[Senate Hearing 107-248]
[From the U.S. Government Publishing Office]
S. Hrg. 107-248
CABLE AND VIDEO: COMPETITIVE CHOICES
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HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
BUSINESS RIGHTS, AND COMPETITION
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
APRIL 4, 2001
__________
Serial No. J-107-11
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JEFF SESSIONS, Alabama RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas CHARLES E. SCHUMER, New York
MITCH McCONNELL, Kentucky RICHARD J. DURBIN, Illinois
MARIA CANTWELL, Washington
Sharon Prost, Chief Counsel
Makan Delrahim, Staff Director
Bruce Cohen, Minority Chief Counsel and Staff Director
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Subcommittee on Antitrust, Business Rights, and Competition
MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania PATRICK J. LEAHY, Vermont
STROM THURMOND, South Carolina RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas CHARLES E. SCHUMER, New York
MARIA CANTWELL, Washington
Peter Levitas, Majority Chief Counsel
Victoria Bassetti, Minority Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 1
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin... 2
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 4
WITNESSES
Currey, Robert, Vice Chairman, RCN Corporation, Princeton, NJ.... 23
Hartenstein, Eddy W., Corporate Senior Executive Vice President,
Consumer Sector, Hughes Electronic Corporation, and Chairman,
DIRECTV Global, El Segundo, CA................................. 6
Kent, Jerry, President and Chief Executive Officer, Charter
Communications, St. Louis, MO.................................. 19
Kimmelman, Gene, Co-Director, Washington Office, Consumers Union,
Washington, DC................................................. 35
Sachs, Robert, President and Chief Executive Officer, National
Cable Television Association, Washington, DC................... 11
QUESTIONS AND ANSWERS
Responses of Shawn Bentley, Motion Picture Association of
America, to questions submitted by Senator Hatch............... 51
Responses of Shawn Bentley to questions submitted by Senator
Leahy.......................................................... 53
Response of Shawn Bentley to a question submitted by Senator Kohl 54
Responses of National Music Publishers' Association to questions
submitted by Senators Hatch, Leahy and Kohl.................... 56
SUBMISSIONS FOR THE RECORD
Comcast Corporation, statement................................... 64
Federal Communications Commission, Cable Services Bureau,
Washington, DC, statement...................................... 67
CABLE AND VIDEO: COMPETITIVE CHOICES
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WEDNESDAY, APRIL 4, 2001
U.S. Senate,
Subcommittee on Antitrust, Business Rights, and
Competition,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:04 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine,
Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE
STATE OF OHIO
Present: Senators DeWine, Specter, and Kohl.
Chairman DeWine. Good morning. Let me welcome all of you to
our hearing this morning on competitive choices in the cable
and multichannel video industry.
Since I became Chairman of this Subcommittee, we have
examined the competitive status of the cable industry on
several different occasions. We do so again today in our
oversight role in an effort to raise questions about
competition and other concerns that remain unresolved in the
industry.
We must view today's competitive conditions in the context
of the deregulation of cable rates resulting from the
Telecommunications Act of 1996. Under that law, rate regulation
ended for many small cable operators, with most remaining
services being deregulated in 1999. The results of this
deregulation appear to me at least to be mixed.
Deregulation appears to have done little to halt the trend
of increasing cable rates. Understandably, many cable viewers
are frustrated with these rates, rates that continue to rise at
a pace of approximately three times the rate of inflation.
Critics of the industry blame these rate increases on the lack
of competition, and believe that the industry is taking
advantage of consumers.
In response, many within the industry believe that
deregulation has been a success and that competition is, in
fact, accelerating. These people continue to argue that rate
increases are not a result of monopoly power, but are justified
by higher programming costs and expensive system and equipment
upgrades that are required to provide broadband services, as
envisioned under the Telecommunications Act. They also, I might
add, say that the consumer is getting more channels and getting
more product.
This is one issue that we will explore today. In doing so,
I would like to hear what our witnesses believe accounts for
the continuing increases in cable rates. Whatever the reasons,
however, it is clear that we did not anticipate such extensive
and ongoing rate inflation when the Congress passed the
Telecommunications Act. As a result, we now must ask, can
consumers expect to see cable rates decrease any time soon, or
are they going to continue to see cable rates increase and
increase and increase?
Notwithstanding the rate hikes, cable competition does seem
to be increasing to some extent, mostly due to the growing
success of direct broadcast satellite service. In fact, some
reports indicate that the majority of new subscribers to
multichannel video services are choosing DBS over cable. Recent
estimates indicate that DBS has captured close to 17 percent of
the total multichannel video market.
Several questions, however, remain concerning the degree of
competition that DBS is providing to cable television. Some
consumers can't receive DBS because of technical problems, and
DBS does not have sufficient capacity to provide local
broadcast channels in many areas. Finally, it is unclear to
what extent DBS is able to provide true price competition to
basic cable television service because of the up-front costs
consumers must bear when switching to DBS service. I hope today
that we can gain a better understanding of these a competitive
issues during this hearing.
Another area we will be discussing is the competition
between current incumbent cable providers and the so-called
overbuilders, companies seeking to build new cable systems to
compete directly with the cable systems already operating in a
given service area.
In the areas where overbuilders have broken into the market
and started a head-to-head competition with incumbent cable
providers, consumers have benefited. This competition offers
consumers more options and ultimately better service and lower
rates. Unfortunately, it is very difficult for potential
overbuilders to gain widespread entrance into existing cable
markets. I would like to examine the reasons why we haven't
seen more overbuilder companies and the kind of cable
competition that they would bring to the market.
In summary, consumers of cable and satellite continue to
have questions--questions about competition, questions about
service, questions about rates. It is my hope that through this
hearing we can provide consumers with some answers on the state
of the industry today and how it will serve consumers better in
the future.
Let me at this point turn to our ranking minority member of
the Subcommittee, Senator Herb Kohl.
Senator Kohl?
STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE
OF WISCONSIN
Senator Kohl. I thank you, Mr. Chairman, for holding this
hearing today. This is an important time for us to consider
competition in the cable television industry. American
consumers continue to face rising cable rates and they don't
like it. Price hikes are almost as predictable as changes in
the seasons.
In 1996, we passed the Telecommunications Act in part to
increase cable competition, but it has not lived up to its
promise. Phone companies tried to compete with cable, but have
since withdrawn. What is worse is that cable rates have climbed
enormously since passage of the Telecom Act.
We know that cable has made huge infrastructure
investments, for which they deserve credit. We also know that
programming costs have increased, but the cable's industry's
cash-flow per subscriber, which is roughly the equivalent of
profit, has increased 33 percent since the Telecom Act.
Compare the cable price increases to the regular price
decreases we see in consumer electronics. From televisions to
VCRs, computers to stereos, almost every electronic device
today is cheaper and better than it was 10 years ago. So the
average consumer has a simple question, which is when will my
cable rates go down?
Today's hearing will examine how we can bring more
competition to cable. Price and service competition is the best
way to assure the best deal for consumers, but perhaps it is
time to do more to open up this market to competition.
There is some emerging competition to cable. Thanks in part
to the Satellite Home Viewer Improvement Act that we passed
last Congress, satellite has become a stronger competitor. By
allowing satellite providers to offer local channels for the
first time, satellite has become a more viable choice for many
consumers. And in a few cities, startup head-to-head
competitors like our witness here today, RCN, have built new
cable systems to compete with the incumbent operators with
encouraging results.
Despite these developments, the competitive situation in
the cable industry is far from ideal. Satellite services appear
to have little effect on cable rates, since the cost of
satellite is generally the same as expanded basic cable
service.
Furthermore, satellite service is often unavailable to
consumers in densely populated urban areas, particularly those
who live in apartment buildings. New cable companies are up and
running, but only in a few locations, so their positive effect
on competition has been limited.
The best way to ensure that consumers pay the lowest prices
possible and have the highest quality of service is to increase
the competitive choices. Perhaps Congress can take steps to
help level the playing field. We should consider three simple
proposals that may increase competition.
First, we should strongly consider extending the life of
the program access rules beyond 2002, and maybe we can make
them even better by closing loopholes that permit certain
exclusive deals.
Second, the time has come to consider building access
legislation that will open the bottleneck blocking the last
mile into the home.
Finally, we need to explore the lack of competition in the
so-called set-top box industry, the charges for which may
account for up to 10 percent of a consumer's monthly cable
bill. If we are serious about unleashing competition, then we
need a plan of action and not rhetoric to do just that.
That being said, we shouldn't ignore the real improvements
made by the cable industry. Cable companies today offer more
and better service than they did 10 years ago. Companies like
Charter Communications have done a great deal to serve their
consumers. In the third quarter of last year alone, Charter
invested over $74 million to upgrade its cable infrastructure
in Wisconsin. Charter serves over 250 communities in Wisconsin
and deserves credit for doing well, and we thank Mr. Kent for
appearing here today.
We thank all the witnesses for appearing before this
Subcommittee today. We look forward to hearing what our
distinguished panel has to say about how we can bring more
competition to the cable television market.
Thank you, Mr. Chairman.
Chairman DeWine. Senator Kohl, thank you very much.
We will turn now to Senator Specter.
STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE
OF PENNSYLVANIA
Senator Specter. Thank you very much, Mr. Chairman, and I
thank you for convening this hearing on a very important
subject to America's consumers--television, to which America is
addicted and a great deal of their service comes from cable or
satellite.
When we passed the Telecommunications Act, there were very
forceful assurances that there would be competition. I had
expected long ago that there would be competitive cable lines
running to my house and to the houses of other Philadelphians
and Pennsylvanians and Americans, and that has not happened.
Where there is a monopoly, the practice in America is to
have regulation, in Pennsylvania through the Public Utilities
Commission. However, Congress relied upon the representations
of the industry that there would be competition and it has not
happened. In fact, it may be that there have been very direct
efforts to thwart competition.
I am very concerned, Mr. Chairman, that a number of
invitees have not responded--Time Warner, Comcast and AT&T,
according to your staff. There are ways to assure attendance
other than by invitation which I think has to be considered by
this Subcommittee if we are to have people present to give us
answers to allegations which are present from those who are
here.
I had considered having a field hearing in Philadelphia on
some of these issues and had deferred until the Subcommittee
held this hearing. In anticipation of this hearing, I held an
informal meeting in my office on March 26th, and one of the
concerns that I had is that RCN had made an effort to provide
cable competition in Philadelphia and in a sequence of events
starting in June 1998 until February 14, 2001, RCN withdrew its
proposal, citing delays in having action taken by the requisite
authorities. That is a matter of enormous concern to me.
I am served by Old Wade, now Time Warner, but I have real
questions about the quality of service. I have a constituent
who can never get the cable company on the telephone, and she
is a very important constituent because when I come home that
is all I hear about. I won't detail the problems that we have
had with our cable company. I don't pay as much attention as I
should to the bill, but I wonder about the bill in light of the
absence of competition.
When we had the informal hearing, officials from RCN told
me about problems that they have in terms of getting the sports
network, SportsNet, and they were only able to get it on a 3-
to 5-month renewal period, which was a material handicap in
dealing with their customers. Comcast at that meeting made the
disclosure that they were prepared to give a long-term
arrangement. But I wondered why that commitment had to come at
a meeting in a Senator's office, why that commitment couldn't
come between the parties.
The Congress and the Senate and this Subcommittee would
much prefer not to have these hearings and not to be involved
in the activities of these private concerns, but that requires
a modicum of good faith and negotiation among the parties so
that the Senators don't have to intervene.
We have got a lot of other issues on our plate which we
have to take care of, and when we are called into these
meetings we don't come with a whole lot of composure and good
feelings about the issues, when we have had these assurances of
competition.
I am told by DIRECTV that because they are a satellite,
they can't get SportsNet. You have the equivalent of SportsNet,
Cablevision, in New York which refuses to give RCN access to
their accommodations.
If I may ask just one question before finishing my opening
statement, is it true that RCN cannot get Cablevision in New
York to give them access to sports programs?
Mr. Currey. That is correct, and I will deal with that in
my comments.
Senator Specter. Well, I am sure you will and after you
deal with it, this Subcommittee will try to deal with it. Maybe
the whole Congress will try to deal with it.
We are finding more of these arrangements made. We are
about to have arrangements made in the Washington, D.C. area,
and I find that the NFL will not give access to television so
that viewers might be able to watch a variety of television
games.
Mr. Kimmelman, may it note for the record, is nodding in
the affirmative.
I believe the NFL owes America a little something by virtue
of having an antitrust exemption. I have spoken about that at
some length in this room about why Pennsylvanians are paying $1
billion for stadium construction when the NFL has a $17.6
billion, multi-year television contract which they are able to
have as a result of a special exemption that Congress has given
to them.
These are some of the questions on my mind, Mr. Chairman. I
am writing to the president of Comcast today about some of the
issues which we heard about and I hate to impose another
hearing on this Subcommittee, but it may be necessary to do
more than invite Time Warner and Comcast and AT&T to appear.
It is my expectation to schedule a hearing in Philadelphia
with enough lead time to see if the invitation will be
sufficient or whether there would have to be something more
than an invitation. The Congress of the United States is
entitled to answers to these questions.
I thank you, Mr. Chairman and Senator Kohl, for pursuing
this important subject.
Chairman DeWine. Senator Specter, thank you very much.
Before we start, a couple of housekeeping items. We would
ask you to keep your opening comments to 5 minutes or less.
Maybe as a little extra incentive, the Senate has two votes in
a row sometime between 10:30 and 11, and once we break it will
be at least half an hour. So if we are done at that point, you
all can go home, and if we are not done, welcome back.
Let me maybe follow up on what Senator Specter said. As
chairman, I don't spend a lot of time using this podium talking
about people who didn't come, whom we invited and who had
``scheduling problems.'' Let me just say that I do have a long
memory, and also state, as Senator Specter has said, there is
always another opportunity, and we would expect that people
would not have scheduling problems two times in a row.
Let me turn to our panel. Mr. Hartenstein is Executive Vice
President of Hughes Electronics, and Chairman of DIRECTV
Global. Robert Sachs is President and Chief Executive Officer
of the National Cable Television Association.
Jerry Kent is President and Chief Executive Officer of
Charter Communications, which he co-founded in 1993. Mr. Currey
is Vice Chairman of RCN Corporation, and Gene Kimmelman is Co-
Director of the Washington, D.C., office of Consumers Union,
and certainly a person who has appeared before this panel I
can't tell you how many times in the last 4 years.
We appreciate all of you being here. We appreciate your
patience, and we will start on my left and on your right with
Mr. Hartenstein and we will go right down the panel.
Let me just say that the written statements which we have
received will certainly be made a part of the record.
STATEMENT OF EDDY W. HARTENSTEIN, CORPORATE SENIOR EXECUTIVE
VICE PRESIDENT, CONSUMER SECTOR, HUGHES ELECTRONICS
CORPORATION, AND CHAIRMAN, DIRECTV, GLOBAL, EL SEGUNDO,
CALIFORNIA
Mr. Hartenstein. Thank you, Mr. Chairman, Senator Kohl,
Senator Specter. Thanks for the opportunity to have us here and
hear from us today.
The last time I appeared before this Subcommittee was in
October 1997, when DIRECTV had been in business a little over 3
years and we had a mere 2.9 million subscribers nationwide.
Today, as we approach our seventh anniversary this summer, we
have more than 9.5 million customers, and that equates to about
1 out of every 11 households in the United States with DIRECTV.
Seventy percent of that customer base comes from areas where
cable is available.
Although more than 15 million households in total for the
DBS industry subscribe to DBS, 80 percent of all of the
subscribers in the country that take multichannel video
services receive their programming from a franchised cable
operator. So there still remain a few cable customers we can
target for conversion to satellite.
We think that the new, enhanced products and services that
we are offering in the interactive space--things like Wink,
things like TIVO, things like Ultimate TV from Microsoft, and
our new programming offerings, DIRECTV PARA TODOS, a Spanish-
language service--will help us attract new subscribers.
Just yesterday, we completed our acquisition of Telocity.
That is a leading nationwide provider of high-speed services
through DSL technology. Coupled with our new satellite two-way
high-speed service called DirecPC, which provides users with a
nationwide high-speed broadband Internet service, we will be
the first entity that can offer customers wherever they reside
in the U.S. a whole-house entertainment and information
solution.
Certainly, our recent success, I think, is in large part
due to the passage, Senator Kohl, as you indicated, of the
Satellite Home Viewer Improvement Act of last year, which
allowed us for the first time to offer local broadcast
channels. Imagine that, having a level playing field with cable
where we now, just a little more than a year since that
legislation was passed was passed and signed, offer local
network stations in some 41 major metropolitan markets, which
represents about 61 percent of the television households in the
country.
Now, in some markets more than 66 percent of our customers
are purchasing local channels. While it is difficult to
differentiate the effect of the availability of local channels
from other factors, overall through the end of 2000, with just
1 year in the marketplace, our new customer growth in those
markets where we did offer local channels was about 20 percent
higher compared to those that we aren't yet able to deliver
them to.
While the ability to offer local channels has certainly
been a major advance for us, I think several statutory and
regulatory obstacles are inhibiting us to complete the
competition with cable operators.
First, the biggest impediment to offering local channels in
additional communities above the ones that we already have is
the ``must carry'' requirement imposed by the Satellite Home
Viewer Improvement Act. By imposing ``must carry,'' Congress
has decided that it is more important for us to carry all 23
stations in Los Angeles and all 23 or 22 stations in New York,
and have that be more important than to offer residents in
cities such as Buffalo, Green Bay, Harrisburg, Wichita, just to
name a few, even a single channel of local content.
We would much rather use the almost $300 million we have
invested to launch this new spot beam satellite later this year
to extend our local channel offerings to additional smaller
markets than to use it to deliver little-watched channels in
markets where we have already substantially satisfied consumer
demand for localism.
But even if we are able to get relief from the ``must
carry'' and get a ``most carry'' interpretation through the
constitutional challenge that we have filed in Federal court,
that would only be the first step. We would still not have
sufficient capability and capacity to offer local channels in
all 210 local markets across the country. For direct broadcast
satellite to become more full-fledged competition to cable, we
need more spectrum, and we would urge Congress to direct the
FCC to do that.
Second, the passage of the program access provision of the
1992 Cable Act. I think I can say honestly I wouldn't be here
before you today if that hadn't happened. It is going to expire
next year, and we think it is going to still be necessary to
provide that competition.
I think using recent events as were mentioned by you,
Senator Specter, we are unable to receive from Comcast the
ability to transmit the Philadelphia sports channels to
Philadelphia residents, and that is because Comcast owns the
rights to that. We would like to do that, and I would urge the
FCC to conclude that program access is important and necessary,
and perhaps even strengthen it in a few ways so that it can't
flaunt the interest of Congress in providing competition.
I think, finally, the FCC has not yet taken full advantage
of the preemptive authority Congress has intended to convey in
1992 which has restrictive covenants and other impediments,
including exclusive long-term cable contracts to prevent
residents of apartment buildings and condos from subscribing to
alternate video services such as DIRECTV and relegate them to
second-class status.
Finally, our efforts to bring a robust, competitive
alternative to cable in the marketplace will be undermined if
the primary spectrum used by DBS is allowed to be invaded by
terrestrial wireless point-to-multipoint services such as those
proposed by Northpoint Technology to interfere with the
millions of consumers that are already getting DBS at home. I
think that today's happy customers of DBS could easily become
tomorrow's unhappy constituents if that kind of ill-considered
Government action would be allowed to happen and create
interruptions.
Before I close, I realize the time, but we are trying to be
good citizens, as well, and follow the lead of cable in going
with a DIRECTV Goes to School public service initiative, where
we are going to provide some 50,000 schools, public and
private, across the country with free access, free equipment,
to School Choice, which is a programming package we have put
together. And we hope that schools in all 50 States and the
District of Columbia will participate.
As I mentioned at the outset, we have come a long way. We
have still got a way to go before we can achieve our goal of
being in a pure competitive position on par with cable, and in
the Q and A I will be happy to go through the value
propositions that we offer to consumers to be that competitive
alternative.
[The prepared statement of Mr. Hartenstein follows:]
Statement of Eddy W. Hartenstein, Corporate Senior Executive Vice
President, Consumer Sector, Hughes Electronics Corporation and
Chairman, DIRECTV Global
Mr. Chairman, Senator Kohl, and members of the Subcommittee, thank
you for inviting me to appear before the Subcommittee. I appreciate the
opportunity to present our views on the competitive choices in video.
The last time I appeared before this Subcommittee in October 1997,
DIRECTV had been in business a little over three years and had 2.9
million subscribers nationwide. Today, as we approach our seventh
anniversary this summer, we have more than 9.5 million customers. One
in every 11 households in the United States has DIRECTV'.
And 70% of our customer base comes from areas in which cable is
available.
Direct broadcast satellite (``DBS'') is the principal competitor to
cable, with more than 15 million subscribers. Nevertheless, according
to the Federal Communications Commission, cable television still is the
dominant technology for the delivery of video programming to consumers
with 80 percent of all subscribers to multichannel video services
receiving their programming from a franchised cable operator.\1\ So
there remain quite a few cable customers we can target for conversion
to satellite.
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\1\ Annual Assessment of the Status of Competition in the Market
for the Delivery of Video Programming, Seventh Annual Report, CS Docket
No. 00-132, FCC 01-1, at In Sec. Sec. 5, 61 (released Jan. 8, 2001).
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We think the new enhanced products and services we are offering,
such as DIRECTV Interactive tm Powered by Wink, the DIRECTV
Receiver with TiVo, and the DIRECTVtm Receiver with
UltimateTV Service from Microsoft, as well as our Spanishlanguage
service, DIRECTV PARA TODOStm, will help us attract new
subscribers. And this week we are completing our acquisition of
Telocity, a leading nationwide provider of high-speed broadband
services through DSL technology. Coupled with our forthcoming two-way
DirecPC' service, which provides users with nationwide high-
speed broadband Internet service via satellite, we will be able to
offer our customers a ``whole house'' entertainment and information
solution.
Certainly our recent success is due in part to the passage by
Congress of the Satellite Home Viewer Improvement Act (SHVIA). While we
did not agree with every provision of that legislation, on balance we
viewed it as worthy of our support. Most importantly, the legislation
allowed satellite TV companies--for the first time--to offer local
broadcast channels.
We have moved quickly to bring the benefits of that legislation to
consumers. We are offering local network stations in 41 major
metropolitan markets, which represent more than 61 percent of the
television households in the country. We are very pleased with the rate
at which our subscribers are purchasing local channels. In some
markets, more than 66 percent of customers are purchasing local
channels. Overall, we are seeing a take rate of more than 43 percent
for all customers. And for new subscribers, the take rate is more than
59 percent.
