnote 67) If the Commission only requires violators to comply prospectively with the law and fails to impose economic penalties, it is inevitable that cable operators or programming vendors will test the limits of the law.
An economic penalty in the form of a forfeiture and/or a damages award is needed to vindicate the strong public interest in curtailing anticompetitive conduct evident in Section 628. As indicated above, Section 628 is a unique provision of the Communications Act because it so clearly is modeled after antitrust law. Indeed, Congress intended that Section 628 serve as a cost-effective supplement to the antitrust laws because ''companies . . . might be denied relief in light of the prohibitive costs of pursuing an antitrust suit.''(see footnote 68) Aspiring competitors to incumbent cable operators should not be denied the opportunity to collect damages they would otherwise be entitled to collect under antitrust law merely because they seek relief under Section 628 to redress their specific anticompetitive concerns. Nor should incumbent cable operators go unpunished economically simply because they are fortuitous enough to be a defendant in a Section 628 proceeding as opposed to a defendant in an antitrust action instituted in federal court.
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The imposition of monetary penalties retroactive to the date of filing the notice of intent to initiate a Section 628 proceeding will serve as a significant deterrent to conduct barred by the statute. It is important to link the penalty amount to the date of filing the notice of intent because defendants are currently using these notice requirements as a built-in delay mechanism in the Section 628 resolution process. Specifically, defendants appear to act conciliatory, stating their ''intent'' to settle amicably the dispute, when in actuality they are merely seeking to protract the complaint process, allowing them to continue to exercise and enjoy an unlawful advantage in the MVPD market to the detriment of competition.(see footnote 69)
It also is critical that the economic penalties imposed by the Commission for Section 628 violations be substantial. Significant economic penalties are essential to introduce a countervailing disincentive to prevent anticompetitive behavior. The Commission's rules should make clear that a Section 628 violator will be liable to pay the complainant damages(see footnote 70) and/or to pay fines to the Commission in an amount sufficiently high to deter anticompetitive conduct.
Economic penalties will force potential violators to realize that they will pay a significant financial price if they are found to have violated Section 628. They also will serve as an antidote to dilatory tactics in Section 628 proceedings because defendants will be at increased financial risk for each day of delay in resolving the complaint.
Page 138 PREV PAGE TOP OF DOC In light of the problems persisting despite today's program access rules, the Commission should grant Ameritech's Petition for Rulemaking and amend the Commission's rules to strengthen enforcement of Section 628 by providing for: (1) a ninety (90) or one hundred fifty (150) day deadline for issuance of decisions on Section 628 complaints, depending on whether or not there is discovery; (2) a right to reasonable discovery; and (3) retroactive economic penalties in the form of damages awards and/or fines for all Section 628 violations. The Commission has the authority to implement these rules changes. The time to exercise its authority is now when new measures are clearly needed to accelerate the pace of developing competition in the MVPD marketplace.
Counsel for Ameritech New Media, Inc.
|Jessica A. Wallace,|
|Verner, Liipfert, Bernhard, McPherson & Hand, Chtd.|
Chicago, IL, May 16, 1997.
|Deborah H. Morris, |
|Ameritech New Media, Inc.|
INSERT OFFSET RING FOLIOS 4 TO 13 HERE
Mr. HYDE. Thank you, Ms. Lenart. Very interesting.
Page 139 PREV PAGE TOP OF DOCSTATEMENT OF DECKER ANSTROM, PRESIDENT AND CEO, NATIONAL CABLE TELEVISION ASSOCIATION
Mr. ANSTROM. Thank you, Mr. Chairman, for providing the cable television industry with an opportunity to participate in this afternoon's hearing.
Today, I'd like to underscore one central point: the fact is that the video marketplace is becoming increasingly competitive, and there is no reason for even more Federal regulatory micro-management of the cable industry. Today, almost every single American has access to at least two different multi-channel video providers. Many households can choose from among several alternatives to cable. These alternatives are eroding cable's market share and signal in the FCC's words, the ''irreversible trend'' toward increasing competition in the video market.
Consider these facts: one, by the end of this year, 10 million consumers will obtain multi-channel video services from one of cable's competitors; two, cable's share of the multi-channel video home marketplace has declined from 89 to 87 percent just since last fall. That, I might add, is in stark contrast to the local telephone market in which local telephone companies control 99 percent of the marketplace.
Direct Broadcast Satellite, or DBS, in particular, continues to add video customers at a rapid pace. From May, 1996 to May, 1997 DBS subscribership grew from 2.6 million to 4.9 million homes; a growth rate of 84.5 percent. Now, why does DBS grow so quickly? Just look at how DBS providers have a distinct competitive advantage over cable operators. DBS offers up to 220 channels, whereas, the average cable system has 53 channels, and DBS has virtually every cable network in its package; and, as Mr. Conyers pointed out earlier, as exclusive sports programs, as well. DBS dish prices continue to plummet and now are generally under $199. And, if you don't like cable and want DBS, how easy is it to get DBS? You call just an 800 number from anywhere in the United States to get one of several DBS options. That, Mr. Chairman, is competition.
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Or consider the telephone companies. Because of the 1996 Telecommunications Act, there are no statutory or regulatory barriersand I want to underscore thatno statutory or regulatory barriers to telcos entering cable. The door is wide open, and within the next year, households with access to a multi-channel choice from a telephone company will surpass the 1 million home mark. Telephone companies like Ameritech and GTE and Southern New England Telephone are aggressively seeking or have obtained cable franchises in their regions. And, indeed, Ameritech has more than 50 franchises, and claims that one of every three homes it markets for cable takes its service. That is competition, too.
Now, Mr. Chairman, despite this undeniable evidence of growing competition, some of our competitors want to regulate cable even more through changes in the program access laws. Congress should reject these proposals. First, there's no evidence of any significant problem in the multi-channel video marketplace that would warrant further regulatory micro-management. Ameritech, for example, as well as our DBS competitors, have full access to major cable programming networks including independent ones as well as those affiliated with cable operators. Moreover, during the past four years when programmers and distributors wrote thousands of contracts, fewer than 35 program access complaints were filed with the FCC. Of these, only three have been resolved in favor of the complainant; hardly evidence of a problem. And as this committee knows, the telcos certainly aren't bashful about filing lawsuits or regulatory complaints. Based on the record, not the rhetoric, the FCC has found no evidence of any need to extend program access laws.
Second, Mr. Chairman, if there are problems, the 1992 Cable Act gives the FCC broad authority to regulate all carriage agreements between distributors and cable networks, whether they're vertically integrated or not, to prevent: evasion of the program access law; coercive behavior; retaliation; discrimination against the carriage of independent programmers, and other possible anti-competitive behavior. That is very broad authority, and, moreover, the Justice Department maintains and exercises broad anti-trust oversight of the cable industry.
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In sum, Mr. Chairman, the facts show that the video market is more competitive everyday. This is the time to let the competition go forward and not to impose more Federal rules and regulations. Thank you.
[The prepared statement of Mr. Anstrom follows:]
PREPARED STATEMENT OF DECKER ANSTROM, PRESIDENT AND CEO, NATIONAL CABLE TELEVISION ASSOCIATION
Mr. Chairman, members of the subcommittee, my name is Decker Anstrom and I am President of the National Cable Television Association. Thank you for inviting me to testify before you today on behalf of NCTA, which represents cable companies serving more than 80 percent of the nation's 65 million cable customers and more than 100 cable program networks. I welcome this opportunity to comment on ''the state of competition in the cable television industry.''
A. THE MULTICHANNEL VIDEO MARKET IS COMPETITIVE AND IS GROWING MORE SO EACH DAY
The nation's television consumers are experiencing a steady and irreversible increase in video choices, as satellite, telephone, SMATV, and MMDS providers intensify their efforts to provide multichannel video programming services. Cable now faces significant competition in the video market, as the following numbers bear out:
From September 1996 to May 1997, the cable industry's share of multichannel homes declined from 89 percent to 87 percent.
Page 142 PREV PAGE TOP OF DOCIn vivid contrast, cable's most significant multichannel competitor, Direct Broadcast Satellite (DBS), had a subscriber growth rate of 84.5 percent over the past yearnearly 34 percent as great as cable's (see Chart 1).
Likewise, MMDS and SMATV subscribership increased 27 percent last year.
Well over a million households will have access to multichannel video programming offered by telephone companies within the next twelve months.
The developments of the last year continue a trend which the FCC acknowledged in its 1996 Annual Assessment of Competition in the Market for the Delivery of Video Programming. The FCC found that ''non-cable MVPD [multichannel video programming distributors] subscribership has been increasing an average of 22 percent per year since 1990, with cable subscribership currently down to 89 percent of all MVPD subscribers.''(see footnote 71) As previously noted, this share declined further to 87 percent by May 1997.(see footnote 72)
The FCC found in its 1996 report that ''incumbent franchised cable systems continue to be the primary distributors of multichannel video programming,'' but acknowledged that other MVPDs, particularly those using alternative technologies (e.g., DBS, wireless cable, and SMATV systems), continue to increase their share of subscribers in many markets.(see footnote 73) Since September 1996, the number of consumers using a non-cable MVPD has grown to 9.5 million. If present trends continue, NCTA conservatively estimates that 10 million consumers will obtain multichannel video service from one of cable's competitors by the end of 1997 (see Chart 2).
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The substantial competition challenging cable operators contrasts sharply with the near total absence of competition for local telephone companies. Cable operators compete for video service with DBS, SMATV, MMDS, OVS, and telephone company cable systems. More importantly, nearly all consumers have a choice between the incumbent cable operator and at least one other competitor. By contrast, how many residential telephone customers have a facilities-based choice, let alone have selected the competitor over the incumbent? Eighteen months after Congress eliminated statutory and regulatory barriers to local telephone competition, few residential customers can choose among different service providers (see Chart 3).
1. Cable's competitors have broad reach
Consumers have choices among multichannel video service providers. While cable service is available to approximately 97 percent of all television households (and is taken by 67.2 percent), DBS service is generally available nationwide to all single-family residences. Moreover, many residents of multiple dwelling units (MDUs) can subscribe to SMATV service and, in several areas, MMDS service. As a result, cable subscribers today have real, meaningful alternatives to their local cable company in virtually every community.
2. DBS in particular is thriving
DBS is an unparalleled consumer phenomenon in terms of growth: first year sales of DBS dishes were ''stronger than those of any other consumer electronics product in history, including VCRs, CD players and big-screen televisions.''(see footnote 74) DBS subscribership grew 2.66 million to 4.91 million between May 1996 and May 1997. DirecTV and United States Satellite Broadcasting (USSB) alone added 1.05 million subscribers during this period. DirecTV subscribership has grown from zero in mid-1994 to nearly 3 million (see Chart 4). The rate of DBS subscriber growth in 1997 is even higher than in 1995 and 1996. DBS Digest now ''projects that 7.2 to 7.8 million households will subscribe to DBS by year's end.''(see footnote 75) This projection is not surprising given the rate of growth DBS has experienced since its inception (see Chart 5).
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According to the SkyREPORT Newsletter, Direct-to-Home (DTH) subscribers (all dish customers, including DBS and C-Band) grew from 5.09 million to 7.25 million, an increase of 42 percent, from May 1996 to May 1997(see footnote 76) (see Chart 6). DTH subscribers increased an additional 226,688 to its current total of about 7.47 million.
Growing numbers of consumers are taking advantage of these options in ways that have a real impact in the marketplace. Aggregate national numbers tell only part of the story. In 24 states, over 10 percent of all television households subscribe to DTH satellite services (see Table 1). While this level may not yet technically satisfy the Cable Act's ''effective competition'' test, it has proved more than sufficient to place real competitive pressures on cable operators.
The continuing growth in the number of programming networks available from DBS also demonstrates expanding competition in the MVPD marketplace. The availability of more than 100 DBS channels fosters the viability of new networks and enables these networks to market their services to consumers nationwideand, in many cases, worldwide.
DBS providers have a distinct competitive advantage over cable operators in light of regulatory and technical factors, notably additional capacity. Subscribers to DirecTV, and its companion service USSB, have access to up to 220 channels, including 34 movie channels, 30 sports channels, 27 variety channels, 16 news and information channels, 6 music channels, 68 payper-view channels and 31 audio channels.(see footnote 77) By contrast, the average cable system has 53 channels.
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Prices for high-power DBS receiving equipment have fallen dramatically since DBS was first introduced to the American public. The FCC has traced this trend in its various annual reports on the status of video competition. In its first report (1994), released shortly after the institution of DBS service, the Commission noted that DBS disheswhich were then used in conjunction with DirecTV and USSB, the only high-power DBS providers at the timecost $699. Subscribers also had to pay $150200 for professional installation or purchase the installation kit for $69.95.(see footnote 78)
One year later, in its 1995 Video Competition Report, the Commission observed that the DBS receiving system available from RCA was then available for $597.(see footnote 79) Last year, in 1996, the Commission reported that when EchoStar began service, it offered receiving equipment for $199 to customers who signed up for a year's programming. In addition, two dish manufacturers lowered the prices of their basic models to $399, and DirecTV began a $200 rebate program for subscribers who purchased a year's worth of programming.(see footnote 80)
This trend has continued. On June 1, 1997, EchoStar ''unbundled'' its programming from its receiving equipment so that customers did not have to purchase a year's worth of programming in order to purchase the EchoStar dish for $199.(see footnote 81) DirecTV recently adopted the same pricing policy.(see footnote 82) It seems likely that this trend in price reductions for DBS equipment will continue.
At the same time that prices for basic DBS receiving equipment have plummeted, a series of initiatives have been announced to make equipment with additional features available to the public. For example, at least two manufacturers have integrated an off-air antenna into their DBS receiving dish so that DBS subscribers can receive local broadcast signals.(see footnote 83) Just two months ago, Hughes Networks Systems introduced an antenna called DirecDuo that can receive both the DBS programming packages of DirecTV and USSB as well as the high-speed data services of DirecPC. Existing subscribers to either DirecTV or DirecPC can upgrade to DirecDuo for between $599 and $699, while new subscribers can purchase the new antenna for $899 to $999.(see footnote 84) Given the history of DBS dish prices, the prices for this TV/PC service can be expected to fall in the near future.
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DBS systems operated by DirecTV and EchoStar offer customers a package of services that nearly always exceeds in number of channels the services available from incumbent cable operators.(see footnote 85) The presence of multiple DBS operators affords consumer choices among full-fledged DBS competitors with cable.
3. SMATV and MMDS are also providing significant competition to cable
Tens of millions of consumers live in apartment buildings.(see footnote 86) MDU residents can obtain multichannel video services from an incumbent cable operator and often from one or more SMATV or MMDS systems. These high density buildings are the subject of vigorous competition. From May 1996 to May 1997, the number of MMDS and SMATV customers increased from 1.78 million to 2.26 million, or approximately 27 percent.(see footnote 87) SMATV and MMDS service remains an option, particularly for residents of MDUs, that many find attractive.
4. Telephone companies are now providing cable service
Since enactment of the 1996 Telecommunications Act, which struck down the statutory and regulatory barriers preventing local telephone companies from entering cable, a number of telcos have moved quickly to offer competitive video services.
Ameritech is aggressively seeking cable franchises throughout its region. At last count, it has received authorizations to operate cable systems in 50 communities serving a population of more than 2,000,000.(see footnote 88)
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The Southern New England Telephone Company (SNET) has begun cable service and plans to operate throughout Connecticut.(see footnote 89)
GTE, through its subsidiary GTE Media Ventures, passes more than 520,000 homes in Clearwater, Florida, and Ventura County, California, in competition with incumbent cable operators.(see footnote 90)
BellSouth plans to operate video systems in many parts of its telephone service area.(see footnote 91)
Bell Atlantic operates an OVS system in Dover Township, New Jersey, and apparently plans to offer cable service in Philadelphia in the near future.(see footnote 92)
In addition, the Commission permits telcos to jointly market video service with telephone service to new customers.(see footnote 93) Under these circumstances, the cable operator is not likely to be the first company called for service by a new resident; the telco will be.
While subscriber counts are not reported by these companies and are difficult to derive, it is nevertheless clear that telephone company video systems constitute an increasingly significant factor
in any assessment of multichannel service competition. Well over a million households either have access to a competitive multichannel choice from a telephone company or will have such a choice within the next 12 months.
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The presence of these choices profoundly changes the multichannel video marketplace. This stands in stark contrast to the local telephone market. When a consumer orders residential telephone service, she or he does not have alternatives today. The only choice is the incumbent telephone company.(see footnote 94) Such is not the case with cable television and the multichannel video market.
5. Cable operators face more aggressive competition from broadcasters
Where a multitude of strong off-air broadcast signals are available, the need for cable service to assure a full complement of local broadcast channels is reduced. In 1975, there were 706 commercial TV stations;(see footnote 95) today there are 1,193 stations on the air, a net gain of 69 percent more stations.(see footnote 96) In addition, cable's carriage of UHF stations, along with random access tuners, have narrowed the ''UHF handicap'' to the point where even major networks freely affiliate with UHF stations.
In the mid-1980's, cable operators competed principally with three national commercial broadcast networks for the allegiance of television viewers. Since then, FOX affiliates have become full-fledged competitors, achieving prime-time ratings that are comparable to other network affiliates. For example, for the week ending July 12, 1997, CBS achieved a prime rating of 5.9, while FOX's rating was 5.7. The two networks garnered equal 11 shares.(see footnote 97)
Cable operators are also pressed by competition from affiliates of two new broadcast networks, ''The WB'' and UPN, which developed in part because of the increased number of licensed TV stations. In many markets, cable operators and programmers face off-air competition from six commercial broadcast networks and public television, rather than just the three or four present a few years ago. Affiliated with two of the leading production studios, ''The WB'' and UPN have ready access to original programming. Despite the early stage of these networks' development, they already achieve average prime-time ratings in excess of any cable network.
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6. Conclusion: the multichannel video market is competitive
Overall, the evidence is clear: the number of alternatives to cable provides significant competition to the cable industry. Cable is competing hard to win new customers, thanks to the value it offers its customers. Yet, despite these efforts, there has been a marked slowing of cable's subscriber growth rate. In 199495, cable subscribership grew at a 3.9 percent rate; in 199697, the rate had declined to 2.5 percent.(see footnote 98) The MVPD video market share enjoyed by cable's rivals would certainly be greater if cable companies had been foolish enough not to respond to their competition.
Some may argue that if the video marketplace were truly competitive, cable companies would irretrievably lose, not gain, customers. But that analysis assumes that cable operators have not responded effectively to more competition. It ignores the cable industry's successful efforts to improve customer service, add capacity, and both restructure and enrich program packages. Recognizing that the cable industry cut its teeth as an aggressive competitor to the broadcast oligopoly, it should not be surprising to see cable respond effectively to a new competitive environment.
B. PROGRAM ACCESS
As part of the Cable Act of 1992 (PL 102385), Congress enacted comprehensive program access requirements to ensure that cable's competitors would have the ability to carry satellite-delivered programming in which cable companies have a financial interest (so called ''vertically integrated'' program services). The law covers networks like CNN, Discovery, and HBO to guarantee that cable operators do not withhold popular satellite-delivered programming from their competitors. It is designed to ensure that cable's competitors such as DBS, MMDS, and telephone companies can compete effectively in the video market.
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The 1992 Cable Act program access provisions have accomplished exactly the result that Congress intended: alternative providers of video programming have access to all of the most widely distributed national cable program networks. Cable's competitors are able toand docompete for multichannel television viewers. Indeed, cable's competitors are marketing packages of national satellite-delivered cable programming networksboth vertically and non-vertically integratedas well as exclusive sports and big event programs.
Not content with guaranteed access to vertically integrated cable networks, cable's competitors now want government-mandated access to independent, non-vertically integrated programming. They also want government-mandated access to local, terrestrially-delivered programming, and they demand the repudiation of product exclusivity for anyone but themselves. What these MVPDs are asking Congress to do is treat all programming like a commodity, where other people take all the risks developing and marketing new programming while theycable's competitorsare free to pick and choose from among the successful ventures.
With no empirical evidence to warrant such intrusion in a thriving video marketplace, cable's competitors argue that recent consolidation of contiguous cable systems and joint ventures in the programming arena somehow threatens their survival. They call for a comprehensive reevaluation of the rules and Congressional action to force every non-broadcast programmer in the United States, cable-affiliated or not, to renounce exclusivity if they wish to sell to cable operators.
Congress should reject these demands. Most of the companies that attack cable's efforts to compete more efficiently through consolidation in various communities are already telecommunications giants. They have aligned in various consortia and joint ventures of size and scope that dwarf the entire cable industry. They have also shown that they are fully capable of competing with incumbent cable operators without further government largesse. Furthermore, the same companies that decry exclusivity for cableparticularly the RBOCs and DBS providerspromote the benefits of exclusivity in their own video services.
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1. Both vertically integrated and non-vertically integrated cable networks are widely distributed by competing multichannel video providers
Since 1994, the FCC has analyzed the issue of program access in its annual reports to Congress on the state of competition in the video market. The Commission also provides ongoing oversight through its enforcement process. In every case, it has found that the Cable Act of 1992 has been successful in promoting competition by providing access to vertically integrated programmingas Congress intended. Indeed, the FCC found as far back as 1994 that:
Our experience over the past year suggests that the program access provisions of the statute and our implementing regulations are successfully working to achieve Congress' goal of increasing competition to traditional cable systems by providing greater access by competing multichannel systems to cable programming services.(see footnote 99)
Today virtually every American household has a choice between two or more competitive packages of video programming at comparable prices from MVPDs other than a cable operator.
Moreover, over the course of the program access rules' four-year history, only 31 complaints have been filed,(see footnote 100) and only two rulings in favor of the complainant have been rendered. This is certainly not a record that demonstrates the need for new legislation or regulation.
Page 152 PREV PAGE TOP OF DOC Yet cable's numerous competitors argue that significant impediments remain to obtaining ''absolutely essential popular quality programming, particularly sports programming, at nondiscriminatory rates and on nondiscriminatory terms and conditions.''(see footnote 101) This claim is refuted by the facts.
The wide availability and wide distribution of cable networksboth vertically and nonvertically integratedon competing MVPDs is indisputable. DirecTV, for example, offers every major national cable network on its 220-channel DBS service, regardless of ownership.(see footnote 102) DBS, by virtue of its channel capacity and relative freedom from regulatory constraints, offers consumers packages of service that nearly always exceed in number of channels the services available from the incumbent cable operator.
Similarly, Ameritech's hybrid fiber-coaxial cable system in Columbus, Ohio, includes a full range of established and newer cable networks.(see footnote 103) Indeed, Ameritech is vigorously challenging incumbent cable operators in the 50 communities in which it has obtained franchises and does not lack programming to compete effectively in these markets. Ameritech, in fact, claims that it is getting 33 percent of the market where its service is being offered.(see footnote 104)
Nevertheless, cable's competitors argue that the confluence of increased consolidation in the cable industry and recent transactions involving cable, broadcast, and other companies endanger their access to programming. They contend that in addition to so-called ''marquee'' networks, they need guaranteed access to all non-vertically integrated and non-satellite delivered programming, including original local news and regional sports.
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Although Congress's program access goal has been achieved, some hope they can convince Members to expand program access regulationnot based on any verifiable anticompetitive behavior by the cable industryso as to increase their leverage in affiliate negotiations. They would do this by having the government take exclusivity off the bargaining table for any programmer who wants to sell to cable.(see footnote 105) And they would have the government force cable operators who have invested millions of dollars to develop original programming of local or regional interest to hand over such programming to their competitors. Congress should reject proposals to extend the program access rules to (1) entities unaffiliated with cable companies, or (2) non-satellite delivered, locally-produced programming services.
2. The program access rules should not be extended to independent, non-vertically integrated programmers
To date, the FCC has repeatedly refused to interfere with the affiliation decisions of independent, non-vertically integrated programmers, finding no evidence to warrant government intervention in private negotiations. Only nine months ago, the Commission found that:
The evidence before us . . . is insufficient for us to make any determination concerning the effect, if any, that exclusive arrangements involving non-vertically integrated programmers may have on competition in local markets for the delivery of multichannel video programming.(see footnote 106)
In enacting program access legislation, Congress aimed to ensure that vertically-integrated cable operators and satellite-delivered programming vendors could not unreasonably deprive competing distribution technologies of national and broad-reaching cable programming services.(see footnote 107) It determined that ''[v]ertically integrated program suppliers have the incentive and ability to favor their affiliated cable operators over nonaffiliated cable operators and programming distributors using other technologies.''(see footnote 108) Section 628 of the Cable Act of 1992 was intended to prevent such programmers from acting on what Congress believed were unique incentives and abilities to favor their commonly-owned cable operators.
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There is no evidence to warrant continuation of the program access rules for vertically integrated programmers beyond 2002, and there is certainly nothing to support extension of the rules to non-vertically integrated programmers. The telephone companies and others assert, however, that the rules should be extended to non-vertically integrated companies because increased consolidation in the cable industry means that such companies now have unprecedented incentive to maintain exclusive distribution arrangements with MSOs. Ameritech, for example, claims that a growing number of significant programmers that are not affiliated with cable operators are ''tying up quality programming in exclusive contracts.''(see footnote 109) It also asserts that its inability to ''acquire substantial amounts of cable programming owned by non-vertically integrated cable programmers pursuant to Section 628 is significant.''(see footnote 110)
The record before Congress lacks any evidence that non-vertically integrated programmers have routinely failed to provide access to their programming to competing MVPDs on nondiscriminatory terms and conditions. The record also wholly lacks evidence that cable's consolidation and joint venture activity (which pales in contrast to the actions of its competitor's telco parents) is in any way impeding affiliation agreements. While anecdotal assertions are occasionally made about Ameritech's inability to reach a carriage agreement for TV Land, the evidence is overwhelming that all of the most widely distributed non-vertically integrated national networks are available to and sold by cable's competitors. Indeed Americast, the telco program consortium, has a major non-vertically integrated ''content partner,'' Disney, which continues to give ''its full support'' despite recent cutbacks.(see footnote 111) There have been no legitimate claims that any of the top 20 most widely distributed cable networks have been unavailable to non-cable MVPDs; and, in fact, all of them are carried by competing MVPDs. To suggest that other unaffiliated program suppliers would not deal with powerful telephone companies is belied by the facts.