While it is difficult to differentiate the effect of the
availability of local channels from other factors, through the end of
2000, customer acquisition in local channel markets was up about 20
percent compared to similar markets where local channels are not
offered.
The ability to deliver local content enables DIRECTV to offer
consumers a service that is fully competitive with cable in terms of
content and price in the markets in which we are offering local channel
service. For example, a DIRECTV subscriber who chooses our most popular
programming package, Total Choice', plus their local channel
package receives 141 channels for just $37.98 per month. His next-door
neighbor in Philadelphia who subscribes to Comcast's analog and digital
tiers receives 124 channels for $45.95--fewer channels at a higher
price. And his friend in Los Angeles who subscribes to Charter's analog
and digital tiers receives 154 channels for $46.95--13 more channels,
but at an additional cost of $8.98.\2\
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\2\ ``Cable Industry Outlook,'' Credit Suisse First Boston, Feb. 5,
2001, Table 12, DBS versus Digital Cable Offering Comparisons, at 20.
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While the ability to offer local channels has certainly been a
major advance for us, cable's continued market dominance requires
ongoing oversight, and where necessary, intervention by Congress and
the Commission to foreclose attempts by incumbent cable television
providers to stifle competition. Moreover, several statutory and
regulatory obstacles are inhibiting our ability to compete with local
cable operators.
Expansion of Local Channel Service
While the availability of loan guarantees may create incentives for
some entities to explore expanded local channel offerings, our ability
to broaden the delivery of local channels has not been limited by
access to capital. Rather, the biggest impediment to serving additional
communities is the ``must carry'' requirement imposed by SHVIA. Even
absent that constraint, we are ultimately limited by the amount of
spectrum allocated to us by the FCC. Let me explain.
Unlike cable operators, which have the ability to increase their
channel capacity indefinitely, DBS providers face very tangible channel
capacity constraints. There are only three DBS orbital slot locations
that are ``full-CONUS''--that is, capable of serving the entire
continental United States. The FCC has licensed all of the frequencies
at those three orbital locations to DIRECTV and EchoStar.
The must carry provision of SHVIA requires us to carry every full-
power local broadcast station in a market in which we offer any local
channels no later than January 1, 2002. This means that we have to use
our limited satellite capacity to deliver stations for which, frankly,
there is negligible consumer demand. For example, in both New York and
Los Angeles, we could be required to carry up to 23 stations. Many of
these stations have, based on their ratings, minuscule audiences.
Carrying such a station is a poor use of our limited satellite
capacity. The practical implications of this requirement are clear: by
imposing must carry, Congress has decided that it is more important for
us to carry all 23 stations in New York and all 23 stations in Los
Angeles than to offer the residents of cities such as Buffalo, Dayton,
Green Bay, Harrisburg, and Wichita even a single channel of local
content.
We will launch in the fourth quarter of this year a new high-power
spot beam satellite. The spot beam satellite will enable us to make the
most efficient use of our existing capacity in order to meet the must
carry obligation. But I can tell you that we would much rather use that
new $275 million satellite to extend our local channel offering to
additional, smaller markets than to use that satellite to deliver
little-watched channels in markets in which we have already
substantially satisfied consumer demand for localism.
Even if we were to get relief from the must carry obligation
through the constitutional challenge we have filed in federal court,
along with EchoStar and the Satellite Broadcasting & Communications
Association (SBCA), we still would not have sufficient available
capacity to provide local channels in all 210 television markets in the
United States. For direct broadcast satellite to become the full-
fledged competitor to cable that Congress desires, we need more
spectrum. To achieve this objective, we would urge Congress to direct
the FCC to make additional spectrum available to the DBS providers,
which could be used to bring local channels to those markets we cannot
serve with our existing limited capacity.
Extension of the Program Access Law
Without Congress' passage of the program access provision of the
1992 Cable Act, I would not be here before you today. That provision
allows cable's competitors to gain access to cable-affiliated
programming, such as CNN, Headline News, TBS, TNT, and HBO. Without
this programming, we cannot compete. The program access law is
scheduled to expire in October of next year, unless the FCC finds, in a
proceeding it is required to begin later this year, that the law
continues to be necessary to ``protect competition.'' \3\ Using recent
events as a likely indicator of future cable industry behavior, I can
predict with some confidence that the program access provision will
continue to be necessary to protect competition after 2002, and to
ensure that DIRECTV's subscribers continue to receive the programming
they've been enjoying.
---------------------------------------------------------------------------
\3\ 47 U.S.C. Sec. 548(c)(5).
---------------------------------------------------------------------------
In particular, Comcast, the nation's third largest cable operator,
has refused to negotiate with DIRECTV for carriage of Comcast
SportsNet, the Philadelphia-area regional sports network. Comcast's
action has disenfranchised tens of thousands of Philadelphia-area
DIRECTV subscribers and hundreds of thousands of other DIRECTV
subscribers who enjoy out-of-market sports. Comcast has used what it
perceives to be a ``loophole'' in the program access law, claiming that
because it has chosen to distribute Comcast SportsNet using terrestrial
rather than satellite facilities it does not have to make the regional
sports network available to its DBS competitors.
DIRECTV's experience with Comcast SportsNet is not an isolated one.
There is every indication that other cable operators are contemplating
similar strategies to attempt to evade the program access law,
particularly with regard to regional sports networks. Thus, it is our
hope that the FCC will conclude that the program access law continues
to be necessary, and that Congress will consider tightening the law to
ensure that cable operators cannot evade the law simply by delivering
programming by terrestrial means instead of via satellite, as Comcast
is attempting to do. The law should be revised to cover programming
owned by cable operators, no matter the delivery mechanism they choose.
Improved Access for MDU Residents
Our penetration rates in apartment buildings, condominiums, and
other multiple dwelling units (MDUs) continue to lag behind our single-
family home rates. The FCC has not yet taken full advantage of the
preemptive authority Congress intended to convey in the 1992 Cable Act
with respect to restrictive covenants and other impediments, including
exclusive, long-term cable contracts, that prevent both MDU owners and
renters who do not have exclusive use of areas suitable for antenna
installation from subscribing to alternative video services such as
DIRECTV. For years, DIRECTV has urged the Commission to amend its rules
to require landlords, condominium associations, and other homeowner
groups to provide access to at least two multichannel video services to
residents who do not have exclusive use of areas suitable for antenna
installation. I do not believe Congress ever intended to discriminate
against residents of multiple dwelling units (MDUs) by depriving them
of the benefits of competition available to single-family homeowners,
and we would ask Congress to help rectify this situation.
Ill-Advised Spectrum Sharing Proposals
All of our efforts to bring a robust competitive alternative to
cable to the marketplace will be undermined if the primary spectrum
used by DBS operators to downlink programming to subscribers across the
United States is invaded by terrestrial wireless point-to-multipoint
services such as those proposed by Northpoint Technology. One of the
top reasons consumers switch from cable to DBS is the greater service
reliability of DBS. Millions of U.S. consumers who use and rely upon
the DBS service will see increased interference in the form of longer
and more frequent service outages if a mass market fixed wireless
service is introduced into the DBS band. Today's happy customers could
easily become tomorrow's unhappy constituents if, as a result of an
illconsidered government action, they begin to see increased service
interruptions.
Let me assure you that our opposition to the deployment of a
terrestrial service in the DBS band has nothing to do with fear of
facing another competitor. We compete every day against the cable
giants, so it's ridiculous to say that we're afraid of competition. And
we will compete against these proposed terrestrial services if they're
properly located in a different spectrum band, such as those
specifically set aside for similar ``wireless cable'' services. Our
only concern is protecting the level of service our customers have come
to expect and which we have spent hundreds of millions of dollars to
ensure. The extensive efforts Congress has undertaken to increase cable
competition will be undermined if the FCC allows the spectrum intended
for DBS use to be shared with terrestrial fixed wireless services.
Public Service Initiative
As a company, we believe in public service. That is why last month
we launched DIRECTV GOES TO SCHOOLtm, a public service
initiative that will provide up to 50,000 public and private schools
around the country with free access to our SCHOOL CHOICEtm
programming package. Participating schools will receive more than 60
channels of educational programming, including such networks as CNN,
Discovery Channel, The History Channel, A&E, The Learning Channel, and
of course, C-SPAN2, which teachers can use to enhance their lesson
plans. In addition, we will provide freeof-charge to participating
schools special issues of DIRECTV--The Guidetm, which will
include feature articles on the educational programming offered in the
SCHOOL CHOICE package. We hope that schools in all 50 states and the
District of Columbia will participate in the program.
Conclusion
As I mentioned at the outset, we've come a long way in the three
years since I last appeared before this Subcommittee. While we still
have a way to go before we can achieve our goal of a competitive
position on par with local cable operators, the next time I appear
before this Subcommittee I hope to be able to tell you we're even
closer to that goal.
I appreciate the opportunity to share my views.
Chairman DeWine. Thank you very much.
Mr. Sachs?
STATEMENT OF ROBERT SACHS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NATIONAL CABLE TELEVISION ASSOCIATION, WASHINGTON,
D.C.
Mr. Sachs. Mr. Chairman, Senator Kohl, Senator Specter,
thank you for this opportunity to testify on the state of
competition in the multichannel video market.
Five years ago, Congress passed the landmark
Telecommunications Act of 1996. Some have argued that the Act
is not working, especially when one considers the lack of local
residential phone competition. But we should not let this
eclipse the fact that the Act has successfully spawned
competition in the video market.
Moreover, as cable companies complete system upgrades,
consumers are realizing benefits in the form of digital cable,
high-speed Internet, and cable telephone service. And in every
one of these businesses, cable faces real competition.
Competition in the video market is now well-established.
Today, consumers can choose from a variety of multichannel
video providers. As a result of this competition, nearly 20
million consumers, more than 22 percent of subscription
television customers, now obtain multichannel video programming
from some company other than their local cable operator.
The total number of direct broadcast satellite subscribers
jumped from 10.7 million to 15.3 million between February 2000
and February of this year, a 43-percent annual growth rate.
With nearly 10 million subscribers, DIRECTV now has more
customers than all but two cable operators, AT&T broadband and
AOL Time Warner. The number-two DBS provider, EchoStar, has
more customers than all but the top five cable companies.
In 38 States, satellite subscribership now exceeds 15
percent of all television homes. In Ohio, it is over 15
percent, in Wisconsin over 20 percent; in Utah almost 25
percent, and in Vermont over 40 percent. Today, most consumers
enjoy the choice of two DBS providers, in addition to cable,
and some have other multichannel video choices as well.
The ability to sell telephone high-speed Internet and an
expanded number of video programming channels over a single
broadband facility is providing new incentives for facilities-
based broadband competition. Companies like RCN, Wide Open
West, Carolina Broadband, Grande Communications, and Western
Integrated Networks have obtained franchises to provide
consumers with competitive broadband services. Although
relatively new, these companies have raised billions of
dollars. Incumbent local exchange carriers and some electric
utilities are also adding video to their product mix.
Cable companies have responded by aggressively upgrading
facilities and launching new services. Since passage of the
1996 Act, the cable industry has invested $42 billion to deploy
broadband plant in order to offer consumers a wide array of
advanced services. As the 1996 turned 5 in February, cable
added its 10 millionth digital video customer, 4 millionth
high-speed data customer, and millionth residential phone
customer. American consumers are realizing the benefits.
Mr. Chairman, I would be remiss if I did not address the
subject of cable prices. Despite escalating programming costs,
especially higher sports rights fees, and billions spent on
system upgrades, cable prices have remained stable on a per-
channel basis. In a recent report, the FCC found that cable
rates stayed unchanged in the year 2000 on a cost-per-channel
basis.
Industry critics may point to the fact that the average
monthly cable price increased 5.8 percent, compared to the
inflation rate of 3.7 percent, during the 12-month period
ending July 1, 2000. But such criticism fails to take account
of the fact that cable customers also received an average of
three additional channels of programming.
As cable systems are upgraded and new satellite services
are launched, cable operators regularly have added new
products. Price comparisons which fail to consider the
increased number of channels can therefore create a misleading
picture. In fact, data from the FCC and GAO show that the
inflation-adjusted price per channel of cable's video services
has actually declined since 1986. Cable customers today are
receiving more channels and better value than ever before.
In summary, cable will continue to be a leader in providing
consumers with choice, not only in video, but also in high-
speed Internet and telephony. At the same time, consumers will
be able to choose from among multiple vendors. In this highly
competitive environment, companies that succeed will be those
who offer consumers the best quality, value and customer
service. It is not possible to forecast precisely who will be
most successful, but one thing is certain. American consumers
will be the ultimate winners in this new competitive era.
Thank you very much.
[The prepared statement of Mr. Sachs follows:]
Statment of Robert Sachs, President and CEO, National Cable Television
Association
1. Introduction
Mr. Chairman, members of the Subcommittee, my name is Robert Sachs
and I am President and CEO of the National Cable Television
Association. NCTA represents cable companies serving more than 90
percent of the nation's 69 million cable customers and more than 200
cable program networks. Thank you for providing us with this
opportunity to testify before your subcommittee. In my testimony today,
I will describe the state of competition in the multichannel video
market and highlight what cable operators are doing to provide
consumers with new products and services over advanced broadband
facilities.
Five years ago, Congress passed the landmark Telecommunications Act
of 1996. The goals of this Act were to: (1) bring competition to
telecommunications and video; (2) expand consumer choice; (3) encourage
investment in new technologies; and (4) speed the introduction of
advanced services, including digital television. Some have argued that
the Act is not working--especially when one considers the lack of
widespread competition in local residential telephone markets. But we
should not let slow progress in local exchange competition eclipse the
fact that the Act has successfully spawned competition in the
multichannel video market. As cable companies complete system upgrades
across the country, consumers are realizing benefits in the form of
digital cable, cable modems, and cable telephone service. As I will
describe more fully, cable faces real competition in every one of these
businesses.
Before 1996, cable operators faced video competition primarily from
over-the-air television, C-band satellite receivers, video rentals, and
movie theaters. Direct broadcast satellite (DBS) competition has
changed that forever. Being digital from the start, and having the
advantage of substantially greater channel capacity, DBS spurred cable
operators to replace hundreds of thousands of miles of coaxial cable
with fiber optics so that they too could offer consumers hundreds of
channels of digital video and audio services. In responding to vigorous
competition from DBS, cable operators have made enormous investments in
not just plant but computers, billing systems, personnel, and
training--resulting in significant improvements in the quality of
service we provide to our customers.
Market Share of Multichannel Video Program Distributors (MVPDs)
----------------------------------------------------------------------------------------------------------------
Subscribers (in
MVPD Millions) Percent of MVPD Market
----------------------------------------------------------------------------------------------------------------
DBS 15.34 17.40
C-Band 1.12 1.30
MMDS 0.70 0.80
SMATV 1.50 1.70
Local Telephone Compani0.43 0.49
Broadband Competitors 0.66 0.75
Total Non-Cable 19.75 22.44
Cable 68.28 77.56
Total Multichannel Subscribers 88.03 100.00
----------------------------------------------------------------------------------------------------------------
Source: NCTA Research Department estimate based on data from A. C. Nielsen, Paul Kagan Associates, Cable World,
SkyREPORT, and public reports of individual companies.
2. Competition in the Video Market is Well Established and Growing
Steadily
a. nearly 20 million consumers now subscribe to cable's competitors
Today, consumers can choose from a variety of multichannel video
providers, including DBS, alternative broadband providers like RCN,
phone companies, and utilities. As a result of this competition, nearly
20 million consumers--more than 22 percent of subscription television
customers--now obtain multichannel video programming from some company
other than their local cable operator. In contrast, five years after
passage of the 1996 Act, the regional Bell companies still control 97
percent of all residential telephone lines.
b. dbs in particular has become a competitive substitute for cable
With the passage of the Satellite Home Viewer Improvement Act
(SHVIA) in November 1999, DBS companies can now retransmit local
broadcast signals into their market of origin (``local-into-local'').
As of December 2000, DirecTV and EchoStar made available local TV
signals to over 61 million television households in 41 markets. When
combined with their ability to offer hundreds of channels of digital
video and CD quality sound, DBS companies compete vigorously with
cable. Just ask Drew Carey.
The total number of DBS subscribers jumped from 10.7 million to
15.3 million between February 2000 and February 2001--a 43 percent
annual growth rate. DirecTV now has more subscribers (9.8 million) than
all but two cable operators--AT&T and AOL Time Warner making it the
third largest multichannel video provider in the U.S. The number two
DBS provider, EchoStar, has more customers than all but five cable
companies.
c. total dish subscribershiu (c-band and dbs) now exceeds 15 percent in
38 states.
According to SkyREPORT, Direct-to-Home (DTH) subscribers (all dish
customers, including DBS and C-Band) grew from 13.44 million to 16.45
million between February 2000 and February 2001, an increase of 22
percent (versus 1 percent for cable). In 38 states, DTH satellite
subscribership now exceeds 15 percent of all television homes. As of
January 2001, DTH penetration exceeded 20 percent in 28 states, 25
percent in 11 states, 30 percent in 4 states, and 40 percent in 1
state. For example, DTH penetration in Ohio is over 15 percent, in
Wisconsin over 20 percent, in Utah almost 25 percent, and in Vermont
more than 40 percent. Today, most consumers have the choice of two DBS
providers in addition to cable, and some have other multichannel video
choices as well.
States With Direct-To-Home (DTH) Dish Penetration of Fifteen Percent or
More (January 2001)
Percent
State of VHH w/
DTH
Vermont...................................................... 40.63
Montana...................................................... 38.39
Wyoming...................................................... 33.16
Mississippi.................................................. 30.76
North Dakota................................................. 28.42
Arkansas..................................................... 28.42
Idaho........................................................ 27.91
North Carolina............................................... 26.71
Kentuck...................................................... 26.38
West Virginia................................................ 25.39
Missouri..................................................... 25.27
South Dakota................................................. 24.46
South Carolina............................................... 24.42
Utah......................................................... 24.00
New Mexico................................................... 23.83
Texas........................................................ 23.64
Indiana...................................................... 23.51
Tennessee.................................................... 23.02
Alabama...................................................... 23.01
Oklahoma..................................................... 22.43
Maine........................................................ 22.33
Virginia..................................................... 22.10
Iowa......................................................... 21.88
Georgia...................................................... 21.78
Colorado..................................................... 20.88
Wisconsin.................................................... 20.68
Nebraska..................................................... 20.62
Oregon....................................................... 20.03
Arizona...................................................... 19.82
Kansas....................................................... 19.80
Minnesota.................................................... 219.04
Michigan..................................................... 17.78
Louisiana.................................................... 17.10
Florida...................................................... 16.79
Washington................................................... 16.42
New Hampshire................................................ 15.32
Ohio......................................................... 15.27
Nevada....................................................... 15.26
Source: SkyTRENDS SkyMAP January 1, 2001; www.skyreport.com
d. dbs is not the only competitor to cable
The ability to sell telephone, high speed Internet access, and an
expanded number of video programming channels over a single broadband
facility (or in conjunction with wireless or satellite providers) is
providing new incentives for facilities-based broadband competition.
Companies like RCN, Knology, WideOpenWest, Altrio, Carolina Broadband,
Everest Connection, Grande Communications, and Western Integrated
Networks have obtained franchises to provide consumers with competitive
broadband services. Although relatively new, and despite recent
difficulties in the capital markets, these companies have raised
billions of dollars to construct alternative broadband facilities in
various areas across the country.
As utilities face a newly deregulated and competitive marketplace,
they--like other telecommunications companies--have incentives to offer
and package additional services over their facilities. Consequently,
utilities like Sigecom in Indiana and Seren Innovations in California
are joining the new class of broadband overbuilders in offering
multichannel video programming services to consumers.
Incumbent local exchange carriers are also adding video programming
to their product line-ups. For example, Qwest has introduced a means of
delivering video programming to telephone subscribers in the
metropolitan Phoenix area over existing fiber-optic and residential
copper-wire telephone facilities. The new technology--VDSL (very high
speed digital subscriber line)--is similar to the DSL service used by
the telephone companies to provide high speed Internet service.
3. Cable Operators are Upgrading Their Systems and Competing With Other
Providers to Bring Consumers New Broadband Services
Cable companies have responded to competition in the video market
by aggressively upgrading their facilities and launching new services.
Since passage of the Telecommunications Act of 1996, the cable industry
has invested $42 billion to deploy broadband plant in order to offer a
wide array of advanced services, including digital video, digital
music, high speed access to the Internet, and telephony. These upgrades
involve rebuilding more than a million miles of cable plant. At year-
end 2000, they were approximately 75 percent complete. As the 1996 Act
``turned five'' in February 2001, cable added its 10 millionth digital
video customer, 4 millionth high-speed data customer, and 1 millionth
residential cable telephone customer.
a. digital video
Among the new options that cable customers have are digital video
services. Digital video provides increased channel capacity through
compression of multiple video signals in the same 6MHz slot previously
occupied by a single analog channel. As a result, customers are able to
receive dozens of new programming services from cable operators.
Digital video also offers crystal-clear video images, CD-quality sound,
on-screen menus, interactive program guides, search capabilities, and
expanded parental controls.
Cable program networks have already launched some 60 new digital
channels, offering consumers additional choice and further program
diversity. Examples include the Biography Channel and History Channel
International (from A&E); Science, Civilization, and Kids (from
Discovery); Noggin, Nick Too, and Nickelodeon Games & Sports (from
Nickelodeon); and style. (from E!). There are six new Hispanic channels
from Liberty Canales, new music channels from MTV and BET, and separate
channels targeting Indian, Italian, Arabic, Filipino, French, South
Asian and Chinese viewers from The International Channel. There are
also many new premium offerings from HBO (HBO Family, ActionMAX, and
ThrillerMAX), Showtime (Showtime Extreme, Showtime Beyond) and Starz!
Encore (Starz! Family, Cinema, Movies for the Soul, and Adventure
Zone).
Consumers are responding by signing up for digital tiers in record
numbers. Cable operators started 2000 with just under five million
digital video subscribers but doubled that number to 10 million by
March 2001. A survey released in March 2000 by the Cable and
Telecommunications Association for Marketing (CTAM) showed positive
customer response to their upgraded, digital cable offerings: of nearly
2,600 consumers polled, 95 percent expressed satisfaction with their
service.