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It is often in a non-vertically integrated network's economic self-interest to enter into agreements with a number of competitive distributors.(see footnote 112) Broader, rather than narrower, distribution means more per subscriber fees and larger audiences for advertiser-supported networks. Indeed, non-cable MVPDs have become an important component of the distribution strategy of both vertically-integrated and non-vertically integrated programmers. For example, five years ago, HBO had fewer than 500,000 non-cable subscribers and no high-power DBS subscribers. Today it has approximately 7 million direct-to-home subscribers (both C-band and Ku-band). For new or low-penetrated basic cable services, non-cable MVPDs have provided a significant boost towards longterm viability. Given the strong performance of non-cable MVPDs and the importance of these MVPDs to HBO's overall business, failure to fully utilize non-cable distribution systems would, as a general matter, be contrary to HBO's business interests.
While broad, non-exclusive distribution is often in a programmer's interest, any given programmer might want to grant exclusive distribution rights to a particular MVPD as part of a legitimate business strategy. As detailed below, exclusivity is a common and generally accepted business practice to, among other things, promote the supplier's brand or improve its financial returns (as the broadcast networks recognized decades ago). In any event, the networks which cable's competitors complain aboutTV Land, Fox News, MSNBCare not exclusive to cable and are available on alternative media. USSB carries TV Land, for example; DirecTV carries Fox News and MSNBC. DirecTV and EchoStar also recently added a new service of an unaffiliated programmer, ESPNews, to their channel line-up.(see footnote 113)
Where exclusivity for a particular program network is sought and granted, it does not foreclose entire program markets to others not granted exclusivity. Unless a product is viewed as essential to viable competition, there is no foreclosure of competitors' market opportunities. The inability of an MVPD to purchase a particular cable network does not, in and of itself, harm competition.
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The absence of foreclosure is demonstrated by the non-broadcast viewing share of cable networks which are routinely available to all providers. These networks on average constitute 80 percent of all basic satellite network prime-time viewing share, and, one must assume, are the most important networks for purposes of local advertising insertions by local MVPDs.(see footnote 114) These are the same networks generally made available to all MVPDs.
In any event, if real world rather than theoretical problems do develop in particular instances, the FCC already has broad authority to address themno further legislation is needed. If, for example, a non-vertically integrated programmer were to enter into exclusive agreements for anticompetitive reasons, the program carriage provisions in Section 616 of the Act broadly regulate the carriage-related behavior of cable operators, with or without an attributable interest in the program supplier, and regardless of the method of distribution.(see footnote 115) Section 616 specifically prohibits any multichannel video distributor from (1) requiring a financial interest in a programming service as a condition for carriage; (2) coercing a programming vendor to provide, or retaliating against such vendor for failing to provide, exclusive rights against other MVPDs as a condition of carriage; and (3) discriminating in their carriage decisions against programming vendors in which the MVPD lacks an attributable interest.(see footnote 116)
The FCC rules implementing section 616 grant standing to competing MVPDs to file complaints where they believe cable operators have coerced programmers, whether vertically-integrated or not, into granting exclusivity to their competitors.(see footnote 117) This provides an added check on potential anticompetitive behavior by MSOs in the negotiation of carriage agreements.
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But under the law, non-vertically integrated cable programming suppliers are free to decide whether and how to deal with prospective buyers. Program affiliation agreements rest on many factors, including price and contract duration, channel capacity, launch and marketing plans, and a host of market forces. The government should not, as cable's competitors have suggested, substitute its judgment for the independent program supplier's judgment as to how to exercise its business interests. It is especially troubling that non-cable MVPDs seek one-sided government action that would allow only non-cable MVPDs to obtain exclusivity.
In sum, given the well-established policy preference for marketplace solutions, Congress should not intervene in the business relationships of non-vertically integrated programmers. Such action could greatly inhibit the creativity and growth of these networks to the detriment of consumers.
3. Program access rules should not be extended to local origination or other non-satellite delivered programming
Cable's competitors also seek to extend the scope of the program access rules to nonsatellite-delivered, locally produced programming. They want the government to force the cable industry to simply hand over local origination programming, including a variety of locally-produced news, information, public affairs, and regional sports services created and nurtured by cable operators for the purpose of better serving their customers. As with non-vertically integrated programming, Congress purposefully limited the scope of the program access rules to national, satellite-delivered services that were arguably vital to the ability of an MVPD to enter the marketplace.(see footnote 118) And in fact, cable's competitors are providing the nationally-distributed satellite programming that Congress envisioned.
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Proposals to force owners of locally-produced, non-satellite delivered program services to sell them without any right to maintain exclusivity would create a further artificial market imbalance. This is because local origination programmingwhich predates the 1992 Cable Actis a key part of cable's commitment to its local communities. The 1984 Cable Act explicitly recognized the substantial governmental interest in ensuring that cable systems are responsive to the needs and interests of the local communities they serve.(see footnote 119)
With advancements in headend technology and interconnection, what began as local programming out of single headends has expanded to cover multiple communities. Cable companies are deploying advanced network architectures to interconnect system headends using high capacity fiber optic rings. These architectures allow systems in the same geographical area to share the same headend and production facilities, such as digital video libraries and compression equipment, advertising insertion equipment, and computer data servers. These shared facilities also enable cable operators to maximize economies of scale in marketing, promotion, administration and production of programming.
Cable companies regularly share local origination programming among cable systems in their region via fiber. For example, in North Carolina, Time Warner Cable (TWC) produces and delivers a half-hour magazine-style program which showcases the natural habitat exhibits of the North Carolina Zoo, including educational segments for children. In Minneapolis, TWC systems produce a monthly public affairs magazine which is shown live or on tape via multiple cable systems throughout the state.(see footnote 120) Some of the programming is promoted as cable exclusive.
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Since 1981, MediaOne (formerly Continental Cablevision) has provided daily and weekly local news programs to more than 70,000 homes in southeastern Massachusetts. The company also produces daily local news programs in Florida, New York, and California. In Atlanta, Georgia, MediaOne delivers community events programming, sports coverage and local news to more than 500,000 customers in the region via fiber. Throughout Ohio, the company distributes a locally-produced sports and community affairs network.
In southeastern Pennsylvania and parts of New Jersey, Comcast has created a 24-hour local origination network that simulcasts New Jersey's leading morning radio talk show. It features sports talk, political and family talk programming, and covers minor league, small college and high school sports that local broadcasters largely ignore. The network serves 1.1 million Comcast customers and is delivered terrestrially via fiber or microwave.
These examples illustrate the wide range of local original programming distributed terrestrially (and, in many cases, exclusively) on a community or region-wide basis to cable customers. Extending program access rules to terrestrial local origination and regional programming would constitute a major shift in policy beyond the concerns articulated by Congress in the 1992 Act since: (1) locally-originated programming and other non-satellite-delivered services are not necessary to the competitive viability of any competitor (a fact that has been demonstrated by the phenomenal growth in DBS and other national services in the past year alone), and (2) requiring cable operators to turn over the fruits of an often costly and risky venture to a competitor would deny program creators the benefits of their creative labors.
If 200 years of U.S. copyright and patent law teach anything, it is that authors and inventors should be rewarded for their creativity, not forced to give up such efforts to any and all competitors. Subjecting local news, sports and other terrestrially-delivered services to the program access provisions would stifle operator incentives to produce such programming. Investments in local news and sports services are costly. News gathering is a labor and equipment intensive enterprise. Sports, too, requires a commitment to production facilities. The public's interest in such programming is part of what the originator has createdand what competitors wish to tap, by getting the government to tap it for them. By turning locally-produced cable programs into commodities, Congress would undermine the goal of promoting increased diversity in video programming in the public interest.(see footnote 121)
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Cable's competitors have the resources to develop their own similar services without needing the government to tip the scales. For example, Tele-TV, a telco programming venture, reportedly spent $300 to $500 million in program development. Americast, a joint venture of Ameritech, BellSouth, GTE, SBC Communications, and The Walt Disney Company, committed $500 million to its start-up activities.(see footnote 122) The phone companies which loudly demand the right to cable's locally developed programming can certainly afford to produce local programs or obtain program rights. Their individual company resources are in most cases equivalent to, or greater than, the entire cable industry. Under these circumstances, it would not only be bad public policybut it would also be unnecessary public policyto require cable networks to relinquish the fruits of their creative efforts to MVPDs fully capable of replicating those efforts. The government should not step into the market and permit the telcos and DBS to live off the efforts of others.
In an attempt to extend program access laws that were never intended to reach local or regional programming, Ameritech, BellSouth, the Wireless Cable Association and others assert that cable is trying to ''evade'' the law by using terrestrial delivery for local and regional programming.(see footnote 123) This assertion is simply incorrect. First, the law purposefully covers only satellite-delivered programming: in no sense can operators who provide non-satellite delivered programming be said to ''evade'' the lawit simply does not apply. Second, to the extent cable's competitors fear satellite delivered programming will be transferred en masse to terrestrial delivery, that fear is misplaced. There is not one national satellite-delivered cable programming network that has switched to fiber or microwave delivery. As the FCC reported to Congress in 1996, it has seen ''no evidence that such strategic conduct has actually occurred.''(see footnote 124) Finally, even if such a switch were to occur, it will not be done for anticompetitive reasons. Terrestrial distribution often makes more economic sense than satellite delivery for smaller distribution zones.
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The facts bear these arguments out. New England Cable News (NECN), a regional news service in which MediaOne has an attributable interest, moved from satellite to fiber delivery because it is less costly to deliver terrestrially. However, before it did soand while it was still satellite-deliveredthe Commission granted NECN a waiver from the program access rules' exclusivity prohibition on the grounds that exclusivity would attract investment and secure distribution essential to the financial viability of the service and foster diversity in the programming market.(see footnote 125) In other words, the network did not move from satellite to landlines to ''evade'' the law; it had already been granted an exclusivity waiver as a satellite network and moved to fiber for economic reasons.
Improved technology and lower costs may make terrestrial distribution of programming more efficient and cost-effective than distribution via satellite. But there is absolutely no evidence that program networks subject to the program access rules have switched to fiber optic distribution for anticompetitive reasons or for the purpose of avoiding the Act's requirements. Moreover, if there were evidence of anticompetitive activity by a particular company, the FCC has authority to remedy it on a case-by-case basis.
4. There are legitimates pro-competitive reasons for exclusive program distribution arrangements
Cable's competitors decry exclusive programming contracts in a noncompetitive market as the ''enemy of competition.''(see footnote 126) But competition to cable is occurring and alternative MVPDs are increasing their share of subscribers in many marketsa trend identified by the FCC in its 1996 report to Congress on the status of competition in the video market. As both Congress and the Commission have recognized, exclusivity in areas served by cable ''may provide countervailing benefits to the programming market or to the development of competition among distributors.''(see footnote 127) Indeed, such a practice is wholly legitimate and promotes rather than inhibits competition.
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Congress, in Section 628, instructed the FCC to balance the benefits of exclusivity against access requirements so as to foster competition in the video distribution marketplace with respect to vertically-integrated, satellite-delivered programmers. While exclusive contracts may sometimes constitute anticompetitive conduct, Section 628 identifies several potentially pro-competitive effects of such agreements and authorizes the Commission to permit them in areas served by cable where it finds that they are ''in the public interest.''(see footnote 128) As noted above, with respect to NECN, the Commission found that the public interest benefits of exclusivity outweighed the rule disfavoring exclusivity under Section 628.
It is important to note that Congress recognized a significant difference between satellite and non-satellite programming in the 1992 Cable Act. With regard to satellite programming, which was widely distributed on a national basis, Congress presumed that exclusivity was generally not in the public interest. However, it provided a mechanism to petition for exclusivity in areas served by cable on a case-by-case basis based on whether exclusivity served the public interest.
By not requiring access to non-satellite-delivered programming, Congress built in a presumption that exclusivity in such programming serves the public interest. It understood that local programmingif not available exclusively to cable operatorswould never have been created, leading to a decrease in consumer welfare. It also understood that cable operators were creating local programmingespecially news and public affairs programming that would provide great consumer benefitsand that other MVPDs would not be harmed by not having access to such programming. Indeed, it is likely Congress assumed these MVPDs would benefit from creating their own local programming for their customers. In sum, Congress understood that exclusivity for local, cable operator-created programming was good for competition.
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In determining that NECN was different from other programming services in light of the ''regional nature of its programming and audience appeal,'' the FCC has recognized that, consistent with Congressional intent, regional programming should be treated differently from nabona1 programming. For example, the FCC agreed that NECN's exclusive affiliations with cable operators ''are required to attract and secure capital investments for production, promotion, distribution and carriage of its regional news service.''(see footnote 129) It also found that given its finding that ''exclusivity plays a vital role in the growth and financial viability of NECN,'' exclusivity will ''foster the public interest in promoting diversity in programming in this situation.''(see footnote 130)
Antitrust scholars and commentators have long recognized that exclusivity agreements are brokered in competitive markets without anticompetitive motives.(see footnote 131) Exclusivity is common in the entertainment industry and is a well-accepted, contractual element in maximizing the value of copyrighted works. The seller puts potential buyers in competition for its goods; while the buyer benefits by being able to differentiate what it offers consumers from the services offered by competitors.(see footnote 132) Basic economic theory indicates that exclusive dealing may encourage competition in the network program market and increase programming diversity without countervailing effects on competition in the distribution market. As Professor Benjamin Klein notes:
Even a satellite delivered cable programming network system without any cable operator ownership interest may find it profitable, [by the above reasoning,] to refrain from selling to noncable video delivery systems.(see footnote 133)
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The 1992 Cable Act contemplates that the FCC may permit exclusivity for vertically integrated programming in areas served by cable based on an assessment of whether exclusivity serves an investment incentive for cable operators to finance, promote, and carry a new service.(see footnote 134) In its initial program access order, the Commission stated:
[W]e recognize that there may well be circumstances in which exclusivity could be shown to meet the public interest test, especially when the launch of local originated programming is involved that may rely heavily on exclusivity to generate financial support due to its more limited appeal to a specific regional market.(see footnote 135)
Similarly, in its decision on program exclusivity in the cable and broadcast industries, the FCC lauded exclusivity as ''a normal competitive tool'' which ''enhances the ability of the market to meet consumer demands in the most efficient way; this is a sufficient reason for allowing all media the same rights to enter into and enforce exclusive contracts.''(see footnote 136) The FCC expressed the view that:
As long as there is reasonable competition among suppliers and distributors, exclusivity is a competitive tool that fosters the efficient channeling of programming to its most appropriate outlets, thereby maximizing the extent and diversity of programming available to viewers. In this context, the antitrust laws are the appropriate vehicle for dealing with those relatively rare situations in which exclusivity can be used to hinder competition.(see footnote 137)
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Against this policy backdrop, the Congress should not handicap the workings of the video programming market by endorsing the intrusive and unwarranted program access proposals of cable's competitors. Alternative MVPDs that would demand access to non-satellite delivered, locally-produced programming are simply asking to be rescued from marketplace competition by the government.
5. Cable's competitors enjoy the benefits of exclusive programming contracts
The media companies that are competing with cable certainly appreciate the benefits of exclusive arrangements. The DBS industry recognizes exclusivity may boost subscribership and give it a competitive edge in a fast-changing video market. DirecTV, USSB, and others intend to move toward more original programming that is not available on cable or any other satellite outlet.(see footnote 138) In particular, DirecTV is reported to be looking at crafting its own music, sports, educational, children's and instructional series and specials to counter cable's offerings.
Already, DirecTV provides marketing material touting its offer of sports programming ''not available on cable'' from every major professional league, such as NFL Sunday Ticket, MLB Extra Innings, NHL Center Ice, and NBA League Pass. Recent DirecTV ads announce that ''we're the exclusive mini-dish provider for NFL Sunday Night Ticket. So you won't find it on any other minidish system, or on cable, either'' (see ad on next page). Just this month, USSB announced an exclusive arrangement with Don King Productions to air major boxing events. USSB is also planning to develop a special movie channel for satellite dish owners.(see footnote 139)
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Similarly, in an effort to lure customers from competing cable systems, Americast is pursuing a strategy of starting to produce more local news, sports and information programming, which would be exclusive to its systems.(see footnote 140) In announcing that they are shifting program development to Disney, Americast's partners indicated that they intend to develop programming on a local basis, including a new service in the Tampa Bay area to compete with a similar service offered by the incumbent Time Warner system.(see footnote 141)
Cable operators spend money to build an audience for a new channel by acquiring rights, assembling staff, running ads, inserting bill stuffers, and undertaking other promotional activities. If they must hand over all programming to a competitor, why would they bother to pursue innovative programming in the first place? Such a requirement would create a major disincentive to the development of costly and risky ventures such as local news programming.
Video distribution media ought to be able to differentiate themselves through exclusive arrangements with program suppliers. As noted above, cable's competitors are giant corporationsRBOCs, DBS (Hughes, AT&T), MMDS (BellSouth)that have the money to bid for exclusivity and invest in the development of new programming without government intervention. To the extent that exclusivity is sought by players in today's video programming market, it reflects a healthy market reality, enjoyed and touted by cable's competitors. Exclusivity does not foreclose competition and should not be foreclosed by Congress.
Page 167 PREV PAGE TOP OF DOCC. AMERITECH IS SEEKING TO GAME THE FCC'S PROGRAM ACCESS RULES
Ameritech is asking the FCC to change the existing program access rules. Specifically, Ameritech urges adoption of new procedures to: (1) impose limited time frames for the resolution of program access complaints; (2) automatically allow complainants to demand discovery when they file a program access complaint, thus allowing them to go on fishing expeditions in their competitors' files; and (3) impose forfeitures and award damages for all Section 628 violations. Congress and the Commission should reject these proposed changes.
Ameritech's petition is a solution in search of a problem. The FCC has closely monitored developments regarding competitors' access to cable programming since Congress adopted Section 628 in 1992. The Commission established detailed procedures for complaints in its initial rules in 1993 and made certain changes on reconsideration in 1994. In addition, the FCC has sought and analyzed information regarding the working of its program access rules as part of its annual competition inquiriesincluding the one now pending for 1997. Every time, the FCC has determined that changes to its rules are unwarranted. For example, in its most recent 1996 Competition Report, the FCC examined and rejected proposals to expedite review of program access complaints and award penalties and damages.(see footnote 142) Moreover, the Commission has repeatedly found that enforcement of its program access rules helps ensure that competing MVPDs have access to vertically-integrated program services in fulfillment of Congress' goals.
Ameritech's petition presents no reason for the FCC or Congress to revisit the program access laws. If anything, the petition demonstrates that Ameritech is vigorously challenging incumbent cable operators in the 50 communities in which it has obtained franchises and that Ameritech's ability to compete has been helped, not hampered, by the Cable Act of 1992.
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The multichannel video market is competitive and features numerous players, including DBS, telcos, OVS, SMATV, and MMDS. Cable now is one of many service providers and has been losing market share to its competitors in recent years. In their efforts to add subscribers, some large telephone companies and DBS operators are asking Congress for government-mandated access to independent program networks and cable's regional and local programming. Although they already enjoy access to vertically integrated national cable program networks, they now want the benefits of cable's local origination programming without having to take any market risks. Furthermore, although they have exclusivity in the distribution of their products, cable's competitors are asking Congress to deny cable companies the same right.
There are no policy or economic justifications for these requests. The Cable Act of 1992 gives the FCC the necessary authority and flexibility to deal with new market conditions as they arise: no further program access legislation is needed. Congress should refuse to grant cable's large, well-funded competitors their request for more federal micromanagement of the video marketplace.
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Mr. HYDE. Thank you, Mr. Anstrom.
Page 169 PREV PAGE TOP OF DOCSTATEMENT OF JOSHUA SAPAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, RAINBOW MEDIA HOLDINGS, INC.
Mr. SAPAN. Thank you, Mr. Chairman, for the opportunity to participate in this hearing to discuss an issue that is of great importance to our company.
I am Josh Sapan, president and chief executive officer of Rainbow Media Holdings, Inc., the owners of which are Cablevision and NBC. Rainbow is an industry leader in the creation and development of innovative and popular national programming services like American Movie Classics, the Bravo Cable Network, MuchMusic, the Independent Film Channel, and Romance Classics. Rainbow also produces and distributes regional news and sports services across the country.
Video programmers that are affiliated with cable operators, so-called vertically integrated programmers like Rainbow, sell their programming subject to marketplace constraints and the limitations imposed by anti-trust laws. We must also abide by the program access requirements of the 1992 Cable Act. The program access rules dictate that Rainbow, generally, must sell its programming to all distributors who want the programming. They also forbid Rainbow from entering into business arrangements such as exclusive arrangements that are commonly used by entrepreneurs to ensure the best possible distribution channels and superior marketing support essential to realizing the full potential and value from their products. Within these constraints, it's still possible to develop regional programming that will fulfill what I understand to be Congress' longstanding goal of narrow casting to local markets.
The purpose of my testimony today is to urge you not to extend the program access law as some other witnesses have proposed. The new burdens will make it impossible for us to make the additional investments necessary for exciting, new local programming.
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First, adding new procedural rules to the program access regime will encourage more extensive litigation rather than marketplace negotiations. Such rules are unnecessary and would be counterproductive. Distributors currently have what appears to be ample access to cable programming under the existing program access procedures and the normal negotiation process for license agreements. According to Ameritech's recent testimony before the House Telecommunications Subcommittee, in those areas where it does offer service, one out of every three families with cable TV service has Ameritech New Media's Americast service. Assuming those numbers are accurate, they seem to indicate that consumers are finding attractive programming packages available through the offerings of cable's competitors.
Ameritech's recently proposed amendments to the program access rules would discourage such negotiations by turning every program access complaint into full-blown litigation. Such a result seems to be directly at odds with the goal of encouraging private settlements of these complaints. Ameritech's proposal is also clearly unnecessary given the limited number of program access complaints actually filed with the FCC, as Decker Anstrom indicated.
Second, the giant telephone companies and GM's Direct TV seek to expand the program access law to programming services delivered to cable operators and other distributors by microwave or fiber optic lines rather than by satellite. Let me state Rainbow's opposition to this proposal fairly bluntly, if I may: If Congress extends the program access rules to terrestrially delivered local and regional programming, we think programmers will not invest the substantial sums and undertake the considerable risks that are associated with such new programming ventures. Rainbow has historically been a leader in the development of local and regional programming. We pioneered the regional news channels about a decade ago in our News 12 service on Long Island, and we operate four of them today. We know from our experience that such programming, this regional programming, is quite risky and very expensive to produce, and it has a relatively small audience because of its regional nature.
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This combination of high cost and a smaller audience means that for a local or regional service to be successful, the distributor must put the service on a channel likely to be viewed by a significant number of subscribers. The distributor or retailer must also agree to make substantial commitments to marketing the service so that it achieves the highest possible subscriber penetration. Unless a programmer can interest the distributor in providing and actively promoting the service in this manner, the programmers investments are lost.
The program access law in its current form, available only to the satellite delivered services or vertically integrated program suppliers, effectively offer these suppliers the opportunity to recoup their investments in risky, local, and regional programming services. Where these programming services can be economically delivered by terrestrial means, the programmer can enter into exclusive contracts that give distributors the incentive to make the commitment essential to the success of such ventures.
Programmers have traditionally used inducements such as marketing support, direct payments, and local advertising avails to obtain carriage. Prior to 1992 and up to the present time for non-vertically integrated programmers, exclusivity has been another important inducement to distributors to carry programming. This is particularly true in the case of local and regional programming. A distributor will be reluctant to carry and promote local and regional programming if that distributor believes that it will have to split an already smaller subscriber base with one or more competitors. The distributor also may be concerned that the competitors will ride free on its promotional and marketing efforts. If a distributor knows that it will be the only entity delivering local and regional programming, however, it will much more willing to support this new, risky venture. A grant of program exclusivity enables a distributor to differentiate its programming packages from those of other distributors in the crowded video distribution marketplace.
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The continued exclusion of terrestrially delivered local and regional programming from the program access law is of great importance to our company. Rainbow is currently committing very substantial resources to the development of an exciting new local programming venture which we intend to offer via terrestrially delivered service. Our vision not yet realized is of a integrated collection of local and hyper-local programming services that will give consumers access to a new level of interactive local TV. This package would blend superior editorial content with broadband technology to deliver what could be called the first true electronic equivalent of the daily newspaper.
Mr. HYDE. Could you kind of summarize? We have four more witnesses to go.
Mr. SAPAN. You bet, absolutely.
Mr. HYDE. Thank you.
Mr. SAPAN. In summary, this visionI'll quickly cut to the chase, and eliminate the restthis vision which we have a deep and underlying belief in of a regional programming package of services that is the equivalent of a daily newspaper with arts, news, weather, how to information, is under way at our company, and we are spending very substantial resources to make it happen. We believe that if we are compelled to offer that service to every distributor, we will not effectively be able to go out to the marketplace and make it occur in such a way that it becomes successful, and the end of that will be that we think the consumers will be the ones who lose, because this new service will never be made to be real. Thank you very much.
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[The prepared statement of Mr. Sapan follows:]
PREPARED STATEMENT OF JOSHUA SAPAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, RAINBOW MEDIA HOLDINGS, INC.
Rainbow Media Holdings, Inc., an affiliate of Cablevision Systems Corporation, is an industry leader in the creation and development of innovative and popular cable programming services, including American Movie Classics, Bravo, MuchMusic, The Independent Film Channel, and Romance Classics, and numerous regional news and sports services.
It is a basic business premise in our country that the developer of a product, whether it is computer software, an automobile, or the latest fashion accessory, is generally free to market and sell its valuable product to whomever it wants in whatever manner it wants. The antitrust laws generally recognize a producer's right to choose the means of distributing his or her product.
Video programmers affiliated with cable operatorsso-called ''vertically integrated'' programmers, like Rainbowface a significant burden on their freedom to market and sell their programming because they must also abide by the program access requirements of the 1992 Cable Act. However well-intentioned the program access law was as a means of promoting competition among distributors, enactment of the program access requirements on top of the antitrust laws has stripped programmers of control over the use of their property and denied them the full business opportunities available to most other entrepreneurs.
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There is certainly no justification for expanding the program access law, as some telephone companies, DBS providers and others have proposed.
First, adding new procedural rules to the program access regime will encourage more extensive litigation rather than marketplace negotiations. Such rules are unnecessary. Distributors currently have ample access to cable programming under the existing program access procedures and the normal negotiation process for license agreements. According to Ameritech's recent testimony before the House Telecommunications Subcommittee, for instance, ''[i]n those areas where [it] offer[s] service, one out of every three families with cable television service has Ameritech New Media's americastTM service.'' Assuming these numbers are accurate, they clearly indicate that consumers are finding attractive programming packages available through the offerings of cable competitors.
Ameritech's recently proposed amendments to the program access rules would discourage such negotiations by turning every program access complaint into full-blown civil litigation. Such a result is directly at odds with the goal of encouraging private settlements of these complaints. Ameritech's proposal is also clearly unnecessary, given the limited number of program access complaints actually filed with the FCC.
Second, the program access law does not currently apply to programming services delivered to cable operators and other distributors by microwave or fiber optic lines rather than by satellite. This exemption effectively permits programmers like Rainbow to develop local and regional programmingwhich can economically be delivered using these so-called ''terrestrial distribution systems''subject only to marketplace and antitrust constraints.
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Rainbow has historically been a leader in the development of local and regional programming; Rainbow's News 12 and SportsChannel services pioneered the concept. Rainbow knows from hard experience that such programming is very risky because it is extraordinarily expensive to produce, yet has a smaller potential audience than national programming. This combination of high costs and a smaller audience means that, for a local or regional service to be successful, the distributor must put the service on a channel likely to be viewed by a significant number of subscribers. The distributor must also agree to make a substantial commitment to marketing the service so that it achieves the highest possible subscriber penetration.
The program access law in its current formapplicable only to the satellite-delivered services of vertically-integrated program supplierseffectively offers these suppliers the opportunity to recoup their investments in risky local and regional programming services. Where these programming services can be economically delivered by terrestrial means, the programmer can enter into exclusive contracts that give distributors the incentive to make the commitments essential to the success of such ventures. Without the option of distributing local and regional offerings on an exclusive basis, programmers will not create it and consumers will have lost access to new, valuable, and diverse programming options. Expanding the program access law to cover terrestrially-delivered programming would deter the development of local and regional programming by denying programmers the full opportunity to benefit from their investments.
Thank you, Mr. Chairman, for the opportunity to participate in this hearing to discuss an issue of great importance to my company. I am Josh Sapan, President and Chief Executive Officer of Rainbow Media Holdings, Inc., an affiliate of Cablevision Systems Corporation. Rainbow is an industry leader in the creation and development of innovative and popular cable programming services. Currently, we manage five national entertainment networks, American Movie Classics, Bravo, MuchMusic, The Independent Film Channel, and Romance Classics, as well as a number of regional news and sports services, including SportsChannel New York, SportsChannel Chicago, SportsChannel Ohio, and Rainbow News 12. These services provide diverse programming to a broad spectrum of the viewing public.
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It is a basic business premise in our country that the developer of a product, whether it is computer software, an automobile, or the latest fashion accessory, is generally free to market and sell its valuable product to whomever it wants in whatever manner it wants. For example, the developer of that new software program has the freedom to choose whether it will sell its program through large national distributors, small computer stores, or mail order catalogs. The free enterprise system grants the owner of the product the flexibility to use its business judgment to choose how best to further its business goals. The antitrust laws also generally recognize a producer's right to choose the means of distributing its product.
More specifically, owners of movies and television programming choose their means of distribution. Original episodes of Seinfeld are shown only on NBC; movies may be distributed only through a particular studio. Packagers of video programming also possess this freedom of choiceif they are not affiliated with cable operators. These packagers may license their programming on an exclusive basis to whichever distributors they choose, subject only to marketplace constraints and the limitations imposed by the antitrust laws.
Program packagers affiliated with cable operatorsso-called ''vertically integrated'' programmers, like Rainbowface a significant, additional burden on their freedom to market and sell their programming. These programmers must also abide by the program access requirements of the 1992 Cable Act. The program access law generally requires Rainbow to sell its programming to any distributor that wants to buy it, regardless of whether distribution by that entity advances our plans for marketing and developing our programming. Additionally, Rainbow must sell its programming to each distributor on nondiscriminatory rates, terms, and conditions as all other distributors, regardless of the value added by that distributor.
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The program access rules forbid Rainbow and other vertically-integrated cable programmers from entering into business arrangements, including exclusive agreements, that are common methods used by entrepreneurs to ensure the best possible distribution channels and superior marketing support for their products. Through these means, entrepreneurs can realize the full potential and value from their products. However well-intentioned the program access law was as a means of promoting competition among distributors, enactment of the program access requirements on top of the antitrust laws has stripped programmers of control over the use of its property and denied programmers the full business opportunities available to most other entrepreneurs.
The purpose of my testimony today is not, however, to re-debate the Cable Act. Rather, I am here to urge you not to expand the program access law as some of the other witnesses have proposed.
First, adding new procedural rules to the program access regime will encourage more extensive litigation rather than marketplace negotiations. Such rules are unnecessary. Distributors currently have ample access to cable programming under the existing program access procedures and the normal negotiation process for license agreements. Rainbow and other programmers license and distribute a wide variety of cable programming to all types of distributorsDBS, cable, wireless cable, C-band, SMATVs, OVS operators, and cable overbuilders.
Second, the program access law does not currently apply to programming services delivered to cable operators and other distributors by microwave or fiber optic lines rather than by satellite. This exemption effectively permits programmers like Rainbow to develop and sell local and regional programmingwhich can economically be delivered using these so-called ''terrestrial distribution systems''subject only to marketplace and antitrust constraints.
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Rainbow has historically been a leader in the development of local and regional programmingour News 12 and SportsChannel services pioneered the concept. We know from hard experience that such programming is very risky because it is extraordinarily expensive to produce, yet has a smaller potential audience than national programming. Expanding the program access law to cover terrestrially-delivered programming would deter the development of local and regional programming by denying programmers the full opportunity to benefit from their investments.
I will discuss each of these points in more detail.
The record is clear. There has never been a period in time when more distributors have had access to more programming. For example, DBS operators are offering more than one hundred channels of programming, far more than is currently available on the vast majority of cable systems. The growth in DBS subscribership was approximately 85 percent between May 1996 and May 1997. Cable overbuilders also have made competitive inroads. According to Ameritech's recent testimony before the House Telecommunications Subcommittee, ''[i]n those areas where [it] offer[s] service, one out of every three families with cable television service has Ameritech New Media's americastTM service.''
Assuming these numbers are accurate, they represent an impressive level of penetration for a company providing video service for only a little more than a year. More important for our discussion today, these growth rates clearly indicate that consumers are finding attractive programming packages available through the offerings of cable competitors. If consumers could not find a good mix of programming through DBS, cable overbuilders, and other distributors, then such growth would have been less likely.
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Despite this impressive growth, a small number of distributors have complained that they are having difficulty obtaining cable programming. The most notable complaint is Ameritech's pending petition before the FCC asking the FCC to amend the program access rules.
In support of its petition, Ameritech claims that it has had problems obtaining regional sports and other programming from Rainbow and SportsChannel. Yet Ameritech has had licenses for more than a year to distribute all Rainbow and SportsChannel programming it has requested. This includes national programming such as American Movie Classics as well as regional sports programming such as SportsChannel Chicago. Since obtaining these licenses, Ameritech has distributed these services and other Rainbow programming without interruption. There is no Rainbow programming currently available to Ameritech's cable competitors that is unavailable to Ameritech.
In almost all instances, these distributors gained access to Rainbow's and SportsChannel's programming by negotiating license agreements. The give and take in these negotiations were no different that any other business negotiations. Congress and the FCC intended these marketplace negotiations to serve as the normal process for obtaining access to cable programming.
As is true with other types of negotiations, there are times when differences between the parties arise. We have faced tough negotiations with cable operators as well as cable competitors. Rainbow tries its best to resolve these disputes when they arise but is not always successful. Sometimes, regrettably, a distributor decides to file a program access complaint. This is what has happened in Ameritech's case. Ameritech was distributing Rainbow's and SportsChannel's programming for more than a year, but became dissatisfied with the rates it was paying and decided to file a complaint.
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SportsChannel has been negotiating with Ameritech since before the complaint was filed to resolve this dispute. Much progress has been made between the parties, and with only an issue or two remaining, a settlement appears imminent. Nevertheless, Rainbow is confident that it will resolve this dispute as it did, for example, with RCN, which now has licenses for Rainbow and SportsChannel programming.
Ameritech's recently proposed amendments to the program access rules would discourage such negotiations by turning every program access complaint into full-blown civil litigation, raising the costs for all parties. Ameritech wants to replace negotiations with extensive discovery and additional rounds of pleadings. This approach is clearly contrary to the FCC's stated goal of ''encourage[ing] resolution of program access disputes through negotiations between the parties in an effort to avoid time-consuming, complex adjudication.'' It also conflicts with the FCC's view that private settlements are in the public interest.
Ameritech's petition to amend the program access rules is clearly unnecessary, given the limited number of program access complaints actually filed with the FCC. As the FCC itself recently noted, its program access rules already provide for an expedited procedure to resolve such disputes. In fact, the FCC has resolved more than ten program access complaints in the past year, including one against Ameritech. The FCC has even reaffirmed its commitment to ''process program access complaints in the most expeditious fashion possible, and to continue vigilant and meaningful enforcement policies in this area.'' Congress does not need to involve itself any further in this process.
I now would like to turn to my second pointthe extension of the program access rules to terrestrially-delivered programming, as advocated by Ameritech and others. Let me state Rainbow's position as bluntly as possible: if Congress extends the program access rules to terrestrially-delivered local and regional programming, programmers will not invest the substantial sums and undertake the considerable risks associated with the development of such programming.
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The program access law currently applies only to satellite-delivered programming. Every major national programming service is delivered by satellite because that is the most cost-effective way to get the programming to the distributor. In its current form, therefore, the law ensures that all video distributors have access to the ''must have'' national programming services necessary to be an effective competitor in the video distribution marketplace.
There was terrestrially-delivered local programming at the time of the 1992 Cable Act, but Congress did not extend the rules to such programming because it was not considered necessary to ''jump start'' competition from non-cable distributors. Doing so now would effectively stifle efforts to develop innovative local and regional programming, which can be efficiently delivered using terrestrial distribution technologies rather than satellites.
Local and regional programming helps fulfill Congress's long-standing goal of increasing the quality and diversity of television available to consumers. The extension of the program access rules to terrestrially-delivered local and regional programmingspecifically the prohibition on exclusive distribution agreementswould deter cable programmers from investing in the production of this diverse programming.
Local and regional programming services are risky ventures. They are expensive to develop because of high start-up and production costs. By definition, moreover, local and regional programming appeals to a much smaller potential subscriber base than does national programming. This combination of high costs and a smaller audience means that, for a local or regional service to be successful, the distributor must put the service on a channel likely to be viewed by a significant number of subscribers. The distributor must also agree to make a substantial commitment to marketing the service so that it achieves the highest possible subscriber penetration.
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Distributors are reluctant to make channel capacity available or otherwise commit resources to a service that appeals to a smaller audience. Thus, there is tremendous pressure on the programmer to find ways to obtain carriage agreements with distributors that include appropriate channel placement and sufficient marketing support.
Unless a programmer can interest a distributor in providing and actively promoting the service to its subscribers, the programmers' investments will be lost. This challenge is made more difficult in today's marketplace where more and more programmers are competing for limited channel capacity. Programmers have traditionally used inducements such as marketing support, direct payments, and local ad avails to obtain carriage. Prior to 1992and up to the present time for non-vertically-integrated programmersexclusivity has been another important inducement to distributors to carry programming.
This is particularly true in the case of local and regional programming. A distributor will be reluctant to carry and promote local and regional programming if it believes that it will have to split an already smaller subscriber base with one or more competitors. The distributor also may be concerned that its competitors will ''free ride'' on its promotional and marketing efforts.
If a distributor knows that it will be the only entity delivering the local and regional programming, however, it will be more willing to support this risky venture. A grant of program exclusivity enables a distributor to differentiate its programming packages from those of other distributors in the crowded video distribution marketplace. Exclusivity will also prevent any free rider problems.
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The program access law in its current formapplicable only to the satellite-delivered services of vertically-integrated program supplierseffectively offers these suppliers the opportunity to recoup their investments in risky local and regional programming services. Where these programming services can be economically delivered by terrestrial means, the programmer can enter into exclusive contracts that give distributors the incentive to make the commitments essential to the success of such ventures. Without the option to distribute local and regional offerings on an exclusive basis, programmers will not create it and consumers will have lost access to new, valuable, and diverse programming options.
A ban on program exclusivity for terrestrially-delivered local and regional cable programming would be particularly anticompetitive because many companies currently competing in the video marketplace are permitted to and routinely do enter into exclusive agreements to boost subscribership and differentiate their products from their competitors' offerings. For example, DirecTV presently offers NFL games on an exclusive basis. Congress should not hinder the development of valuable regional programming services by depriving programmers of an important marketing tool.
The continued exclusion of terrestrially-delivered local and regional programming from the program access law is of great importance to Rainbow. Rainbow is currently committing substantial resources to the development of an exciting new local programming venture, which we intend to offer via terrestrial delivery on an exclusive basis.
Our vision is of an integrated collection of local and ''hyper-local'' programming services that will give consumers access to a new level of interactive television. This package would blend superior editorial content with advanced broadband technology to deliver the first true electronic equivalent of a local daily newspaper. It is a service that would ultimately have separate channels each dedicated to a single interestlocal weather, traffic, sports, music, arts, and self-help. Some of the programming will be live, allowing community interaction via phone, fax, and the Internet. Our intent is designed to put the villageevery customer's local villageback into the ''global village.'' Ultimately, Rainbow hopes to offer as many as five local channels addressing divergent interests.
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This service will be delivered terrestrially, for several reasons. First, terrestrial delivery is a more economically and technically efficient means of reaching specific communities of interest than using a satellite with a national footprint. Even the ''spot beams'' on these satellites cover more territory than we need to reach. Second, permanent linked landlines will enable us to offer interactive and innovative services as part of the mix of programming, such as the multiple camera angles during sporting events, and the ability to deliver a version of these services to personal computers. Third, landline distribution provides the level of reliability we need for the mix-and-match programming and the inter-network coordination we envision for these channels. Rainbow is prepared to invest substantial capital in the development and deployment of a terrestrial network to deliver this service.
As a terrestrially-delivered offering, this service would not be subject to the mandatory access requirements of the Cable Act. For the reasons I discussed earlier, we believe that the success of an innovative local and regional service depends in substantial measure on our ability to make it available on an exclusive basis. This is particularly true for a service that requires a multi-channel commitment from the distributor.
Rainbow believes that the offering of exclusive local, professional sports as part of this package is a critical element in convincing distributors to make the necessary channel capacity commitment to this innovative, but risky plan. No one buys the Sunday newspaper without a sports section. We cannot expect consumers or distributors to buy our electronic equivalent of the Sunday paper without a sports component. Sports plays a vital role as a driver of local information, entertainment, and general interest editorial product.
Page 185 PREV PAGE TOP OF DOC I would close with one last observation. It is interesting to note that those who shout the loudest to expand the reach of the program access rulesthe telcos such as Ameritech and Bell Atlantic and CTECare the same companies that have invested little, if anything, in the development of new programming. This is particularly astonishing considering that Ameritech and Bell Atlantic each generate revenues and profits that dwarf those of the largest cable companies. Rainbow has invested tens of millions of dollars in regional news services that have run at a loss since their inception. Congress should encourage the telcos to spend some of their own money developing new diverse programming. Of course, so long as they can use the program access rules to obtain all the programming they need, why should they bother?
Thank you again for the opportunity to testify about these critical issues. I would be happy to answer any questions you have.
Mr. HYDE. Thank you very much. Your entire statement will be made a part of the record.
STATEMENT OF MICHAEL J. MAHONEY, PRESIDENT AND CHIEF OPERATING OFFICER, C-TEC CORPORATION
Mr. MAHONEY. Thank you, Mr. Chairman.
I'm Mike Mahoney, president and chief operating officer of CTEC and of our affiliate RCN Corporation, or RCN. RCN is a single source provider of bundled telecommunication service over fiber to the residential community. We compete directly in the marketplace with the incumbent telecommunications provider and the incumbent cable television operator every day.
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I'm glad to be here today to illustrate the benefits of the Telecommunications Act of 1996the fact that we're in businessbut also to highlight some of the obstacles which we must overcome in order for our vision of competition to become a widespread reality.
Let me start with just a little bit of background about RCN. RCN sells a groundbreaking package of services: local telephone, long distance, cable television, and internet access over a fiber optic facility. We operate under an OVS platform which was created by the Telecommunications Act of 1996. We currently provide our service in the Boston, Massachusetts area under one of the only two operating OVS agreements in the country. We have a number of other OVS agreements with surrounding communities in the Boston area. We also have laid the groundwork in New York City to provide this service. We have an agreement in principle with the City of New York pending ratification by the city council to provide the service in the city.
Most recently, we've announced the joint venture with a subsidiary of Potomac Electric to provide this service in the Washington D.C. area. We expect within the next 12 months to offer our service in several communities in the D.C. area, and within three years, to have our service offerings in over 40 communities in the Washington D.C. area. We think this will be an excellent opportunity for the policy makers who police the Telecom Act to see first hand the benefit of technology. We also realize that this will benefit the local economy by the creation of jobs. I think you can see that the benefits are there for not only the District but for the entire country.
But I'd like to highlight briefly, in the time I have, just four areas that we think could use a little more policing. One is that under the purview of OVS, the first thing we have to do after we become certified by the Federal Communications Commission is negotiate with local communities. We've been successful in that area, but it's been a very time-consuming process, and there is a lot of confusion on the parts of the communities about what the OVS statutes really require them or obligate them to do. Frequently, they attempt to apply taxes to our telephone revenue stream which places us at a disadvantage in that we would be forced to pay a tax that the incumbent telephone provider does not have to pay.
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I'd also like to speak briefly about some of the anti-competitive behavior by the incumbent cable television operators, and I want to touch on three areas. One is the programming access rules which have been talked about a lot at this hearing this morning. I also urge the Commission to continue to police the programming access rules. We have encountered significant delays in obtaining programming on our service, and these delays are costly to a competitor. Consumers simply will not buy programming if it is not comparable with that offered by the incumbent, particularly if that programming is regional sports programming. It becomes a very critical impediment.
I also support the Commission'sthis rulingif they would care to make iton expanding their access rules to all means of delivery. I think this would close a potential loophole that could be exploited to refuse programming to local operators.
Another issue is the incumbent operators frequently preventattempt to prevent or severely limit our use of inside wiring in multi-dwelling units and condominiums. The significance of this is if we don't have access to the existing wire, it requires us to build new wire and new conduit, and, frequently, building owners will not allow us to do that, and it effectively stifles competition. So, we urge the Commission to reach a decision in their much anticipated decision on inside wiring which is now out for further rule making.
And finally, we'd like to talk about the OVS rules. There have been petitions by cable operators to become programmers on OVS platforms. We recognize that the OVS platform requires us to make our network available to other programmers, however, it was specifically created to compete against the incumbent cable television operators, and, yet, although the FCC has promulgated rules allowing an incumbent operator to deny access to a local cable operator, cable operators have petitioned the Commission for permission to go on the programming network and have challenged the FCC rules. We encourage the Commission to resist this. We think that that would be bad policy and counter to competition.
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I'd just like to close by thanking the committee for having me here today. We urge you to continue your oversight, and I'll be available for questions. Thank you.
[The prepared statement of Mr. Mahoney follows:]
PREPARED STATEMENT OF MICHAEL J. MAHONEY, PRESIDENT AND CHIEF OPERATING OFFICER, CTEC CORPORATION
RCN is one of the nation's leading facilities-based providers of local and long distance telephone, video, and Internet access targeted at the residential market. Our experiences competing with telecommunications and cable television giants highlights the vast potential for competition and as well as some of the challenges we face.
RCN is working to provide residential subscribers a ground-breaking service: a single package which includes video programming, telephone, and Internet services. This triad of services, which is provided over fiber optic lines via an open video system, or ''OVS,'' is not yet available from any incumbent telephone, cable, or other provider. Right now, in Boston, RCN operates one of the only two OVSs in the country. Soon, we will bring OVS to New York City, then to Washington, D.C.
Competitive endeavors like OVS cannot thrive unless new market entrants can overcome significant obstacles. For example, we must successfully negotiate with local officials in each market we enter. Although many local of finials are eager to bring competition to their areas, there are also many who see OVS as a potential new source of revenue, and thus seek to impose more regulation than is permitted under the 1996 Act.
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Another road block is anti-competitive behavior by incumbents including withholding programming in violation of FCC rules. To remove this road block, the FCC must adequately oversee the behavior of vertically-integrated incumbents. Furthermore, the FCC should change the program access rules to require non-discriminatory access to all programming, regardless of how it is delivered. This change will close the loophole that allows cable operators to switch to terrestrial microwave or fiber delivery and thus circumvent the current rules, which only require them to provide access to programming delivered by satellite.
Cable incumbents further thwart competition by preventing access to the inside wiring of multiple dwelling units such as apartment buildings and condominiums. The FCC can remedy this problem by adopting the much-needed revisions to its cable inside wiring rules.
Finally, the cable companies threaten competition by attempting to gain access to the OVS platform. Under the FCC's rules, although OVS platforms are open to video programming providers other than the OVS operator, they are intended to compete against the incumbent cable franchises. That is why the FCC adopted rules that allow an OVS operator to deny access to competing, in-region cable companies. Providing access to incumbent cable operators runs counter to good public policy and would eliminate competition.
We look forward to Congress and the FCC taking an active role in fostering competition in the market.
I am Michael Mahoney, President and Chief Operating Officer of CTEC Corporation and its affiliate Residential Communications Networks or RCN. RCN is one of the nation's leading facilities-based providers of local and long distance telephone, video, and Internet access targeted at the residential market. Our company is competing against the incumbent telecommunications and cable television giants to bring the benefits of competition to consumers as envisioned by the Telecommunications Act of 1996. I am here today to illustrate the Act's vast potential for competition as experienced by RCN: the ability to create innovative services, new partnerships, more jobs, and lower prices. I am also here to describe some of the challenges we must meet in order to make the vision of widespread competition a reality. These challenges include successfully negotiating to enter local markets, countering anti-competitive behavior by the incumbent providers, and fostering support and understanding on the part of the FCC.
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RCN is cultivating competition in the marketplace in many ways. However, today I will limit my testimony to the issues surrounding an innovative new package of services. We are working to provide residential subscribers a single package which includes video programming, telephone, and Internet services. This triad of services is not yet available from any incumbent telephone, cable, or other provider.
To become a viable full-service competitor, however, we must get to the market as soon as possible. To this end, we have looked to a variety of technologies to enter the programming distribution market. In Boston, RCN operates one of the two open video systems (OVSs) in the country. OVS is an alternative to franchised cable operation which permits local telephone companies and others to distribute multichannel video programming in competition with cable operators. Congress provided for OVS in the Telecommunications Act in an effort to stimulate video competition and therefore required lighter regulatory burdens for new entrants trying to compete against an incumbent's monopoly power. RCN provides its OVS service through an advanced fiber-optic network that brings our customers in Boston the three-in-one package of video programming, telephone, and Internet services. In addition to serving the Boston market, RCN soon will provide OVS service in New York City where it already operates a wireless video system.
Most recently, RCN signed an agreement to bring the same services to the D.C. area. In partnership with Potomac Capital Investment Corporation (PCI), an unregulated subsidiary of Potomac Electric Power Company (PEPCO), we will bring Washington-area residents and businesses local and long-distance telephone, cable TV and Internet services in a single package. Forging a partnership right here in D.C. will allow the government policy makers who are guiding implementation of the 1996 Act, and those who safeguard competition in the market, to see first hand whether the rules they are promulgating are working, and, of course to see the technology in actionhopefully even in their own homes.
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The joint venture will be equally owned by PCI and RCN, and each will invest up to $150 million over the next three years to provide the ''bundled'' services over an advanced fiber optic network. Initial network construction will begin in D.C. and parts of Maryland and Northern Virginia. In the near future, the partnership will begin offering local and long distance telephone and Internet service to some areas of D.C., Maryland, and Virginia. And within three years, we will serve more than 40 major communities. In advance of the buildout of the fiber optic network, a competitive package of local and long-distance telephone and Internet services will be offered throughout the Washington area. As anticipated by the 1996 Act, the joint venture will not only improve services but will create new jobs.
Although RCN's market share to date is small, and the company must overcome difficult regulatory and competitive hurdles before any meaningful market share can be obtained, the company's efforts and accomplishments are important because they represent one of the first true applications of the principles of competition which drove enactment of the 1996 Act. Further, unlike many emerging telecommunications services that are only offered to businesses, RCN brings services right into American homes.
We believe that the kinds of ventures undertaken by RCN are what Congress had in mind when it passed the 1996 Actnew combinations of marketplace participants creating innovative services for consumers at lower prices. However, developing true competition in industries that have been dominated by single providers is no easy task. The 1996 Act was but the first step. My company and others are now working with the FCC and individual state PSCs to develop and implement the rules for competition. Additionally, it is often necessary to negotiate licenses, permits, and franchise agreements with a myriad of individual local and state governments in order to start providing many of these competitive services. In some instances, this process can be time consuming and costly, particularly since some local governments are not yet accustomed to working with competitive cable companies, and therefore sometimes expect to impose more regulation than is permitted under the 1996 Act. There is a high level of confusion as to the new advances forged by the 1996 Act in many local communities accustomed to regulating monopoly providers. For example, RCN customers can buy cable service alone for a certain price. However, we reduce that price if the customer also buys a complete package of services including cable, local, and long distance. This is a standard pricing strategy. Unfortunately, during negotiations for licensing, some local governments have taken the position that since RCN's rates are lower than the monopoly franchise holder, a reduction in tax revenue, which is based on a percent of revenue, will occur when a customer switches service providers. To prevent this potential revenue loss, cities have demanded that RCN, the new entrant, pay a higher per-customer fee, thereby keeping the tax revenue stream intact. This mindset simply does not recognize the benefits of lower prices and better service that occurs when a marketplace moves from a regulated monopoly to open competition.
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We have also experienced local governments attempting to apply the tax they are permitted to collect by law on gross video revenue to telephony service as well. This clear misunderstanding of their taxing authority with respect to telephone service imposes real discrimination against new facilities-based entrants to local service telephony because the incumbent, and owner of a dominant market share, is not required to pay a similar fee.
This is one area where further guidance and clarification to the municipalities by Congress and federal regulators would be especially helpful in jumpstarting residential competition. This is not to say that all local governments present problems. We have also been fortunate to negotiate with many enlightened local officials who see competition as a welcome benefit to their constituents, rather than as a new source of revenue. We are especially encouraged by those who not only permit competitors like RON operate, but actively facilitate our entry into the market. These officials realize that we are cooperative when it comes to contributing our share, but we need to ensure that franchise authorities do not hold hostage new market entrants like ourselves. We must be given a fair opportunity to take root before we can hope to experience meaningful growth in any given community.