With millions of digital set-tops now deployed in cable networks,
and thousands more installed every week, cable operators are beginning
to look beyond simple broadcast services toward new, interactive
services that meet the needs of individual customers. One service that
many operators are aggressively pursuing is video-on-demand (VOD, which
includes ``subscription video-on-demand''). This `personalized'
television service allows customers to watch new movie releases or
favorite TV programs, with real-time control of such features as pause,
fast-forward, and rewind.
b. cable modems: high speed access to the internet
Cable's upgraded broadband facilities also enable consumers to
access any website of their choice at speeds 50 to 100 times faster
than standard dial-up services. In addition, cable modem service is
``always-on'': there is no waiting for a connection to the network or
the Web. Customers can download information instantaneously with cable
modems, which can be purchased at retail stores or leased from a cable
operator. The industry ended last year with 3.7 million customers--more
than double its 1999 total of 1.6 million. By March 2001, the number of
cable modem subscribers exceeded 4 million.
Cable's entry into high speed data services has also benefited
consumers by prompting a strong competitive response from incumbent
telecommunications companies. For example, cable's deployment of cable
modems has led local telephone companies to offer digital subscriber
line (DSL) service, a broadband data technology that has been available
for over a decade. When there was no competition from cable, companies
like NYNEX and Bell Atlantic (now Verizon) chose to sell more expensive
T-1 and ISDN lines to consumers. However, as soon as cable offered
broadband access to the Internet, local exchange carriers took DSL off
the shelf and began selling it aggressively to millions of households
across the nation. By year-end 2000, DSL subscribership reached the two
million mark. In addition, companies such as Worldcom and Sprint
provide broadband fixed wireless service, while satellite operators
have begun to offer two-way broadband service.
c. cable telephony
The local residential telephone market has proven to be most
resistant to the introduction of competition. Despite strong incentives
provided by the Telecommunications Act of 1996, the vision of CLECs
purchasing unbundled network elements and reselling local loops has not
materialized as planned. However, with upgraded digital broadband
facilities, cable operators are well positioned to offer facilities-
based competition to local telephone companies.
Cable telephony provides numerous enhanced services, including
voice mail, caller ID, and call forwarding. AT&T Broadband, Cox Cable,
and Cablevision are today offering such services at rates 10-50 percent
below those charged by incumbent telephone providers. For example, Cox
communications offers its 200,000 residential phone customers a first
line at 10 percent below the prevailing Bell rate; additional lines at
up to 50 percent discounts; and feature packages such as call waiting
at 30-75 percent discounts.
Cable operators started the year 2000 with 200,000 residential
telephone customers and ended it with 850,000. They added a record
280,000 new residential telephone subscribers during the fourth quarter
of 2000, and currently serve more than 1 million telephone customers.
In addition, cable companies such as Cox, Adelphia Business Solutions,
and Cablevision Lightpath are providing more than two million telephone
lines to business customers.
Although still a new business, telephony is a key component of
cable's business strategy for the future. This includes both switched
voice service and Internet protocol (IP) telephony over broadband
networks. Cable companies like Charter, Comcast, AOL Time Warner, and
others are already field-testing IP telephony. Just as the first five
years of the Act have seen video, wireless, and Internet competition
flourish, I believe the next five will see Congress' vision of local
phone competition finally realized.
4. Programming Ownership
Today there are 224 national cable networks, compared with 76 in
1989. At the same time that cable is expanding its service offerings,
vertical integration in the cable industry has declined from 53 percent
in 1989 to 35 percent in 2000. This percentage will drop even further
when AT&T completes its plans to divest Liberty Media.
In contrast, major companies like Disney, General Electric, Viacom,
and News Corp (who respectively own the ABC, NBC, CBS and Fox
networks), are increasing their ownership of cable networks. Each of
the major commercial broadcast TV networks today is owned by a media
company that has financial interests in 10 to 20 cable networks. Some
are nationally distributed channels like CNBC, while others are
regional channels like Fox Sports Net. Recently, Viacom (the owner of
CBS) completed the acquisition of Black Entertainment Television,
adding to its array of popular cable networks, which already includes
Showtime, MTV, and Nickelodeon.
Broadcast Network Investments in Cable Networks
Walt Disney/ABC
The Disney Channel
SoapNet
Toon Disney
Partial Ownership:
ESPN
ESPN2
ESPNews
ESPN Classic
Lifetime Television
Lifetime Movie Network
E! Entertainment Television
A&E Television
The History Channel
The Biography Channel
The History Channel International
News Corp./Fox/Fox Entertainment
Fox News
Fox Sports Americas
Fox Sports World
fX
fXM: Movies on Fox
The Health Network
Fox Sports (regional networks): Southwest, West,
West 2, Pittsburgh, Rocky Mountain, Northwest,
Utah, Midwest, Arizona, Detroit, North
Partial Ownership:
National Geographic
TV Guide
Fox Family
Outdoor Life
Speedvision
Golf Channel
Fox Sports (additional regional sports networks)
Viacom/CBS/UPN
BET Holdings: BET, BET Action Pay-Per
View, BET on Jazz, BET Gospel
The Box
MTV Nickelodeon/Nick at Nite
TV Land
VHi
TNN: The National Network
Showtime
The Movie Channel
Flix
The Suite (digital networks): Noggin,
Nickelodeon GAS, Nick Too, M2,
MTV X, MTV S, VH1 Country, VHI
Smooth
Partial Ownership:
Comedy Central
Sundance Channel
General Electric/NBC
CNBC
Partial Ownership:
MSNBC
A&E Television
The History Channel
The Biography Channel
The History Channel International
AMC
Bravo
Independent Film Channel
MuchMusic
WE: Women's Entertainment
Valuevision
Fox Sports (regional networks): Chicago,
Bay Area, Florida, New England, New
York, Ohio, Madison Square Garden
Network
5. Cable Prices
Despite escalating programming costs (especially higher sports
rights fees) and billions spent on system upgrades, cable prices have
remained relatively stable on a per-channel basis. For example, the
Federal Communications Commission found that cable rates stayed
unchanged in the year 2000 on a cost-per-channel basis (Report on Cable
Industry Prices, FCC 01-49, MM Docket No. 92-266, released February 14,
2001). According to the same report, during the 12month period ending
July 1, 2000, average monthly prices for basic service tiers (BST),
cable programming service tiers (CPST), and equipment increased by 5.8
percent. This represents a very slight increase (from 5.2 percent) for
the year ending July 1, 1999--during which CPST prices were subject to
FCC regulation from July 1, 1998, to March 31, 1999.
Industry critics may seize on the fact that average monthly cable
prices increased 5.8 percent compared to the inflation rate of 3.7
percent during the 12-month period ending July 1, 2000. But their
criticism fails to take into account the fact that cable subscribers
also received an average of three additional channels of BST and/or
CPST programming. As cable systems are upgraded and new satellite
programming services are launched, cable operators have added new
channels that consumers want. Year-to-year comparisons which fail to
consider the increased number of channels that operators provide to
customers therefore create a misleading picture. In fact, data from the
FCC and General Accounting Office show that over time, the price per
channel of cable's video services has declined since 1986 when adjusted
for inflation:
Price Per Cable Channel, 1986--2000
------------------------------------------------------------------------
12/1/86 4/1/91 7/31/97 7/31/00
------------------------------------------------------------------------
Nominal Price per Channel $0.44 $0.53 $0.63 $0.66
Price Per Channel Adjusted for $0.69 $0.68 $0.68 $0.66
Inflation (in 2000 dollars)
------------------------------------------------------------------------
Source: GAO Survey of Cable Television Rates and Services, July 1991;
FCC Reports on Cable Industry Prices, released 12-15-97 and 2-14-01;
Bureau of Labor Statistics, CPI-U.
This drop in real per-channel cable prices has occurred even though
programming costs have skyrocketed since 1986. For example, between
1996 and 2000, the cable industry spent over $36 billion on basic and
premium programming--roughly 75 percent more than the $20.6 billion it
spent during the previous five years. Cable customers today are
receiving more channels and better value for their dollar than ever
before.
Cable Systems' Programming Expenditures: 1986-2000
Expenditures
Year (in
Billions)
1986...................................................... $2.030
1987...................................................... 2.289
1988...................................................... 2.599
1989...................................................... 2.918
1990...................................................... 3.195
1991...................................................... 3.463
1992...................................................... 3.811
1993...................................................... 4.000
1994...................................................... 4.370
1995...................................................... 4.963
1996...................................................... 5.656
1997...................................................... 6.413
1998...................................................... 7.466
1999...................................................... 8.000
2000...................................................... 8.882
Source: NCTA Research Department estimate, based on data from Paul Kagan
Associates, Inc. and the U.S. Copyright Office
5. CONCLUSION
Over the last five years, there has been rapid and unabated growth
of competition in the video market. The job is not yet done, but the
convergence of video, voice, and data services in the digital broadband
marketplace will only accelerate this trend. Cable will continue to be
a leader in providing consumers with choice--not only in video
services, but also in high speed Internet services and telephony. At
the same time, consumers will be able to choose from among multiple
vendors when making their purchases. In this highly competitive
business environment, companies that succeed will be those who offer
consumers the best quality, value, and service. While it is not
possible to forecast precisely which companies will be most successful,
one thing that can be said with certainty is that American consumers
will be the ultimate winners of this competition.
Thank you again for this opportunity to present our industry's
views. I would be happy to answer the Subcommittee's questions.
Chairman DeWine. Thank you.
Mr. Kent?
STATEMENT OF JERRY KENT, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
CHARTER COMMUNICATIONS, ST. LOUIS, MISSOURI
Mr. Kent. Good morning. Thank you, Mr. Chairman, Senator
Kohl, Senator Specter, for inviting me to testify today.
I cofounded Charter as an entrepreneurial company in 1993
and we have grown to be the fourth largest cable company in the
country, serving approximately 6.5 million customers in 40
States. Today, Charter is facing increasing competition in the
video marketplace from direct broadcast satellite and from
terrestrial competitors such as local utilities, phone
companies, and cable overbuilders. Approximately 20 percent of
the homes in Charter's service areas have chosen to subscribe
to a competitor, and that is growing daily.
To compete effectively, Charter has chosen to capitalize on
what we perceive to be our greatest competitive advantage, our
advanced broadband delivery system. We believe that we have the
best technology to transmit voice, video, and data services
with the speed, capacity, and interactive capability that our
customers demand. That belief in our broadband pipe was the
main driver in my founding of Charter Communications.
Subsequently, in 1998, Paul Allen bought controlling
interest in Charter to help realize his vision of a wired world
in which cable's broadband capabilities will facilitate the
convergence of television with computers and the Internet.
Today, we are delivering on that wired world vision by
upgrading our plant and equipment to state-of-the-art
technology that is second to none. Our strategy is to invest in
and deploy a plethora of services through that broadband pipe
that will give us a competitive advantage in the open
marketplace.
We are well into a 3-year, $3.5-billion program to upgrade
and rebuild Charter's systems to the highest broadband
standards in the industry. The billions of dollars we are
investing to convert our plant from a one-way analog video
delivery service into a two-way interactive digital platform is
in large part fueled by the competition we face.
In response to this competition, we also made converting
our systems to digital our top priority in the year 2000.
Charter started the year with just 155,000 digital customers.
By the end of the year, we had over 1 million digital
customers, accounting for almost 15 percent of our customer
base. In the first quarter of 2001, we added well over 20,000
new digital customers per week. Through the end of this year,
Charter will have invested approximately $1 billion in the
conversion to digital, which is over and above our $3.5 billion
plant upgrade program.
Now, of course, rebuilt plant is more than just increased
programming choices and better quality. Using our new capacity,
we are able to offer our customers exciting, new interactive
services, including high-speed Internet access, Internet access
over the television set, and video on demand. And we have begun
trials on Internet protocol, or IP telephony, in order to offer
our customers a choice in local phone service.
In 2000, we nearly tripled customers to our high-speed
Internet service, called Charter Pipeline. In the first quarter
of this year, we have added 6,000 new data customers per week.
Charter Pipeline cable modem service competes directly with the
telephone industry's fast-growing DSL service.
We also recently launched Video on Demand in two of our
markets. With this new service, customers have access to a
library of more than 400 movie titles and can enjoy full VCR
functionality while viewing their selection. By the end of
2001, we are projecting 2.2 million Charter homes will have
access to Video on Demand technology.
But in a competitive environment, it all comes down to
taking care of your customer. They vote with their pocketbook
everyday in this competitive environment, and that is why we
are continuing to enhance our customer service program.
For example, in Wisconsin we have invested more than $500
million to upgrade our plant and swiftly deploy advanced cable
services. To service our newly upgraded systems, we opened our
first state-of-the-art regional customer contact center in Fond
du Lac, which is staffed 24 hours a day, 7 days a week. This
center will serve as a template for six additional regional
centers that we are building just this year at a total cost of
over $60 million.
Charter is also undertaking telephony initiatives focusing
on the testing of Internet protocol calling technologies. We
are working currently on a trial in Wisconsin and in the St.
Louis market, and we expect to compete in local telephone
service when our IP technology is ready.
In conclusion, Charter is working on several other advanced
technology initiatives because we acknowledge a new era of
competition. As I say in investor conferences, we do not bury
our head in the face of competition. By investing in broadband
technologies and deploying new services through innovation,
Charter is well positioned to compete effectively in this
vibrant new marketplace. The American consumers are the real
winners, with an increasing array of digital, data, and
interactive services available from a growing number of
competitive providers.
Thank you.
[The prepared statement of Mr. Kent follows:]
Statement of Jerry Kent, President and CEO, Charter Communications
Good morning. I am Jerry Kent, President and CEO of Charter
Communications. I cofounded Charter as an entrepreneurial company in
1993, and we have grown to be the fourthlargest cable company in the
country. With the closing of a pending acquisition, Charter will be
serving approximately 7 million customers in 40 states. Thank you for
inviting me to testify this morning on how Charter Communications is
responding to the intense competition we face in the multichannel video
marketplace.
The cable industry is facing increasing competition in the video
marketplace from direct broadcast satellites and from terrestrial
competitors such as local utilities, phone companies and cable
overbuilders. More than 20% of the homes in Charter service areas have
chosen to subscribe to a competing DBS provider. Terrestrial
competitors include Knology, which competes with us in several markets
in the southeast; Wide Open West, which has obtained franchises in Fort
Worth, Texas and in several communities in our hometown of St. Louis;
and several local utilities and phone companies in communities
including Wisconsin Rapids, Wisconsin; Newnan, Georgia; and St. Cloud,
Minnesota.
In order to compete effectively, Charter has chosen to capitalize
on what we perceive to be our greatest competitive advantage: our
advanced local delivery system. We have the ability to transmit voice,
video and data services with the speed, capacity and interactive
capability that our customers demand. That belief in our broadband pipe
was the main driver in my founding of Charter Communications. In 1998,
Paul Allen bought controlling interest in Charter to help realize his
vision of a Wired World, in which cable's broadband capabilities will
facilitate the convergence of television with computers and the
Internet.
Based upon our potential, my management team in 1999 completed what
was then the third largest IPO in U.S. history.
Today we are delivering on that Wired World vision by upgrading our
plant and equipment to state-of-the-art technology that is second to
none. Our strategy is to invest in and deploy a plethora of services
through that broadband pipe that will give us the ability to compete
effectively in the open marketplace.
We are well into a three year $3.5 billion program to upgrade and
rebuild our systems to the highest broadband standards in the industry.
Today, nearly 70% of our customers are served by systems that are newly
upgraded and capable of providing digital video, high speed Internet
access and other exciting interactive services. And by the end of next
year, almost 90 percent of our customers will be served by systems of
750 MHz or greater.
This massive rebuilding project is not occurring in a vacuum.
Charter is engaged in a fierce competitive battle with DBS providers,
telephone companies, utilities, and cable overbuilders. The billions of
dollars we are investing to upgrade our plant from a one-way analog
video delivery service into a two-way interactive digital platform is
in large part fueled by the competition we face in the marketplace. We
are deploying advanced services to set us apart from the competition in
the eyes of the consumer.
In response to this competition, we made converting our systems to
digital our top priority in 2000. Our digital conversion has been
occurring at a rapid rate and our customers are responding with great
enthusiasm. Charter started the year 2000 with just 155,000 digital
customers. By the end of the year, we had over one million digital
subscribers accounting for almost 15 % of our customer base-a 550% rate
of growth. On average, we added 17,500 new digital customers per week,
a 560% rate of growth. In the first quarter of 2001, we added well over
20,000 new digital customers per week and we expect to end the year
with over 30% of our customers subscribing to digital services.
Of course, rebuilt plant is more than just increased programming
choices and better picture quality. Using our new capacity, we are able
to offer our customers exciting new interactive services including high
speed Internet access, Internet access over the television set and
video on demand. And we have begun trials on Internet Protocol (IP)
telephony in order to offer our customers a choice in local phone
service.
In 2000, we nearly tripled customers to our high speed Internet
service, called Charter Pipeline, ending the year with 250,000 data
customers. We added over 3,500 new data customers per week last year.
In the first quarter of this year, we have added 6,000 new data
customers per week. Charter Pipeline cable modem service competes
directly with the telephone industry's fast growing DSL service, and
our prices are very competitive. In fact, it was the deployment of
cable modem service that sparked competition from DSL providers. We
also provide significant discounts for a bundled video and data product
to attract and retain customers.
We also recently launched Video on Demand in two of our markets.
With this new service, customers have access to a library of more than
400 movie titles and can enjoy full VCR functionality while viewing
their selection. Customer response has been extraordinarily positive.
We have seen Video on Demand take rates double that of traditional pay-
per-view and we will roll out Video on Demand in 10 more markets this
year. By the end of 2001, we are projecting 2.2 million Charter homes
will have access to Video on Demand technology.
But in a competitive environment, it all comes down to taking care
of your customer. They vote with their pocketbook every day in this
competitive environment. That is why we are continuing to enhance our
customer service program.
For example, in Wisconsin, we have invested more than half a
billion dollars to upgrade our plant and swiftly deploy advanced cable
services. To service our newly upgraded systems, we opened our first
state-of-the-art regional customer contact center in Fond du Lac. The
center does not replace our local offices, but adds a level of
specialized customer support for advanced digital products, available
24 hours a day, seven days a week. This center will serve as a template
for six additional regional centers that we are building this year at a
total cost of over $60 million, culminating in twelve regional call
centers at a cost of over $100 million in the next two years.
Charter is also undertaking telephony initiatives focusing on the
testing of IP calling technologies and developing back-office support.
We are working with Cisco, Telecordia and Motorola on a trial in
Wisconsin and another home-user trial with Nortel and Antec in the St.
Louis market. We expect to compete in local telephone service when our
IP technology is ready. We anticipate this to be 2003.
Charter is working on several other advanced technology initiatives
including video streaming, which will be available to our customers in
the third quarter; home networking, and web cams for video conferencing
that will benefit our residential customers.
Charter fully recognizes that we are in a new era of competition
for the various services we offer to our customers. By investing in
broadband technologies and deploying new services through innovation,
Charter is well positioned to compete effectively in this vibrant new
marketplace. The American consumers are the real winners with an
increasing array of digital, data and interactive services available
from a growing number of competitive providers.
Thank you again, Mr. Chairman, for inviting me to appear before you
today. I would be happy to answer any questions you might have.
Chairman DeWine. Thank you, Mr. Kent.
Mr. Currey?
STATEMENT OF ROBERT CURREY, VICE CHAIRMAN, RCN CORPORATION,
PRINCETON, NEW JERSEY
Mr. Currey. Mr. Chairman, Ranking Member Kohl, and members
of the Antitrust Subcommittee, I am pleased to be here to
discuss the importance of competition in the cable market.
RCN was formed in 1996 with the unique mandate to provide
bundled telephone, cable, and Internet access all on one pipe,
through one provider, on one bill--true convergence. We operate
in 7 of the 10 largest U.S. markets, and for the first time in
these markets consumers have a choice.
RCN is the largest cable competitor in the country, with
about 1 million customer connections. We are also unique
because unlike telecom startup companies, we focus on serving
residential consumers.
Today, the cable industry is dominated by a small number of
multiple-system operators who also own programming and who are
now clustering their systems geographically for greater local
control. The country's 10 largest cable monopolies now serve
almost 90 percent of all subscribers.
Despite this David-and-Goliath scenario, RCN is
aggressively competing in the market. We are spending large
amounts of time and money and we are making healthy progress,
but we continue to face serious anti-competitive practices by
entrenched incumbent cable operators. Their anti-competitive
practices include withholding vital programming, restricting
our access to apartment buildings, and pressuring local
authorities to deny competitive franchises.
As to the programming, consumers simply will not switch to
RCN if we cannot guarantee first-rate programming, especially
local sports. Naturally, incumbents are trying to keep the best
programming away from us. In New York City, for example,
Cablevision owns or controls the programming rights to 7 of the
9 professional sports teams and their venues, and Cablevision
has withdrawn from our consumers an important tier of local
sports programming by claiming the so-called terrestrial bypass
loophole.
In Philadelphia, Comcast serves about 90 percent of the
market and controls the programming for professional
basketball, baseball, and hockey. Yet, Comcast won't give us
more than a rolling 3-month contract for that programming. This
is simply not sustainable commercially.
Congress has tried to prevent this abuse by requiring
vertically integrated cable companies to make their programming
available to competitors. But the FCC's mistaken interpretation
of the law allows the incumbents to withhold that programming
by simply delivering it by terrestrial means. We urge Congress
to close this loopholes.
Incumbents also attempt to deter our access to the market
by preventing us from serving apartment buildings through
exclusive agreements with building owners and operators, or in
an even more insidious way by claiming ownership to the inside
wire inside the building walls. These buildings are a crucial
core market for a new competitor providing residential service
in urban areas. Incumbents also pressure local franchise
authorities to delay granting competitive franchises. If that
doesn't work, they push for commercially unreasonable
obligations on the potential competitor.
In Philadelphia, Comcast heavily lobbied the city against
our entry. Eventually, the city government became indifferent,
even hostile to our efforts. After 2 1/2 years, we reluctantly
abandoned our plans to spend more than $200 million and bring
hundreds of new jobs to the city, as well as introduce choice
for the first time for cable and phone service. This is not in
the public interest.
Competition is such a powerful force that merely announcing
our entry into a market dramatically changes the incumbent's
behavior. Price increases are moderated or delayed and channel
lineups and customer service are improved. These facts are
documented for a number of markets in detail and covered in my
written testimony.
Incumbent monopolists are aggressively pushing a message
that oversight is no longer necessary because competition has
arrived. Well, competition has begun to arrive, but during the
transition to a fully competitive environment we need the
Government's active oversight and enforcement of the existing
rules.
Most immediately, the provisions of the Cable Act of 1992,
barring exclusivity in the distribution of vertically
integrated programming, will sunset next year unless the FCC
acts to retain them. Congress should urge the FCC to prevent
the sunset of this rule. Further, Congress should close the
terrestrial bypass loophole and make clear the FCC's power to
enforce pro-competitive policies. These actions are vital to
guarantee consumers the benefits of competition.
I will be happy to answer any questions you may have. Thank
you very much.
[The prepared statement of Mr. Currey follows:]
Statement of Robert Currey, Vice Chairman, RCN Corporation
Mr. Chairman and Members of the Subcommittee:
My name is Bob Currey. I am the Vice Chairman of RCN Corporation
(``RCN''), which is one of the largest new competitive entities in the
cable, or Multichannel Video Programming Distribution (``MVPD'')
industry. I am grateful for the opportunity to testify today before the
Antitrust Subcommittee to give you my company's perspective on the
state of competition in an industry which historically has been
dominated by entrenched monopolists.
I. Introduction
RCN, which was created in response to the pro-competitive policies
adopted in the Telecommunications Act of 1996, is unique in a number of
respects. We offer our customers a variety of bundled services,
including competitive local exchange carrier and interstate telephone
service, high speed internet access services and cable services. We
focus our efforts on bringing competition to residential consumers. We
are building out, and relying on, our own state-of-theart broadband
fiber optic cable network, an investment of many billions of dollars.
We operate in the Northeast corridor, from Boston to Washington, D.C.,
and in the San Francisco, Los Angeles, and Chicago areas. Through our
Resilinksm plan, we offer our customers the option of subscribing to
one or more of our services. In respect to each we seek to provide
higher value than the competition and, in addition, we offer discounts
for those who participate in all three. The focus of my testimony
today, however, is on the video aspect of our business and specifically
on the state of competition in the cable, or MVPD marketplace. In such
capacity we are frequently described as a ``cable overbuilder.''
Before describing RCN's business model and activities, let me
briefly outline the state of the cable market as I see it. Given the
very strong economies of scale and scope which exist in the
construction, installation and servicing of a broadband facility, the
cable industry has historically been characterized by monopoly in any
given area. There has been some minor competition in certain markets,
coming from wireless (so-called SMATV and MMDS) operators, especially
in large apartment buildings, but on the whole incumbent cable
operators have accounted for virtually all of the market.\1\
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\1\ In a very few markets cable-to-cable competition has existed
for some years, for example in Allentown, Pennsylvania, in which RCN
has been competing with another local franchisee for many years. Both
companies have wired most of the community and most homes have
immediate access to two sets of cable wires.
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Competing with an existing cable operator in an urban area is not
for the faint-hearted or the thinly-capitalized. Since passage of the
Telecommunications Act of 1996, however, with its strong emphasis on
encouraging competition in the telecommunications and broadband
markets, and legislation addressing certain problems faced by the
Direct Broadcast Satellite (``DBS'') industry, competitive entry has
taken root. In its January, 2001 annual survey of the MVPD industry,
the FCC concluded that traditional cable now accounts for only 80% of
the market, with DBS having captured some 15%, and other market
participants, such as overbuilders of traditional cable systems and
wireless operators, accounting for the remainder.\2\ The terrestrial
wireless and DBS systems suffer from line-of-sight limitations which do
not hinder RCN's fiber optic based service. For that reason, it is
particularly important for city dwellers to have access to a cable-
based competitor like RCN.
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\2\ In the Matter of Annual Assessment of the Status of Competition
in the Market for the Delivery of Video Programming, 7th
Annual Report, CS Docket No. 00-132, FCC O1-1, rel. January 8, 2001.
According to the FCC, cable's share of the MVPD market has declined in
2000 from 82% to 80%, although the number of cable subscribers has
grown from 66.7 million to 67.7 million. Non-cable MVPD subscribership
has grown from 14.2 million to 16.7 million, an 18% increase. Most of
this growth is attributable to DBS, whose share of total MVPD
subscribers has grown from 10.1 million to 13.0 million, or 15.4% of
all MVPD subscribers. Local exchange carrier (telephone) participation
in the MVPD industry is slowing; there is little OVS activity (less
than. 1%) and little cable participation in telephony.
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Nevertheless, it is worth emphasizing that, even as modest
competitive entry has been occurring, the cable industry has grown ever
more concentrated, with the 10 largest multiple system owners
(``MSOs'') now accounting for some 52.5% of the market, and with the
vertical integration of cable companies and programming vendors growing
ever more concentrated.\3\ This continuing concentration expresses
itself also geographically, through the development of ``clustering,''
by which large, multiple system owners (``MSO''s) trade systems among
themselves with the goal of concentrating an entity's ownership in one
or a few areas, rather than having widespread but less market-dominant
operations. The industry claims that this clustering allows it to
undertake system and program upgrades, and no doubt it does.
Unfortunately, it also has the effect of making a local cable company's
entrenchment in a metropolitan area even more unassailable than it may
have been before the clustering took place.
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\3\ The Commission states flatly that the market for the delivery
of video programming ``continues to be highly concentrated and
characterized by substantial barriers to entry which serve to increase
the cost of potential entry into a rival's market.'' (para.
137). The 7th Annual Report notes that the top four MSOs
serve more than 50% of all subscribers: ATT (19.1%);T/W (14.9%);
DirecTV (10.3%); and Comcast (8.4%). The Report notes also that the top
10 MSOs served 75% of the MVPD universe in 1999 but 84% in 2000.
(para. 169). One or more of the top five MSOs holds
ownership interests in each of the 99 vertically integrated services.
(para. 174). Nine of the top 20 video programming networks
ranked by subscribership are vertically integrated with a cable MSO.
(para. 175). A ``significant amount'' of video programming
is controlled by only 11 companies, including cable MSOs. (Id.).
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While this is not the place to recite the long and complex
regulatory history of the cable industry, a few very brief observations
are necessary to understand the current situation. The basic
Communications Act of 1934, of course, had no reference to cable
service, although in the late 1950's and mid 1960's the FCC did take
regulatory steps to protect the television industry from the rapidly
growing power of cable operators. Congress itself did not specifically
impose regulation on the cable industry until 1984, when it passed the
Cable Communications Policy Act of 1984,\4\ which established the basic
federal regulatory scheme by which local franchise authorities have
jurisdiction to authorize cable systems, subject to a limited degree of
federal oversight. This legislation, however, only provoked growing
concern about the monopolistic power of the cable industry and the need
to impose some greater degree of regulation on it. As a result, the
Cable Television Consumer Protection and Competition Act of 1992 was
adopted.\5\ This legislation followed three years of contentious
congressional hearings, was heavily oriented toward regulation, and
added to the FCC's authority to control cable's rates and practices in
an effort to address widespread and vocal public concern about the
economic power and poor service performance of the cable industry. Yet
it too failed to quell rising unhappiness with the prices and services
offered by the industry.
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\4\ Pub. L. No. 98-549, 98 Stat. 277 (1984), codified at 47 U.S.C.
Sec. Sec. 521, et seq.
\5\ Pub. L. No. 102-385, 106 Stat. 1460 (1992), codified in
scattered sections of Title VI of the Communications Act. See 47 U.S.C.
Sec. 521, et seq.
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Accordingly, the Congress again addressed the issue in the
Telecommunications Act of 1996 which contains a number of provisions
specifically intended to encourage competitive entry into the MVPD
market. The most important of these is section 653,\6\ which creates a
new mode of competitive entrant, known as an open video system
(``OVS'') operator. The OVS, a mixture of cable operator and common
carrier, was designed by Congress to permit local exchange telephone
companies and others to enter the cable business, enjoy a reduced
degree of regulation, and offer unaffiliated programmers the
opportunity, in effect, to program their own small capacity system,
riding on a portion of the high capacity pipe installed by the OVS
operator.
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\6\ 47 U.S.C. Sec. 573.
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RCN has become the country's largest OVS operator,\7\ and has
entered local markets either as an OVS operator or as a traditional
Title VI franchised cable company, depending on the circumstances in
each community. Specifically RCN currently operates as an OVS in
certain suburbs of Boston, in New York City, in Washington, D.C. and
certain of its suburbs, as well as in South San Francisco. We are also
developing traditional franchised cable operations in the Boston, New
York, Philadelphia, Washington, D.C., San Francisco, Los Angeles, and
Chicago metropolitan areas. Unfortunately, the OVS model has not proven
as attractive as one might have hoped due to a variety of factors.
These include a court decision which struck down the FCC's rule
eliminating the need for local franchising of OVS systems, the
hesitation and even reluctance of many local franchising bodies to put
aside the traditional franchise as a regulatory model and to adopt the
new OVS concept, and, in addition, certain regulatory decisions of the
FCC which have had a chilling effect on the OVS approach by permitting
local cable competitors, in certain circumstances, to require the OVS
operator to divulge its service and operational plans to a local
competitor.
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\7\ Indeed, there exist no other significant OVS operations
although Congress and the FCC intended OVS to be the primary source of
facilities based competition to cable operators. See, e.g.,
Implementation of Section 302 of the Telecommunications Act of 1996,
Open Video Systems, Second Report and Order, 11 FCC Rcd 18223, 18259
(1996)(Subsequent history omitted).
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Another of the procompetitive steps taken in the Telecommunications
Act of 1996 was the amendment of section 224 of the Communications Act
to compel pole-owning utilities to make their poles accessible to cable
companies and to telecommunications companies and to impose additional
pro-competitive conditions on the utilities.\8\ RCN has found it
invaluable to have the benefit of this legislation. As a telecom entity
which plans to build its own facilities to serve primarily residential
customers, rather than the more limited universe of commercial
subscribers targeted by the great majority of competitive local
exchange carriers (``CLECs''), and as a cable competitor, RCN must run
its facilities up every residential street and down every alley.
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\8\ 47 U.S.C. Sec. 224(e), 224(f)(1).
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In Massachusetts, for example, we are currently on 72,000 poles and
will require access to some 60,000 more. In Pennsylvania we are
currently licensed for almost 16,000 poles and, ultimately, may need
access to over 100,000. In Queens, New York, we are on 5,200 poles.
This means that suitable access to poles is far more important to RCN
than it is to other telecom competitors. Indeed, we have had to rely on
the pro-competitive policies embodied in section 224 of the
Communications Act to address circumstances in which RCN has been
unable to secure what it deems just and reasonable terms for access to
utility poles.\9\ In both the Boston and Washington, D.C. markets RCN
has entered into partnerships with affiliates of local power companies
in part to assure access to utility poles.
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\9\ RCN has experienced difficulties securing access to the poles
of Verizon in both Massachusetts and Pennsylvania. In the Philadelphia
suburbs RCN has filed a formal Pole Access Complaint against the local
power company, Exelon, alleging that Exelon's pole attachment fees are
excessive, and in other respects unjust and unreasonable. See RCN
Telecom Services of Philadelphia, Inc. v. Exelon Corp, PA No. 01-
______, filed March 16, 2001.
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Earlier, I noted that competing with entrenched monopolists is a
daunting challenge. The entrant must be able to market its services
against entrenched cable operators who have substantial advantages in
the competitive battle: name recognition, an embedded customer base,
strong economies of scale, established relationships with local
franchise and governmental authorities, a corporate presence in the
community, and vertically integrated programming affiliates or
established contracts for programming.
The new entrant has no captive subscribers; no initial revenue and
enormous start-up expenses such as securing the local franchise. This
latter process alone generally takes six months to a year. Local
franchise authorities usually attempt to secure as high a price as
possible for granting a franchise and typically require high standards
of proof of a franchise applicant's financial and operational
experience and capability. Multiyear construction commitments are
normally required. Accordingly, the potential competitor must earmark
funds, purchase long lead time items, enter into programming
commitments, hire hundreds of employees in each market, and, most
important, fight for each subscriber because the local citizens who
want cable service are probably already customers of the incumbent. To
use a well-worn metaphor, the lowhanging fruit has been picked.
Installing fiber optic or coaxial cable throughout a community can cost
tens to hundreds of thousands of dollars per mile. As a result, it has
generally been thought that competitive MVPD service based on
construction of a second local broadband distribution network is not
sustainable financially \10\ and there has been relatively little of
it, either before passage of the Telecom Act of 1996, or thereafter.
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\10\ Typically, it is said that ``[o]nce an incumbent system has
captured a large share of the viewing public in a particular area, it
is quite difficult for a new system to come into the market and offer
potential subscribers as favorable pricing and viewing options as those
available from the incumbent system.'' Piraino, A Proposal For the
Antitrust Regulation of Professional Sports, 79 B.U.L. Rev. 889 (1999)
at n. 387.
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Of course, RCN also enjoys certain competitive advantages: its
newly designed and installed fiber optic network is among the most
advanced in the world,\11\ it is able to offer bundled service
combining local and long distance telephony, high speed Internet
access, and broadband video from day one. Because it is not an
incumbent cable operator it is not generally disdained or disliked by
the general public, as are so many established cable companies whose
reputation for poor service and high price is well deserved. In fact,
almost without exception RCN has found that local franchise authorities
and local residents enthusiastically welcome the introduction of a
cable competitor.
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\11\ See Morgan Stanley Dean Witter Report, March 31, 1999. RCN has
been rated number 2 out of 100 of the most innovative
telecommunications companies in America. See Forbes ASAP Dynamic 100
List, April 5, 1999.
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In each of the markets in which we have made a bridgehead in spite
of the numerous and daunting entry barriers, we have been able to
fulfill the fundamental pro-competitive premise of the 1996 Act. This
Subcommittee, of course, does not need to be persuaded that competition
is a good thing, nor that competition in the video marketplace is both
desirable and necessary. The continuous increase in customers' cable
rates, typically well in excess of inflation, is a constant topic of
concern.\12\ Yet it is interesting to see the theory at work. Economic
theory recognizes that the cable incumbents, who have enjoyed a quiet
but very prosperous life for decades, do not welcome new
competition.\13\ Over the last three years we have been subjected to a
barrage of anticompetitive activities by incumbent cable companies: we
have been harassed by pleadings seeking the withdrawal of our OVS
authority on various specious grounds--pleadings filed both by
individual cable companies and by cable trade associations. We have
been subjected to multiple administrative proceedings instigated by the
cable incumbent in Boston--our first OVS market--as well as litigation
in federal court brought by the incumbent cable operator which the
presiding judge urged be withdrawn because it was so lacking in merit.
We have been denied access to critical programming by our video
competitors both in Boston and New York and threatened with such denial
in the Philadelphia area.
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\12\ See, e.g., FCC 7th Annual Report on Competition in
Video Markets (Jan. 2001), para. 155, reporting an overall
increase in cable rates of 4.8% as compared with a CPI increase of
3.2%; Communications Daily, July 15, 1998, p. 2, reporting CPI data
showing cable rate increases of 7.3% over the previous 12 months as
compared with a 1.7% inflation rate.
\13\ See Predation In Local Cable TV Markets, Antitrust Bulletin,
9/1/95 by T.W. Hazlett: ``Cable television operators pursue a
predictable set of reactions. . . to a potential CATV entrant. . .
beginning with a vigorous lobbying campaign to deny entry rights. . .
selective price cutting, preemptively remarketing the first submarkets
to be competitively wired. . . tying up cable network programming. . .
delaying access to . . . poles and/or underground conduits. . . and
creating customer confusion . . ..'' Id. at 11.
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For any prospective competitor to have a meaningful chance to be
commercially successful in introducing competition into a community
served by an entrenched cable operator, whether or not that incumbent
is one of the large vertically integrated multiple system operators,
the competitor must have deep pockets, an ability to postpone profits
for some years, the most modern technology, and the patience to
negotiate franchise agreements and rights-of-way agreements with local
governments, pole attachment agreements with local utilities, and all
the associated real estate, employment, marketing and related business
relationships. But all of these pale into relative insignificance
compared with the need to acquire the product which is to appear on the
screens of the competitor's subscribers.
Programming is of course essential to MVPD competition since in the
absence of appealing programming nothing else matters. RCN is not aware
that any participant in the MVPD industry disputes this proposition.
Even the Commission has accepted its root importance: ``A major
component of the ability to compete with cable systems is the ability
to secure programming. Ensuring fair and equitable program access is
the key to fostering the development of vigorous multichannel
competitors to cable.'' \14\ The general public does not know or care
about technology, corporate structure, or abstract theories of
competition. It cares only about the programming and the costs of that
programming, and it is here--at this core issue--that RCN faces a key
barrier to the successful implementation of its competitive services.
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\14\ In the Matter of Competition, Rate Deregulation and the
Commission's Policies Relating to the Provision of Cable Television
Service, Report, 5 FCC Rcd 4962 (1990) (``FCC 1990 Cable Report''), at
para. 112.
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Of course, we anticipated resistance but to be candid the extent
and intensity of that resistance--the prevalence of anticompetitive
practices--has really surprised us. I hasten to add the important point
that it has not deterred us but merely required allocating more time
and resources to establishing ourselves in various local markets than
we had initially anticipated.
II. Competitive Improvements
With this brief background, let me turn to illustrations both of
the advantages to the public of competitive entry and to the various
difficulties we have encountered. RCN's introduction or announced
introduction to a market benefits consumers because it leads the
incumbent to improve its existing offering in one or more ways.
Sometimes these are voluntary adjustments by the incumbent. Sometimes
they occur in the context of a franchise renewal when RCN is awaiting
the award of its own franchise, a process which gives the local
franchise authority more leverage on the incumbent:
somerville, ma
Incumbent Time Warner announced rate freezes in Somerville, a
Boston suburb, upon RCN's entry, even though it was raising rates in
most of the eastern Massachusetts communities in which it was the
franchisee by 10% to 15%.
boston, ma
The City was able to negotiate a franchise renewal with Cablevision
which imposed obligations on the incumbent more favorable to the public
than would otherwise have been possible because RCN was already
operating in the city as an OVS. Cablevision agreed to increase its
commitment to public, educational and government (``PEG'') channels and
increase the channel capacity of its system. Cablevision also moderated
its regional rate increase in the Boston area because it faced
competition from RCN.
new york city
In Manhattan the incumbent, Time Warner, adopted an aggressive bulk
discount plan for apartment buildings targeted for service by RCN.
suburban philadelphia
As RCN has rolled-out its competitive cable and local telephone
services in suburban Philadelphia communities such as Folcroft, the
incumbent, Comcast, began offering rate locks and service improvements
in towns to which RCN was offering or about to begin offering service.
These special offers were highly selective, and focused specifically on
the imminent arrival of RCN's competitive service.
allentown, pa
Allentown is one of the very few communities in the United States
which has been served for 20 years by competitive cable companies. In
Allentown the competitors are RCN and Service Electric. Both have
almost fully built-out the city, so that most residences have two
broadband wires available at each house. As a result of the
competition, cable rates are significantly below the national average,
and penetration is higher than the national average (approximately 90%
of the city is wired by both companies). There are also fewer customer
complaints on a percentage basis than the industry experiences
nationally.
washington, d.c. metropolitan area
RCN's affiliate in Washington, D.C., Starpower, has provoked
dramatic changes in the offerings of incumbent cable operators,
discouraging price increases and improving service offerings. Upon the
announcement of Starpower's entry into the market, the D.C. incumbent's
rate increases moderated from previously announced annual increases in
the range of 7% to a mere 2% in 1998. Starpower's basic rate in
Washington, D.C. is $31.95 for 96 channels and no installation fee.
Comcast charges $33.87 for 56 channels with a $39.95 installation fee.
In anticipation of competitive entry, Cox Cable announced that it would
upgrade its cable to 860 MHz capacity in Fairfax County. In Prince
George's County, Comcast announced an upgrade of its plant beyond its
franchise obligation in light of Starpower's arrival. Comcast in
Arlington announced a major overhaul of its channel line-up with
significant additional channel capacity and digital upgrades to make
its offerings more competitive with newly-franchised Starpower.
in general
The FCC has broadly addressed this issue in its annual reports on
the status of competition in the MVPD market.\15\ Typical observations
are the following: ``[C]ompetition often results in lower prices,
additional channels, improved services, or additional non-video
services.'' \16\ ``Generally, we find that in communities where head-
to-head competition is present, the incumbent cable operator has
responded to competitive entry in a variety of ways, such as lowering
prices, providing additional channels at the same monthly rate,
improving customer service, adding new services including high speed
Internet and telephone services, or by challenging the legality of the
entrant's activities.'' \17\
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\15\ See, e.g., Fourth Annual Report, Assessment of the Status of
Competition in Markets for the Delivery of Video Programming, 13 FCC
Rcd 1034 (1998), at para.para. 131-132; Fifth Annual Report,
13 FCC Rcd 24284 at para.para. 121 and 136-137, and Sixth
Annual Report, 15 FCC Rcd 978 at para.para. 129-133; Seventh
Annual Report, supra, at para.para. 213-238.
\16\ FCC, Seventh Annual Report at para. 39.
\17\ ld., at para. 213.
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III. Opposition From Incumbent Cable Operators
Almost without exception RCN has found that incumbent cable
operators will attempt to inhibit, delay, complicate or, if possible,
preclude altogether competitive entry. Such obstinance deprives
consumers of the benefits of competition and should not be tolerated by
policy makers. Among RCN's experiences is the following:
in general
RCN has seen a troubling trend among incumbents to consolidate
their holdings in a limited number of metropolitan areas, i.e. to
``cluster,'' and then to build a fiber distribution network in those
communities. The advantage of using fiber optic distribution is that
the FCC has held (wrongly, in our view) that the program access
provisions of section 628 of the Cable Act of 1992 do not apply to any
programming not distributed by satellite. With clustering, the
economics of fiber distribution becomes more practical, allowing the
incumbent to evade the provisions of section 628 of the Act by buying
the rights to local professional sports programming and refusing to
share that programming with competitors. This is what Cablevision has-
done to RCN in New York City, and is what Comcast threatened to do to
RCN in Philadelphia.
In the Washington, D.C. area, in which Comcast has the dominant
position, it refused the request of a member of the Arlington, Va.
County Board to agree in principle to make its vertically integrated
programming available to competitors but appears to have been deterred
from curtailing access to Home Team Sports, now renamed ``Comcast
SportsNet,'' because the Justice Department carefully reviewed
Comcast's proposed acquisition of that programmer and negotiated an
agreement with Comcast. Local sports programming is critical to
entrants because many consumers subscribe to cable programming solely
or primarily to view such programming; many consumers will not switch
providers without it.\18\ Starpower also has been as yet unable to
secure the rights to carry certain other programming, including News
Channel 8 and MSNBC, due to claims of exclusivity. Clearly the public
is not served by its inability to view those channels on Starpower's
system.