While we are optimistic that, with hard work and cooperation, these governmental and regulatory obstacles are largely surmountable, the more formidable barriers to competitionthe dominant incumbents themselvesmay be the most difficult to overcome.
As was plain during the debate over the 1996 Act, many incumbents do not want competition, or want competition only in someone else's industry or service area. The vertically integrated structure (where programmers are affiliated with cable systems) of the incumbent providers and the amount of market power that they possess, make it extremely difficult for a new competitor to break into the market. In the 1996 Act, Congress tried to eliminate some of the ways that these companies can use that power to obstruct competition. Despite the Act's provisions, however, many large incumbents are still trying to protect their exclusive market position through court challenges, delays in negotiations ova licensing or interconnection, or flat refusal to comply with the 1996 Act and the FCC's implementing regulations.
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It is critical that the FCC adequately oversee the behavior of vertically-integrated incumbents, particularly where they seek to withhold programming from competitors. These incumbents are required by FCC rules to provide non-discriminatory program access to OVS operators and often do not. This refusal to provide programming is deadly to new competitors. Consumers simply will not buy a new service where it fails to provide programming comparable to that provided by an existing serviceespecially if the programming is regional sports coverage. Furthermore, the program access rules should be changed to require nondiscriminatory access to all programming, regardless of how it is delivered. This change will close the loophole that allows cable operators to switch to terrestrial microwave or fiber delivery and thus circumvent the current rules, which only require them to provide access to programming delivered by satellite.
Cable incumbents further thwart competition by seeking to prevent or to severely limit access to the inside wiring of multiple dwelling units such as apartment buildings and condominiums. Seemingly small failures to cooperate with competitors have dramatic effects on the ability of competitors to enter the market. For example, incumbents have sought to prevent competitors from accessing the space under wall moldings or within conduits that hide the cable wiring. Understandably, building owners are not willing to allow duplicate moldings or to have their walls torn down for additional internal conduits. Yet without access to existing facilities, new competitors are forced to build redundant moldings and conduits and therefore may be refused access altogether by building owners who will not consent to additional wiring. We believe that the FCC has the jurisdiction to prevent this type of barrier to competition and hope that the Commission will be responsive to requests that it exercise its jurisdiction. We are encouraged by the recent steps the FCC has taken in its Further Notice of Proposed Rule Making on Inside Wiring. In that NPRM the FCC recognized the need to Ensure physical accessibility to cable inside wiring and demonstrated that it understands the anti-competitive effects of the current access rules. True competition in the video programming market is dependent on the FCC adopting the much-needed revisions to its cable inside wiring rules to ensure new entrants have access to consumers and thus consumers have choices.
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Finally, cable companies are seeking to stifle competition from OVS operators through their attempts to gain access to the OVS platform. Under the FCC's rules, although OVS platforms are open to video programming providers other than the OVS operator, they are intended to compete against the incumbent cable franchises. Therefore, the FCC adopted rules that allow an OVS operator to deny access to competing, in-region cable companies. Cable companies, however, are asking the FCC for exemptions from these rules and have appealed the rules generally to the Fifth Circuit Court of Appeals. Providing access to incumbent cable operators runs counter to good public policy and would eliminate competition. First, it would require the OVS operator to disclose proprietary information to its primary competitor. Second, it would allow an incumbent monopoly cable company to reserve up to one-third of the OVS operator's channel capacity thereby denying viable competitors access to these channels for the provision of competitive services. OVS was created in part to allow lesser regulations for new entrants. Allowing cable companies to piggy back on the OVS provider's system would completely defeat the intent of the OVS platform. I say without any hesitation that if incumbent cable operators are given access to competing OVS service, the OVS platform will not be a viable competitor to incumbent cable providers.
In sum, we have made great progress toward achieving a competitive market, but we still have a long way to go. by passing the 1996 Act, lawmakers assured the American people that they would stand watch while the transition to competition took place. New we are all at a point where we have identified some of the major challenges involved in this transition. We look forward to Congress and the FCC taking an active role in creating an environment where new market entrants can thrive and where American consumers can reap the benefits of competition.
Page 195 PREV PAGE TOP OF DOC I would like to thank the chairman and the committee for its efforts to ensure the creation of competitive markets. I would also like to thank you for allowing me to inform the Committee of RCN's experiences and its efforts to live up to the expectations embodied in the 1996 Act. RCN remains available to answer any questions that Congress may have.
Mr. HYDE. Thank you very much, Mr. Mahoney.
STATEMENT OF MATTHEW ORISTANO, CHAIRMAN, PEOPLE'S CHOICE TV
Mr. ORISTANO. Mr. Chairman, members of the committee, thank you for giving me this chance to address today.
I am chairman of People's Choice TV with wireless cable licenses covering 11 million homes in the U.S., building video subscription businesses in Chicago, Detroit, Milwaukee, and elsewhere. My prior experience is a couple of decades in the cable television industry. Congress understood that without competitive access to cable programs, there will be no cable competition, and the 1992 Cable Act and 1996 Telecom Act were important steps in that direction, but the cable industry, today, still controls 87 percent of the video market, and it uses its clout to control all cable programs whether they own them or not. Now, as a small company with about $30 million in revenues, we have little say as larger companies write the rules of the marketplace, and so as of today, cable programming control remains very concentrated in the hands of the same media conglomerates who have historically controlled it. The result is we still can't get important programs.
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Now, I'll give you a few real life examples from my life. Viacom and we had reached a deal on carriage of two of their new program services, TV Land and M2. The day that Viacom closed on its $2 billion sale of its cable company to TCI, which Viacom desperately needed because of the cash needed to reduce debt on their balance sheet, Viacom made an embarrassed call to us to say that these new services which they were happy to sell to us the day before were now going cable exclusive, just coincidentally that day, and that wireless companies and telephone companies would not be able to buy them. To add insult to injury, Viacom promotes these channels endlessly on the Viacom channels that I do get to carry, so that what I'm forced to do is to carry advertisements for a monopoly service to drive my customers away to the cable monopoly. That's one example.
Another one, MSNBC, is the most important news channel since CNN. We can't carry it. The cable companies have demanded that it be exclusive to them, and NBC has capitulated. So, now we have situation where NBC uses its free broadcast channel and celebrities like Tom Brokaw and Katie Couric to promote MSNBC to drive our customers to the cable monopoly; we're shut out. Also, Microsoft, which is an owner of MSNBC and an investor in the cable TV industry, is going to integrate MSNBC into the desktop of their new Windows 98 software which means the monopoly maker of desktop computer software is going to try to drive our customers to the monopoly cable TV program provider. That's just too much market power for us to fight.
All broadcasters like NBC should sell their programs to all comers, because the platform they're using is a publicly granted free television license. CBS, FOX, NBC should not be allowed to do monopoly deals with cable operators which brings us to FOX. Mr. Murdoch controls a TV network, a high powered DBS slot, and major cable TV program channels. Now, on April 10th, he came before the Senate and personally promised in return for whatever favors he was asking for, he said, ''Oh, absolutely, I will sell my programming to all cable competitors.'' Well, he also promised that his DBS venture would compete with cable television. Neither one of those two things have happened. Instead, what's happened is he's folded his DBS start-up, and he plans to merge it in with the cable monopoly's Prime Star giving the cable industry control of programming in the sky as well as on the ground, and we still can't license FOX News or FX channels. The day he made his promise, we called his organization and said, ''Well, what about it? We're ready as always to license the programming.'' It was like they never heard of Rupert Murdoch. They didn't follow the promise. Today, the promise is broken. We believe that under no circumstances should the Government allow the transfer of the license to Prime Star unless Mr. Murdoch keeps his promise. It's a vital anti-trust issue.
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By the way, the reason we haven't filed any programming complaints on these issues, it's not what you might think. The fact of the matter is we're not allowed to. These aren't vertically-integrated programmers, and the FCC just won't be able to hear the complaints. So who can we complain to? I would submit yourselves.
Many telephone companies promised to compete with cable if they were deregulated; many cable companies promised to get into the phone business if they were deregulated. The fact of the matter is, with the exception of Ameritech, and prospectively Bell South, the telephone industry has pulled back on cable competition, and the cable industry has pulled back on telephone competition. And as a result, we're still left with very powerful monopolies and a very difficult situation as a small company. So we urge you to support enhanced program access.
Thank you very much.
[The prepared statement of Mr. Oristano follows:]
PREPARED STATEMENT OF MATTHEW ORISTANO, CHAIRMAN, PEOPLE'S CHOICE TV
The wireless cable industry appreciates the opportunity to testify before this Committee about obstacles that need to be cleared away in order to promote competition in the subscription television marketplace. This hearing focuses on issues of critical importance to the wireless cable industry that can have far-reaching effects on the ability of competitors like the wireless cable industry to fulfill their promise as alternative providers of subscription television services. Consumers still have monopoly subscription television markets, even five years after the 1992 Cable Act and more than one year after the landmark Telecommunications Act of 1996. For example, 87 percent of the subscription television market is still dominated by the cable industry. Briefly, in order to stimulate and accelerate competition in this market, it is essential to close the loopholes in existing law by:
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(1) expanding program access rules to all video programming, regardless of whether it is vertically-integrated with cable operators, delivered terrestrially, or bundled with other programming; and
(2) conditioning any federal regulatory approval of the MCI-Primestar deal on assurances that News Corp. controlled programming will be subject to tough fair access to programming requirements as well.
In addition, to closing these loopholes, the narrow preemption of local taxation direct-to-home satellite video services (or DBS) secured as part of the Telecom Act should be extended to other wireless service providers who also transmit video programs to subscribers without using traditional wire-based distribution equipment.
My name is Matt Oristano, and I am Chairman of People's Choice TVa wireless cable operator providing services in several communities across the country. PCTV transmits its signals from the Sears Tower and has the potential to reach 2 million subscribers in the Chicago area. Other communities served include Detroit, Milwaukee, Houston, Phoenix, Indianapolis, St. Louis, Tucson and Salt Lake City. I thank Chairman Hyde and Ranking Member Conyers and the entire Committee for the opportunity to testify on behalf of the Wireless Cable Association about obstacles that need to be cleared away in order to promote competition in the video marketplace.
This hearing focuses on issues of critical importance to the wireless cable industry that can have far-reaching effects on the ability of competitors like the wireless cable industry to fulfill their promise as alternative providers of subscription television services. Five years after the 1992 Cable Act and more than one year after the landmark Telecommunications Act of 1996, consumers still face monopoly markets. For example, 87 percent of the subscription television market is still dominated by the cable industry. In brief, in order to stimulate and accelerate competition in this market, it is essential to close the loopholes in existing law by (1) expanding program access rules to all video programming, regardless of whether it is vertically-integrated with cable operators, delivered terrestrially, or bundled with other programming and (2) extending the narrow preemption of local taxation direct-to-home satellite video services (or DBS) secured as part of the Telecom Act to other wireless service providers who also transmit video programs to subscribers without using traditional wire-based distribution equipment.
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Before I begin my testimony, I would like to describe wireless cable services. Wireless cable operators deliver subscription television services comparable to traditional cable television services and satellite delivered direct-to-home services to consumers. Typically, a wireless cable system works as follows: the signal is sent by satellite to a local transmission tower where a microwave antenna re-transmits the signal to individual, often ''smoke alarm''sized, rooftop antennas on customers' houses. The signal is then sent along traditional wire from the customer's antenna to a descrambling device on the customer's television set. Both wireless cable and direct-to-home satellite services do not cross the public rights-of-way in order to deliver their programming to consumers. Thus, the key difference between both of these services and traditional cable is that both wireless television signals are delivered over-the-air to antennas on a customer's roof top rather than over land-based cables. From the consumers point-of-view, when you turn on your television set, wireless cable, direct-to-home and traditional wire-based cable all deliver identical programming services into the home.
Today, wireless cable operators provide service in 200 communities throughout the United States, and serve close to one million subscribers. Worldwide, there are approximately 5 million subscribers in over a dozen countries. Even though wireless cable is small compared to traditional cable's 65 million subscribers, it now has the ability to expand rapidly.
Access to fairly priced programming continues to be critical to the wireless cable industry. We saw major progress begin with the 1992 Cable Act. It provided significant access to programming by requiring cable operators to sell their vertically-integrated satellite delivered cable programming and satellite delivered broadcast programming to multichannel video programming distributors. This provision is by far the most important part of the 1992 Cable Act for consumers of alternative video services and is viewed by competitive providers as perhaps the most successful part of the 1992 Cable Act.
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The 1996 Telecom Act extended to telephone companies that are vertically-integrated with programmers the same video program access obligations imposed upon vertically-integrated cable operators. Nevertheless, even though expanded by the 1996 Telecom Act, the program access law still contains major gaps in its coverage of the programming that should be available to wireless cable customers. Specifically, owners of both independent programming and vertically-integrated programming that is not distributed via satellite are not subject to the program access provisions of either act. For example, the programming controlled by News Corp is not subject to the program access rules. Just as Rupert Murdoch would like his new DBS venture with Primestar and MCI to be able to rebroadcast local, over-the-air television channels in major metropolitan areas in order to enhance his business, other competitors would like to have access to FOX programming in order to enhance their ability to compete. At a hearing on April 10th of this year before the Senate Commerce Committee, Mr. Murdoch specifically stated to Chairman McCain that he would not withhold Fox programming from unaffiliated program distributors and that further he would ''sell its programming to any customer.'' It is 6 months later and this has simply not happened. And despite Mr. Murdoch's assurances to the contrary, we see no signs that it will happen anytime in the near future. Today, the Murdoch channels F/X and Fox News offer cable operators a ''terrestrial exclusive,'' meaning that wireless operators and telco overbuilds are prohibited from getting these FOX Programming services.
Another major gap in coverage of existing program access rules is that they do not apply to video programming that is delivered by terrestrial means instead of via satellite. For example, it has been widely reported recently that with Comcast's purchase of the Philadelphia Flyers, 76ers, and Phantoms, Comcast intends to start a new regional sports network that it will distribute via fiber to its affiliated cable operators, but not to other competing video providers. Comcast is betting that by delivering its signals terrestrially, rather than via satellite, the existing program access protections will not apply. In addition, CBS has announced that its new cable network Eye on People will be available to cable operators on a terrestrial-exclusive basis. This means that this programming will not be available to telephone or wireless distributors that compete with cable operators.
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In addition to the delivery loophole, wireless cable operators have been denied access to video programming that is bundled with other programming. For example, MSNBC, which is owned by NBC and Microsoft, have used their market presence to control their retransmission consent rights by creating new programming channels that operators have to carry. This is all well and good, but the cable operators are demanding, and receiving, terrestrial exclusives on new services, which shut out potential competitors. This is particularly egregious in the case of MSNBC, where NBC network personalities from Tom Brokaw on down relentlessly use the broadcast network to promote a program that only cable can deliver locally. The broadcast programs are available to all, and the FCC has prevented exclusive retransmission deals. This should be extended to broadcaster controlled cable programming as well.
In addition to these specific problems, the vast majority of the nation's cable programming is still controlled by John Malone, Rupert Murdoch, and Time-Warner. The next level down is occupied by Sumner Redstone's Viacom, which has sued both Time-Warner and TCI in the past for antitrust violations of their commanding distribution positions. Malone and Time-Warner engineered the absorption of the Turner Communications empire, further enhancing their control. As for the host of new entrants we were expecting in cable programming, what we've actually experienced is the old guard in new clothes. Using their key services as platforms, the media giants have created multiplexed clones of their programming, soaking up shelf space that could be allocated to competitors. Thus we have five channels of HBO, three channels of ESPN, six Discovery networks, eight Encore channels, new Turner Channels, etc. The cable industry claims that its distribution pipeline is overburdened, but if so, it is overburdened in a way deliberately designed to keep out competition.
Page 202 PREV PAGE TOP OF DOC And now Murdoch, who had made impressive war-cries while plotting to compete via his DBS project ASkyB, has folded his hand completely and has joined the cable companies to control the nation's local sports channels through his new deal to merge his DBS company into Primestar, which is cable controlled. The Wireless Cable Association opposes any government approval of this deal unless, at a minimum, there are assurances of fair access to programming.
Despite all the progress that we have made, the cable operators still monopolize the market. They have monopoly control over the bottleneck pipeline that programmers have to reach the market. An eighty-seven percent market share, by any traditional measure, is evidence of monopoly power. Program access is the reason. The same old players are in control, and their grip is tightening. Unless Congress acts decisively, a very few powerful media interests will enhance their control of TV viewing options for all America. It is important for the Committee to remember that the program access provisions of the 1992 Cable Act did not preempt any general antitrust remedies. And in the exercise of its antitrust jurisdiction, we would urge this Committee to determine what changes in program access rules are appropriate, because at bottom, antitrust concerns underlie the fundamental need for fair program access.
I would like now to turn the Committee's attention to a second impediment to competition that this Committee has addressed in the pastlocal tax preemption. In the 1996 Telecom Act, Congress provided for a technology-neutral, non-discriminatory market structure to govern the provision of telecommunications. To advance this policy, Congress should extend the local tax preemption that DBS currently enjoys to wireless cable and other over-the-air providers. This action will create parity among similarly-situated video programming service providers and, therefore, fulfill this congressional policy. Indeed, Chairman Hyde, in a colloquy with Commerce Committee Chairman Bliley during the House debate on the Telecom Act last year, endorsed this principle. And Representative Gekas, during the last Congress, conducted a hearing examining this very issue. Simply put, it would be counter to this policy for localities to establish barriers to entry through discriminatory local taxation that frustrates this overriding national goal and halts the benefits that the wireless cable industry has already brought to the video services marketplace and to the consumer.
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The main difference, however, between wireless cable and DBS is one with important ramifications. The Telecom Act's local tax preemption for DBS grew out of the DBS industry's refusal to acknowledge any local government jurisdiction over the provision of DBS services. By contrast, wireless cable is a local business and pays local property, sales, income and other business taxes but, like DBS, it does NOT make use of the public rights-of-way. In light of this, it also should not be subject to local taxation or charges comparable to cable franchise fees for its use of federally regulated airwaves. A federal appellate court recently clarified that franchise fees levied in Maryland are, in fact, rents for the use of rights-of-way and not taxes. City of Dallas v. FCC, 118 F.3d 393 (5th Cir., 1997). These charges and taxes would be duplicative and discriminatory in light of the lease payments wireless cable operators already make to local institutions to share their ITFS channels and, especially, if wireless cable operators were the only video providers to pay them.
Indeed, this is exactly what has happened in several localities across the country. For example in Chicago, Illinois and in Richmond, California, each city has enacted a video services tax of seven or eight percent of gross revenues. In both cases, however, wired cable is permitted to deduct the franchise tax that it already pays to the local government for the use of the public rights-of-way. As a result, cable companies only pay two or three percent. And, because of the Telecom Act, DBS is exempted from the collection and remittance of these taxes. Wireless cable operators and consumers, however, are left having to pay the entire tax. On top of their federal auction fees and ITFS lease payments, not only are these taxes discriminatory, but they increase the cost to consumers for video services. Moreover, it is just plain wrong to impose franchise fees on wireless cable for the use of public rights-of-way that it does not use, as it would be to charge cable companies for the use of airwaves that they do not use to transmit programming signals.
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Without relief from these discriminatory taxes, much of the competition that Congress envisioned wireless cable would bring to traditional cable will be lost because of the discriminatory and duplicative treatment that wireless cable will receive from local governments.
We know this Committee is serious about getting true competition in the video marketplace and we are here today to help achieve that goal. In order to reach it, Congress must first re-examine the program access provisions of the 1992 Cable Act, that were amended by the Telecom Act and further broaden them. It also should ensure that any federal regulatory approval of the MCI-Primestar deal is conditioned on assurances that News Corp. controlled programming will be subject to tough fair access to programming requirements as well. Second, Congress should expand the local tax preemption afforded the direct-to-home industry, to the wireless cable industry. The wireless cable industry strongly supports these actions and we believe they will ensure that parity exists among all industries in the video delivery marketplace.
Mr. HYDE. Thank you, Mr. Oristano.
STATEMENT OF JOHN C. NORCUTT, PRESIDENT, INDEPENDENT CABLE AND TELECOMMUNICATIONS ASSOCIATION
Mr. NORCUTT. Thank you.
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Mr. HYDE. Yes, it's working [referring to the microphone]. Pull it a little closer.
Mr. NORCUTT. Thank you. My name is John Norcutt. I'm here today as a small businessman. My company, One Point Communications, provides cable television and, as of this year, telephone services to 40,000 customers located in 140 separate buildings from metropolitan Philadelphia down through central Virginia. Each of these is a multi-family dwelling unit, or MDU. As you know, MDUs include apartments, condominiums, and many other unique forms of multi-family housing.
I am also here today as the president of the Independent Cable and Telecommunications Association, a trade association representing many other small companies like mine. The FCC calls us satellite master antenna television providers, or SMATVs. We call ourselves private cable operators. There are over 1,900 private cable operators around the country, many of them formed in recent years. We only operate where we do not cross public right-of-ways. Only the franchise operators can do that. We get signals sent to satellite dishes and through other technology to the properties of the MDUs that we serve.
We're a small industry with roughly 2 million subscribers nationwide, compared with 63 million franchise subscribers. Our small size, however, is also our strength. We creatively package and price our products in a manner different than the franchise cable provider. Essentially, we give our customer a better deal. And, by the way, every one of my 145 properties offers lower rates; many times those rates are set by our customers, not ourselves.
Page 206 PREV PAGE TOP OF DOC There are many things that differentiate us from the franchise operators, but today I'd like to address a number of questions with you. First, the MDU marketplace and why is that important to our industry. Well, first of all, it's huge. Over 27 percent of the U.S population lives in MDUs, over 30 million dwelling units. MDUs are being constructed today at a rate twice as fast as single-family homes.
MDUs are where my industry has chosen to compete for a number of reasons: higher housing density, tenant turnover, or the ability to introduce our service to more and more people, but primarily the fact that it's easier to deal with the owner or a condo board than it is the government agency that grants us a cable franchise. As a result, our industry, according to the FCC, is growing three times faster than franchise cable. If we are allowed to compete unfettered by outdated regulations, we will force franchise companies to respond competitively or lose market share.
The question we've been asked is: Can companies as small as mine really compete with huge franchise operators? You bet; we do it every day. A majority of my customers today were previously franchise customers. They're not private cable operator subscribers because we offer better rates; we have less bureaucracy; we can decide things on the spot; we provide responsive customer service; we answer our telephones; I answer our telephones.
Even more recently, we entered into an arrangement with direct TV, so that private cable operators can offer DBS service to the multi-family unit, something franchise operators cannot do. We have a better service. This DBS arrangement solves the problem of local broadcast channels which we provide and gives the DBS customer in the multi-family unit a way to get the service without the building owner being impeded with dozens or hundreds of dishes being installed on his property.
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We are successful in what we do. There are, however, a number of things that slow the speed at which we can increase competition. And what are they? Some are our state barriers, like what I believe are discriminatory, mandatory access laws. In 15 states in this country only the franchise cable operator has a right to wire a building whether the owner or the customers want them on that building or not. It's impossible for private cable operators to compete in these 15 states, and we do not do so.
Many barriers, though, are still under Federal control. The inside wiring has been discussed by some other speakers. I'd like to raise the issue of perpetual contracts. Daily we encounter people who want our service, but signed perpetual contracts, signed long before competition existed. These contracts allow the franchise operator to remain on the property ''for the term of the franchise or any extension or renewal thereof.'' Well, as we've all heard today, when have you ever heard of a franchise system being terminated? They haven't even done that here in Washington, D.C.
Couple this with unclear pricing rules, which the FCC has not clarified, which permits the franchise operator to lower his rates, but it's usually only on a building that I've gone into. He'll lower his rates below my rates, if he needs to, on one property, while the neighbor across the street pays the full rate, and that's not at all unusual. Franchise guys are really good at that trench warfare.
Finally, what can this committee do to enhance competition or, more likely, speed it up? Since it's unlikely that you're dealing with the 1996 act again in this Congress, we would encourage you to continue these oversight hearings. Please invest in the details because that's where the machinery of this competition impediments occur. If you agree with us and other speakers here, please urge the FCC to move faster on the changes that are underway. We are encouraged by the inside wiring that may be coming up shortly, but we worked on that for four years. Copyright action can out in April; I filed comments on that nine years ago. If this can happen quicker, we can compete more
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I thank you for your time and attention.
[The prepared statement of Mr. Norcutt follows:]
PREPARED STATEMENT OF JOHN C. NORCUTT, PRESIDENT, INDEPENDENT CABLE & TELECOMMUNICATIONS ASSOCIATION
Thank you for allowing me to be here today. I am President of the Independent Cable & Telecommunications Association. I am also a small businessman. My company, OnePoint Communications, provides cable television and telephony services to multiple dwelling unit buildingsMDUs including apartments, condominiums and other unique MDU markets. We have just over 100 employees that work hard to provide high quality service to approximately 40,000 subscribers in 140 MDU buildings. The FCC calls us Satellite Master Antenna Television (SMATV) providers. We call ourselves Private Cable OperatorsPCOs. There are 1900 of us around the country. We only operate where we do not cross public rights-of-wayonly franchise operators can do that. We get satellite signals sent to our dishes on the properties of the MDUs we serve. We are small, with roughly 2.0 million subscribers nationwide, compared with the franchise operators that have 62 million subscribers. But that also is our strength. We are technologically state-of-the-art, we have better rates, we have very close contact with our customers, we customize our product to meet their needs and we can act quickly. That differentiates us from franchise operators. Today, I would like to address several questions as to why we think PCOs enhance competition and why we hope this Committee and Congress will agree.
First, how do we read the Telecom Act of 1996 and Congressional intent?
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The Purposes provisions of the Act are clear, Congress wanted more providers of video services for more consumers. This competition will provide downward pressure on rates and will stimulate better quality of current products and the introduction of new services. ICTA strongly supports these Purposes and thinks PCOs can act as a catalyst to stimulate positive market changes. We may be relatively small but due to certain market forces PCOs can produce significant competition which will benefit consumers.
Second, what is the MDU marketplace and why is it so important to competition?
Over 27% of the US population live in MDUsover 30 million units, and it is growing at twice the rate of single family homes. MDUs are where we have chosen to compete because of higher density, tenant turnover and its easier to deal with an MDU ownera business personthan the government that grants franchises. And therefore we are growing at 3 times the rate of franchised cable. If we are allowed to competeunfettered by out dated regulationswe will force franchise companies to respond competitively or lose market share.
Next, can companies like mine really compete with the huge franchise operators?
You bet, we do it every day. A majority of our subscribers formerly had franchise service. They are now PCO subscribers because we have better rates, less bureaucracy, services tailored to what our customers want, more responsive customer service and, increasingly, both video and telephony services.
Even more recently we entered an arrangement with DirecTV so that PCOs can offer DBSsomething franchise operators simply can not offer. This DBS arrangement solves the problem of providing local channels to DBS customers and the MDU owner's objection to multiple dishes being installed on the building. These are some of the reasons PCOs can compete with franchise operators. We compete with them everyday. Yes, we are successful at it, too.
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What are the barriers impeding more competition?
Some of them are state barriers like discriminatory mandatory access laws which in 15 states allow only franchise operators to wire a building whether the MDU owner wants their service or not. That makes it virtually impossible for PCOs to go in and make a viable business proposition.
But most barriers are still under Federal control. Here are the key barriers:
Daily we encounter perpetual contracts, signed before competition existed, which allow franchise operators to tie up an MDU, preventing PCOs from competing for the duration of the franchise or any extensions or renewals thereof. And when was the last time you heard of a franchise being terminated? They haven't even done that here in DC.
Absence of clear FCC rules on uniform cable pricing which currently allow a franchise operator to lower rates only in buildings where a PCO wants to compete.
Inside wiring rules that govern who owns the cable inside the buildings. They make a big difference and will either encourage or impede new market entrant competition.
Last, what can this Committee do to enhance competition?
Since it's unlikely that amendments to the 1996 Act will be pursued this Congress, ICTA would encourage you to have further oversight of the above issues. Learn the details. If you agree with ICTA, then push the FCC to act on rulemakings to reduce or eliminate the barriers. That would be consistent with the purposes of the 1996 Act, that would enhance competition and that would benefit consumers.
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I am President of OnePoint Communications (''OnePoint''), which has been in operation since 1986. OnePoint provides multichannel video programming services as a franchised cable operator in several counties in Maryland and it also provides multichannel video programming services in certain parts of the District of Columbia, Maryland, Virginia, Pennsylvania and Connecticut as a private cable operator. OnePoint also provides private telephony services at an increasing number of these properties since the passage of the Telecommunications Act of 1996.
In addition to my position at OnePoint, I am also President of the Independent Cable & Telecommunications Association (''ICTA''). ICTA is a trade and service association comprised primarily of private cable and telephony operators, property owners and managers, and vendors of cable and telephone equipment. Private cable and telephony operators primarily serve multiple dwelling units (''MDUs''), including apartments, condominiums, cooperatives, planned unit developments (''PUDs''), college campuses, hotels/motels, marinas and prisons.
A private cable operator provides service through what is commonly referred to as a satellite master antenna television (''SMATV'') system. A SMATV system ordinarily receives and distributes video programming in a manner similar to a franchised cable system. That is, a SMATV system uses satellite dishes and antennas to receive the programming signals, related equipment to combine, amplify and process the signals, and wiring to distribute the signals to the individual dwelling units. SMATV systems differ from franchised cable systems in that SMATV systems usually serve a single building or small number of buildings in relatively close proximity to each other, thereby avoiding the need to have wires that cross public streets and rights-of-way, which in turn obviates the requirement that the operator receive a franchise. Some private operators have begun using wireless technology, and specifically 18 GHz microwave facilities, to link MDUs that are separated by public rights-of-way. The Federal Communications Commission has ruled that the use of 18 GHz microwave facilities to link MDUs does not trigger the need for an operator to obtain a franchise.
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On the telephony side, private telephone operators provide local exchange, intralata and long distance services, for example, to MDU residents primarily through incumbent local exchange interconnection and resale, but increasingly through direct facilities based competition. Whether shared tenant services providers or competitive local exchange carriers, private telephone operators are a fast-growing segment of the wireless and wireline telephony industry.
The MDU marketplace has become the fulcrum for whatever real competition exists for the delivery of multichannel video services. Over twenty-seven percent of the U.S. population resides in MDUs which together represent some thirty million units nationwide. The construction of MDUs exceeds twice that of single family homes. The MDU market is attractive to all video service providers alike, since a large number of subscribers can be accessed simultaneously. The private cable industry is uniquely situated as a competitive alternative to cable franchisees because of the industry's ability to tailor its programming services to match the demographics of a particular MDU community, e.g., seniors, military, young professional, families with children, rather than offering a standard programming package throughout the municipal or county area.
Most private cable operators offer approximately 4070 channels of video programming and many of these operators also provide telephony (including cellular) and Internet service to their subscribers. Private cable operators currently serve approximately two million subscribers nationwide. This number pales in comparison to the more than sixty two million subscribers currently served by franchised cable operators in the United States.(see footnote 143) In fact, eighty nine percent of multichannel video programming subscribers in this country still subscribe to the franchised cable operators' service,(see footnote 144) notwithstanding (i) many private cable operator's provision, at a lower cost, of programming packages similar or better to those offered by franchised operators; and (ii) the increased presence of several DBS providers and many other providers using different technologies. In fact, one of the avenues that the private cable and DBS industries are exploring as a means of increasing competition to the franchised cable industry is to join forces for the delivery of video services to MDUs. In such fashion, MDU residents will have available to them programming packages at competitive rates ranging from basic lifeline tiers to the fullest complement of channels possible, including pay-per-view and interactive services.
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While some obstacles to competition in the market for the delivery of video services have been eliminated (such as the requirement that a private operator obtain a franchise even though its system does not cross public streets or rights-of-way if it serves buildings that are not commonly owned and managed), many legal roadblocks still remain. These impediments enable franchised cable operators to maintain a near, if not complete, monopoly in most franchised areas despite their continual increase of rates. Some of these legal obstacles to robust competition in the video services markets are briefly set forth below.
Access to Inside Cable Wiring
In the Cable Television Consumer Protection and Competition Act of 1992 (the ''1992 Act''), Congress required the Commission to ''prescribe rules concerning the disposition, after a subscriber to a cable system terminates service, of any cable installed by the cable operator within the premises of such subscriber.'' 47 U.S.C. §544(i) (1995) (''Section 16(d)''). I believe Section 16(d) should be clarified in the MDU context to permit the MDU owner to purchase all of the cable wiring inside the MDU at the time the cable operator's service is terminated. Such a clarification could be effected by adding a sentence to Section 16(d) providing that ''[F]or the purposes of this provision, [i]n the MDU context, the subscriber shall be deemed to be the owner of the MDU.'' As shown below, this clarification would greatly further competition in the video services market for MDUs.
A cable provider uses two wiring components to service an MDU: common wire and wire dedicated to individual rental units (''homerun wire''). Common wire ordinarily runs to the junction box in each building at which point it is connected to the multitude of separate, homerun wires that run continuously to and within the individual rental units. Section 16(d) does not cover, nor am I suggesting it should, the common wiring. My concern with Section 16(d), and the reason a clarification is necessary, arises from the Commission's apparent belief that Congress reference to the subscriber in that provision was a reference to the tenant in the MDU context. As a result, the Commission promulgated regulations (the ''12 inch rule'') providing that the only wiring that the subscriber in an MDU could purchase upon termination of the video services provider's service was the portion of the homerun wire that was in the MDU unit (i.e. in the tenant's premises) or within 12 inches of that unit (which point is often located in the middle of a wall). The Commission has not, because it believes it cannot given its interpretation of Section 16(d), required the incumbent video services provider to sell all of the homerun wire at the time its service is terminated. Such failure to compel the cable operator to sell all of the homerun wire to the MDU owner at the time of termination has an enormous detrimental impact upon the growth of competition in the MDU market.
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Under the 12 inch rule, competitors to franchised cable operators are frequently precluded from competing with, or replacing, franchised cable operators at MDUs where the property owner does not own the wiring. As the Commission has found, property owners often refuse to allow installation of a second set of homerun wires throughout their buildings ''for reasons including aesthetics, space limitations, the avoidance of disruption and inconvenience, and the potential for property damage.''(see footnote 145) Accordingly, property owners routinely insist that a competitor to the incumbent franchised cable operator may only service the MDU (whether in addition to, or in replacement of, the franchised operator) if the competitor uses the homerun wiring currently running throughout the building.
The homerun wiring ordinarily was installed many years earlier by the franchised cable operator, who has already more than fully recouped its investment on the wiring and who would ordinarily not remove the wiring after termination of service because it costs more to remove than it is worth. Nevertheless, the franchised operator invariably will claim that it owns the homerun wiring on the property and threaten to sue the property owner and the competitor for conversion and tortious interference if the property owner allows the competitor to use the homerun wiring. Often the issue of who owns the wiring is unclear, and therefore the property owner, faced with the prospect of becoming embroiled in a large and highly expensive and visible law suit, backs down and allows the franchised operator to retain exclusive access to the property. The 12 inch rule encourages this result by preventing property owners from acquiring all of the homerun wiring so that the property owner can add providers or change providers without facing the Hobson's choice of defending a lawsuit or incurring the cost, impairment, risk, disruption and inconvenience associated with adding another set of wires throughout the building. As the Commission recognizes, the litigation threat is often ''employed aggressively by the incumbent [and] [t]he result is to chill the competitive environment.''(see footnote 146)
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Given the Commission's apparent belief that Congress has not given it authority under Section 16(d) to compel the incumbent provider to sell all of the homerun wiring to the MDU owner at the time of service termination, the Commission has recommended adopting a compromise proposal. This proposal, which is based on a compromise proposal submitted by our trade association, ICTA, would require an incumbent provider to make an election as to whether it will sell, remove or abandon the homerun wiring (other than the wiring in or within 12 inches of the tenant's unit) at the time of termination.(see footnote 147) This proposal, if adopted, will provide some benefit to competition because it will prevent the incumbent provider from falsely claiming that it will remove the wiring, thereby forcing the alternative provider to install new homerun wiring, after which time the incumbent provider simply abandons or disables the wiring. It is axiomatic that it is anticompetitive for the incumbent provider's false claims that it will remove the wiring to lead to a rewiring of the building by the alternative provider.
The proposal, however, will not provide the full benefit that is needed in this area. Franchised operators can undercut the effectiveness of the proposal by simply electing to remove the homerun wiring after their service is terminated, thereby forcing property owners to stay with the incumbent or undergo the cost, impairment, risk, disruption and inconvenience associated with the installation of the alternative provider's homerun wiring. To eliminate this anticompetitive dilemma, Section 16(d) should be clarified in the manner I proposed above. If Section 16(d) is so clarified, a property owner's decision of which provider to select will be based upon factors that are important to tenants such as price, quality of service, and channel selection, instead of factors that are unimportant to tenants, such as the property owner's fear of being dragged into a lawsuit or concern over the effects of rewiring the property.
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Discriminatory Mandatory Access Statutes
Fifteen states and the District of Columbia have passed cable mandatory access statutes, and in other states, municipalities have enacted cable mandatory access ordinances. With few exceptions, each of these laws discriminates in favor of franchised cable operators and against all other video service providers. These discriminatory laws give franchised cable operatorsand no other video services providersthe right to force their way onto the private property of multiple dwelling units and/or associations over the objections of the owners or associations. These laws allow franchised cable operators to condemn private property even in circumstances where the property owners and associations have arranged for and offer similar cable services to the residents using competitive technologies such as private cable, MMDS, 18 GHz, or DBS. I believe Congress should preempt such discriminatory mandatory access laws, which are contrary to the public interest, discourage competition, and benefit no one but the near or complete monopolist franchised providers.
The public benefit derived from further entrenching a local monopolywhich is exactly what these laws dois nil. Under these discriminatory mandatory access laws, while non-franchised operators are precluded from entering into exclusive contracts, franchised operators may enter into such contracts whenever they want. To force head-to-head ''competition'' only at those multifamily dwellings whose landlords or condominium boards or homeowner associations have chosen a different supplier while leaving the rest of the municipality subject to the de facto exclusive service of the cable franchisee injures the public as it further solidifies the position of the near or complete monopolist. When coupled with the incumbent cable operator's ability to lower rates (but only in the face of competition) on a property-by-property basis, the results are predatory in nature and should be prohibited.
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Competition is greatly impaired where discriminatory mandatory access laws exists. Entry by private cable, MMDS, DBS or 18 GHz operators, for example, has been and will surely continue to be chilled in mandatory access states as a result of the preferential treatment of the franchised operators. In fact, most ICTA members do not willingly operate in states or municipalities with mandatory access laws or ordinances. Both the Commission and the courts have recognized the obvious anticompetitive nature of such laws.(see footnote 148)
In sum, discriminatory mandatory access laws conflict with the reality that a competitive marketplace now exists for the delivery of multichannel video programming services, treating cable franchisees alone as if they were providing a natural monopoly, utility-type service. These laws have no place in the dynamic, competition-oriented telecommunications environment of the mid-1990's and are wholly at odds with the pro-competitive spirit of the Telecommunications Act of 1996 (the ''1996 Act''). Congress should preempt these laws and instead allow competitive marketplace forces to govern.
Perpetual Contracts Linked to the Franchise and All Renewals or Extensions
Another impediment to competition in the video services market are the existence of a multitude of contracts between franchised cable operators and MDU owners that last for the length of the operator's franchise and any renewals or extensions thereof, or that have similar language. Agreements utilizing this language, which ordinarily were form, ''take it or leave it'' contracts drafted by the franchised operator, constitute ''perpetual contracts'' because their terms dictate that they will or almost certainly will remain in effect forever given that it is exceedingly rare for a franchise not to be renewed. Moreover, the agreements are typically transferable to successors and assigns further ensuring their perpetual duration.
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The practical result of this type of service agreement is that the owner's choice of provider is restricted forever. If the contract contains an exclusivity provision, the property owner simply cannot ever contract with an alternative provider without violating the agreement. Even if the agreement does not contain an exclusivity provision, it may not be economically feasible for another operator to provide service to the property in tandem with the franchised operator. In either situation, there may never be alternative providers even seeking to serve the property. These contracts cannot be justified based upon business necessities such as the need to recover costs. The terms of these perpetual contracts extend well beyond the period necessary for the cable operator to recoup its investment.
The unfairness in enforcing these agreements in perpetuity stems not only from their perpetual duration in an era where competition should reign, but also from two other factors. First, these perpetual agreements were often executed years ago when the operator was the only provider in town and the property owner had no choice but to execute the agreement if it wanted to provide its tenants with cable. Second, many property owners were unaware at that time (and some still are) that the language used in these form contracts would result in a perpetual agreement because they lacked knowledge of the regularity with which franchises are renewed.
For these reasons, Congress should prohibit franchised cable operators from locking property owners into perpetual service agreements linked to the term of the operator's franchise and all renewals or extensions thereof. Congress should require that all future service agreements between franchised operators and property owners include a durational provision that states that the agreement will remain in effect for a specific term of years, thereby providing property owners with clear notice of the effective duration of the agreement. This will also ensure that the market is invigorated at regular intervals by alternative providers attempting to win away properties served by incumbent franchised operators.
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Existing service agreements linked to the term of the franchise and any renewals or extensions should be subjected to a ''fresh look'' policy wherein property owners are given a set period of time to renegotiate such contracts for a set term of years or enter into a new contract with an alternative supplier.
The inability of non-franchised video service providers to obtain access to programming hinders their ability to compete with franchised operators. Pursuant to the 1992 Act, the Commission partially addressed this concern. At that time, the Commission promulgated rules that, with certain exceptions, prohibited satellite-delivered programming vendors that were vertically integrated with cable operators from denying other service providers with access to the vendors' programming.
I believe these rules do not go far enough. There is no valid reason why the program access rules do not apply to non-satellite delivered programming. A microwave-delivered programming vendor can just as easily discriminate against non-franchised providers as a satellite-delivered programming vendor. Congress should amend the law to make it clear that the program access rules should apply regardless of the means by which the programming is delivered.
The program access rules should also apply regardless of whether the programming vendor is vertically integrated, and Congress should amend the law accordingly. Given franchised cable operator's dominance of the nationwide market, it is critical for non-vertically integrated programmers (as well as vertically integrated programmers) to have their programming shown on franchised operator's systems. Therefore, franchised operators are in a position to exercise great influence over non-vertically integrated programmers, and such influence can lead to such programmers refusing to give access to their programming to non-franchised operators. Thus, the protections of the program access rules should be extended to apply where the programmer is not vertically integrated.
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Taxes as Franchise Fees
While Congress has exempted DBS providers from any tax or fee imposed by any local taxing jurisdiction, it has not provided other alternative providers with the same protection. As a result, while municipalities cannot require alternative providers to obtain a franchise and pay the corresponding five percent franchise fee, many local taxing authorities impose a five percent tax on such alternative operators as a back-door means of receiving a franchise fee. Alternative providers such as private, MMDS and 18 GHz operators should not be disadvantaged vis a vis DBS providers and should receive the same protection from local taxation received by the DBS providers.
One additional impediment to robust competition may result from an improper construction of the provision in the 1996 Act amending the requirement that a franchised operator maintain a uniform rate structure throughout its franchise area. Under the 1996 Act, a franchised operator may offer bulk discounts to multiple dwelling units unless there are reasonable grounds to believe the discounted price is predatory.
Uniform rate requirements are important because they prevent the franchised operators from undercutting potential competitors by offering lower rates only in areas where competitors seek to offer a competing service. It is critical that exceptions to the uniform rate requirements are not so broadly applied as to swallow the rule. Thus, the bulk discount exception should only apply where the rates are negotiated and paid for by property management on behalf of all residents of the MDU. Some franchised operators have claimed that bulk discounts offered to individual subscribers in MDUs is also encompassed within the exception. Such an interpretation would leave the general rule with virtually no effect or meaning. Moreover, obviously discounts to an individual subscriber are not true bulk discounts. Instead, they would be targeted discriminatory per subscriber discounts subsidized by the single family home market still largely monopolized by the franchised industry.
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Competition will also be impeded if the Commission interprets the limitation on the bulk discount exception to apply only where there is an antitrust violation. Congress has always recognized that the antitrust laws apply to telecommunications providers, and therefore it certainly meant to carve out an additional limitation to the exception where it provided that bulk discounts to MDUs cannot be predatory. This view is further bolstered by the number of years antitrust cases ordinarily take to resolve and the lack of clarity of federal antitrust law. If the limitation to the bulk discount exception is to have any practical effect whatsoever, a bright line test must be established so that an alternative provider can readily ascertain whether there may be a violation, and pursue such matter without incurring the expenditure of enormous attorneys' fees normally associated with an antitrust case. For example, the law should require that for a competitive provider to make a prima facie showing of a violation it must establish that the franchised operator is charging two like MDUs prices that differ by at least ten (10) percent. At that point, the burden would shift to the cable operator to prove an economic justification for the difference. Without such a bright line test, the limitation to the exception will not have any benefit whatsoever as alternative providers will never pursue such a claim for fear of becoming involved in an inordinately expensive, highly unpredictable, litigation against an opponent with greater resources.
Thank you for the opportunity to present these views on how to increase competition in the provision of broadband telecommunications services.
Mr. HYDE. Thank you very much, Mr. Norcutt.
And now, as in the wedding feast at Cana, we have saved the best for last. [Laughter.]
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Mr. Kimmelman, you're happily recognized, and I know you will condense your remarks to five minutes, more or less.
STATEMENT OF GENE KIMMELMAN, CO-DIRECTOR, CONSUMERS UNION
Mr. KIMMELMAN. I certainly will, Mr. Chairman.
Mr. HYDE. Thank you.
Mr. KIMMELMAN. And on behalf of Consumers Union, I thank you for inviting us to testify.
You've heard a lot of talk today about competition. We support all these entrepreneurial efforts to compete. It's good for consumers. Unfortunately, consumers aren't really seeing a lot of it. They're not seeing enough of it. Cable rates are going up and up and up. The newest numbers from the Bureau of Labor Statistics show that, since you passed the Telecom Act of 1996, rates are up 14 percent. The Baltimore Sun just reported Comcast raising rates a little over $3. in Phoenix, AZ the newspaper reports rates going up over $2 from Cox. It's happening everywhere. Rates are up more than three times faster than inflation, about the same rate as when cable was an unregulated monopoly between 1986 and 1992. The FCC's regulations are doing nothing to restrain monopolistic pricing, and so we're waiting and waiting for the competition, but in the meantime consumers need relief.
Page 223 PREV PAGE TOP OF DOC You heard Chairman Hundt this morning talk about the cost of programming driving this. Well, this is supposed to be a competitive industry where programmers compete and bargain with operators in each of their self-interests for the best deal. But look at the industry structure. You have 8 of the 13 most popular cable channels owned by cable companies. You have the largest cable companies owning more than 60 of the popular cable channels. The programmers are the big cable companies predominantly, and as you've heard, they're leveraging even those who are not within the family, but want to be close to the family. So they control the price of programming. They control the price of cable television service. The FCC's regulations pass it all on to the consumer. They pass it on to the competitor, if the competitor can get it, and prices are going up across the board for everybody.
The two largest cable companies in this country dominateTCI serves about a third of all cable subscribers and Time Warner serves 19 percent of all cable subscribers, and TCI, through Liberty Media, is allowed to now own 9 percent of Time Warner. Fifty-five percent of cable subscribers are tied up in these two companies that own the lion's share of popular cable programming.
What we fear, Mr. Chairman, is that, even with new players coming to the table trying to compete, there is likely to be little price competition if this cable cartel is allowed to persist, is allowed to grow as it has in the past. The FCC has the power to do something about this. You granted them the power in 1992. You gave them the directives when rates were going up three times faster than inflation then, as they are today, to set reasonable rates, to impose appropriate limits on the number of systems a cable company can own, the number of subscribers it could reach, the amount of programming it could own. You gave them the power, the authority, as Mr. Anstrom says, to attack all sorts of discriminatory anti-competitive practices, to make sure there was appropriate access to programming. The FCC is doing virtually nothing in furtherance of your goals of competition and reasonable pricing that you mandated in the 1992 Act and maintained in the 1996 Act.
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You've heard about the ventures. Mr. Oristano explained the Murdoch venture, the great satellite competition that went poof, and now Mr. Murdoch is part of the cable cartel. He gets to buy new channels. He gets to joint venture with cable companies. He gets carriage of his channels. And he offers his satellite license to the satellite company controlled by the cable industrymore domination by the cartel.
To address these problems, Mr. Chairman, Consumers Union yesterday filed a rulemaking petition with the FCC. I've given this to your counsel, and would ask that it be put in the record. This petition asks the FCC, first, to freeze rates, as they did when they were going up three times faster than inflation in 1993, so they can readjust their rate formulas, make sure consumers aren't being gouged; to impose reasonable horizontal limits, ownership of systems, vertical limits, ownership of programming, and to address complaints about access, like you've heard today.
We ask that you and this committee push the FCC to follow through on doing its job, doing what you demanded they do under the 1992 Act. And we ask that you look into finetuning the 1996 Telecom Act to ensure that consumers start getting more competition, lower prices, more choices, and put an end to the price-gouging by cable monopolies. Thank you.
[The prepared statement of Mr. Kimmelman follows:]
PREPARED STATEMENT OF GENE KIMMELMAN, CO-DIRECTOR, CONSUMERS UNION
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Despite significant Congressional efforts to promote competition to local cable monopolies, consumers face ongoing excessive rate increases for cable services. Cable rates are rising just as fast now (three times the rate of inflation) as they did when cable was an unregulated monopoly. Consumers Union believes that the goals of the 1996 Telecommunications Act can only be achieved by putting a lid on rates, cracking down on monopolistic practices and by promoting new alternatives to cable.
In response to deregulatory pressure from Congress and the numerous new responsibilities imposed by the 1996 Act, the FCC has virtually abandoned its responsibility to address concerns about excessive cable rate increases and continued concentration of ownership by the largest cable companies. According to the FCC's own market analyses, a few large cable companies dominate the ownership and distribution of cable programming.
Ongoing consolidation of ownership in the cable industry raises further concerns about the likely development of competition. The merger of Time Warner with Turner Broadcasting has created a competitively dangerous link between the largest entrepreneurs in the cable industry.
Since this merger, TCI has engaged in a number of market transactions that, if not blocked by antitrust and regulatory authorities, will further consolidate TCI's and Time Warner's market dominance. In June, TCI announced plans to purchase 33% of Cablevision Systems Corp., expanding its stake in cable systems to cover about one-third of all cable subscribers (not including TCI's 9% interest in time Warner, which serves about 19% of cable subscribers).
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These transactions coincide with a number of other deals between Rupert Murdoch, TCI and Time Warner. After threatening to launch a competitive challenge to the cable industry by joining forces with EchoStar's satellite television business. Murdoch abandoned EchoStar in return for a share of the cable-controlled satellite system (Primestar) and carriage of his Fox news channel on cable industries Primestar partnersTCI, Time Warner, Comcast, US West (formerly Continental Cablevision) and Coxwill control massive satellite capacity that could have been used to offer competition to the cable industry.
Preoccupied with numerous, time constrained proceedings designed to open the local and long distance telephone markets to more competition, the FCC has failed to address the excessive video concentration and monopolistic pricing its own analyses identify. Since passage of the 1996 Act, cable rates are rising at a faster rate than ever before. It is therefore time for Congress to remind the Commission that it has the responsibility to ensure reasonable rates, prevent monopolistic practices and promote vigorous competition for cable services.
Despite significant Congressional efforts to promote competition to local cable monopolies, consumers face ongoing excessive rate increases for cable services. Even after Congress opened the cable market to competition from local telephone companies and eliminated significant impediments to competition from satellite and wireless video providers, very few consumers have a cost-effective alternative to paying the monopolistic prices charged by their cable company. Consumers Union(see footnote 149) believes that the goals of the 1996 Telecommunications Act (1996 Act) can only be achieved by putting a lid on rates, cracking down on monopolistic practices and by promoting new alternatives to cable.
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I. Cable's History of Monopolistic Practices
In 1992, Congress imposed stringent pricing, ownership and behavioral limitations on a cable industry that had reinforced its market dominance since being substantially deregulated in 1984.(see footnote 150) After six years of relaxed regulation, Congress found that:
The average monthly cable rate has increased almost three times as much as the Consumer Price Index since rate deregulation . . .
(4) The cable industry has become highly concentrated. The potential effects of such concentration are barriers to entry for new programmers and a reduction in the number of media voices available to consumers . . .