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\18\ RCN's business plan anticipates a penetration rate of about
30% of the homes it passes in each market it builds out. As the surveys
it has taken indicate, approximately 40-58% of any local market would
essentially be impenetrable to an overbuilder if it lacked access to
the bulk of local sports programming. The result would be a penetration
rate of about 15%, a rate so low that no entrepreneur would be willing
to risk the hundreds of millions of dollars required to overbuild an
urban area with modern fiber optic plant. In essence, this is the plan
of the entrenched MSOs. Both the Commission and the Congress have
repeatedly recognized the special importance of sports programming. RCN
can provide further detail on this crucial issue if it would be helpful
to the Subcommittee.
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boston, ma
In Boston the incumbent refused to make certain programming it
controlled available to RCN. It also attempted to use the FCC's OVS
rules to pry proprietary and confidential data from RCN concerning its
market plans. The FCC rejected the effort. The incumbent also filed
suit in Federal Court against the City of Boston and RCN's Boston
affiliate to try to delay the build out of RCN's competitive
system.\19\ The incumbent refused to share its cable inside wiring with
RCN in multi dwelling units (MDUs) where the building owners would not
allow RCN to install its own wiring. Another incumbent, operating in
the suburbs, sought acquisition of RCN's OVS data. In this instance,
the FCC ruled partially in favor of the incumbent and partially in
RCN's favor. The full Commission has been asked to reconsider its
ruling and the U.S. Court of Appeals for the D.C. Circuit has been
asked to review the FCC's decision.\20\
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\19\ The filing of this suit, Cablevision of Boston, Inc. v. Public
Improvement Commission, et al., 38 F. Supp. 2d 46 (D. Mass. 1999),
affirmed, 184 F. 3d 88 (1999), neatly illustrates the anticompetitive
motives of incumbents. In its suit Cablevision sought to have the Court
stay further implementation by RCN of its business plan to use existing
conduit and fiber to accelerate the roll-out of RCN's competitive OVS
services in the City of Boston. The District Court denied any
injunctive relief to Cablevision and found that Cablevision's case was
not likely to succeed on the merits. Indeed, the Court characterized
RCN as ``a paradigm of the new entrant that Congress contemplated,''
and observed that:
Cablevision has brought this suit, which In have preliminarily
found has little chance of succeeding, just as the people of Boston
have a realistic hope of receiving the benefits of fair competition in
the cable television industry. Those benefits include more choices,
better service and the prospect of lower prices. It would be contrary
to the public interest to issue the preliminary injunction Cablevision
now seeks. Id., at 63. The First Circuit Court of Appeals sustained the
denial of stay, and found that the suit had little merit. Cablevision
ultimately dismissed it with no decision on the merits.
\20\ See, e.g., Time Warner Co. v. RCN BecoCom, LLC, 15 FCC Rcd
1124 (2000), recon. pending, appeal pending sub nom. RCN Telecom
Services of New York, Inc. v. FCC, D.C. Cir. Case No. 00-1043, filed
February 9, 2000.
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new york city
In New York City one of the incumbents, Cablevision, with some 2.7
million subscribers, controls programming rights for seven of the nine
local professional sports teams\21\ and their venues. In early 1999,
Cablevision revised its sports programming distribution system from
satellite to terrestrial so as to preclude RCN's carriage of an
important tier of extremely popular local sports programming. As RCN
explained to the FCC, the loss of a full slate of local sports
programming is a serious detriment in marketing RCN's new service.\22\
Another New York City incumbent, Time Warner, sought access to RCN's
competitively sensitive OVS data as Cablevision had done in Boston. In
this instance the FCC ultimately ruled partially in favor of Time
Warner and partially in favor of RCN.\23\ Time Warner also declined to
carry RCN's advertising on its Manhattan cable system, and for a long
time refused to permit RCN to share apartment building inside cable
wiring or to use Time Warner's poles to distribute its competitive
programming.
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\21\ These teams are the Yankees, Mets, Knicks, Nets, Rangers,
Islanders, and the N.J. Devils. Cablevision owns outright two of these
teams: the Knicks and the Rangers.
\22\ ``From the viewpoint of marketing, it is not good enough to
say we offer `most' local sports, or `almost all' local sports. The
public does not want to have to analyze what is missing; they want to
know they will get it all, and this is especially important in a
fiercely competitive environment such as the New York City MVPD market.
Stated differently, having, for example, 85% of the local sports
programming is not 85% as good as having 100%; it is a significant
competitive disadvantage, and this is true whether we have 75% or 85%
or even 95%.'' Reply of RCN Telecom Services of New York, Ex. A, pp. i-
ii, June 28, 1999.
\23\ This proceeding, consolidated with the Boston case described
above, is subject to FCC reconsideration and Court of Appeals review.
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philadelphia
In the Philadelphia metropolitan area the overwhelmingly dominant
incumbent, Comcast,\24\ acquired the great bulk of the local sports
programming, as well as their venues, and threatened to deny RCN long
term access.\25\' The threat was mitigated only when Comcast faced
Justice Department review of its plan to acquire Home Team Sports in
the Washington area. To this day, however, Comcast has refused to enter
into a multi-year industry-standard contract for local sports
programming in Philadelphia, but keeps RCN on a revolving three month
renewal. This is no way to run a business and puts us at constant risk.
Comcast also was successful in making RCN's effort to secure a
franchise from the City of Philadelphia so difficult, expensive, and
time consuming that RCN ultimately abandoned the effort altogether.
This withdrawal removed some 200 million of potential investment in the
City and the prospects of hundreds of jobs.
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\24\ Comcast serves 1.9 million subscribers in the Philadelphia
metropolitan area, about 90% of the total subscribership. Nationally it
is one of the largest MSOs, with some 8.2 million subscribers.
\25\ Through subsidiaries, Comcast owns a controlling interest in
the Philadelphia Flyers National Hockey Team, the 76ers National
Basketball team and two area arenas. It also holds a controlling
interest in SportsNet which controls the great bulk of the professional
area sports programming in the Philadelphia DMA. SportsNet carries
approximately 66% of the games of the Philadelphia Flyers (NHL) and 73%
of the Philadelphia 76ers' (NBA) regular season games as well as 49% of
the Phillies' games (MLB). Comcast also owns exclusive rights to
broadcast games of the Philadelphia Phantoms (American Hockey League),
Philadelphia Wings (National Lacrosse League), and Philadelphia Kixx
(National Professional Soccer League), as well as numerous football and
basketball games of regional colleges and universities. This
programming is distributed terrestrially to 2.7 million subscribers in
the Philadelphia DMA. In its own promotional material Comcast has
touted the strategic importance of SportsNet: ``SportsNet provides a
significant marketing advantage against satellite TV and other
competitors.''
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washington, d.c.
In the Washington, D.C. metropolitan area Media General, which
operated in a number of suburban counties, followed the approach
pioneered by Cablevision and Time Warner when faced with competition
from RCN, and attempted to use the FCC's OVS rules to get access to
proprietary and confidential business data of Starpower, RCN's
affiliate. The matter is still pending before the Commission. In
various D.C. metropolitan area jurisdictions incumbents have sought to
delay the granting of franchises to Starpower and to influence local
franchise authorities to impose financially and operationally
unrealistic obligations on Starpower. Comcast has adopted the practice
of paying MDU owners up front to sign contract renewals, and seeks
exclusive agreements wherever it can get them. In northern Virginia in
particular, Starpower has been locked out of numerous buildings because
the incumbent has the benefit of an exclusive right to provide service
to that structure.
IV. Critical Issues
There are other impediments to the successful roll-out of
competitive cable service. These include the following:
denial of access to inside wiring
Competitive cable providers must have access to tenants in
apartment and office buildings to survive. About 30-35% of the total
population lives in multiple dwelling units (MDUs), such as apartments,
cooperatives or condominiums. The ability to serve this sector of the
market is crucial because it is generally more profitable due to the
large number of subscribers in each MDU. For a start-up company, MDU
access is especially vital since it allows a more rapid build up of
operating revenue than developing market share by building out service
to individual homes. However many MDU owners fear that new entrants
will disrupt the building to install their own wiring to each
apartment, and incumbents frequently claim that they own the existing
wiring and by law or contract have the right to remain in the building
and need not share their wiring with the newcomer. The result is that
the new competitor is effectively blocked or, at the least,
significantly impeded in this especially valuable segment of the
market. RCN has encountered this problem in every metropolitan area.
The inside wiring issue has been a problem for cable overbuilders
for some time. Section 624(i) of the Communications Act,\26\ which
Congress adopted in the Cable Act of 1992, directed the FCC to adopt
rules governing the disposition of wiring within the cable subscriber's
home when such subscriber voluntarily terminates service. The FCC
subsequently adopted such rules setting forth the rights to such wiring
of the cable provider, the resident, and the building owner, and any
new competitor. However, the FCC restricted the application of these
new rules to the wiring inside individual units and up to 12 inches
beyond such units.\27\ In 1997 the Commission adopted rules governing
access to home run wiring in cases where an incumbent does not have an
enforceable right to remain on the property.\28\
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\26\ 47 U.S.C. Sec. 544(i).
\27\ See 47 C.F.R. Sec. Sec. 76.801-2 and 76.5(mm).
\28\ See Telecommunications Services, Implementation of the Cable
Television Consumer Protection and Competition Act of 1992, Cable Home
Wiring, Report and Order and Second Further Notice of Proposed
Rulemaking, CS Docket No. 95-184 and MM Docket No. 92-260, 13 FCC Rcd
3659 (1997) (``Inside Wiring Order''), recon. pending and appeal
pending, Charter Communications, Inc. v. FCC, Case No. 97-4120
(8th Cir.).
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In formulating its inside wiring rules, the FCC anticipated that
incumbent cable companies, especially in the case of service to MDUs,
might not cooperate with new video competitors and adopted rules
specifically designed to address such situations. The Commission has
therefore gone to great lengths to resolve the many complex bottleneck
issues related to inside wiring within MDUs, and has adopted
regulations that attempt to moderate the anticompetitive inclinations
of incumbents. In explaining these procedures, the Commission
accurately described some of the problems RCN has faced:
[W]e believe that disagreement over ownership and control of the home
run wire substantially tempers competition. The record
indicates that, where the property owner or subscriber seeks
another video service provider, instead of responding to
competition through varied and improved service offerings, the
incumbent provider often invokes its alleged ownership interest
in the home run wiring. Incumbents invoke written agreements
providing for continued service, perpetual contracts entered
into by the incumbent and previous owner, easements emanating
from the incumbent's installation of the wiring, assertions
that the wiring has not become a fixture and remains the
personal property of the incumbent, or that the incumbent's
investment in the wiring has not been recouped, and oral
understandings regarding the ownership and continued provision
of services. Written agreements are frequently unclear, often
having been entered into in an era of an accepted monopoly, and
state and local law as to their meaning is vague. Invoking any
of these reasons, incumbents often refuse to sell the home run
wiring to the new provider or to cooperate in any transition.
The property owner or subscriber is frequently left with an
unclear understanding of why another provider cannot commence
service. . .. The result, regardless of the cable operators'
motives, is to chill the competitive environment.\29\
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\29\ Id. at para. 38 (footnotes omitted).
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Unfortunately, the Commission's inside wiring rules are grossly
deficient. They are limited to instances in which the incumbent does
not have a legal right to retain its wiring on the premises. In many
states the incumbent cable companies have persuaded the legislature to
adopt what are known as ``mandatory access laws.'' These laws, with
variations from state to state, grant cable companies a legal right to
install their service in MDUs even over the objection of the building's
owners or managers.\30\ Because the mandatory access laws were crafted
only for the benefit of Title VI cable companies, they are one-sided
relics of a by-gone era and have been relied on repeatedly by the
incumbents to claim that they own inside wiring, even when they can not
provide any proof of ownership. For its part, the Commission has
declined to draft its rules so as to preempt these anticompetitive
statutes, instead expressing hesitation about the scope of its
authority to do so.\31\
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\30\ There are about 18 such statutes.
\31\ Report and Order and Second Further Notice of Proposed
Rulemaking, in Docket No. 95-784, MM Docket No. 92-260, at page 81-101.
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program access
Section 628 of the Communications Act,\32\ adopted in the Cable Act
of 1992, is vitally important to the development of broadband
competition. Section 628(b) was enacted in response to widespread
difficulties experienced by competitors gaining access to programming
controlled by the incumbent cable companies. The statute therefore
provides that vertically integrated cable companies cannot engage in
unfair methods of competition or unfair or deceptive practices in an
effort to hinder competitors' access to programming controlled by the
integrated cable companies. It also prohibits discrimination in the
terms under which such programming is made available to
competitors.\33\ The FCC however, has interpreted the statute to be
inapplicable to instances in which such programming is distributed by
terrestrial, as compared with satellite, distribution.\34\ This
interpretation of the law makes no practical sense whatever, and has
created a giant loophole which is being used by a number of incumbent
cable companies to shift programming previously distributed by
satellite to terrestrial transmission and then to refuse to make it
available to local competitors.\35\
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\32\ 47 U.S.C. Sec. 548.
\33\ See 47 U.S.C. Sec. 548(b) and Sec. 548(c)(2)(B). The following
excerpt from the legislative history of section 628 containing remarks
by Representative Tauzin provides considerable insight into
Congressional intent: ``[My] amendment, very simply put, requires the
cable monopoly to stop refusing to deal, to stop refusing to sell its
products to other distributors of television programs. In effect, this
bill says to the cable industry, `You have to stop what you have been
doing, and this is killing off your competition by denying it
products.'. . . Programming is the key. . .. Without programming,
competitors of cable are . . . stymied and who is the big loser? The
big loser is everyone in America who pays a cable bill. . ..'' What
does it mean? It means that cable is jacking the price upon its
competitors so high that they can never get off the ground. In some
cases they deny programs completely to those competitors to make sure
they cannot sell a full package of services. So the hot shows are
controlled by cable. . .. It is this simple. There are only five big
cable integrated companies that control it all. My amendment says to
those big five, ``You cannot refuse to deal anymore.' '' 138 Cong. Rec.
H6533-34 (July 23, 1992) (statement of Rep. Tauzin) (emphasis added).
\34\ See, e.g. RCN Telecom Services of New York, Inc., v.
Cablevision, et al., 14 FCC Rcd 17093 (CSB, 1999), application for
review pending.
\35\ See, e.g., id, and DirecTV, Inc., et al. v. Comcast, 15 FCC
Rcd 22802 (2000).
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As I have noted above, in three of our principal markets we have
had serious concerns about access in particular to local sports
programming. This is not an accident. The cable industry appears to
have adopted ownership or control of local sports programming as a
device to capture or assure dominance in local markets. It has long
been recognized that sports programming is crucial.\36\ Cablevision is
not only dominant in the New York City sports programming market but
has investments in a wide variety of sports programming activities.\37\
Industry commentators recognize the value of the sports programming
monopoly to cable operators:
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\36\ See, e.g., Implementation of Section 26 of the Cable
Television Consumer Protection and Competition Act of 1992; Inquiry
into Sports Programming Migration, Final Report, 9 FCC Rcd 3440 (1994).
\37\ According to Multichannel News, Cablevision's Rainbow Media
Holdings Inc. and Fox/Liberty Networks (with which Cablevision has
sports affiliations) ``either own or are affiliated with more than 20
regional sports networks that have programming deals with most
professional teams: 25 of 30 MLB teams, 26 of 29 National Basketball
Association teams and 19 of 26 National Hockey League squads.''
Multichannel News, May 4, 1998, p. 74. The article also comments that
such programming is a ``gold mine'' for the regional sports networks,
``[L]ocal events often generate the highest ratings of any cable
program . . ..'' Id.
[P]rofessional sports leagues have further extended their economic
power by allying with other monopolies in related markets. The
leagues' relationships with broadcast networks and cable
systems have limited competition in local media as well as
sports markets. The New York Yankees, for instance, have
granted Cablevision the exclusive right to broadcast games in
the New York area in exchange for a payment of $486 million
over twelve years. Such a relationship, however, does not only
increase the Yankees' monopoly profits. By giving Cablevision
exclusive control over sports programming critical to any cable
system's success, the Yankees have allowed Cablevision to
preclude potential competitors from entering the New York cable
market.\38\
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\38\ Piraino, supra, at 891 (footnotes omitted). Cablevision has
tied up programming rights to the Mets for 30 years, and the Yankees
for 12 years. Possessing the rights for seven of the nine teams in the
New York metro area has allowed Cablevision to triple its previous
subscribership. Id., at 919.
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The FCC's narrow interpretation of Section 628 has acted as a
substantial barrier to entry and we urge Congress to amend the law so
that the method of program distribution is irrelevant to the
applicability of the program access provisions. Another important
provision of section 628 limits the ability of vertically integrated
cable companies which own programming to enter into exclusive
agreements that result in denying such programming to new
competitors.\39\ However, this provision sunsets on October 5, 2002,
unless the Commission determines in a rulemaking that continuing that
provision beyond the termination date is necessary to preserve and
protect competition and diversity in the distribution of video
programming.\40\ Failure to extend those provisions would be a disaster
for new entrants like RCN. In any case, however, it is vitally
important that all provisions of section 628 are vigorously enforced by
the FCC.
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\39\ 47 U.S.C. Sec. 548(c)(2)(D).
\40\ 47 U.S.C. Sec. 548(c)(5).
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difficulty in accessing local rights-of-way on fair and reasonable
terms.
Competitive cable providers must have access to local rights-of-way
to deploy their networks to consumers, whether by attaching to existing
utility poles or using underground conduit. Sections 253 and 621 \41\
of the Communications Act leave control over local franchising and
local rights-of-way to municipal or other local authorities subject to
broad principles of federal law. It is extremely common for local cable
regulators to use the need to secure local authority as an occasion to
extract substantial revenue or valuable concessions such as free
municipal service from new competitors during franchise negotiations.
Numerous FCC and court cases have addressed the scope of local rights
to impose such charges or obligations under federal and state law. RCN
has suggested to the Commission that it establish federally-mandated
standards governing access to such public rights-of-way and require
local authorities to adhere to reasonable standards of timeliness and
equitable treatment in granting such access. The Commission has not yet
acted on this proposal. At the moment there are few clear rules which
are uniformly interpreted and applied in all areas.
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\41\ 47 U.S.C. Sec. Sec. 253, 541.
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adverse administrative and judicial action.
Numerous recent decisions of the Cable Services Bureau are
anticompetitive and inhibit, rather than encourage, the development of
broadband competition. Congress should encourage the FCC to enforce the
pro-competitive provisions of existing law. Some of these are described
above. In a broader context, RCN has been urging the Commission to take
a more dynamic and interventionist approach to the preservation and
encouragement of cable overbuilding by construing its rules in a more
procompetitive fashion, and by considering the adoption of rules or
policies to facilitate the transition to meaningful competition.
Although the Commission frequently acknowledges that problems may exist
in the implementation of broadband competition, it has often declined
to address them in a meaningful way and frequently requires far too
long to resolve individual matters.\42\
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\42\ In one instance, involving RCN's September 1998 request for an
interpretive ruling concerning access to MDUs, the Cable Services
Bureau has not yet acted.
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The Federal Courts have also issued a number of decisions which
have inhibited the development of broadband competition. As described
above, section 653 of the Communications Act created a new form of
cable provider, the OVS which was intended to expedite broadband
competition. The FCC developed rules implementing section 653 and
provided that, consistent with Congressional intent to encourage new
competition, OVS operators could secure an FCC certification within 10
days and need not be franchised by local communities. This streamlining
of regulatory hurdles promised to significantly accelerate the
development of cable competition.
However, at the urging of local governments and the cable industry,
the 5th Circuit Court of Appeals struck down the rule
eliminating the need for a local franchise.\43\ By doing so it severely
diminished one of the principal advantages of the OVS mode of
operation, and in fact OVS has not been widely exploited by new
competitors. There are other federal district and appellate court
decisions which have interpreted various provisions of the
Communications Act in a fashion which inhibits the development of MVPD
competition. Among these are Gulf Power v. FCC (Gulf Power II),\44\
which denies to cable or telecom companies providing internet access a
federally-mandated right to attach their wires to such utility poles or
conduits and the benefits of regulated rates for such use of utility
poles or conduit for the distribution of their signals. We believe both
these decisions seriously misconstrue federal law and have the effect
of eviscerating Congress' procompetitive purposes.\45\
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\43\ City of Dallas v. FCC, 165 F.3d 341 (5th Cir.
1999).
\44\ 208 F. 3d 1263 (11th Cir. 2000), reh. den. 226 F.3d
1220, cert. granted sub nom. FCC v. Gulf Power Co., 121 S.Ct. 879 (Jan.
22, 2001) (No. 00-843).
\45\ Many other federal court decisions have construed
Communications Act provisions in mutually inconsistent ways, thereby
creating uncertainty about their practical meaning.
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In sum, we are seeing competitive entry into the MVPD market,
primarily from DBS operators and RCN, with a few other cable
overbuilders. However the market remains highly concentrated and indeed
the 80% of the market still served by traditional cable entities is
becoming more and more concentrated as time goes by. Looking back over
the five years since passage of the pro-competitive Telecommunications
Act of 1996, we can see in retrospect that significant barriers to full
competitive entry persist, and that the competition which has emerged
is in response to the opportunities created by, and fostered by,
forward-looking legislation and regulation. The bottom line issue here,
of course, is not the fate of RCN; we will continue to deploy our
financial and human resources to compete with the entrenched
monopolists. The bottom line is the consumer, and it is clear from
these five years of experience that the consumer benefits tremendously
from the emergence of competitors. We hope this Subcommittee, and
others in the Congress, will continue to assure that the competitive
opportunity remains alive and well.
Thank you very much.
Chairman DeWine. Mr. Currey, thank you very much.
Mr. Kimmelman?
STATEMENT OF GENE KIMMELMAN, CO-DIRECTOR, WASHINGTON OFFICE,
CONSUMERS UNION, WASHINGTON, D.C.
Mr. Kimmelman. Thank you, Mr. Chairman, Senator Kohl, for
once again inviting me to represent consumers' point of view on
these important issues.
My colleagues on this panel present some very, very
impressive statistics about what their companies are doing, and
I certainly don't doubt that they are doing very important
things for our economy. However, I would like to highlight what
consumers are facing and echo what you both said in your
opening statements. This is not what was promised with the 1996
Act.
It is not unheard of in an industry where rates have gone
up 33 percent since passage of deregulation law, almost three
times the rate of inflation, and there are new players in the
marketplace--it is not unheard of for competition to involve
rate increases. But I would like to suggest to you that it does
not fit with the market economics in this instance, and
therefore truly indicates that there is something more complex,
maybe even something very fishy going on here.