(5) The cable industry has become vertically integrated; cable operators and cable programmers often have common ownership. As a result, cable operators have the incentive and ability to favor their affiliated programmers. This could make it more difficult for noncable-affiliated programmers to secure carriage on cable systems. Vertically integrated program suppliers also have the incentive and ability to favor their affiliated cable operators over nonaffiliated cable operators and programming distributors using other technologies.(see footnote 151)
Under the 1992 Act, the Federal Communications Commission (FCC) imposed price limitations on cable rates found to be ''unreasonable,'' developed extensive rules to prevent cable companies from discriminating against unaffiliated video distributors and programmers, and established ownership limits designed to prevent further monopolization in the cable industry. While these measures initially saved consumers more than $3 billion on their cable bills(see footnote 152) and began to open the market to competition, the FCC has virtually abandoned its efforts to police market abuses and challenge inflated rates. As a result, Congress' goal of reducing cable rates to a reasonable level and promoting broad-based, head-to-head competition is being undermined.
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II. Increased Concentration and Rate Hikes
In response to deregulatory pressure from Congress and the numerous new responsibilities imposed by the 1996 Act,(see footnote 153) the FCC has virtually abandoned its responsibility to address concerns about excessive cable rate increases and continued concentration of ownership by the largest cable companies. According to the FCC's own market analyses, a few large cable companies dominate the ownership and distribution of cable programming:
Between 1995 and 1996, concentration of cable systems at the national level increased, . . . In the 1995 Report, we found that the four largest cable MSOs served 55% of all cable subscribers nationwide, with TCI (with a subscriber share of 26%), Time Warner (16%), Continental (7%), and Comcast (6%) being the four largest. In the past year, the percentage of cable subscribers served by the four largest MSOs has risen to 61.40%, with TCI (27.94%), Time Warner (18.94%), Continental/US West (7.69%), and Comcast (6.83%) remaining the four largest . . .
Overall, the size of vertically-integrated ownership interests has remained nearly the same. Cable MSOs, either individually or collectively, own 50% or more of 47 national cable programming networks, compared with 45 networks last year . . .
Vertical integration continues to involve principally the largest cable system operators. The eight largest cable MSOs have a stake in 63 of the 64 vertically-integrated services, or in 98% of all such services.(see footnote 154)
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Ongoing consolidation of ownership in the cable industry raises further concerns about the likely development of competition. The merger of Time Warner with Turner Broadcasting has created a competitively dangerous link between the largest entrepreneurs in the cable industry. Although the Federal Trade Commission (FTC) attempted to limit the involvement of Tele-Communications Inc.'s (TCI) John Malone (more than 9% owner of Time Warner) in the control of Time Warner, the merger nonetheless unites the owners of cable systems serving approximately one-half of all subscribers and owning many of the most popular cable programming networks. As the FTC noted, there are grave dangers associated with this type of merger given the concentrated nature of the cable market:
The sale of Cable Television Programming Services to MVPDs (Multichannel Video Programming Distributors) in the United States is highly concentrated, . . .
Entry into the relevant markets is difficult, . . .
Entry into the production of Cable Television Programming Services for sale to MVPDs that would have a significant market impact and prevent the anticompetitive effects is difficult. It generally takes more than two years to develop a Cable Television Programming Service to a point where it has a substantial subscriber base and competes directly with the Time Warner and Turner ''marquee'' or ''crown jewel'' services throughout the United States. Timely entry is made even more difficult and time consuming due to a shortage of available channel capacity . . .
Entry into the sale of Cable Television Programming Services to households in each of the local areas in which Respondent Time Warner and Respondent TCI operate as MVPDs is dependent upon access to a substantial majority of the high quality, ''marquee'' or ''crown jewel'' programming that MVPD subscribers deem important to their decision to subscribe, and that such access is threatened by increasing concentration at the programming level, combined with vertical integration of such programming into the MVPD level.(see footnote 155)
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Since this merger TCI has engaged in a number of market transactions that, if not blocked by antitrust and regulatory authorities, will further consolidate TCI's and Time Warner's market dominance. In June, TCI announced plans to purchase 33% of Cablevision Systems Corp., expanding its stake in cable systems to cover about one-third of all cable subscribers (not including TCI's 9% interest in Time Warner, which serves about 19% of cable subscribers). This transaction would also expand TCI's partial ownership of 14 regional sports channels to include Cablevision's Rainbow Media Holdings, which consists of Madison Square Gardens, the New York Knicks, the New York Rangers, and 8 additional regional sports channels.(see footnote 156) Then, TCI attempted to expand its stake in Rainbow by joining with Rupert Murdoch's News Corp. to purchase an additional 40% stake in Rainbow's sports assets.(see footnote 157)
These transactions coincide with a number of other deals between Rupert Murdoch, TCI and Time Warner. After threatening to launch a competitive challenge to the cable industry by joining forces with EchoStar's satellite television business, Murdoch abandoned EchoStar in return for a share of the cable-controlled satellite system (Primestar) and carriage of his Fox news channel on Time Warner systems.(see footnote 158) If this transaction is approved by antitrust and regulatory authorities, the cable industries Primestar partnersTCI, Time Warner, Comcast, US West (formerly Continental Cablevision) and Coxwill control massive satellite capacity that could have been used to offer competition to the cable industry.
The chain of events that brought Rupert Murdoch into the cable cartel demonstrates the overwhelming market power of the largest cable companies. This spring, Rupert Murdoch's News Corp. proposed a major competitive assault on the cable industry by attempting to combine his satellite capacity (jointly owned with MCI) with the satellite system of EchoStar Communications Corp. As Mr. Murdoch described the venture to the Senate Commerce Committee on April 10 of this year:
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. . . DBS still has not made major inroads against cable. Why? For three major reasons: the minimum $700 up-front outlay required for current DBS services is too expensive; current DBS services do not easily or economically serve multiple TV sets in the home; and the DBS program package does not include local broadcast stations. . .
Subject to merger approval, SKY plans to come to market this Fall with a service that does overcome these limitations. . .
The up-front costs for SKY subscribers will include only around fifty dollars to purchase the dish itself, plus a fifty dollar refundable deposit per converter box and a reasonable installation charge. With that, consumers can receive hundreds of channels of digital pictures with CD quality sound.
Finally, SKY will overcome the most difficult hurdle. We will bring viewers their local broadcast stations as a part of the basic package. . .
Charlie Ergen and I are truly excited about the pro-competitive service we want to bring to market in a few short months. For the first time, when consumers choose between cable and DBS offerings, the choice before them will be between two equivalent service to multiple sets in the home and equivalent sign-up costs. . .
. . .SKY is willing to risk a three billion dollar capital investment to bring consumers a better choice now. . .
Page 232 PREV PAGE TOP OF DOCIf you give the legal authority to compete, the rest is up to us.(see footnote 159)
Now it is Fall, and there is no SKY. As abruptly as this competitive threat appeared on the horizon, it vanished and was transformed into an effort to expand cable's control over potential satellite competition. The cable industry did not take kindly to Murdoch's competitive efforts and launched a counterattack:
As the cable industry descends on New Orleans today for its annual trade show, it is launching a legal, political and advertising assault aimed at blocking or at least slowing down the new service, reviled in cable circles as the Death Star. Although Sky is scheduled to begin operating next year, it must clear regulatory hurdles involving market concentration, foreign ownership and copyright violations. The cable industry plans to exploit all these in a bid to topple Sky.
The cable industry will marshall its forces against rival Rupert Murdoch's plan to beam hundreds of TV channelsincluding local TV stationsinto peoples homes via satellite, cable giant Ted Turner declared yesterday.
'' We re going to make it as tough for him as we possibly can. Kind of like the Russian army did with the German army,'' said Mr. Turner, Time Warner Inc. vice chairman. . .(see footnote 160)
While the Bureau of Labor Statistics reports that since passage of the 1996 Act, cable rates shot up about 12% (compared to an inflation rate of 3.6%),(see footnote 161) the FCC has found that cable subscribership has expanded as consumers cannot find a lower priced alternative:
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In all but a few local markets for the delivery of video programming, the vast majority of consumers still subscribe to the service of a single incumbent cable operator. The resulting high levels of concentration, together with impediments to entry and product differentiation, mean that the structural conditions of markets for the delivery of video programming are conducive to the exercise of market power by cable operators . . .
During 1996, the cable industry's total basic subscribership, total homes passed, basic penetration, and premium channel subscriptions have reached all-time highs . . . Subscribership grew from a total of 59.7 million at the end of 1994 to 62.1 million at the end of 1995, a 4.0% increase . . . This increase in penetration is the second largest annual increase since 1977. According too at least one analyst, industry subscribership appears to be growing at approximately a 3% growth rate during 1996.(see footnote 162)
When seeking reduced regulation during Congressional consideration of the 1996 Act, the cable industry claimed that potential competition would prevent the excessive rate increase consumers have been experiencing:
But he [Mr. Anstrom] says that the looming threats of imminent competition will keep cable operations honest.
''If I'm running a variety store, and I learn that WalMart is buying a parcel of land and they'll open in 18 months, what am I going to dojack up my prices and alienate my customers? No Way,'' Mr. Anstrom says.(see footnote 163)
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Apparently, no ''WalMarts'' are anywhere in sight to challenge the cable ''variety store'' monopoly.
Now the cable industry is blaming its rate increases on the rising cost of programing.(see footnote 164) What the cable industry fails to mention, however, is the fact that eight of the thirteen most popular cable networks are substantially owned by cable operatorssee Table 1, and a substantial portion of overall cable programming is owned by the largest cable companiessee Table 2. It appears that the largest cable companies, knowing that programming costs can be passed through to consumers and competitors with the FCC's relaxed regulations, have made programming their profit center. The FCC points out that, while the price of regulated cable programming shot up 19% in 1995, the price of premium channels (including the most expensive movies) and broadcast channels (the most expensive, popular network programming) rose only 2%.(see footnote 165)
Preoccupied with numerous, time constrained proceedings designed to open the local and long distance telephone markets to more competition, the FCC has failed to address the excessive video concentration and monopolistic pricing its own analyses identify. Since passage of the 1996 Act, cable rates are rising at a faster rate than ever before (see Figure 1). It is therefore time for Congress to remind the Commission that it has the responsibility to ensure reasonable rates, prevent monopolistic practices and promote vigorous competition for cable services.
III. Slow Growth of Competition
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One of the biggest disappointments so far, under the 1996 Act, has been the retreat of the local telephone companies from their previous desire to compete against the cable industry. After years of clamoring to offer competition to the cable industry, the local telephone companiesfully unshackled by the 1996 Act to enter the video market through four different streamlined approaches(see footnote 166)have done more backtracking than competing against cable. While Ameritech and BellSouth have made modest efforts to provide video services, the much ballyhooed Bell company Tele-TV initiative went from a major potential competitor to the dust-heap last year:
Sixteen months ago, Mr. Grushow agreed to take over the programming arm of Tele-TV, a television joint venture owned by Bell Atlantic, Nynex and Pacific Telesis. The three companies had set a lofty goal: to develop an interactive alternative to cable television . . .
The Baby Bells originally planned to roll-out Tele-TV to 30 million homes in six of the nation's seven largest markets by the end of the century . . .
But after repeated delays in technology and a tectonic shift in regulations, the Baby Bells now admit that getting into television is only one of several priorities. Having completed his design for Tele-TV, Mr. Grushow wonders how many people will ever see it.(see footnote 167)
Tele-TV, the high-profile programming alliance owned by three Baby Bells, has been ordered to slash its budget, slow down hiring and delay development of interactive fareostensibly the reason the unit was formedfor at least another year.(see footnote 168)
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Bell Atlantic Corp., Nynex Corp. and Pacific Telesis Group are taking steps to shut down Tele-TV, . . . they have basically abandoned their hopes of leading the way on development of the next generation of interactive fare amid technical difficulties, rising costs and vast changes in the market.(see footnote 169)
The Bell company pull-back from aggressive video competition has also occurred in the wireless market. The FCC found that the only operational wireless system owned by a local phone company is a 42,000 subscriber system in California.(see footnote 170) Recently Bell Atlantic abandoned a digital trial in Fairfax, Va.,(see footnote 171) and in conjunction with Nynex, appears to have bailed out of wireless altogether:
Bell Atlantic Corp. and Nynex Corp. said they plan to ''suspend'' their agreement with a small wireless cable operator, CAI Wireless Systems Inc., . . . The move sets the stage for the two Bells to bail out of that business altogether as they pursue other opportunities.
The Friday announcement amounted to an about-face for Bell Atlantic and Nynex, which last year had hailed their pact with CAI as instrumental to speeding delivery of video entertainment and information service to millions of customers in the Northeast.(see footnote 172)
Interestingly, most of the Bell companies now believe they are better off investing their money in the long-term opportunity to move into the long distance businesseven though not a reality until statutory guidelines are metinstead of the immediate chance to compete with cable. For example, at the time they announced their proposed merger with Nynex, Bell Atlantic officials expressed relief that their previous ''pact'' with cable giant TCI ''foundered,'' as market analysts described the logic for the Bell companies to pull back from a video competition strategy:
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''The reason that long-distance carries the day over television is that it is just so easy,'' said William C. Bane, a telecommunications consultant at Merger Management Consulting in Washington. ''The problem with them getting into cable TV is that they don't have the plant,'' he added, referring to the miles of high-capacity cable typically required for video networks.(see footnote 173)
The large cable companies have gone through a similar backtracking from their previous aggressive talk about competing in the telephone business, reducing the local telephone companies' retaliatory incentives to compete against cable. Almost exactly two years ago, as Congress began deliberations on the Telecommunications Act, the Senate Commerce Committee received testimony from the cable industry stating unequivocally that ''. . . cable television companies are the most likely competitors to local phone monopolies . . .''(see footnote 174) Not only did cable claim it was the personification of telecommunications competition, it asserted that relaxing or eliminating cable rate regulation, to increase cable's cash flow, was necessary to make competition happen:
If you look at the entire structure, the competitive theory of the broad legislation in front of this committee, the theory is that you are going to allow the Regional Bell companies to move into manufacturing, information services, burglar alarm services, cable, other areas, and that their potential for anticompetitive behavior is going to be checked because they are going to have competition. And then you look around, and who is going to provide that competition?
And I would submit to this committee it is us. We are the other wire, and if we do not have the financial and investment environment to make those investments, those tens of billions of dollars, then the end result is that this committee and this Congress will have opened up a Pandora's box in terms of extending the regional phone companies' monopolies, and you will never close it again.(see footnote 175)
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Despite a strong cash-flow resulting from relaxed regulation of cable rates,(see footnote 176) the largest cable companies have virtually abandoned immediate efforts to compete with local telephone companies. For example,
Time Warner has already indicated it plans to substantially scale back both Orlando (futuristic Full Service Network) and its ambitious plans for the telephone business, a move that is expected to save the company about $100 million next year in capital expenditures. ''Our strategy to approach the telephone business is something we are reassessing,'' a Time Warner spokesman confirmed.(see footnote 177)
Shockingly, the most aggressive cable CEO, John Malone, has announced a full retreat from telephone competition:
John Malone, chief of the nation's biggest cable company, Tele-Communications Inc., has a stunning admission to make. His widely hailed vision for TCI's future as a multimedia powerhouse straddling television, telephones and the Internet, isn't working.
It was too ambitious, over hyped, and impossible to carry out on schedule, he says . . . ''The company got overly ambitious about the things it could do . . .''
He is abruptly revising his longstanding promise that TCI was set to become the powerful lord of the new information superhighway, using cable to deliver phone service, the Internet, and other futuristic interactive goodies.
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''If you read our annual report last year, you'd think we're one-third data, one- third telephone and one-third video entertainment, instead of 100% video entertainment and two experiments,'' he says . . .
With the zeal of a convert, he has a new sermon. The old cable industry is a perfectly good business to be in, and shouldn't be penalized for failing to deliver on all its promises, he says. Moreover, telephone companies have retreated as video competitors to focus on long-distance business.
''Right now, we've got zero revenue from residential telephone service, diminishing revenue from high-speed Internet, and $6 billion in revenue from video entertainment,'' he says.(see footnote 178)
With cable companies showing no sign of taking away a significant portion of the local telephone companies core business, it is no wonder that the telephone companies have lost their zeal to attack the cable market and compete aggressively for that business.
As a result of this telephone industry retreat, the biggest source of potential competition to cable comes from the growing satellite industry. However, with prices for necessary equipment still substantially above cable's rates, and the inability to offer local broadcast stations, satellite remains only a limited high end alternative to cable that the FCC has found inadequate to constrain cable pricing.(see footnote 179) Even the cable industry admits that Direct Broadcast Satellite is not cost competitive with cable:
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TCI spokesman Bob Thomson asserted yesterday that even with the increase, the company's prices are still a bargain compared with DBS.
At a news conference, the company displayed charts showing that the cost of service provided by one of its typical systems is about half that of the three leading DBS services, based on roughly equivalent program packages.
The widest disparity was between TCI's price and that of DirecTv/USSB, which is the leading DBS provider with more than 2 million customers . . .
Despite its growth, DBS services remain a higher-priced option for many, if not most, of cable's 65 million customers, particularly after factoring in the cost of equipment and installation. What's more, DBS hasn't completely displaced cable for avid viewers, since many DBS subscribers maintain basic cable service to receive local stations, which DBS services don't offer yet.(see footnote 180)
Consumers Union believes that the only immediate way to protect consumers from excessive cable rate increases is for Congress to have the FCC put a lid on prices and block monopolistic practices until effective competition develops in the video market. Without aggressive intervention in the increasingly monopolistic cable market, the competitive goals of the 1996 Telecommunications Act will never be achieved, and consumers will face spiraling cable rates without a reasonable choice of alternative service providers.
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INSERT OFFSET RING FOLIOS 26 HERE
Mr. HYDE. Thank you, Mr. Kimmelman.
And if I may, let me just start off the questioning. We've heard from cable companies justifying the increases. First of all, they say there are not big increases. There are definite, perceptible, palpable increases, but they say, with the increased revenue, they are able to support better programming and infrastructure repair and that a lot of the infrastructure has been there for a long time. It needs to be maintained and repaired, and so they need the extra revenue, and that you're really getting value received. What is your comment on that?
Mr. KIMMELMAN. A lot of responses. I don't believe that weand Ameritech can respond to thisI don't believe we allow telephone companies to overprice their services, jack up their rates to build their infrastructure. We try to allow reasonable return for telephone companies; cable companies should have a reasonable return, but no more.
The FCC's data show that when consumers have a choice, when they can buy channels, the premium channels, the prices have been flat or falling. While the price of regulated programming went up 19 percent, the price of the premium channels went up 2 percent. The price of broadcast programmingthat's supposed to be pretty expensive stuff to put together, the networks claim at leastwent up 2 percent. There's something fishy going on here.
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Mr. HYDE. Mr. Anstrom and Mr. Sapan, both of you argue that there are pro-competitive reasons for exclusive programming contracts. Why wouldn't you want to sell your programming to as many cable systems as possible?
Mr. ANSTROM. I think because, quite consistent with 200 years of history that this committee is very familiar with, Mr. Chairman, in terms of copyright and patent law, that creators of programming invest significant intellectual, creative, financial capital in terms of the development of programming. And if you step back and look at the program access law, it, frankly, is a major break with that tradition of copyright and patent protection for the creators of intellectual property, and that's what television programming is, whether it's HBO or Discovery or CNN.
Now we're complying with the 1992 law, which requires companies that are vertically-integrated to distribute their programming. But I think, as Joshua has pointed out, many times a new competitor or a new program network may seek to have an exclusive distribution arrangement to initially get wide distribution, to create brand identity that would come through certain marketing commitments that that distributor would make.
And, in fact, I think it's instructive to note that some of our competitors value exclusivity. Direct TV, for example, as Mr. Conyers pointed out again earlier this afternoon, has exclusive product in terms of the NFL packagesonly available on Direct TV. That helps advance the interest of the NFL, I assume, or they wouldn't have had that agreement. It also advances the interest of Direct TV. In the end, exclusivity to some extent clearly helps to promote diversity by stimulating the development of new programming.
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Mr. HYDE. Well, okay. Yes, Ms. Lenart.
Ms. LENART. May I comment on that? I have a very similar question because, from a programming perspective, intuitive economics would lead me to believe that you would want as many eyeballs carrying that programming as possible for increased advertising revenues, just more subscribers. I mean, you'd want as many people watching that programming as possible. So I fail to understand why a programmer would not want to make their programming available.
And to add to that, in our short period of time in the marketplace, less than 18 months, we've secured, as was quoted by many of the panelists here, over one in three cable providersover one in three cable customers are watching our competitive service. So as we continue to grow and to become more successful in the marketplace, why wouldn't a programmer want to ride our network? I don't understand. Let me talk you through an example of what might happen here:
Let's say TV Land wants to secure 20 million subscribers by the end of 1996; that's their profitability goal. They go toand this is an illustrative examplethey go to Cox Cable and say, ''Will you carry my programming?''
And Cox says, ''Sure, I'll give you my 4 million subscribers if you give it to me exclusively.''
Now I think that speaks to the examples that we were referring to. They're trying to lock-up programming, but that does not help consumers. It doesn't help competition, and it clearly can be led to other examples in programming, like Nickelodeon. So that's the reason that we're here appealing to you.
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Mr. HYDE. Thank you.
Mr. ORISTANO. Yes, I'd like to give a little firmer color on it, if I may, because I was very strongly lobbying for the 1992 cable act because many more programmers, prior to 1992, would not sell to us, and we heard all kinds of rationales about, you know, we don't sell to overbuilders; we don't want you to skim the cream; you know, you're new; we need to see you, your credit, your this, your that. And then the day the act was passed, and all their representatives started to call us and send the contracts over, when everything was done and the smoke cleared, and we got these people alone, they said, ''You know what? We really always wanted to sell you the stuff anyway, but the guys in the boardroom wouldn't let us do it.'' And at the end of the day, it always comes down to the equity interest.
You cannot paint Microsoft and NBS as poor programming entrepreneurs who need some kind of economic stimulus, and that's why they cut out PCTV, a wireless cable company with 75,000 customers nationwide, because the cable companies wouldn't carry their channel unless they didn't sell to PCTV. That's ridiculous. The cable companies bought their silence.
Mr. HYDE. Thank you.
Mr. SAPAN. Thank you. I just wanted to address what I mentioned in the testimony, which is we are in the business of regional programming and have four regional news channels in the New York area, each of which is relatively expensive and operates in a small geographic area.
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We have attempted to get the retailers to carry each of them on a specific channel, and it's been quite a challenge. As we go forward our plans, and our plans are to launch a regional arch channel, a regional education channel that's begun, and a regional weather and traffic channel, and others, our belief is that, for that package, that idea, to succeed, they'll all have to be on specific channels, so that the consumer knows where they are, and they'll have to editorially relate to each other, like sections of a newspaper; that the manner in which they're deployed will have to be very careful and rather unique, and that for that very practically to occur, being carried on one retail outlet in a geographic area will be very helpful in making that happen. So it's not a comment to wholesale, but, very specifically and practically for our plans, we think it really will be a practical way for us to proceed.
Mr. HYDE. Thank you.
Mr. Boucher, the gentleman from Virginia.
Mr. BOUCHER. Thank you very much, Mr. Chairman.
Mr. Oristano, let me begin with you, if I may. When we passed the program access rules in 1992, we basically provided that companies that had both programming and cable properties would have to make their programming available to competitors. We thought that in 1992 we had captured with that rule most of the programming that was really important, what people wanted to see.
My sense is that the landscape has changed rather dramatically since that time, and I would appreciate your telling the subcommittee just how important it is to you to have access today, not just to cable-affiliated programming, but to independently-produced programming as well.
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Mr. ORISTANO. Sir, you're absolutely right; the landscape has changed dramatically. For example, one of the vertically-integrated cable companies at the time of the 1992 act was Viacom, whose example I gave before, and they had to provide their programming as of the date of the act. However, they've since divested themselves of their cable assets to TCI, and at that time they made the channels we did not have under contract cable exclusive.
My fear is now that channels like MTV and NickelodeonNickelodeon is the single most popular cable channel in the country. It gets more programs in the top 10 than any other cable channel. Viacom has no obligation to sell that to us when the contract is expired, and yet we're not going to have any customers with children without Nickelodeon, So there's an example of the landscape having changed.
The other aspect in which the landscape has changed is that the cable operators and the broadcasters were thrown into the retransmission consent mix as a function of the 1992 cable act. They have now had time to work out a kind of modus vivendi of how they live together, which is the broadcasters say, ''We'll let you carry our channel if you carry this other new cable programming service.'' And the cable operators say, ''I'd be happy to carry your channel if you keep that one away from the telephone companies and the wireless companies.'' Shake hands; go away. And at the end of the day what you've got is the broadcasters are allowed to leverage their free public interest licenses into a mechanism that supports the cable monopoly.
Mr. BOUCHER. You mentioned Viacom earlier, and you indicated that at one time you had a contract with Viacom to supply the new service, TV Land, I believe, to you, and that Viacom then later changed its mind?
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Mr. ORISTANO. It was not a written contract. We had an agreement. We had negotiated all the terms. The contract was on the way, and then what happened was, as the sale started to get closer and closer of the cable systems, ''Well, the lawyer's on vacation. Well, the contract's late. Well, we'll get it to you shortly.'' And then one day, the day that the system sale closed, a very embarrassed representative from Viacom called us and said, ''Well, there's a problem.'' I mean, I don't get the sense that Viacom wanted to do that, because if you know Sumner Redstone's background, he has always been a champion of competition. He sued TCI. He sued Time Warner for antitrust. I think he had to do it.
Mr. BOUCHER. Ok, so Viacom would have liked to have gone through with this at least preliminary agreement they had with you and offered the programming to you.
Mr. ORISTANO. I think they would have
Mr. BOUCHER. Why do you think they changed their mind? What happened?
Mr. ORISTANO. I think they needed to unload assets and get $2 billion in cash on the balance sheet. All I can say is it happened simultaneously with this purchase of their cable systems, and it's just not coincidental, in my mind.
Mr. BOUCHER. Is this an example of one or more of the cable MSO's having said to Viacom, ''If you start sharing this program with our terrestrial competition, we're going to have second thoughts about carrying some of your program ourselves.''? Could that have been the problem?
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Mr. ORISTANO. I'm not so sure about that because I think Viacom produces excellent programs, and they can take the Nickelodeon platform and use that, which cable operators already carry, to promote TV Land, to make cable operators really want to carry it regardless.
I think the cable operators were able, through a combination of economic means and the particular circumstances surrounding the cable salehad a very fertile opportunity to make Viacom sort of see the light in this case. And for the record, I really think Viacom wanted to sell us, and for all I know, they still want to sell us today.