If you look at adjacent communities in certain parts of the
country, they have very different attributes, but we have
looked at a number and they are all over the country and in
these adjacent communities cable companies are upgrading, just
like Mr. Kent's company. And just like Mr. Sachs indicates,
they are moving to digital service and high-speed Internet, and
investing billions and billions of dollars. But there are some
differences, also.
In one set of communities right next to each other, the
average local basic cable rate is about $11 a month; in the
adjacent communities it is $17.67. For the whole package of
expanded basic, in the first set of communities the price on
average is $27, compared to $31 in the other communities. Why
the difference? They are the same cable companies in many of
these adjacent communities with the same upgrades.
In both sets of communities, satellite TV is available. In
both sets of communities, you get that high-cost, very popular
TV programming--Fox, NBC, CBS, ABC. You get that really
expensive sports programming--ESPN. As a matter of fact, in the
communities that I indicate where the prices are cheaper, you
get more than 10 percent more channels, 71 versus 63.
There is only one meaningful difference we can find in
these communities, and we find this throughout the country. In
the communities where the prices are lower, there are two wires
competing head to head. That is the only meaningful difference.
Now, if you look carefully at some of the cable industry's
explanations for why their rates go up, I would suggest they
are not presenting the whole picture. Programming costs, as
reported to the Federal Communications Commission, have
increased more than $2 billion since 1997. When you add their
increased advertising revenue and you add their new pay-per-
view services, that virtually covers all those costs.
And if you look at all of their operating cost increases,
all of them, and compare it to just their new revenue, not any
of their basic rate increases, not any of their expanded basic
rate increases, you find that the new digital services, the new
high-speed Internet services, the advertising revenue, and the
others that I mentioned cover 90 percent of all those new
operating costs.
So then you find that for basic and expanded basic, since
1997, consumers are paying more than $4 billion a year more. A
billion dollars of that would cover the other operating
expenses. What about the other $3 billion? It looks like it is
going to the bottom line.
All the data suggest that there is clear price gouging
going on in this industry, despite the fact that there are more
players, not nearly as many as we had hoped for after passage
of the 1996 Act, but more players. Something is wrong when,
where there is competition, you get 14- to 30-percent price
reductions compared to where there is only one company.
So we urge you to step back and truly declare war on the
persistent monopoly elements of these industries. We would
certainly concur with Senator Kohl's suggestions of what needs
to be done, extending access to programming, urging the FCC to
more aggressively go after discriminatory practices, making
sure that the loophole that applies to terrestrial transmission
of cable programming is closed.
It is time both to pressure the agency to do more to
promote competition and for Congress to step in and fill the
gaps. This should not be an ideological issue. As I think about
electricity prices going up almost 50 percent in California
with deregulation and I think about your own committee's
oversight of the airline industry and what is going on, and
then add the 30-plus-percent cable rate increases, what is
obvious here is that deregulation, whether you are for it or
against it, just doesn't work automatically to translate the
benefits that many of its proponents argue are there.
We know in the political process passing legislation often
involves compromises. It is not an ideological question to go
back in and make mid-course corrections and make sure that we
truly deliver a marketplace with more choices and lower prices
for consumers. I urge you to do that.
Thank you.
[The prepared statement of Mr. Kimmelman follows:]
Statement of Gene Kimmelman, Co-Director, Washington Office Consumers
Union on behalf of Consumers Union and Consumer Federation of America
There is something rotten in the state of ``cable television
competition.'' Very rotten. Cable rates are up about 33 percent nearly
3 times the rate of inflation since Congress passed the
Telecommunications Act of 1996.\1\ There is no sign of meaningful price
competition in sight. Consumers Union \2\ and Consumer Federation of
America \3\ believe the need for policymakers to curtail the abusive
practices of cable monopolies is long overdue.
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\1\ Bureau of Labor Statistics, consumer price indexes, March 2001.
\2\ 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 good, 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 more than 4 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.
\3\ The Consumer Federation of America is the nation's largest
consumer advocacy group, composed of over two hundred and forty state
and local affiliates representing consumer, senior, citizen, low-
income, labor, farm, public power an cooperative organizations, with
more than fifty million individual members.
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Let's put this problem in context. At the time the
Telecommunications Act became law, consumers were given the clear
impression that cable prices would go down, not up Consumers Union were
led to believe competition would expand sooner rather than later.
President Clinton promised that ``consumers will receive the benefits
of lower prices, better quality and greater choices in their telephone
and cable services.'' \4\ The bill's co-sponsor, Rep. Thomas Bliley,
predicted that that the Act would break up ``two of the biggest
government monopolies left--the monopolies in local telephone service
and in cable television. Beside lower rates and better service, the
result will be innovative new products and services.'' \5\ Based on
these optimistic predictions, the Act phased out cable rate regulation
and assumed that the elimination of legal barriers to entering the
catme business would unleash a torrent of competition from local
telephone companies, electric utilities and others.
---------------------------------------------------------------------------
\4\ Aversa, Jeannine. ``Promises, Promises--Two Years after Big
Telecom Bill: Promises Unfulfilled.'' Associated Press, January 20,
1998.
\5\ Id.
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Unfortunately, the local telephone companies have virtually
abandoned efforts to compete with cable.\6\ Electric utilities have had
difficulty breaking into the market. Even the quickly expanding
satellite television companies have been unable to discipline cable
prices. So without the benefit of regulations that prevent cable price
gouging, only consumers in the few communities where two wire-line
companies engage in head-tohead competition for cable services are
receiving the benefits promised in the 1996 Act. Federal Communications
Commission (FCC) data show that head-to-head competition saves
consumers 14 percent compared to prices charged by cable monopolies
(where satellite service is also available), and independent research
indicates that competition can save consumers as much as 32 percent on
their cable bills.\7\ Indeed, Dr. Thomas Hazlett of the American
Enterprise Institute points out that ``even using a conservative
estimate, the prompt establishment of competition for [video services]
could save consumers over $1 billion annually.\8\
---------------------------------------------------------------------------
\6\ FCC Seventh Annual Assessment of the Status of Competition in
the Market for the Delivery of Video Programming (CS Docket No. 00-
132), January 8, 2001.
\7\Declaration of Thomas Hazlett, PhD (Resident Scholar, American
Enterprise Institute for Public Policy Research). In the Matter of
Applications of Northpoint USA, PDC Broadband Corporation, and
Satellite Receivers, Ltd. To Provide a Fixed Service in the 12.2-12.7
GHz Band. (ET Docket No. 98-206.
\8\ Hazlett Declaration at 2.
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A recent Los Angeles Times article compared rates charged by the
same cable companies in communities with and without competition. The
article vividly illustrates how much consumers are being shortchanged
by the persistence of monopoly. In Southern California cities where
there were two cable companies competing head-tohead, basic cable
subscribers paid 37.5% less ($11.06/monthly) than basic subscribers in
cities where there was not a wire-line competitor ($17.69 monthly).\9\
Subscribers to enhanced cable in cities with competition paid an
average of $26.92/month for 71 channels compare that to the $30.93 for
63 channels that subscribers paid in cities without wire-line
competition. In addition to price competition in cities where there
were two cable companies, consumers also received better service
quality and more channels than in communities where only satellite
competes against a single cable company.
---------------------------------------------------------------------------
\9\ Talev, Margaret. ``Consumers Have Little Recourse on Cable
Rates,''Los Angeles Times, Feb. 4, 2001.
---------------------------------------------------------------------------
Unfortunately, two-wire towns are the exception to the rule in
today's marketplace. The cable industry is increasingly dominated by
large companies that are well positioned to block competition.
Currently two companies (AT&T and AOL Time Warner) together own cable
systems serving more than 50% of the nation's cable subscribers. A
recent court decision may strengthen the largest cable companies'
hands. AT&T, which had exceeded legal limits for cable ownership when
it merged with Media One, was under an obligation to divest its
holdings in Time Warner's cable systems as a result of the FCC's cable
horizontal ownership rules and the conditions the Commission imposed
during review of the merger. However, in the wake of a federal court of
appeals decision on cable ownership limits,\10\ the FCC recently
suspended the deadline for AT&T to come into compliance with the
Commission's ownership limits in the merger order,\11\ setting the
stage for further consolidation.
---------------------------------------------------------------------------
\10\ Time Warner Entertainment Co., v. Federal Communications
Commission, No. 94-1035 (D.C. Cir).
\11\ AT&T Receives a Reprieve on a Deadline to Shed Some
Holdings,'' New York Times, Mar. 19, 2001.
---------------------------------------------------------------------------
In order to defend their rate hikes, cable companies often cite
increases in programming costs as a primary reason for the increases.
However, upon closer inspection of cable industry data, we find that a
substantial portion of the increase in programming costs should be
offset by corresponding increases in advertising revenue. As
programming gets more expensive, cable companies are receiving greater
revenue from advertisers who run commercials during the programming.
For example, FCC data show that during the years cable programming
costs rose 18-21 %, advertising revenue increased 16%.\12\ Furthermore,
considerable revenue increases in advanced services such as high-speed
Internet \13\ and pay-per view services \14\ are offsetting any
additional expenditures that the cable companies are making in either
programming or infrastructure investment.
---------------------------------------------------------------------------
\12\ FCC, Fifth Annual Assessment of the States of Competition in
Markets for Delivery of Video Programming (CS Dkt. No. 98-102). Dec.
17, 1998.
\13\ Cable industry total revenues for advanced services have
increased from $91 million in 1996 to an estimated $4.2 billion at
year-end 2000. FCC Seventh Report, Annual Assessment of the Status of
Competition in the Market for the Delivery of Video Programming (CS
Docket No. 00-132), Jan. 2, 2001.
\14\ Cable industry pay-per-view revenues have increased from $647
million in 1996 to an estimated $1.5 billion in 2000.
---------------------------------------------------------------------------
Complaints from cable companies that programming costs and capital
outlays are rising and account for the increase in monthly rates for
basic and expanded basic monthly service simply do not withstand
scrutiny.
First, the largest cable system operators have a significant
financial interest in about one-third of all national and regional
programming services. Complaining about rising costs is simply an
excuse for the right pocket to charge the left pocket more, and to put
the excess profits in the bank. The substantial vertical integration
into programming and the market power that the largest cable operators
enjoy blunts any incentive cable companies have to resist price
increases.
In addition, even at the local level, the complaint about rising
programming costs does not hold water. Since the passage of the 1996
Act, cable revenues have increased much faster than costs. Since 1996,
total revenues are up 50 percent, and operating revenues are up 43
percent.\15\ Average operating revenues (total revenues minus operating
costs) are up 32 percent.\16\ Most notably, the revenues that are
associated with the expansion of systems--advertising, pay-per view and
shopping services, advanced services and equipment are up 123
percent.\17\
---------------------------------------------------------------------------
\15\ FCC Seventh Video Competition Report at 102, Table B-6. is Id.
\16\ Id.
\17\ Id.
---------------------------------------------------------------------------
The dollar value of revenue increases for new and expanded services
since 1997 alone swamps the increase in programming costs. It would
cover over 90 percent of cable's increase in total (programming and
non-programming) operating costs. Viewed in this way, virtually all of
the increase in basic and expanded basic service revenues have been
carried to cable's bottom line in the form of increases in operating
profits.
While there are certainly capital costs that must be covered with
this increasing flow of operating revenues, cable companies have
exhibited an irrational exuberance for acquisitions that dramatically
diluted the assets of the industry's dominant firm. AT&T's bidding war
to become the dominant cable firm tripled the price of cable systems
and helped reduce its stock price by almost three-quarters. Driven by
these outrageous acquisition costs and unchecked by price competition
or regulation, basic service ratepayers have been socked with abusive
price increases. (See Attachment A).
While Direct Broadcast Satellite television (DBS) continues to
grow, for most consumers it remains more expensive and less attractive
than cable. In addition to problems (often in urban areas) obtaining
satellite reception, or failure to receive local broadcast channels
with satellite TV, the high cost of installation and multiple TV
hookups still makes DBS significantly more expensive than cable.
The FCC's recent finding that ``DBS is a substitute for cable and
exerts a small (as shown by the small magnitude of the DBS coefficient)
but statistically significant influence on the demand for cable
services,'' should not be interpreted to suggest that DBS disciplines
the abusive pricing practices of cable systems. Leaving aside the fact
that the FCC data are self-reported, self-selected, unaudited data in
which forty percent of the respondents left out the key variable (DBS
penetration), the data show that satellite exerts no significant effect
on cable prices.\18\
---------------------------------------------------------------------------
\18\ As a strict economic proposition, a statistically significant
cross price elasticity is a much better demonstration of the
substitutability of DBS for cable services. DBS continues to be a niche
market technology that may substitute for cable in the high capacity,
high cost market segment and in rural areas. It does not compete head-
to-head with cable in any broad sense.
---------------------------------------------------------------------------
This is exactly the point we have demonstrated time and again in
our analysis of cable price increases. It makes more sense for cable to
raise prices and lose a small market share to DBS than it does to
exercise price restraint.\19\
---------------------------------------------------------------------------
\19\After two decades of relentless price increases (except for a
short period of regulated price restraint), it should come as no
surprise that cable is beginning to approach the limit price set by
satellite in an increasing segment of the market, hence the fact that
the FCC's competition report finally shows a small responsiveness of
cable to DBS penetration. What this means is that the monopoly abuse of
cable operators has become embedded and institutionalized in the
market. The rip off of consumers is permanent, although its rate of
escalation may slow in the years ahead. It will remain until
policymakers gain the courage to relieve the public of this cable
monopoly tax, or some new technology with cost characteristics that can
compete with cable comes along to break its iron grip on the
multichannel video programming market.
---------------------------------------------------------------------------
And technological developments may strengthen the hand of cable and
reinforce its ability to abuse market power. The roll out of digital
cable and the bundling of high speed internet access erode the ability
of DBS to compete even in high capacity niche markets. By allowing the
cable companies to leverage their market power base in cable into the
high speed Internet access market, the FCC has all but ensured that the
abuse of consumers will continue. Three years after consumers asked the
FCC to begin requiring cable companies to open their systems to
multiple high-speed Internet service providers, virtually all cable
companies still sell high speed service on an exclusive basis and
bundle it with video services. The best chance for a technological
development to weaken the market power of the cable operators-streaming
videohas been destroyed by the FCC's failure to require open access.
Today's ``hands off' legal and regulatory climate does not bode
well for consumers. Prohibitions on exclusive deals in cable television
programming could expire this year if the FCC fails to extend its
``access to programming'' rules,\20\ which will give the largest cable
companies (which own vast programming in addition to their cable
networks) even more sway over potential competitors. Not only must this
programming remain accessible to cable's potential competitors, but
Congress should consider expanding this requirement to include cable-
owned regional sports channels or other popular programming that cable
companies directly or indirectly prevent from being made available to
others. And the nondiscrimination obligations should apply regardless
of whether cable distributes its programming terrestrially or by
satellite.\21\
---------------------------------------------------------------------------
\20\ 1992 Cable Act, Public Law 102-385, 47USC548.
\21\ The FCC has interpreted the 1992 Cable Act's access to
programming provisions to apply only to satellite distribution
channels.
---------------------------------------------------------------------------
In addition, the Federal Court of Appeal's recent ruling regarding
cable ownership limits in Time Warner Entertainment, Co. v. Federal
Communications Commission \22\ has created an even greater risk of
increased marketplace domination by just a small handful of large
companies. The court reversed and remanded the FCC's horizontal
ownership limit (which limited any one company to a maximum of 30% of
the nation's cable and satellite subscribers), holding that the FCC had
not adequately justified its limits on purely competitive grounds, and
was not allowed to justify its limits with ``diversity'' concems.
Although FCC Chairman Powell has indicated that he thinks the court's
decisiorv, was incorrect in its exclusion of diversity concerns from a
properly' formulated cable ownership limit,\23\ he so far shows no
interest in seeking a rehearing or appeal of the court's decision. We
believe it is essential that the FCC challenge this court decision as
an inappropriate reading of the statute, its legislative history, and
the Commission's appropriate authority to make legitimate regulatory
judgments in establishing ownership limits.
---------------------------------------------------------------------------
\22\ Time Warner Entertainment Co. v. Federal Communications
Commission, No. 94-1035 (U.S. App., DC Cir.) Mar. 2, 2001.
\23\ Testimony of FCC:Chairman Michael Powell before the House
Telecommunications Subcommittee, March 29, 2001.
---------------------------------------------------------------------------
Finally, a proceeding currently before the FCC showcases the high
barriers to entry faced byA would-be cable competitors. North poi nt/
Broadwave is a promising potential compEittor to cable and satellite TV
that is trying to secure a license for its service, but is oaught in a
regulatory morass at the FCC. After having invested large sums to bring
ali patented technology to market-a technology which offers a practical
and ingenious solution to our country's spectrum shortage and lack of
competition for video services--the FCC appears inclined to delay or
thwart cable and satellite competition by denying Northpoint a license
and instead begin proceedings to auction this spectrum.\24\
---------------------------------------------------------------------------
\24\ FCC ET Docket No. 98-206, RM 9147, RM 9245. While there are
numerous instances where we believe spectrum auctions offer enormous
consumer benefits, this is not one of them. If there were ever an
instance where consumers deserve immediate access to more choices and
lower prices, it is in the cable and satellite markets. We believe that
the failure of cable deregulation to deliver lower prices and better
service requires the most aggressive regulatory efforts to let
potential competitors like Northpoint enter the market as soon as
possible.
---------------------------------------------------------------------------
With cable prices continue to rise at an alarming rate, and no sign
of meaningful price competition, consumers believe measures designed to
jump-start market entry and prevent--monopoly abuse are needed.
Potential competitors like North point/Broadwave should be allowed to
enter the market and begin earnest, pricedisciplining competition. Most
importantly, Congress must renew and expand nondiscrimination
requirements where cable retains monopoly power over content and
distribution of video programming and high-speed Internet services.
Finally, we urge you to ensure that the FCC does everything in its
power to prevent further cable consolidation or unfair distributional
arrangements that thwart the expansion of more choices and lower prices
for consumers.
[GRAPHIC] [TIFF OMITTED] T7277.001
Chairman DeWine. Thank you very much.
Let me welcome William Johnson and Marsha Globerman from
the FCC's Cable Services Bureau. They are here with us today
and we appreciate that very much. They have submitted a
statement for the record, and without objection we will make it
a part of the record at this point.
Chairman DeWine. Mr. Kimmelman, what do you think of Mr.
Sachs' argument about these extra channels, that really I ought
to be happy because I am getting well over 100 channels now on
my cable system?
Mr. Kimmelman. Well, I think people probably like more
rather than less, but the fact of the matter is that using Mr.
Sachs' own measurement, in the communities where you have two
wires the price per channel is approximately 45 cents and where
there is only one cable company the price is more than 60 cents
a channel.
The FCC has consistently shown a 30-percent differential
between wire-to-wire competition in one cable company. So while
cable companies are adding more channels, I don't believe they
are doing it at a fair price to consumers.
By the way, Mr. Chairman, I would just be interested to
have a poll of everyone in every one of these communities who
faced a couple-buck cable rate increase last year to identify
the three new channels they got for it. I bet you they are not
very highly watched, popular channels.
Chairman DeWine. Mr. Sachs, do you want to respond to that?
Just jump right in.
Mr. Sachs. I will be happy to. There is continued consumer
demand for services that aren't offered on cable systems, and
whether it is Arts and Entertainment's new History Channel or
Odyssey, a new women's channel, or the newly launched National
Geographic Channel, we are hearing from customers that they
want new programming. Programming has costs associated with it.
In Mr. Kimmelman's analysis, he spoke of electric rates in
California. Well, when electric prices go up, the consumer is
not receiving more kilowatts for that. When cable prices are
adjusted, consumers are receiving more product and service for
it. If we look at the period since cable--and we are really
talking about cable program service tiers, not the underlying
basic rates, but since those were deregulated, which is as of
the end of March 1999, we are talking about a 2-year period.
There have been two cycles of cable rate increases. Those
increases have been each year about 2 percent above inflation,
and at the same time consumers have received more programming.
So I believe what I said in my opening statement is correct
that--and this is consistent with what the FCC found--on a per-
channel basis, the cable rates essentially have been flat.
I think the one other thing that is probably fair to say is
when you are looking at cable prices, you really have to look
community by community. You also have to say, compared to what
in terms of entertainment and information value.
I was at the movies with my wife Saturday night--$8.75 for
a ticket for a 2-hour movie. There were just the two of us. If
it were a family of four, you are looking at $35.
Chairman DeWine. You go in the afternoon if you are a
family of four.
[Laughter.]
Mr. Sachs. You could, and maybe you should.
Chairman DeWine. That is what the DeWine family does.
Mr. Sachs. The newsstand price of the Wall Street Journal
this week went from $.75 to $1.00. Well, you know, if you
happen to buy it everyday at the newsstand, that is $5.00 a
week.
You look at cable where the average customer is taking your
basic and expanded service and is paying something in the
neighborhood of $35 a month. The average household is watching
television 7 hours a day, 30 days a month. Compared to other
entertainment and information options, cable remains a very
good value.
Chairman DeWine. Mr. Hartenstein, assume for me that there
is no change in the law, that we do not change the law, as you
have suggested should take place. You have testified, I believe
I wrote down correctly here, 61 percent of the households--you
now have the ability to offer them local TV as part of the
package. Is that where you are, 61 percent?
Mr. Hartenstein. That is correct.
Chairman DeWine. Assuming no change in the law, when do the
other 39 percent get theirs?
Mr. Hartenstein. With no change in the law--
Chairman DeWine. No change in the law. Assume that for me.
You have already made your point about you need a change in the
law.
Mr. Hartenstein. With no change, we can do no more markets
than we have up today because the new satellite that we are
putting up would then only serve to fill up all of the
channels, the ``must carry'' that we have for the markets that
we already have up.
If we have that same spectrum and the satellite that we are
putting up, we could expand to perhaps as many as 80 markets
and get closer to about 79, 80 percent of the households of the
entire country coverage, and that is what we would propose to
do.
Chairman DeWine. You might get to Dayton, Ohio, sometime?
Mr. Hartenstein. I picked those cities specifically because
they are the next ones that we would go to if we don't have to
do the--
Chairman DeWine. I get the argument. We all understand that
argument.
My time is about up. I am going to go ahead and vote. We
are now about 5 minutes into a vote. I am going to turn it over
to Senator Kohl. He is going to go as long as he wants to go
and when he is done, I suggest, Herb, that you stop at that
point and we will take a break until we come back.
Senator Kohl. That is fine.
Chairman DeWine. Senator Kohl?
Senator Kohl. Thank you, Mr. Chairman.
Gentlemen, we believe that cable rates are increasing and
we have heard the explanations for these price hikes, but be it
the cost of upgrading or expensive programming, Congress has
reacted in the past to an unchecked trend of rising prices. But
I would like to see competition, not the Government, discipline
rates.
Mr. Sachs, I have two questions. Can we expect cable rates
to level off any time soon, and how would you describe the
state of price competition? Is it vigorous?
Mr. Sachs. I think the answer to your first question
depends on our costs. Not to avoid your question, but our rates
are a function of our costs. What is happening and will happen
more as we introduce new services like movies on demand that
Mr. Kent spoke of and high-speed data and cable telephony is
that there will be reduced pressure on basic and expanded cable
rates.
Insight Communications, for instance, another NCTA member
company, has been very aggressively marketing video on demand.
Their increases last year were in the 4- to 5-percent
neighborhood because 20 percent of their subscribers in the
first year had signed up for new digital services. So those
digital services are actually subsidizing the basic-only and
basic and expanded subscribers.
So as we have more sources of revenue, I would expect to
see the pressure on basic rates reduced. But when we are seeing
double-digit increases in programming costs year to year, and
sports increases in the mid-teens, it is difficult to keep your
rates at inflation.
Mr. Kimmelman suggested that because of advertising revenue
and pay-per-view revenue, all the programming cost increases on
basic ought to be absorbed. The vast majority of the
advertising revenue does not flow to the local cable operator;
it flows to the program networks. And as to pay-per-view, there
are programming costs associated with that as well.
Mr. Kimmelman. If I could just clarify, Senator Kohl, I am
not counting the $8 billion that flows to the programming
networks, only the $1 billion-plus increase since 1997 that has
flowed to actual cable operators, according to your submissions
to the FCC.
Senator Kohl [presiding.] Mr. Kent, what would you tell the
subscribers in Wisconsin about the future of their rates?
Mr. Kent. Senator Kohl, our research has shown that in this
competitive environment our consumers are much concerned about
quality of service, about the channel lineup, and about the
advanced offerings that we can provide our customers.
The situation we have been in over the past several years
is that, frankly, up until we launched our digital product in
this industry, which is only about a year-and-a-half to 2 years
ago, we had an inferior product to direct broadcast satellite.
They had enhanced channel capacity and were able to offer a
superior product with more channels. We are just now catching
up, and we now have a level playing field where we have spent
the dollars, added our channel capacity, particularly in
Wisconsin, and we now have pretty much the same number of
channels as DIRECTV and EchoStar for similar offering.
What we have seen is this year--and I can document it. I
have to tell Mr. Kimmelman that prior to being a cable
operator, I was a CPA and I can assure him that pay-per-view
revenues and ad sales don't come close to earning an adequate
rate of return on our investment on upgrading our plant.
The situation is such that this year alone, Charter
Communications has experienced a 24-percent increase in our
programming costs, half of which is adding of channels to try
to provide a level playing field with our satellite
competitors. The other half is just sheer inflation increases,
particularly sports inflation.
Where Charter is today is our margins, the gross revenues
less programming costs, are absolutely decreasing. We cannot
raise our rates to recoup the full amount of programming costs
that we are absorbing, so we are trying to remain competitive.
Where we are competing significantly on price is in the
advanced services, in our pay channels.
Just last year in Wisconsin, and frankly nationwide, for 2
and 1/2 months we had what we called a Summer Sizzle. For
$49.95 a month, you could get every single digital and analog
offering, including all the pay channels that we offered, which
was about a $35 discount from our normal cost and frankly about
a $27 discount to DIRECTV.
Today, those same consumers have the ability to take that
service for $10 less than DIRECTV. So there is significant
price competition going on across all of our offerings. I think
the problem with basic and expanded is until we get sports
inflation under control, it is going to be hard for us to
decrease our rates. In fact, DIRECTV and EchoStar have the same
problem and have also recently increased their rates.
Senator Kohl. Thank you, gentlemen. We will have to stand
in recess until the votes are completed.
[The Subcommittee stood in recess from 11:04 a.m. to 12:02
p.m.]
Senator DeWine [presiding.] Well, let me apologize to our
panel and to our audience. The first vote in the Senate took 50
minutes. The second one only took a few minutes, but it is one
of the interesting things about having a divided Senate. We
have a lot of close votes and we have the Vice President who is
even closer, so it is going to be an interesting week.
Let me start again with you, Mr. Hartenstein. You have
stated in your testimony that you don't believe the FCC should
permit competitors to use the spectrum that your company uses
to provide its services. Northpoint is one company that would
like to do so, and we certainly appreciate your concerns and
understand that you want to ensure that your business can
deliver its service without interference from other services.
However, I understand that there have been several tests
performed that have shown minimal interference. Why have these
tests failed to alleviate your concerns?
Mr. Hartenstein. Without getting into some of the
technical--
Chairman DeWine. Don't do that. Thank you.
[Laughter.]
Mr. Hartenstein. I won't. Thank you.
Chairman DeWine. Just give me the summary.
Mr. Hartenstein. The tests have been problematic, I think,
to say the least. We did, we feel, have a positive step forward
when a few months ago the FCC agreed to bring in an outside
firm, a third party, to conduct the tests.
Chairman DeWine. Excuse me. You are going to have to be a
little more specific than ``problematic.'' What do you mean?
You don't trust them, you don't like them, they are no good?
What is the deal?
Mr. Hartenstein. Up to before the FCC brought in a third
party, it was, if you will, EchoStar's and DIRECTV's tests and
analysis versus Northpoint's, and I think the FCC saw the
wisdom in bringing in a neutral third party to conduct the
tests.
As we stand today, those tests have commenced. There is an
issue, however, because the DBS providers and the trade
association for DBS have not been allowed to review the test
procedures and the actual test setup to verify that it would
actually replicate a real-life situation.
We in the DBS industry--and DIRECTV and EchoStar I think
can speak together on this--are not at all afraid of
competition. For gosh sakes, we are up against cable which has
the market power and the size, and we are not afraid of that.
What we are very concerned about, as I think anybody who uses a
portion of the spectrum, is that when a new application would
get planted on top of you in the same spectrum with the
potential to cause interference and cause interruptions and
outage. That is what we are concerned about. If the tests are
done above board and if the procedures in doing the tests are
shared and made available to all parties, then we will stand by
the results of those tests.
Chairman DeWine. Mr. Currey, I wonder if you could
elaborate a little bit on your comments about both the
Philadelphia and the New York markets as far as sports. It has
been my experience in talking to people both in the business
and also as consumers that, maybe to state the obvious, sports
is just an unbelievable draw.
One of the things I would tell Mr. Hartenstein is when I
was trying to decide in Cedarville, Ohio, whether I was going
to get DIRECTV or not was what sports we could get and whether
I could see the Cincinnati Reds. I don't know that I am unique
to anybody else, but I think sports is just huge.
I am kind of intrigued by your written testimony and the
summarization you made of it, and I wonder if you could maybe
describe the market in New York and Philadelphia in regard to
sports and the withholding of that from basically your ability
to function or others to function and offer consumers what they
want, which is sports. You mentioned in New York, I guess, 7 of
9--well, you tell me; go ahead. You said 7 of the 9 sports
are--
Mr. Currey. Controlled by Comcast, and the venue.
Chairman DeWine. Yes. Tell me about that.
Mr. Currey. Well, maybe just a preliminary comment about
this whole programming issue. We talked about the cost of it.
Yet, if you look behind that cost, too, and who owns a lot of
that programming, that is also highly concentrated among the
largest cable operators in the country. So a lot of that profit
is going right back into that company.
Chairman DeWine. They own the product?
Mr. Currey. Yes, they do; in many instances they do.
To your point, though, cost is one thing. More important is
the withholding or the threat of withholding of that program.
So while in New York we can get sports from Comcast, our
customers don't know what sports they are going to get because
they allow us certain sports, but they won't tell us which
sports we are going to get.
So you may want the Cincinnati Reds, and that day you are
going to get the Cleveland Indians and the Chicago Cubs. It
would have to be a local one, but in New York they control 7 of
the 9. The only two they don't control are professional
football, so they have got hockey, basketball, and baseball.
Chairman DeWine. So they have got everything but football?
Mr. Currey. Yes, sir. The more problematic one for us is
also Philadelphia, though, where Comcast has the same control
over the sports as I described. What they do to us there is not
only threaten us with denial of that programming, but then sign
a 3-month contract with us so that it is commercially available
for 3 months. We don't know when they are going to not re-up it
for the 3 months. Then, worse, they will tell their salespeople
to go out; don't switch to RCN because you don't know how long
they are going to have sports programming.
To your point, our market research shows that about 50
percent of the consumers will not even consider switching
unless they can be guaranteed that they are going to have the
sports programming of the incumbent provider. So it is a
critical issue, not only getting it and getting it at a
reasonable rate, but more so just the guarantee that you can
get it.
We are not asking for subsidies, we are not asking for it
to be free. We are willing to pay a competitive price for it,
but we have to have it and we have to be able to tell our
potential customers that--
Chairman DeWine. So your point is that at least in the
Philadelphia market they just jerk you around, is what you are
saying.
Mr. Currey. That is exactly right.
Chairman DeWine. And getting back to the New York market,
where are you with that?
Mr. Currey. Well, again, that is Comcast.
Chairman DeWine. You are in there?
Mr. Currey. We are in.
Chairman DeWine. It is your market?
Mr. Currey. Yes. In the Philadelphia market, we are not
just in the city; we are going to build in the Philadelphia
suburbs. We are not just going to the city. We are going to
spend the money, but we finally just gave up after 2 and 1/2
years. We have enough other cities that want us to come to town
that recognize the benefits of competition, recognize that the
incumbent starts to behave to withhold prices and add channels.
The mayor of Detroit's office called us after Philadelphia
and said Comcast is a competitor here, but they are not located
here; come to Detroit; we would love to have a competitor. And
there are multiple examples of that right now, that the cities
recognize the benefits to their consumers and they would love
to have us come to town. So why stay in a city that really
doesn't want you? We don't have to do that anymore.
Mr. Hartenstein. DIRECTV and EchoStar, Mr. Chairman, didn't
even get the 3-month rolling option from Comcast. We have been
denied access all along.
Chairman DeWine. In what markets, then?
Mr. Hartenstein. In Philadelphia, if you are a DIRECTV
customer, we do not deliver the local, regional sports channel
there. So you don't get the Sixers' games, you don't get the
Flyers' games.
Chairman DeWine. So they have totally denied you?
Mr. Hartenstein. Yes, yes.
Chairman DeWine. It is not a price issue?
Mr. Hartenstein. We said the name the price and there is no
price.
Chairman DeWine. If you can't have that product, I don't
know how you compete. We all have our own example, but when I
checked you all out, I wouldn't have gotten you if I couldn't
have gotten the Cincinnati Reds. I just wouldn't have done it,
and so if someone could deny you that, you are at horrible
disadvantage, it would seem to me.
Mr. Currey. I just wanted to correct the record. I made a
mistake. I commented on Comcast in New York, and it is
Cablevision. It is Comcast in Philadelphia and Washington,
D.C., just to correct the record.
Chairman DeWine. Thank you very much.
Mr. Sachs. Mr. Chairman, may I be heard on that topic?
Chairman DeWine. Yes.
Mr. Sachs. The vast majority of cable programming networks,
satellite networks, are not owned by cable operators. Going
back to the time of the 1992 Act, there was about 50-percent
vertical integration. That is down to about 35 percent, and
when AT&T broadband completes its spin-off of Liberty Media,
that percentage will go down further.
There is a very limited amount of exclusive programming
today, and it is not limited just to cable. DIRECTV has the NFL
all-you-can-eat package on Sunday afternoons.
Chairman DeWine. All you can eat?
Mr. Sachs. All you can eat, all you can consume, any city,
any game, which has been advertised quite heavily and it is a
very good competitive tool that DIRECTV has. So I think to
complete the picture, you have to--
Chairman DeWine. Your point is that is exclusive. Is that
right?
Mr. Sachs. It is not available to any cable companies.
Mr. Kent. Nor any other satellite provider.
Mr. Currey. But I would add, look at his penetration in
Philadelphia or other urban areas. It is not the 15 percent or
17 percent that he has nationwide. It is much less; it is
probably a third of that, and part of that is attributable to
the lack of local sports programming.
Mr. Kimmelman. Mr. Chairman, if I could just add, as we
know, programming is not all equal. As you just pointed out,
you wouldn't have gotten the service if you didn't have your
favorite teams. Of the channels that are owned by cable
companies, it turns out that among the top most viewed cable
channels about half are owned by cable companies; among the top
20, about half; among the top 30, about half.
So while, when you go down to 200 channels, a whole bunch
of the small ones are independent, a lot of the most popular
ones are owned by the cable companies themselves. Obviously,
these are the marquis-draw channels that, like yourself, are
the reasons why consumers would want a particular service.
Mr. Hartenstein. Mr. Chairman, if I may just clear the air
on it, DIRECTV currently is the exclusive DBS provider for the
NFL Sunday Ticket service, the so-called all-you-can-eat. That
doesn't preclude the consumer's access to probably five to six
games every week of NFL between CBS, the Fox feeds on Sunday,
the ESPN, and then the ABC feeds.
Chairman DeWine. Right, right, but if I want that package,
the only place I can get it is from you?
Mr. Hartenstein. From me or from C-BAN satellite, the
larger dish. Whether the product is available to cable is an
issue frankly between cable and the NFL. There is no mention of
that in our agreement.
Chairman DeWine. Your agreement is a non-exclusive
agreement?
Mr. Hartenstein. Yes. What I said is we are the exclusive
DBS distributor for that. We negotiated with the NFL, which is
an independent third party. There is no cross-ownership between
DIRECTV and the NFL.
Chairman DeWine. So there is nothing in your contract that
says they can't sell that to cable. Is that what you are
saying?
Mr. Hartenstein. That is correct.
Chairman DeWine. OK, so they have decided to market it
differently for cable?
Mr. Hartenstein. Yes, and the NFL is an independent third
party which has no reason to favor, no incentive to favor one
distributor over another. On the other hand, Comcast in this
case--and I don't disagree with you, Mr. Sachs. You are right.
The amount of vertical integration has gone down. By the way,
we never had a problem with Liberty on any of the content.
But I think there is an incentive to favor in the case of
Comcast, namely themselves, to what is their only competitor in
the Philadelphia market, which is DBS, and presumptively here
Mr. Currey's company to come in and overbuild. So those are the
reasons that I think we both feel strongly about cleaning up
that loophole in the program access provision and continuing it
beyond the sunset of next year.
Chairman DeWine. Let me ask this question to any members of
the panel who would like to respond. Section 304 of the 1996
Telecom Act required the FCC to open up the set-top box market
to competition. Why do you think we haven't seen competition in
this area and what more needs to be done to foster competition?
Does anyone want to jump on that one?
Mr. Sachs. I would be happy to speak to that. In 1992, when
Congress reregulated cable rates, that included set-top boxes.
With the 1996 Act and deregulation in 1999 of the cable program
service tiers, regulation of set-top boxes continued. So the
cable operator today--its equipment is price-capped at 11.25
percent over cost. Consumer electronics retailers are
accustomed to much higher margins than an 11-percent markup
over cost. So there has been little economic incentive for them
to compete with us on that basis.
The other factor there is that with DIRECTV and with
EchoStar, they are functioning as the local distributor and
they are working out arrangements which involve some commission
and perhaps some continued revenue stream from that subscriber.
With cable being a local business, 30,000 separate franchises
in local offices, we are for the most part our own local
distributor. So there is no economic benefit to the cable
operator to be paying out to Circuit City or Radio Shack or
Best Buy a continuing revenue stream on set-top boxes. So there
is not an economic proposition that is particularly attractive
to the consumer electronics retailers.
Chairman DeWine. Anybody else?
Mr. Kent. Mr. Chairman, if I may, at Charter
Communications--and I think I can speak for the rest of the
cable industry--we have invested in point of deployment
security devices that we have available at each of our systems
to ensure that if a consumer does buy a set-top box at a retail
outlet that we can serve that customer.
Frankly, Mr. Chairman, it is in our best interest. Right
now, we are spending hundreds of dollars per box and we can
only, under law, mark that up 11.25 percent over cost to charge
back to that customer. To the extent I can move those boxes to
the retail market, I don't have to expend those capital
dollars, so it is in my interest.
In fact, we have recently entered into deals with CompUSA
and others to get a retail presence in the store. So I think we
have done as much as we can to help promote the retail outlet.
Chairman DeWine. Mr. Kimmelman, in the past you have said
that the cable industry needs to be reregulated to get rates
under control. Some have expressed concern that this will slow
the cable companies' efforts to roll out new services, such as
broadband and telephony. Do you want to comment on that
criticism of your criticism?
Mr. Kimmelman. Well, you asked me to come up today and
speak to competition, so I didn't raise rate regulation, but
Senator Specter did.
Chairman DeWine. We are going to give you a chance.
Mr. Kimmelman. I agree with Senator Specter. I think we
traditionally put a lid on what monopolists can charge, and we
still believe that would be necessary until we get to
competition.
I think that there is no question about the fact that you
can have a dampening effect on innovation, but what we are
seeing is blatant price gouging, and you have to balance the
interests of consumers who don't have meaningful choice and
meaningful price competition versus the interests of the
industry. Some of the industry's behavior is being questioned
as to whether it is blatantly anti-competitive as well.
I think at this juncture the logical course to follow, Mr.
Chairman, is to really try to break open this market more
forcefully to competition. I recognize there is not a lot of
sentiment to reregulate in the Congress today. I disagree with
Mr. Hartenstein. I can't speak to the technical issue, but we
will file today urging the FCC to go forward and license
Northpoint broadwave as a competitor to both satellite and
cable to give consumers another choice.
They are proposing a $20 price point for, I think, 70 to 90
channels that we think could be extremely attractive to
consumers, and we certainly hope the FCC can move this way
without any interference problems, certainly extending access
to programming, expanding it to make sure that marquis
programming like sports programming cannot be used to
circumvent the non-discriminatory access provisions.
So I think that we are at a point now, practically
speaking, where a few surgical endeavors here, both
regulatorily at the FCC and with Congress' help to ensure non-
discrimination, hopefully will get us to a point where we are
going to start seeing some price competition.
Chairman DeWine. Let me thank you all very much for your
patience today. Again, I apologize for the major break that we
had that lasted over an hour. We do appreciate your testimony.
It has been very helpful.
Senator Specter has indicated, as you have heard, that he
has an interest in holding hearings in Philadelphia. We are
certainly going to accommodate him on that. So I would
anticipate that we would be holding hearings in Philadelphia,
or at least one hearing.
There is also the possibility that this Subcommittee will,
within a short time, have another hearing on this same topic.
If we do not do that, however, this Subcommittee obviously is
going to continue periodically to hold oversight hearings to
see how we are doing and to get the update and to see what, if
any, additional legislation is needed by Congress.
So, again, we thank you all very much.
[Whereupon, at 12:22 p.m., the Subcommittee was adjourned.]
[Questions and answers and submissions for the record
follow:]
QUESTIONS AND ANSWERS
Responses of Shawn Bentley, Motion Picture Association of America, to
questions submitted by Senator Hatch
Question 1: For all panelists (especially Mr. Parsons, Mr. Ken
Berry, Mr. Murphy, and Mr. Richards, and Mr. Henley and Ms.
Morissette): One argument we have heard in favor of a compulsory
license is that music has so many nieces to license and there have been
substantial disputes between the record labels, the publishers and
technology companies like MP3.com about how to get the publishing
rights cleared in the volume demanded by online offerings. Some have
suggested that a stumbling block to getting the labels to license sound
recordings is that they tray not have the rights from their artists to
want those rights I understand there may even be problems with the
MusicNet offering to some degree because of these impediments. Would
any of you be interested in commenting on this particular problem and
suggest ways to remedy it?
Answer: As I said in response to some questions in the hearing, I
speak only for the movie industry. I will defer to my colleagues on the
panel to address questions concerning the music industry. In our haste
to bring legitimate digital content to online consumers, we must not
abandon the market-based principles that are the bedrock of the
nation's economy. As Congress has noted in the past, compulsory
licensing is an intrusion by the government into the marketplace. That
intrusion artificially shrinks and devalues the exclusive rights of
authors and creators. Government price fixing just never works. Never
has. Never will. It is a flimsy substitute for the marketplace.
Compulsory licensing is always a drastic measure of last resort. At
this moment the online world is still very much in its infancy, as dot-
com failures and almost-daily retooling of business models has made
clear. In this environment we must take care that our impatience in
building the online marketplace does not lead us to abandon essentials
of our economy. The marketplace is the arena where competition thrives.
It is the marketplace that drives growth in the national economy.
Therefore, a leap by Congress into a ``compulsory licensing'' mode for
the digital environment would not only be unnecessary, it would be
wrong.
That is not to say that rights clearance is easy. Movie studios
deal with difficult rights clearance issues every single day, ranging
from synchronization rights for music to portrayals of visual arts in
motion pictures to publicity rights. None of this is easy, but we do
it. The vast majority of programs on every cable system are freely
negotiated between rights holder and cable system. The same with
satellite delivery, the same with over-the-air television. Online
marketplace distribution of digital will work in the same way.
Question 2: For all panelists: Mr. Hank Barry argues that we have
created compulsory licenses in the past, for publishing rights in music
and in rebroadcast of television programming because it was difficult
to clear the rights to the myriad creative interests involved in making
up a broadcast day. Would anyone like to explain why that analogy does
or dues not obtain in the online music and entertainment world?
Answer: The Register of Copyrights addressed a similar question
when studying whether it was appropriate to extend the cable and
satellite compulsory licenses to Internet retransmissions of broadcast
programming. She concluded that it would be inappropriate to ``bestow
[] the benefits of compulsory licensing on an industry so vastly
different from other retransmission industries now eligible fur
compulsory licensing under the Copyright Act.''
The Copyright Act's existing compulsory licenses are totally
different in scope and applicability than the type of compulsory
license proposed by Mr. Barry. To begin with, there is no compulsory
license for digital downloads via cable or satellite--only for
retransmission of broadcast signals. Perhaps even more importantly, the
impact of the cable and satellite licenses on copyright owners is
tempered by regulatory and technical limitations that restrict the
reach of those media and their potential to foster serial copying and
retransmission. Cable and satellite operators have to deal not only
with the fact that they can only transmit within limited viewing areas,
but also with regulatory requirements like syndicated exclusivity,
network non-duplication, sports blackout, retransmission consent, etc.