Mr. BOUCHER. Let me ask you, Ms. Lenart, just almost in a word because my time is limited here, do you have examples of instances where the cable industry has used its market power in order to prevent the independent programmers that you really need to acquire programming from from making that programming available to you, on the threat of perhaps not carrying that programming on the systems, if it is made available to you?
Ms. LENART. Well, Viacom is, clearly, one example where that has happened. But what we continue to monitor very closely is the availability of the regional sports networks. Examples I can cite you specifically might be the Comcast example in Philadelphia. Brian Roberts, the head of Comcast, owns the regional sports or is launching the Comcast sports network and also owns the sports teams there. That same example could be applied toward the regional sports networks in the New York area as well.
There is one thing I would like to clarify, which is in relation to Mr. Sapan's opening statements, and that is, I think there is clearly a link that's being attempted here between local programming and the issue of terrestrial delivery, when I'm not sure that that's the issue at all. I mean, if you look behind the veil of that, terrestrial delivery would best be used, and has been rumored to be used, toward regional sports networks, not so much for local programming. I mean, the local programming, the rules of exclusivity for local programming are established at the FCC and they have procedures to deal with any exceptions to exclusivity on local programming. And I'm not sure that you can compare the Bulls against the Naperville 17 channel. So I'm not sure we have a relative apples-to-apples comparison here at all.
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Mr. BOUCHER. Well, my time has expired
Mr. HYDE. Yes, it has.
Mr. BOUCHER [continuing]. And I thank the witnesses for their answers.
Mr. HYDE. I thank you, Mr. Boucher.
We have another very important motion to adjourn. So, Mr. Delahunt, do you really have a burning question you want to ask? [Laughter.]
Mr. DELAHUNT. I just want to walk through this just for a moment to see whether I'm clear. From what I'm gathering here, the prior legislation didn't anticipate the change in the marketplace. Is that a fair statement? Let me direct that to Mr. Oristano and Mr. Kimmelman.
Mr. ORISTANO. I think it either didn't anticipate changes or, like water finding its level, people found ways to work with it.
Mr. DELAHUNT. Let me say this: They didn't anticipate, at least from your perspective, Mr. Kimmelman, the marriage between the cable industry and programmers; is that
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Mr. KIMMELMAN. Well, I think that's true, Mr. Delahunt, but I think you gave the FCC very broad authority
Mr. DELAHUNT. I wasn't here, so I didn't give the FCC
Mr. KIMMELMAN. You in the Congress gave the FCC very broad authorities that they could have used. You told them that the cable industry was already concentrated; do something about the size of the companies and their ownership of programming. Since 1992, the two biggest companies went from serving 40 percent of subscribers to 55 percent and bought more and more programming. So the FCC
Mr. DELAHUNT. Well, I do want to respect the admonition of Mr. Hyde, but why has there not been a complaint along antitrust lines, in terms of this concentration of economic power? Isn't thataren't we talking here in terms of economic power, the concentration thereof, and potential antitrust violations?
Mr. KIMMELMAN. We went to the Federal Trade Commission when it was reviewing the Time Warner/Turner merger, and they did put some conditions on the merger, but predominantly their response to the concerns we raised from consumers was: Those are regulatory questions; the FCC has the power.
Mr. DELAHUNT. I understand they're regulatory and statutory. At the same time, was there an approach made to the Department of Justice in terms of an antitrust review?
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Mr. KIMMELMAN. This was an antitrust review. This one was in the FTC. They split cases. So the satellite ventures I think may be at the Justice Department; some of the cable ventures
Mr. DELAHUNT. So then relief, if there should be relief after discussionand I'm sure a series of hearingsreally is more than an amendment to the Telecommunications Actan expansion, if you will, of our antitrust statutes?
Mr. KIMMELMAN. Or tough enforcement under them. I think a lot of the authority is there, if you just have the will to enforce.
Mr. HYDE. I think, Mr. Kimmelman, you're absolutely right, and it seems to me there are serious antitrust questions here. We've heard a lot of testimony, and it just reeks of restraint of trade and these agreements, and it needs a good look. And it may be the laws are adequate, but nobody's paying attention to them. And with the bifurcation between FTC and Justice and the constant shifting of personnel at both places, but that's our job and you've alerted us, all of you, and it's been worthwhile. And we're not going to end this here, we can assure you.
And so Mr. Delahunt will yield
Mr. DELAHUNT. Mr. Delahunt will be quiet, Mr. Hyde. I won't ask another question. [Laughter.]
Page 252 PREV PAGE TOP OF DOC Mr. HYDE. I want to thank you for a most useful hearing, and we'll be back in touch. Thank you.
The committee stands adjourned.
[Whereupon, at 2:55 p.m., the committee adjourned subject to the call of the Chair.]
A P P E N D I X
Material Submitted for the Hearing
STATEMENT FOR CONGRESSMAN COBLE
MR. CHAIRMAN, Thank you for holding a hearing on the State of Competition to the Cable Television Industry. As one who reserved my support for the Telecommunications Act of 1996 until changes were made to ensure the bill would result in true competition, I applaud your decision to monitor where things stand in the video marketplace, and I would welcome a similar look into the local telephone loop.
I am encouraged by the FCC's Third Annual Report on Competition which indicates that consumers are experiencing a steady and irreversible increase in video choicesas satellite, telephone, SMATV and MMDS providers compete to offer multichannel video programming services. This competition may not be developing as quickly as we would like, but it is burgeoning. In particular, I note that by year-end 1997, 10 million subscribers may be getting their multichannel video service from someone other than their local cable company. I think it is undeniable that the Telecommunications Act of 1996 is the catalyst for much of this growth, especially by the telephone company providers.
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I look forward to the testimony today. The Telecommunications Act of 1996 is just a little over 18 months old. It is right for congress to exercise its oversight role to ensure that competition develops, but we must also exercise caution in intervening where unnecessary.
Hon. HENRY J. HYDE,
|House of Representatives,|
|Washington, DC, October 10, 1997.|
Chairman, Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR MR. CHAIRMAN: I understand that the committee has been holding hearings on the state of the cable industry. I commend to you, for inclusion in the record, the enclosed letter form Mayor Archie H. Bailey of Flushing in my 5th District of Michigan.
The Mayor's letter mirrors complaints which I consistently receive from cable consumers. More troubling perhaps, it illustrates the confusion among our citizens and elected officials about how we solve these problems. There is an apparent lack of positive effect of our efforts to promote lower rates and better service in the industry. And, in seeking to attain this goal, it is almost impossible for Members of Congress to determine which party is responsible for addressing our constituents' concerns. I receive inconsistent and sometimes conflicting explanations for the practices in the industry on rates, tiers, service, programming and equipment, from the FCC, local and state officials, and broadcasters. It is my sincere hope and expectation that the Committee, through its deliberations on this matter, will, at the very least, clearly identify the parties responsible for each aspect of the industry and the intent of Congress on their conduct in serving our constituents. It is only through this exercise that our citizens and their elected officials can identify the root of the problems and solve them.
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As always, I am sure that through your leadership, and that of your Ranking Member and my colleague from Michigan, Congressman Conyers, we will appropriately address the interests of the nation.
|Member of Congress.|
Hon. JAMES BARCIA,
|City of Flushing,|
|Flushing, MI, October 2, 1997.|
United States Representative
DEAR CONGRESSMAN BARCIA: I am writing regarding the proposed cable rate increase announced by our city's sole cable provider. Comcast Cablevision. The provider has announced new cable rate increases effective November 1, 1997. Six of the seven categories of service on their rate card will be increased and ''certain premium promotional services may realize a $2.00 to $4.00 increase. . .''
Presently the Judiciary Committee of the U.S. House of Representatives is accepting testimony regarding high cable rates and exclusive programming contracts. Harper Woods Mayor Frank Palazzolo testified that local cable rates, unlike some telephone rates, have not gone down since the 1984 deregulation of the cable industry. He said further that ''the rate of increase has been nearly 7 percent a year since deregulation, or about $18 a month in 1984 as compared to nearly $40 today.''
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Flushing has not benefited from the deregulation of the cable industry since rates have increased significantly in our community. Even though Comcast's record of service is exceptional, many residents request that we solicit competition and the city council may decide to do that in the future.
I urge you to contact the chairperson of the Judiciary Committee and Federal Communications Commission chairperson Reed Hundt and recommend that the cable industry be re-regulated at the basic level with guaranteed pricing. Most city residents would be able to afford it and would be satisfied with the basic programming.
I would appreciate your support with this issue.
cc: Scott Marshall,
Comcast Cablevision Flushing City Council.
Hon. HENRY J. HYDE,
RE: The impact of the Telecommunications Act of 1996
DEAR CONGRESSMAN HYDE: We believe that the experience of the Village of Glenn Ellyn is an excellent case study to measure one very important aspect of changes in the cable television industry: Public Access programming.
The most dramatic example of the new challenges faced by a municipality and its citizens is our recent decision to shut down public access broadcasts for an indefinite time (called ''going black'').
Ameritech New Media and Jones Intercable compete for cable services in Glen Ellyn. In theory, adding a second cable TV provider should have meant greater programming choice at lower prices. It is not that simple. In practice, unanticipated realities have impacted elected and appointed officials and the people directly. Daily issues for public access now include:
Vacating the current studio (effectively ''we lost our lease'');
Finding a suitable location from which to continue operations;
Adapting to the shift from private to public funding sources;
Politicizing daily operations;
At minimum, a one-month suspension of production schedules;
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When first conceived, public access was considered a special component of cable service. It was offered to municipalities as a legitimate, above board incentive in exchange for an exclusive franchise. By pricing the product accordingly, the cost was spread among all cable subscribers. Now a municipality must spread the cost among its citizens, whether or not they use cable television. Granted, this may not be an extraordinary burden, but a hidden tax is still a tax, which we all prefer to avoid.
We were pleased to learn that Congress is examining the many ramifications of the Act. If you feel our experience might add a meaningful dimension to your proceedings, or that it might help other communities anticipate similar problems, please call us. At your discretion, we are available to provide either written or oral testimony. Thank You.
|Mary H. Savaiano, President,|
|Glen Ellyn Cable Communications Foundation.|
|Trustee Liaison to the Glen Ellyn Cable Communications Foundation and Cable Communications Commission.|
Bellsouth welcomes this hearing and the opportunity to comment on the state of competition in the cable television industry. Bellsouth has already purchased the rights to serve some 4 million potential customers with wireless TV service, which we will complement in selected areas by wired cable. Our objective is to bring video choice to millions of consumers.
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Our first wireless launch is currently planned for New Orleans late this year and we look forward to offering consumers a real competitive choice.
The committee has called this hearing to focus on the state of competition in the cable television industry and to determine whether additional steps are required to encourage video competition. Bellsouth believes that the best way to ensure video competition today is to strengthen a fundamental principal the congress established in the 1992 act: that is, open access to programming on equal terms and conditions. Without any doubt, open access to programming on nondiscriminatory terms is the number one risk to anyone planning or implementing competition to cable. Technology, sales and service can all be managed. But, without open access to programming there is no service. For these reasons, programming access reform is the number one legislative priority for Bellsouth's video business.
The telecommunications act of 1996 is designed to open both telephone and cable markets. The 1996 act relies heavily on mandatory resale and equal interconnection of local telephone networks to accelerate economic entry by telephone competitors. However, there are no comparable provisions to lower the investment levels for new video competitors.
Entry into cable markets, whether as a franchised cable operator, as a wireless cable operator, or as a satellite service provider, requires a large upfront investment in an alternative distribution network.
Bellsouth has committed to invest millions of dollars to bring millions of consumers a competitive choice of video services. The success of that investment depends in very large part on open access to programming. From the customers' point of view, which ultimately is the only one that counts, the video business is access to programming at competitive prices.
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Competitors can build the best networks in the world, but if they don't have the right programming, they will fail, their investment will be worthless and consumers will lose.
Since 1992, a number of disturbing trends affecting programming access have arisen that are of serious concern to potential competitors. Bellsouth urges the congress to stop these trends now before they become major barriers to competition.
The first trend is the emergence of exclusive programming deals between incumbent cable operators and programmers not currently subject to the programming access rules. The continued consolidation of cable households demands more open programming access than was required in 1992. Programmers, regardless of their affiliation, are increasingly dependent for carriage on these very large incumbent operators. All programmers must have access to a sufficient number of households to support the introduction and success of their programming and cable operators use this to their advantage.
These facts create an environment which stimulates exclusive deals. Exclusivity, which limits access by new entrants, is a small price programmers are either willing or forced to pay for carriage. Since new entrants have yet to establish a substantial customer base, they are left totally vulnerable. Examples of such exclusive deals include TV land (owned by Viacom), FX and Fox News (owned by News Corp.), MSNBC (owned by NBC and Microsoft) and Eye On People (owned by CBS).
In addition, some cable companies appear to be using alternative delivery technologies other than satellites, such as fiber and microwave. One effect of such approaches is to avoid open program access requirements. Bellsouth has already encountered this problem in New Orleans and Orlando and it has recently been reported in the press that Cablevision and Comcast were planning a similar move to distribute popular sports programming on an exclusive basis in New York and Philadelphia.
Page 260 PREV PAGE TOP OF DOC
In another development, some local broadcasters have demanded that new entrants carry other affiliated programming as a condition of granting retransmission consent for their local station. NBC and CNBC is just one example of this.
Bellsouth believes these loopholes in the programming access rules can be plugged with two simple changes to today's rules: first, Congress can extend the existing program access rules to all programmers and broadcast stations, regardless of whether they are vertically integrated or regardless of how they are delivered.
Second, Congress can prohibit cable programmers and television stations from requiring a forced bundling of multiple programs as a condition of granting retransmission content or having access to popular programming.
Policymakers and industry participants have watched this lack of programming access limit the evolution of satellite and wireless video services for years. We also saw a recent example of the tremendous economic pressure the cable industry wields over nonaffiliated programmers when Mr. Murdoch abandoned his plans to build an alternative video delivery system in favor of a cable partnership.
Congress may not be able to unbundle cable facilities to stimulate competition as in the telephony world but congress can ensure open access to programming.
In summary, it is apparent to Bellsouth, and no doubt others, that the cable industry clearly knows that their customer service, and their prices are not sufficient weapons to block competitive entry. When they say let ''open'' markets take care of the programming exclusivity issue, what they are really saying is let us use programming exclusivity as the weapon to ensure a closed market.
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Open access to programming is the fundamental prerequisite to ensure that customers always win.
INSERT OFFSET RING FOLIOS 27 TO 79 HERE
INSERT OFFSET RING FOLIOS 80 TO 83 HERE
STATE OF COMPETITION IN THE CABLE TELEVISION INDUSTRY
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
Page 262 PREV PAGE TOP OF DOCONE HUNDRED FIFTH CONGRESS
STATE OF COMPETITION IN THE CABLE TELEVISION INDUSTRY
SEPTEMBER 24, 1997
Serial No. 41
Printed for the use of the Committee on the Judiciary
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
STEVEN SCHIFF, New Mexico
Page 263 PREV PAGE TOP OF DOCELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
SONNY BONO, California
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRISTOPHER B. CANNON, Utah
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
Page 264 PREV PAGE TOP OF DOCMARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
THOMAS E. MOONEY, Chief of Staff-General Counsel
JULIAN EPSTEIN, Minority Staff Director
C O N T E N T S
September 24, 1997
Gekas, Hon. George W., a Representative in Congress from the State of Pennsylvania, and Chairman, Subcommittee on Commercial and Administrative Law
Anstrom, Decker, President and CEO, National Cable Television Association
Carr, Hon. C. James, Mayor, City of Wheaton, Illinois
Hundt, Reed E., Chairman of the Federal Communications Commission
Kimmelman, Gene, Co-Director, Consumers Union
Page 265 PREV PAGE TOP OF DOC
Lenart, Deborah L., President, Ameritech New Media Inc.
Oristano, Matthew, Chairman, Peoples's Choice TV
Palazzolo, Hon. Frank, Mayor, Harper Woods, Michigan
Petri, Hon. James P., Village Trustee of the Village of Elk Grove Village, Illinois
Mahoney, Michael J., President and Chief Operating Officer, CTEC Corporation
Norcutt, John C., President, Independent Cable and Telecommunications Association
Sapan, Joshua, President and Chief Executive Officer, Rainbow Media Holdings, Inc.
Wietecha, Hon. Ronald, Mayor, Park Ridge, Illinois
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Anstrom, Decker, President and CEO, National Cable Television Association: Prepared statement
Page 266 PREV PAGE TOP OF DOC
Carr, Hon. C. James, Mayor, City of Wheaton, Illinois: Prepared statement
Hundt, Reed E., Chairman of the Federal Communications Commission: Prepared statement
Hyde, Hon. Henry J., a Representative in Congress from the State of Illinois, and Chairman, Committee on the Judiciary: Prepared statement
Jackson-Lee, Sheila, a Representative in Congress From the State of Texas:
Kimmelman, Gene, Co-Director, Consumers Union: Prepared statement
Lenart, Deborah L., President, Ameritech New Media Inc.: Prepared statement
Mahoney, Michael J., President and Chief Operating Officer, CTEC Corporation: Prepared statement
Norcutt, John C., President, Independent Cable and Telecommunications Association: Prepared statement
Oristano, Matthew, Chairman, Peoples's Choice TV: Prepared statement
Page 267 PREV PAGE TOP OF DOC
Palazzolo, Hon. Frnak, Mayor, Harper Woods, Michigan: Prepared statement
Petri, Hon. James P., Village Trustee of the Village of Elk Grove Village, Illinois: Prepared statement
Sapan, Joshua, President and Chief Executive Officer, Rainbow Media Holdings, Inc.: Prepared statement
Sensenbrenner Jr., Hon. F. James, a Representative of Congress from the State of Wisconsin: Prepared statement
Wietecha, Hon. Ronald, Mayor, Park Ridge, Illinois: Prepared statement
Material submitted for the hearing
(Footnote 1 return)
Pub. L. No. 104104, 110 Stat. 56 (1996).
(Footnote 2 return)
The Bureau of Labor Statistics recently released data that showed for the 12 months ending July 31, 1997, cable rates were up 7.5% v. 2.2% growth in the Consumer Price Index. Bureau of Labor Statistics, Consumer Price Index Summary: July 1997. <http://stats.bls.gov/news.release/chi.nws.htm>
(Footnote 3 return)
Allison Kaplan, Competition a Good Thing for Elgin Cable Customers, ELGIN DAILY HERALD, Aug. 23, 1997, at 4.
(Footnote 4 return)
Cable Television Protection and Competition Act of 1992, Pub. L. No. 102385, 106 Stat. 1460, 1494 (1992) (''1992 Cable Act''); (codified at 47 U.S.C. §548(b)).
(Footnote 5 return)
S. Rep. No. 92102, 102nd Cong., 1st Sess. 25 (1991). The most notable exceptions were ESPN, then owned by Capital Cities/ABC; and The Disney Channel, owned by The Walt Disney Company.
(Footnote 6 return)
Comments of the National Cable Television Association, Annual Assessment of the Status of Competition in the Markets for the Delivery of Video programming, FCC CS Docket No. 97141 July 23, 1997,at 4, 36.
(Footnote 7 return)
Reply Comments of Viacom Inc., Annual Assessment of the Status of Competition in the Markets for the Delivery of video programming, FCC CS Docket No. 97141, Aug. 20, 1997, at 7 (''Viacom pleading'').
(Footnote 8 return)
(Footnote 9 return)
One can understand this trend given the growing popularity of cable programming. For the first time ever this summer, basic cable scored a higher Nielson rating than the Big Three broadcast networks. Linda Moss, Cable Nets Root for Endless Summer, MULTICHANNEL NEWS, Sept. 1, 1997, at 1, 46.
(Footnote 10 return)
New YorkCBS Eye on People, MULTICHANNEL NEWS, Jan. 13, 1997, at 30.
(Footnote 11 return)
Linda Moss & R. Thomas Umstead, TCI Gives Eye on People a Boost, MULTICHANNEL NEWS, Aug. 18, 1997, at 10, 61.
(Footnote 12 return)
Second Amended Complaint filed in Bartholdi Cable Co. v. Time Warner, Inc., Entertainment Company, CIV. No. 962687, at 98 (E.D.N.Y. filed December 13, 1996).
(Footnote 13 return)
On August 20,1997 ''X-Files'' pulled in a 3.3 Nielsen Media Research rating, representing 1.06 million households, for its 8 p.m. telecast. That was the three-year-old network's highest single rating ever and, according to FX executives, the highest prime-time rating for an off-network series telecast on cable. ''NYPD Blue,'' which followed ''X-Files'' at 9 p.m., scored a 2.2 rating worth 692,000 households. Linda Moss, FX Bets on 'X' Factor to Boost Carriage, MULTICHANNEL NEWS, Aug. 25,1997, at 18, 20.
(Footnote 14 return)
These ads are attached to this testimony.
(Footnote 15 return)
Petition of Outdoor Life Network and Speedvision Network for Public Interest Determination under 47 C.F.R. §76.1002(c)(4), CSR No. 5044P, (July 16, 1997), at 2.
(Footnote 16 return)
Viacom pleading, at 7.
(Footnote 17 return)
Geraldine Fabrikant, As Wall Street Groans, a Cable Dynasty Grows, N.Y. TIMES, April 27, 1997, at 1, 8.
(Footnote 18 return)
Satellite, Cable Losing Philly Sports, SATELLllE BUSINESS NEWS FAX UPDATE, Aug. 13, 1997, at 85. Satellite Campaigns for Philly Sports, SATELLITE BUSINESS NEWS FAX UPDATE, Aug. 18, 1997, at 87.
(Footnote 19 return)
The New EstablishmentVanity Fair's Fifty Leaders of the Information Age, VANITY FAN, Oct. 1997, at 166.
(Footnote 20 return)
Testimony of Rupert Murdoch, Chairman and CEO, News Corp., before the Senate Commerce, Science and Transportation Committee, at 1 (April 10, 1997).
(Footnote 21 return)
Echostar, News Corp.'s jilted suitor, cites as evidence of News Corp.'s changed plans the fact that Primestar will no longer purchase the spot beam technology (the technology that would make it possible for DBS to carry local programming) that News Corp. was to provide to Echostar. Without the ability to offer local programming, DBS is not seen by many consumers to be a true competitive alternative to cable. Comments of Echostar Communications Corporation, Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming, FCC CS Docket No. 97141, July 23, 1997, at 15.
(Footnote 22 return)
Eben Shapiro, News Corp., Time Warner Settle Rift as Fox Ness is Promised New Outlets, THE WALL STREET JOURNAL, July 24, 1997, at B7.
(Footnote 23 return)
For example, Rupert Murdoch has recently agreed to acquire the Los Angeles Dodgers and Dodgers stadium. In Detroit, Fox Sports acquired the rights to the Detroit Red Wings and bought the rights of the existing regional sports network (PASS) for the Detroit Tigers and Detroit Pistons. As a result, PASS will reportedly cease operations later this year.
(Footnote 24 return)
R. Thomas Umstead & Joe Estrella, Dolan's Super ClusterCablevision. TCI Team Up in Mega-Deal, MULTICHANNEL NEWS, June 9, 1997, at 1, 70.
(Footnote 25 return)
Kent Gibbons & Joe Estrella, Summer of Love ContinuesTCI, Time Warner, Inc., Deals for 2M + Subs, MULTICHANNEL NEWS, Sept. 8, 1997, at 1, 63.
(Footnote 26 return)
Joe Estrella & Kent Gibbons, TCI's Domino EffectNo. 1 MSO's Deals May Spawn More, MULTICHANNEL NEWS, Aug. 25, 1997, at 1, 54.
(Footnote 27 return)
Petition For Rulemaking of Ameritech New Media, Inc., to Amend Procedures for Adjudicating Program Access Complaints, 47 C.F.R. §76.1003, RM No. 9097, May 16, 1997 (hereinafter referred to as ''Petition for Rulemaking'') (attached hereto).
(Footnote 28 return)
47 U.S.C. §1.401.
(Footnote 29 return)
See, John Mercurio, Big Cable Company Cuts Deal to Carry C-Span. The Network of Congress, Battered by Supreme Court Decision, Wins 100% Coverage on TCI, Roll Call, May 5, 1997.
(Footnote 30 return)
As a recent New York Times article observes, access to sports programming is considered critical to an MVPD's success, and Cablevision is convinced that its virtual monopoly on New York sports programming as well as its extremely strong position in regional sports programming across the nation will create endless new opportunities to make money. See Geraldine Fabrikant, As Wall Street Groans. A Cable Dynasty Grows, N. Y. Times, April 27, 1997, financial section at 1 and 8 attached hereto as Exhibit 1.
(Footnote 31 return)
''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 prevent any multichannel video programming distributor from providing satellite cable programming or satellite broadcast programming to subscribers or consumers.'' See 47 U.S.C. §548(b).
(Footnote 32 return)
See S. Rep. No. 10292, 102nd Cong;, 1st Sess. 29 (1991).
(Footnote 33 return)
Ameritech already has concluded one Section 628 adjudicatory proceeding, another is pending, and it expects to file additional Section 628 complaints to vindicate its rights to obtain access to programming on nondiscriminatory prices, terms and conditions.
(Footnote 34 return)
In the common carrier context, the Commission already has recognized the need to improve the speed and efficiency of its formal complaint process if the goals of the Telecommunications Act of 1996 are to come to fruition. See, Implementation of the Telecommunications Act of 1996 (Amendment of Rules Governing Procedures to be Followed when Formal Complaints are Filed Against Common Carriers) in FCC 96460, (Nov. 27, 1996) (Notice of Proposed Rulemaking in CC Docket No. 96238) [hereinafter ''Common Carrier Complaint NPRM''] citing S. Conf. Rep. No. 230, 104th Cong., 2nd Sess. (1996).
(Footnote 35 return)
The text of the proposed amendments to 47 C.F.R. §76.1003 is attached hereto as Appendix A.
(Footnote 36 return)
This time frame is consistent with the range of deadlines for complaint resolution mandated by the Congress in the Telecommunications Act of 1996 in connection with several types of common carrier disputes. See Common Carrier Complaint NPRM, at 56, §610.
(Footnote 37 return)
For example, Section 628(b) is patterned after Section 5 of the Federal Trade Commission Act (15 U.S.C. §45); Section 628(c)(2)(B) is modeled after the Robinson-Patman Act Amendments to the Clayton Act (15 U.S.C. §(3 et seq.); and Sections 628(c)(2)(C) and (D) reflect a strengthening of Sherman Act protections (15 U.S.C. §1).
(Footnote 38 return)
1992 Cable Act §628(f)(1); 47 U.S.C. §548.
(Footnote 39 return)
Implementation of §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), 8 FCC Rcd 3359, 336970 (1993) (First Report and Order in MM Doc. No. 912265) (hereinafter ''Program Access Order'').
(Footnote 40 return)
Id. at 3389. The notice must provide sufficient specificity so that the precise nature of the dispute can be determined by the vendor or cable operator.
(Footnote 41 return)
National Rural Telecommunications Cooperative, 10 FCC Rcd 9785 (1995).
(Footnote 42 return)
Program Access Order, 8 FCC Rcd at 338892.
(Footnote 43 return)
Program Access Order, 8 FCC Rcd at 3389. The Commission stated that it does not expect that non-price discrimination cases will present the need for discovery. Id. at 3422; see also 47 C.F.R. §1.102(b).
(Footnote 44 return)
47 C.F.R. §1.1003(i).
(Footnote 45 return)
(Footnote 46 return)
Parties are free to file an application for review of the staff's determinations directly to the Commission. Program Access Order, 8 FCC Rcd at 3421.
(Footnote 47 return)
This conclusion is derived from a statistical analysis of nine Section 628 complaints decided on procedural or substantive grounds by the Commission.
(Footnote 48 return)
See, American Cable Company v. Telecable of Columbus. Inc., 11 FCC Rcd 10090 (1996) Memorandum Opinion and Order in CSR4206; CSR 4198P (complaint filed December 10, 1993, resulting in a 32 month and 19 days review process).
(Footnote 49 return)
Hutchens Communications. Inc. v. TCI Cablevision of Georgian, 9 FCC Rcd 4849 (1994) (complaint filed on March 8, 1994 resulting in a five (5) months and twenty-nine (29) days review process).
(Footnote 50 return)
Based upon a review of the Commission's files,it appears that fifteen Section 628 complaints have been settled while only nine have gone to decision.
(Footnote 51 return)
A 20 day period for filing the answer is contemplated in the Common Carrier Complaint NPRM, at 20, §47.
(Footnote 52 return)
See Common Carrier Complaint NPRM, at 19, §45 (proposing that parties be required to append relevant tariffs or tariff provisions to their pleadings). If these programming agreements are considered proprietary, they may be submitted pursuant to protective order.
(Footnote 53 return)
See Common Carrier Complaint NPRM, at 18, §41.
(Footnote 54 return)
See also Program Access Order, 8 FCC Rcd at 3416.
(Footnote 55 return)
Fed.R.Civ. P.26(b); See Oppenheimer Fund v. Sanders, 437 U.S. 340 (l978).
(Footnote 56 return)
The defendants would have a right to seek a protective order for documents containing proprietary or highly competitively sensitive information.
(Footnote 57 return)
The Commission staff has the authority to require discovery. Program Access Order, 8 FCC Rcd at 3392.
(Footnote 58 return)
See Common Carrier Complaint NPRM, at 24, §55.
(Footnote 59 return)
See, Fed. R. Civ. P. 37(b); Fed R. Civ. P. 11.
(Footnote 60 return)
Implementation of the Cable Television Consumer Protection and Competition Act of 1992 (Development of Competition and Diversity in Video Programming Distribution and Carriage), 10 FCC Rcd 1902, 1911 (1994) (Memorandum Opinion and Order on Reconsideration of the First Retort and Order), [hereinafter ''First Reconsideration Order''].
(Footnote 61 return)
Id. at 1910 (citing Black's Law Dictionary (4th ed. 1968)).
(Footnote 62 return)
The Commission has authority to award damages under Title II. Specifically, 47 U.S.C. §209 states, ''If, after hearing on a complaint, the Commission shall determine that any party complainant is entitled to an award of damages under the provisions of this Act, the Commission shall make an order directing the carrier to pay the complainant the sum to which he is entitled. . . .''. See also, Common Carrier Complaint NPRM, at 2933, §6369.
(Footnote 63 return)
First Reconsideration Order, 10 FCC Red at 1911.
(Footnote 64 return)
Id. at 1991.
(Footnote 65 return)
In a high profile antitrust action, Bartholdi Cable Company alleged anticompetitive behavior (denial of access to Madison Square Garden Network) by Time Warner significantly delayed Bartholdi's entry into the New York City cable market and noted that Time Warner was required to make the programming available to Bartholdi only ''[a]fter a lengthy and costly process in which many potential subscribers were lost.'' Bartholdi Cable Co. v. Time Warner. Inc., No. CV962687 (E.D.N.Y. filed May 29, 1996) at §8487, 8891.
(Footnote 66 return)
Program Access Order, 8 FCC Rcd at 3392.
(Footnote 67 return)
Id. at 3420.
(Footnote 68 return)
S. Rep. No. 921-2. 102nd Cong., 1st Sess. 29 (1991).
(Footnote 69 return)
For example, Ameritech through Americast sent Rainbow Programming Holdings, Inc. (''Rainbow'') a notice of intent to file a Section 628 complaint on October 30, 1996 which served as an impetus for Rainbow to ''negotiate'' after months of dilatory tactics. These negotiations lacked even a scintilla of good faith on Rainbow's part, however, and caused a delay of over a month in the formal filing of the complaint. This complaint is currently pending at the Commission, more than five months after being filed.
(Footnote 70 return)
In cases where the complainant seeks damages, the Section 628 proceeding should be bifurcated with the damages phase deferred until after a decision has been rendered on whether or not there has been a Section 628 violation. See Common Carrier Complaint NPRM, at 51, §119.
(Footnote 71 return)
Annual Assessment of Competition in the Market for the Delivery of Video Programming, FCC 96496, ref. Jan. 2, 1997, at 5 (''1996 Report''). Section 628 (g) of the Communications Act of 1934, as amended, directs the Commission to ''annually report to Congress on the status of competition in the market for the delivery of video programming.''
(Footnote 72 return)
In May, 1997, there were approximately 74.5 million multichannel subscribers, 65 million cable subscribers, or 87.2 percent, and 9.5 million noncable multichannel customers.
(Footnote 73 return)
1996 Report at 5.
(Footnote 74 return)
''Pizza-Sized Dish is the Hottest Item on Home Telecommunications Menu,'' Washington Times, February 4, 1995.
(Footnote 75 return)
Quoted in Cable World, July 7, 1997, at 17. During the first five months of 1997, DBS subscribers increased 741,000, by comparison during the first five months of 1996, subscribership increased by 546,000 and in 1995 by 445,000.
(Footnote 76 return)
SkyReport, June 1997. DTH includes C-Band Subscribers (roughly 2 million). It should be noted that virtually all of the growth in DTH subscribership over the past three years is attributable to DBS, given that C-Band subscribership has remained relatively flat.
(Footnote 77 return)
See infra n.16.
(Footnote 78 return)
1994 Report, 9 FCC Rcd 7442, 7475 (1994).
(Footnote 79 return)
1995 Report, 11 FCC Rcd 2060, 2085 (1995).
(Footnote 80 return)
1996 Report, FCC 96496 at 43.
(Footnote 81 return)
''A Mixed Bag for DBS,'' Broadcasting & Cable, June 9, 1997, at 42.
(Footnote 82 return)
Satellite News, June 16, 1997.
(Footnote 83 return)
See, ''A Solution for DBS' Local Signal Blind Spot?'' Cable World, July 21, 1997, at 64, and ''Antenna America Licensed by DirecTV,'' Cable World, July 21, 1997, at 8.
(Footnote 84 return)
''New Dish,'' Cable World, July 21, 1997, at 18.
(Footnote 85 return)
The DirecTV programming options include the following services: AMC, Encore, Encore West, Encore 2-Love Stories, Encore3-Westerns, Encore 4-Mysteries, Encore 5-Action, Encore 6-True Stories, Encore 7-WAM!, Independent Film Channel, Starz!, Starz!-2, Starz!West, Starz!2-West, Romance Classics, Turner Classic Movies, CMT, MuchMusic, TNN, ESPN, ESPN2, Empire Sports Network, Fox Sports-Arizona, Fox Sports-Midwest, Fox Sports-Northwest, Fox Sports-Pittsburgh, Fox Sports-Rocky Mountain, Fox Sports-South, Fox Sports-Southwest, Fox Sports-West, Fox Sports-West 2, HTS, MSGN, NESN, PASS, SportsChannel-Chicago, SportsChannel-Cincinnati, SportsChannel-Florida, SportsChannel-New England, SportsChannel-New York, SportsChannel-Ohio, SportsChannel-Pacific, SportsChannel-Philadelphia, Sunshine Network, Classic Sports Network, The Golf Channel, Outdoor Life, SpeedVision, A&E Television Network, Animal Planet, BET, Bravo, Cartoon Network, Discovery Channel, Disney-East, Disney-West, E!, The Family Channel, The History Channel, Home & Garden TV, HSN, TLC, Sci-Fi Channel, QVC, TBS, Trinity, TRIO, TNT, TV Food Network, USA Network, WGN, America's Health Network, Bloomberg Information TV, Channel Earth, CNBC, CNN, CNNI/CNNfn, C-SPAN, C-SPAN2, Court TV, Fox News Channel, Headline News, MSNBC, NewSport, Newsworld International, The Weather Channel and 31 channels of digital audio programming. DirecTV also offers Playboy TV and Spice a la carte and numerous sports programming packages including NFL Sunday Ticket, MLB Extra Innings, NBA League Pass, NHL Center Ice, ESPN Full Court (college basketball) and ESPN GamePlan (college football).
In addition to the programming available on DirecTV, USSB carries the following programming services: HBO-East, HBO-West, HBO2-East, HBO2-West, HBO3, HBO Family, HBO Family-West, Cinemax-East, Cinemax-West, Cinemax 2, Flix, Showtime-East, Showtime-West, Showtime 2, Showtime 3, The Movie Channel-East, The Movie Channel-West, Sundance Film Channel, VH1, MTV, M2, Comedy Central, Lifetime, Nickelodeon, Nick-at-Nite's TV Land, and All News Channel. There is simply no cable company in the U.S. today that offers this line-up of programming.
(Footnote 86 return)
According to the Statistical Abstracts of the United States 1995 at 733 Table No. 1224, over 28 million people resided in multiple dwelling units with three or more units in 1993.
(Footnote 87 return)
Paul Kagan Associates, Marketing New Media, May 19, 1997, at 4.
(Footnote 88 return)
Ameritech press release, August 12, 1997: Ameritech signs 50th cable TV franchise.
(Footnote 89 return)
''SNET Expanding Competition for Cable Subscribers,'' Hartford Courant, July 3, 1997.
(Footnote 90 return)
''Cable Service Puts Internet Feel on GTE Subscribers' Television,'' LA Daily, May 10, 1997.
(Footnote 91 return)
See, e.g., ''BellSouth Acquires Wireless Cable of Atlanta; Video Services to be Available to 900,000 Households,'' Yahoo PR Newswire, Feb. 12, 1997; ''BellSouth Agrees to Buy Wireless Cable TV Services in Nine Southern Markets,'' Atlanta Journal-Constitution, Mar. 20, 1997.
(Footnote 92 return)
See CableFax Daily, July 21, 1997, at 1.
(Footnote 93 return)
Implementation of the Nonaccounting Safeguards of Section 271 and 272 of the communications Act of 1934, as amended, 5 FCC Rcd 696, 782 (1996).
(Footnote 94 return)
Over 99 percent of residential telephone subscribers still have only one choice of provider.
(Footnote 95 return)
Warren Publishing, Television & Cable factbook Services, Vol. 65, at I45.
(Footnote 96 return)
Broadcasting & Cable, July 14, 1997, at 66.
(Footnote 97 return)
Nielsen Media Research, as reported in The Washington Post, July 16, 1997, at D4.
(Footnote 98 return)
A.C. Nielsen Cable Universe Estimates, May 19941997.
(Footnote 99 return)
Memorandum Opinion and Order on Reconsideration of the First Report and Order, FCC 94 287, 10FCC Red 1902, l911, 18 (1994).
(Footnote 100 return)
See Appendix A, Status of Program Access Complaints.
(Footnote 101 return)
FCC CS Docket No. 97141, Comments of Ameritech New Media at 4.
(Footnote 102 return)
DirectTV is launching new satellites to provide more programming options and EchoStar intends to launch satellites to provide local signals in the 20 largest metropolitan markets.
(Footnote 103 return)
In addition to local broadcast television stations and PEG access channels, Ameritech's multichannel video service (called Americast) in Columbus, OH includes the following cable networks: Inspirational Network, USA Network, Nickelodeon, QVC, TBS, WON, Sneak Prevue, The Cartoon Network, The Disney Channel, Lifetime, E!, Comedy Central, VH1, MTV, SportsChannel, The Golf Channel, The Learning Channel, ESPN, ESPN2, TNT, AMC, Bravo, TV Food Network, HGTV, Turner Classic Movies, The Family Channel, Classic Sports Network, America's Health Network, Sci-Fi Channel, A&E Television Network, The History Channel, FIT, The Discovery Channel, BET on Jazz, CNBC, CNN, Headline News, CNNfn, Court TV, C-SPAN, C-SPAN2, ONN, TNN, BET, Country Music Television, The Travel Channel, The Weather Channel, The Sundance Channel, Cinemax, FLIX, Showtime, Showtime2, The Movie Channel, Encore, Starz!, HBO, HBO2, HBO3 plus 10 channels of pay-per-view. See also CSR4873P, Corporate Media Partners d/b/a Americast New Media. Inc. v. Rainbow Programming Holdings. Inc. (answer, filed Jan. 10, 1997) at 89 (detailing agreements between SportsChannel and petitioner).
(Footnote 104 return)
Ameritech news release, July 29, 1997.
(Footnote 105 return)
DirecTV also wants to extend vertical limits on cable beyond the year 2002 expiration.
(Footnote 106 return)
Third Annual Report at 157.
(Footnote 107 return)
Section §628(b) of the Act prohibits cable operators and vertically integrated programmers from engaging in ''unfair'' conduct, ''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.''
(Footnote 108 return)
1992 Cable Act, Pub. L. No. 102385, §2(a)(5),106 Stat. 1460, 1460 (1992). S. Rep. No. 92, 102d Cong., 1st Sess. 27, 28 (1991) (scope of program access rules limited only to vertically integrated systems); H.R. Rep. No. 628, 102d Cong., 2d Sess. 41 (1992) (expressly limits application of the program access rules to vertically integrated programmers).
(Footnote 109 return)
FCC CS Docket No. 97141, Comments of Ameritech at 14.
(Footnote 110 return)
Id. at 18.
(Footnote 111 return)
''Americas Slimming,'' Daily Variety, July 28, 1997.
(Footnote 112 return)
See Hay, D & D Morris, Industrial Economics and Organization, 1991 (Oxford, UK, Oxford University Press) at 152162 for a detailed analysis.
(Footnote 113 return)
''ESPNews joining DirecTV roster,'' Hollywood Reporter, July 30, 1997.
(Footnote 114 return)
Cable Television Advertising Bureau, Primetime Viewing Share for July 1997, based on data from A.C. Nielsen Co. The 20 most widely distributed cable networks' combined primetime share equaled 25.03, or 80.4 percent of the basic cable network primetime share of 31.15.
(Footnote 115 return)
1992 Cable Act §616, 47 U.S.C. §536. Section 628(b) also covers ''unfair conduct'' of all cable operators, not just vertically integrated cable operators.
(Footnote 116 return)
Section 628 allows distributors who allege injury from the actions of vertically integrated programmers to avoid the delay and expense of protracted antitrust litigation and to obtain expedited consideration and relief from the Commission
(Footnote 117 return)
47 C.F.R. §76.130076.1302.
(Footnote 118 return)
47 U.S.C. §548(b) (''it shall be unlawful for a cable operator, a satellite cable programming vendor in which a cable operator has an attributable interest, . . . to engage in unfair methods of competition . . . 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''; emphasis added). See also First Report and Order, 8 FCC Red 3359, 3369, 28 (1993).
(Footnote 119 return)
Section 601(2), 47 U.S.C. 521(2).
(Footnote 120 return)
Other examples of programming that is produced by TWC and shared among systems via fiber or microwave include high school sports and a news show in Eastern Pennsylvania; a public affairs show dealing with ethnic and cultural issues, college football and basketball in Indianapolis, Indiana; college basketball in Austin, Texas; horse racing, and high school basketball in Albany, New York.
(Footnote 121 return)
Section 628(a); 47 U.S.C. §548(a).
(Footnote 122 return)
Ameritech News Release, September 28, 1995. Southern New England Telephone (''SNET'') joined the consortium on June 18, 1996. Ameritech News Release, June 19, 1996.
(Footnote 123 return)
See, for example, FCC CS Docket No. 97141: Comments of BellSouth at 15; Comments of Ameritech at 19; and Comments of Wireless Cable Association at 11.
(Footnote 124 return)
Third Annual Report at 154.
(Footnote 125 return)
New England Cable News, 9 FCC Rcd 3231, 3238 (1994) (NECN Order).
(Footnote 126 return)
FCC CS Docket No. 97141, Comments of Ameritech at 4.
(Footnote 127 return)
NECN Order 9 FCC Red 3231. Development of Competition and Diversity in Video Programming Distribution and Carriage, First Report and Order, at 163 (''As a general matter, the public interest in exclusivity in the sale of entertainment programming is widely recognized.''); Congressional Record, July 23, 1992 at 6534 (Statement of Representative Tauzin: ''[E]xclusive programming that is not designed to kill the competition is still permitted.'').
(Footnote 128 return)
In 1990, the Commission discussed the delicate balance between pro-competitive exclusivity practices and promoting entry by new competitors: ''While we agree with cable commenters that the Commission should and does generally support exclusivity rights, we believe that the public interest in developing competition to the local cable operator justifies temporary, limited and targeted intervention to ensure that alternative multichannel program providers have fair and equitable access to programming.'' 1990 Cable Report, 5 FCC Red at 5031 (emphasis added).
(Footnote 129 return)
NECN Order at 3238, 52.
(Footnote 130 return)
Id. at 3237, 42.
(Footnote 131 return)
See, e.g., The Competitive Consequences of Vertical Integration in the Cable Industry,'' Benjamin Klein, University of California, Los Angeles, June 1989, attached to NCTA Comments, Competition Deregulation and Commission's Policies Relating to the Provision of Television Service, MM Docket No. 89600, March 1, 1990.
(Footnote 132 return)
Id. at 50.
(Footnote 133 return)
Id. at 51.
(Footnote 134 return)
47 U.S.C. §548(c)(2)(C).
(Footnote 135 return)
8 FCC Rcd at 3385.
(Footnote 136 return)
Program Exclusivity in Cable and Broadcast Industries supra N.2 at 530910.
(Footnote 137 return)
Id. at 5310.
(Footnote 138 return)
''More Original thinking,'' Cable World, July 21, 1997.
(Footnote 139 return)
Cable world, Aug. 11, 1997, at 37.
(Footnote 140 return)
''Americas Slimming,'' Daily Variety, July 28, 1997.
(Footnote 141 return)
''Americast pulling plug on programming business,'' Electronic Media, August 4, 1997 at 29.
(Footnote 142 return)
Third Annual Competition report at 159160. (rel. Jan. 2, 1997).
(Footnote 143 return)
In re Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, (''Third Annual Report'') CS Docket No. 96133, FCC 96496, 14 (rel. Jan. 2, 1997).
(Footnote 144 return)
Third Annual Report, 4.
(Footnote 145 return)
Further Notice of Proposed Rulemaking in re Telecommunications Services Inside Wiring, Customer Premises Equipment, and Implementation of the Cable Television Consumer Protection Act of 1992: Cable Home Wiring, (''Further Notice'') CS Docket No. 95184, MM Docket No. 92260, FCC 97304, 25 (rel. Aug. 28, 1997).
(Footnote 146 return)
Further Notice, 31.
(Footnote 147 return)
Further Notice, 3243.
(Footnote 148 return)
See Competition, Rate Deregulation and the Commission's Policies Relating to the Provision of Cable Television Service, Report, 5 F.C.C. Rcd. 4962, 5036 (1990) (''after reviewing the record, we believe that discriminatory local mandatory access laws can operate to hinder the growth of alternative distribution services''); City of Lansing v. Edward Rose Realty, 502 N.W.2d 638, 645 (Mich. 1993) (in striking down mandatory access ordinance for failure to promote public interest, court held that while the ordinance allowed the cable franchisee to ''initiate condemnation proceedings to secure cable access to any dwelling in [the city], no corollary rights are granted other cable systems [and therefore the cable franchisee] will be guaranteed the ability to compete with private cable systems where it decides to compete, without an equivalent right of competition guaranteed to private systems''); Cable Holdings of Georgia, Inc. v. McNeil Real Estate Fund VI, Ltd., 953 F.2d 600, 60708 (11th Cir) (commenting on anticompetitive ''unequal regime'' that would have been created had Congress legislated a discriminatory mandatory access lawwhich it did not, and finding ''that it would be odd if Congress intended to sanction exclusive agreements when negotiated by franchised cable companies, while at the same time outlawing similar exclusive arrangements when negotiated by non-franchised cable companies''), cert. denied, 113 S. Ct 182 (1992), reh'g denied, 988 F.2d 1071 (11th Cir. 1993).
(Footnote 149 return)
Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the State of New York to provide consumers with information, education and counsel about goods, services, health, and personal finance; and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union's income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports with approximately 5 million paid circulation, regularly carries articles on health, product safety, marketplace economics and legislative, judicial and regulatory actions which affect consumer welfare. Consumers Union's publications carry no advertising and receive no commercial support.
(Footnote 150 return)
Cable Television Consumer Protection and Competition Act of 1992, (1992 Act), Public Law 102385 102nd Congress, Oct. 5, 1992, 106 Stat. 1460, amending the Cable Communications Policy Act of 1984.
(Footnote 151 return)
1992 Act, op.cit.
(Footnote 152 return)
David Lieberman, ''Industry argues for deregulation,'' USA Today, May 31, 1995.
(Footnote 153 return)
The FCC also appears to have perceived the Act's deregulatory thrust to mean that, as the original versions of S. 652 and H.R. 1555 indicated, Congress intended for the Commission to relax cable rate regulation as soon as possible. However in the Act's final version, Congress reinstated full Commission authority to regulate all cable programming services of the largest cable companies for three years. See Pub. L. 104104, 110 Stat. 56 (1996) at Sec. 301(b)(4).
(Footnote 154 return)
In the Matter of Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, THIRD ANNUAL REPORT, CS Dkt. No. 96133, adopted by the FCC Dec. 26, 1996, at para. 130145 (footnotes omitted).
(Footnote 155 return)
In the Matter of Time Warner Inc., Turner Broadcasting System, Inc., Tele- Communications, Inc., and Liberty Media Corp., FTC File No. 9610004, Complaint, Sept. 12, 1996 at 68.
(Footnote 156 return)
Paul Farhi, A Sporting Chance to Be No. 1, Washington Post, June 24, 1997.
(Footnote 157 return)
Mark Robichaux, Fox-TCI Venture Nears Pact to Buy 40% Of Cablevision Sports for $850 Million, Wall Street Journal, June 20, 1997.
(Footnote 158 return)
John Lippman and Mark Robichaux, ''News Corp. Wins Tentative Pact to Join Cable Firms in Satellite-Dish TV Service,'' Wall Street Journal, May 27, 1997.
(Footnote 159 return)
Statement of Rupert Murdoch before the Senate Commerce Committee on Multichannel Video Competition, April 10, 1997 (emphasis added).
(Footnote 160 return)
Jeannie Aversa, Associated Press, ''Cable Industry Takes Aim at Murdoch's Satellite,'' Washington Times, March 20, 1997.
(Footnote 161 return)
Bureau of Labor Statistics, Consumer Price Index, urban areas, cable services and all goods, February 1996 through July 1997.
(Footnote 162 return)
THIRD ANNUAL REPORT, op. cit., at para. 1214 and para. 128 (footnotes omitted).
(Footnote 163 return)
Mark Robichaux, ''Cable Industry Says New Rivals Obviate Rules,'' Wall Street Journal, April 3, 1995.
(Footnote 164 return)
Rebecca Cantrell, ''TCI Reports Rise In Cash Flow,'' Rocky Mountain News, March 4, 1997; and David Lieberman, ''TCI to Boast Cable TV Rate,'' USA Today, March 13, 1997.
(Footnote 165 return)
THIRD ANNUAL REPORT, op. cit., at para. 19.
(Footnote 166 return)
Pub. L. 104104, 110 Stat. 56 (1996); see also ANNUAL REPORT, op. cit., at para. 6769.
(Footnote 167 return)
Mark Landler, ''Baby Bells' TV Developers Are on Hold and Frustrated,'' New York Times, August 5, 1996.
(Footnote 168 return)
Leslie Cauley, ''Baby Bells Push the Pause Button Again on Tele-TV Interactive Unit,'' Wall Street Journal, June 7, 1996.
(Footnote 169 return)
Leslie Cauley, ''Bell Atlantic, Nynex, PacTel to Close Tele-TV,'' Wall Street Journal, December 6, 1996.
(Footnote 170 return)
THIRD ANNUAL REPORT, op. cit., at para. 72.
(Footnote 171 return)
Id., at fn. 224
(Footnote 172 return)
Leslie Cauley, ''Bell Atlantic, Nynex Plan to Suspend Agreement With CAI Wireless Systems,'' Wall Street Journal, December 16, 1996.
(Footnote 173 return)
Mark Landler, ''A Sticking-to-Their-Knitting Deal,'' New York Times, April 23, 1996.
(Footnote 174 return)
Statement of Decker Anstrom, National Cable Television Association Before the Committee on Commerce, Science, and Transportation U.S. Senate, March 21, 1995, S. Hrg. 104216 at 5,8, and 25.
(Footnote 175 return)
Statement of Decker Anstrom, op.cit., at 115 (emphasis added).
(Footnote 176 return)
THIRD ANNUAL REPORT, op. cit., at 1116.
(Footnote 177 return)
Eben Shapiro, ''Time Warner Expands Plans For Cost Cuts,'' Wall Street Journal, October 10, 1996.
(Footnote 178 return)
Mark Robichaux, ''Malone Says TCI Push Into Phones, Internet Isn't Working for Now,'' Wall Street Journal, January 2, 1997 (emphasis added).
(Footnote 179 return)
THIRD ANNUAL REPORT, op. cit., at para. 38 and para. 125128.
(Footnote 180 return)
Paul Farhi, ''Biggest Cable Operation To Raise Rates 7% in 97,'' Washington Post, March 14, 1997.