The Internet, on the other hand, is global and unrestricted in its
reach. It allows perfect serial copies and distribution of copyrighted
works that is both infinite and instant. As I am wont to say from time
to time, the Internet is to cable/satellite environments as lightning
is to the lightning bug.
The existing compulsory license for musical compositions--the so-
called mechanical license--is similarly inapposite. That license
enables a person to make and distribute recordings of a particular
musical composition (i.e., the sheet music) that has been previously
recorded and distributed to the public under authority of the copyright
owner. In other words, it allows someone to record a song that has been
previously recorded, using their own performers and as their own
rendition of the song, upon payment of the prescribed royalty to the
copyright owner in the underlying musical composition (i.e., the
composer and songwriter). It is not a license to reproduce and
distribute the underlying sheet music in copies, and it does not convey
a right to make copies of the resulting sound recording. That is the
right, with respect to sound recordings, that Mr. Barry proposes to
usurp by way of a compulsory license. There is simply no precedent for
such a proposal in the Copyright Act.
The justifications suggested in this question for the existing
cable and satellite compulsory licenses might very well not even hold
true were Congress revisiting the need for those licenses today. As I
already mentioned, the majority of programming offered on cable and
satellite is not subject to compulsory licensing. Cable networks like
HBO, Showtime, USA, Lifetime, Discovery Channel, ESPN, Nickelodeon, and
hundreds of others are not subject to any compulsory license, yet cable
and satellite operators have no problem acquiring retransmission rights
for these networks. The reason? In the absence of a compulsory license,
these networks have emerged as rights aggregators for all the programs
on those channels. For example, HBO secures both the right to exhibit
the show and the right to sublicense the retransmission by satellite
and cable providers. There is no reason to believe that similar market-
based solutions would not emerge with respect to online digital content
delivery, provided that the market is allowed to work.
Finally, four quick points why it is that a compulsory license
simply will not work for movies. First, as I mentioned already, the
Internet is global in nature and provides the means for perfect serial
copying. This means that the 100' copy of a digitized movie is as pure
as the original. Not so in the analog format, where each copy is
degraded in quality. More ominously, transmission of a movie on the
Internet is instantaneous to every corner of the globe. The potential
for harm to copyright owners is immense. The effect is particularly
alarming in the film industry, where the average major studio motion
picture costs $82 million to produce, distribute, and advertise, and
where only 1 in 10 films ever makes its money back from domestic
theatrical exhibition. Here is the question that the Congress must
answer: If films are unable to return their investment through
ancillary markets like home-video, pay-per-view, and international
territories because perfect digital copies are floating around the
Internet for anyone to take down, who will put up huge amounts of
private risk capital to produce films if they can be so easily and so
swiftly pilfered?
Second, a compulsory license would devastate small and independent
film producers. These producers cannot finance films out-of-pocket.
Rather, they finance their films by pre-selling distribution rights in
markets around the world. An Internet compulsory license would do away
with this entire market. The small independents would be doomed.
Third, to repeat, government price-fixing does not work. As 1 said
in the hearing, today a cable system with $9 to $10 million in revenue
pays less than one percent of that revenue in royalties to the
copyright owners. A satellite provider pays 19 cents per subscriber for
ALL the programming of a SINGLE broadcasting station for ONE month.
Everyone knows that an Internet compulsory license would similarly
undervalue content, but that degradation of worth would have far
greater an impact on copyright owners given the Internet's global
reach. Risk capital would dry up. Not a happy augury for the future.
Fourth, an Internet compulsory license would force American
consumers to subsidize foreign consumption of American copyrighted
works. American movies are the most popular on all the continents. Our
movies dominate the world for one simple reason: Most citizens of just
about every country find our creative movies the most entertaining. The
U.S. movie industry is a big reason why the Copyright Industries have a
surplus balance of trade with every single nation in the world. No
other U.S. business industry can make that statement. A compulsory
license would change all of that in a most desolating way. Keep in mind
that a compulsory license would have to take into account the global
reach of any distribution system, as well as the increased potential
for unauthorized copies and distribution. Because copyright law is
national, American consumers--not foreign consumers--would have to bear
the costs of foreign uses. Rather than bringing more foreign revenues
to the U.S., a compulsory license for movies would give foreign
consumers a free-ride on the back of American consumers.
Question 3: I have heard a number of entertainment companies say
that acceptable protection for online content simply does not exist
yet, that existing Digital Rights Management and watermarks. wrappers.
or encryption, is simply not good enough to protect valuable content.
Yet we have a number of technology companies here today who believe
that they have such a solution, and now we, have announcements of
online initiatives from all five major labels, which suggests the
technological protections have developed recently. Would any of you
care to comment on the state of technological protection for content?
Answer: Companies with content protection products to sell are
motivated to declare that the answer to this question is a clear yes
(and that each, in fact, has the specific ``yes'' that is needed!). Yet
as the clip from ``Gladiator'' viscerally demonstrated, the current
marketplace is filled with illegitimately obtained copyrighted works,
strongly suggesting a diametric answer as the correct one.
Technology development is an iterative process and the core issue
at the heart of the question is ``where are we in this iterative
process?'' Are we near the start, middle, or the end of the process of
the development and deployment of effective content protection
technologies?
As is pointed out in the question, there are numerous vendors
offering content protection technologies that, as witnessed by recent
announcements, are now entering the marketplace for initial tests with
real products and real consumers. Some of these technologies will be
fully flawed while others will show more promise.
The fact that we are seeing the start of deployment clearly
indicates that the answer to the question posed is that we are at the
beginning, not the middle or the end, of the deployment of content
protection technologies in the marketplace. Extrapolating when we will
arrive at the middle--a robust and active market--is impossible to
judge as the pace of adoption and acceptance of these first-to-be-
deployed technologies will depend on the unknown answers to questions
such as how consumers will respond as they test and trial the products
wrapped in these protection technologies and how effective the vendors
of these products will be at repelling the legions of hackers that are
sure to arrive on the scene.
Question 4: The premise of this hearing is that digital content is
coming soon to digital devices to he enjoyed by consumers soon. Bared
on our discussion today. how soon is soon, and when will the promise
become a reality?
Answer: Legitimate, technologically protected digital content is
already reaching millions of consumers in many ways such as via DVDs,
digital satellite, digital cable, and other methods. These consumer-
friendly technologies did not appear overnight. They required years of
dedicated effort by hundreds of companies and they continue to be
refined to this day not only in the area of content protection but,
equally important, in ways that heighten the entertainment. experience
and usability for the consumer. Innovation will continue and we expect
both product types and variations to multiply every year as far as we
can see into the future. Competitive products such as those noted,
which provide great consumer experiences and also protect content, take
real work, innovation and dedication to produce--and those that would
look to Congress to diminish their efforts to the detriment of the
rights of others should not be encouraged.
Responses of Shawn Bentley, Motion Picture Association of America, to
questions submitted by Senator Leahy
Question 2: Jack Valenti testified that within four to six months,
several movie studios plan to use the Internet to transmit to American
homes in encrypted form, but that more protection may be needed. ``some
of which might require congressional legislation. `` In the Digital
Millennium Copyright Act (DMCA). the Congress has provided protection
for technological measures that effectively control access to
copyrighted works and barred the manufacture, import. or sale of
products or services primarily designed to circumvent such
technological measures. 17 U.S.C. Sec. 1201 (a)(1) & (2). Please
describe the circumstances where additional protection may he warranted
and the areas not already covered by the DMCA where additional
legislation may be requested.
Answer: The DMCA provides a critically important remedy against
those who would circumvent technical measures used to protect against
unauthorized access to and reproduction of copyrighted content. This
remedy already had been successfully applied to protect the integrity
of DVD technical protection measures, without which there would be no
DVD marketplace--a marketplace that has benefited consumers enormously.
However, the DMCA measures, although critically important, are
quite limited in their application. In particular, the DMCA does not
require devices to affirmatively respond to access and copy protection
technology. This is a hugely significant limitation. In the case of
DVDs, responsiveness to technical protection measures has been required
by technology licensing terms. However, such terms require privity of
contract, which substantially narrows, and complicate,, the ability of
content owners to require device manufactures to respond to technical
protection measures.
A statutory mandate that requires devices to recognize
technological protection measures would provide a much broader and more
reliable safety net for content owners and could make it easier for our
industry to distribute more high quality, high value ;films to
consumers. So I believe that Congress should give serious thought to
this possibility, but 1 am not at this time prepared to recommend
specific legislative measures. Of course, if a statutory mandate were
enacted, it would have to be accompanied by measures that would
preserve the balance among the various interests that were struck in
the DMCA.
Question 3: Concerns have been expressed that ``copyright
management'' measures being developed by copyright owners to control
the distribution of their digital works may erode the first sale
doctrine. If a customer pays for the personal use of a copyrighted
work, the right holder may use technological means to ensure that the
work is not posted on a website for my by others. Do you believe that
the marketplace will sort out the scope of copyright management
measures since customers who believe they are not getting what they pay
for will simply stop buying?
Answer: We strongly believe that ``copyright management'' measures
will in no way undermine the sanctity of the ``First Sale'' doctrine
and that such concerns are sorely misplaced. The First Sale doctrine
does not prohibit the use of either technical or contractual measures
to restrict the dissemination of copyrighted material. However, the
marketplace has placed practical limitations on the use of such
measures. For instance, the use of contractual restrictions to prevent
the rental of videos by purchasers proved unworkable in the
marketplace. We do believe that the marketplace will sort out the scope
of copyright management measures on-line, as it has off-line. If
imbalances occur, they should be addressed. But at this time there are
no problems that need to be ``fixed"-only speculation about what could
or might happen sometime in the future. There is certainly no basis for
even considering ``prospective'' amendments to the First Sale doctrine,
which is operating as intended.
Question 4: Retailers of music, movies, video games, and other
copyrighted works have expressed concern about whether copyright
management measures and end user licensing agreements will erode the
ability of retailers and distributors to distinguish themselves from
one another in meaningful ways with the potential of stifling
competition among retailers, since those measures may yet uniform price
policies. and terms for the online distribution of digital works
Answer: Motion Picture companies are in the very earliest stages of
marketing their films to consumers on-line. It remains to be seen
whether copyright management measures and user licensing agreements
will be uniform or whether they will have an adverse impact on
competition. If so, however, existing laws should be more than adequate
to protect retailers and the public against any anticompetitive
practices that might develop. Indeed, the likelihood is that
distribution of films through the Internet will have strong
procompetitive effects and provide significant benefits to consumers.
Response of Shawn Bentley, Motion Picture Association of America, to a
question submitted by Senator Kohl
Question 1: While all of the panelists are primarily concerned with
access to the online entertainment marketplace, they must also
understand chat they have a responsibility to parents. The Internet
makes it even more difficult or parents to police the songs that their
children hear, the images that they see and the games that they play.
I'd like the panelists to discuss what their company or industry plans
to do to help parents as online entertainment becomes more readily
accessible to all consumers, especially children.
Answer: Your question, ``what our industry plans to do to help
parents as online entertainment becomes more readily accessible to all
consumers, especially children,'' is quite relevant, in part because it
highlights the importance of facilitating a legitimate marketplace for
the distribution of digital entertainment.
The movie industry is now implementing a 12-point set of
Initiatives to help parents determine what films they want their
children to watch or not to watch in theaters. Included in those
Initiatives is a pledge to give reasons fur the ratings of a movie in
advertising and on web sites so that parents can easily assess that
films' suitability for their children.
The voluntary movie rating system, established November 1, 1968,
has won high marks of parental endorsement. I attach a summary of
national surveys over the past 30 years which confirm that statement;
the latest Opinion Research Corporation of Princeton, New Jersey poll
reveals 81% of parents with children under 13 find the rating system
Very Useful/Fairly Useful. An independent poll taken by the Federal
Trade Commission in 2000 found that 80% of parents were ``Satisfied''
wit the rating system.
The Motion Picture Association is also a founding participant in
the voluntary television program rating system. All TV shows visually
display a rating; most newspapers also carry the ratings. This aids
parents in guiding their children's TV viewing.
As you know, Congress passed the V-Chip legislation (supported by
the MPA), which allows parents to block TV programming they choose for
their children not to watch.
MPAA and its member companies are committed to fulfilling our
pledge to parents in the online world as we do in the offline world. To
date, the Internet has largely been a promotional tool for MPAA member
companies. As such, the MPAA has adopted a policy that requires
Internet advertising for all rated films to be pre-screened by the
MPAA's Advertising Administration just like any other ad. That means
that before it can be put on the Internet, every trailer, every
official web page, and associated banner ads must be approved by the
Advertising Administration and must meet the same standards as offline
advertisements to ensure that Internet ads are likely to be judged
appropriate for even the youngest audience.
As I said in the hearing last week, we are now on the eve of an
important shift in the way movie studios use the Internet to market
their films. Within four to six months, several movie studios will be
online offering downloads of full-length feature films. Each film
offered to the public will have to pass the scrutiny of parents before
it can be downloaded for a fee. The computer format will demand a
credit card and a password for that credit card so that youngsters will
be unable to download movies on their own, unless their parents
approve. Every movie offered to families will have a rating, and the
reasons for the rating. Through the use of technology, the MPAA and its
member companies are committed to giving effect to the MPAA ratings
system in the online environment.
Keep in mind that web sites which illegitimately offer copyrighted
works for download, without permission of the owner (such as Napster,
Gnutella, Freenet, Aimster, and others) have no information about
ratings and make no effort to assist parents in discerning what is
appropriate for their children. These web sites and software
applications that offer films, illegally, are easily accessible by
children, and most am riddled with obscenity and child pornography. We
are now in the process of determining technological procedures which
are needed to protect valuable creative works on the Internet, and many
of those same technologies may also enable parents to exercise greater
control over their children's viewing choices. If some part of that
technology requires congressional legislation, we will return to you
and your colleagues to help preserve the worth of America's most
valuable trade export and a huge part of the national economy. One
thing, however, is perfectly clear: Only in a legitimate marketplace
will parents be given meaningful choices and information necessary to
enable them to influence their children's viewing habits. The ``near
perfect anarchy'' envisioned by Ian Clark, the creator of Freenet, is
as bad for parents as it is for copyright owners.
To graphically illustrate the difference between legitimate on-line
movie sites, and pirate sites, I have attached two screen shots taken
from the Web. One is the opening screen for a legitimate movie site
called Sightsound.com, which offers movies (including rating
information), music, sports events, children's programs and other
material. The other is an illegitimate site, Gnutella, which offers
pirate movies, music, video games and the most tawdry pornography
imaginable--all on one page, easily accessible to children.
Responses of National Music Publishers' Association to questions
submitted by Senators Hatch, Leahy and Kohl
Questions from Senator Hatch
Question: One argument we have heard in favor of a compulsory
license is that music has so many pieces to license and there have been
substantial disputes between the record labels, the publishers and
technology companies like MP3.com about how to get the publishing
rights cleared in the volume demanded by online offerings. . .. Would
any of you be interested in commenting on this particular problem and
suggest ways to remedy it?
Answer: As you are aware, songwriters and music publishers already
operate pursuant to the statutory compulsory license in section 115 of
the Copyright Act. MP3.com has mischaracterized its experience in
clearing publishing rights with the Harry Fox Agency (``HFA''), and in
fact substantial progress has been made recently between MP3 and HFA,
which we describe in detail below. There has been no increase in the
number of licenses necessary to distribute music since the emergence of
online digital music services, and music has been successfully
distributed for decades under the current legal regime. As we
demonstrate in detail in the answers that follow, no new compulsory
license is necessary--nor would it be beneficial.
Question: Mr. Hank Barry argues that we have created compulsory
licenses in the past for publishing rights in music and in rebroadcast
of television programming because it was difficult to clear the rights
to the myriad creative interests involved in making up a broadcast day.
Would anyone like to explain why that analogy does or does not obtain
in the online music and entertainment world?
Answer: NMPA does not believe that any new compulsory license is
warranted to promote the availability of music over the Internet. What
is necessary for a vibrant online music market to take root is for
``services'' such as Napster to cease their promotion and facilitation
of online infringement. At both the Committee's initial hearing on
music and the Internet, held July 11, 2000, and the April 3, 2001
hearing, witnesses representing companies and interests offering
appropriately licensed music services acknowledged the virtual
impossibility of competing with rogue entities that make other people's
music available to anyone for nothing. Until Napster and its imitators
follow the law by seeking necessary licenses and making the necessary
payments to creators and rights holders, law-abiding companies will
remain at a serious, if not fatal, commercial disadvantage.
As Mr. Barry knows, at the time Napster launched its service, the
company was eligible--like any other Internet music service--for
compulsory licenses under the terms and conditions of section 115 of
the Copyright Act for the making of ``digital phonorecord deliveries''
(``DPDs'') of musical compositions. It chose not to use the compulsory
licensing system available to it. Napster has therefore forfeited
eligibility for compulsory licensing through its continued
infringement. The company now urges Congress to establish a new
compulsory license regime that would reward it with access to all
musical compositions (and all sound recordings), presumably at a rate
it finds acceptable and with few if any administrative responsibilities
for Napster. NMPA believes that the existing section 115 compulsory
license provides an adequate framework for Napster and other Internet
distributors of music to secure licenses at a reasonable rate.
Question: I have heard a number of entertainment companies say that
acceptable protection for online content simply does not exist yet,
that existing Digital Rights Management and watermarks, wrappers, or
encryption, is simply not good enough to protect valuable content. Yet
we have a number of technology companies here today who believe that
they have such a solution, and now we have announcements of online
initiatives from all five major labels, which suggests the
technological protections have developed recently. Would any of you
care to comment on the state of technological protection for content?
Answer: The technology for protection of digitally distributed
content is still in its infancy. The field is extremely complex and
combines disparate academic fields of study including computer science,
encryption mathematics, digital signal processing and acoustics. Our
experience with reviewing the different technologies offered by various
vendors (large and small) is that a technology is ``tamper-proof' or
``hacker proof' only as a matter of degree. Today, there is no single
copy protection technology that meets the requirement of consumer
convenience, strong protection, practicality and reasonable cost.
In addition to copy protection technology, use tracking mechanisms
are equally important to ensure a vibrant digital music business where
all of the participants, including songwriters and publishers, get
properly paid for the uses of their creations. While ``fingerprinting''
technology is useful to identify unauthorized music files on computer
servers, such a function is distinct from managing legitimate delivery
to consumers of copy protected music. For example, The Harry Fox Agency
has proposed for several years, most recently in the ``SDMI'' process,
that the license number corresponding to the mechanical license (and
any other relevant license number) authorizing a digital distribution
be included in the header of each downloaded or streamed file.
Inclusion of the mechanical license number would permit automated spot
checking of websites and allow automated auditing of a licensed
website. It is a given that different website operators may secure the
authority to distribute a song from their website from different
parties. In order for a songwriter, publisher or their agent (HFA, for
example) to check that a website has such authority, it is essential
that a license number corresponding to the license granting the
operator the authority to execute such distribution appear in the
header of the digital music files being distributed from their website.
Although digital rights management technology vendors profess to
have the solution to this problem, they and the record labels have
resisted attaching license numbers to digital music files. While we
have been given a number of reasons for this resistance (including the
``header'' can only accommodate so much data), all can be
technologically surmounted. By continuing to resist inclusion of this
license information in the ``header,'' the record companies make it
much more difficult for music publishers to audit record company
compliance with our licensing agreements. Furthermore, because the
primary clients of digital rights management vendors are the record
labels (because the record labels control the distribution of sound
recordings), the technology they have developed and adopted so far has
been responsive to the interests of record labels, not those of music
publishers. An important principle arises from our experience with
digital rights management: technology alone is not the only challenge
facing an effective digital rights management regime. The economic
tensions that have been a part of the music business for decades are
also a significant factor in whether the right technology is made
available. We remain hopeful that on-going discussions between the
music publishing community and the RIAA will resolve this issue.
There is an important additional factor to consider: the
``consumerfriendliness'' of the protection and management technologies.
A near-perfect copy protection technology is of little help to the
music industry if it frustrates consumers. It is our experience that
the easier and more versatile the technology is for consumers, then the
easier they are to ``hack'' or bypass. Conversely, the more tamper-
resistant the technology is, the more difficult it becomes for
legitimate consumers to access their purchased content and for the
music licensing community to implement the technology. Currently, the
Achilles heel of all of these technologies is a product called ``Total
Recorder.'' This packaged software product, generally available,
pretends to the computer operating system that it is the sound card
hardware that produces the musical sound. This means that after
legitimate content is legitimately decrypted by the copy protection and
rights management software, the Total Recorder software can copy the
decrypted digital sound data constituting the song into a separate
file, typically in MP3 format, that would be ``clear'' of encryption.
In other words, truly piracy-proof digital music delivery technology
must protect the entire chain of delivery, from the website to the
speaker. This last state of affairs will only occur if the entire
industry agrees on a copy protection and rights management model that
meets everyone's needs and is implemented across all platforms at each
point in the chain of digital music delivery. So far, as mentioned
above, that has not occurred.
In summary, copy protection technology is still developing.
``Perfect'' systems from a technological perspective are not yet
perfect from a business market perspective. Digital rights management
technologies are improving but so far, music publishers are at the
mercy of the record companies regarding which digital rights management
technology is used and what information is included in the identifying
``headers.'' Industry-wide resolution of this issue remains elusive. We
are confident that these problems can be resolved, but as this answer
indicates, there are some significant issues remaining.
Question: For all panelists: The premise of this hearing is that
digital content is coming soon to digital devices to be enjoyed by
consumers soon. Based on our discussion today, how soon is soon, and
when will the promise become reality?
Answer: Mr. Chairman, for music, the question is not when the
content is coming digital delivery of music is here. NMPA members have
licensed more than thirty enterprises, most of them fledgling
businesses less than five years old, to distribute recordings of music
over the Internet. EMusic and MP3.com are among the licensees. These
companies have chosen to respect the rules laid down by Congress by
obtaining licenses and paying compensation to the copyright owners. Our
licensing arrangements demonstrate that music publishers are fully
prepared to license any Internet music service if that service is
prepared to follow the law.
Furthermore, NMPA has every incentive to license its works in the
digital environment. Some digital music services imply that music
copyright owners are deliberately impeding the issuance of licenses for
online music services. This suggestion is both inaccurate and
illogical. Music publishers only get paid when their work is used; if
it is not used, no revenue is generated. NMPA members are eager (and
economically motivated) to license their works in the new digital
environment.
Question: For all panelists: Is there any point you feel should be
raised or that you would like to further respond to for the
completeness of our record?
Answer: We would like to respond to the suggestion of some that a
new ``blanket'' statutory license be created for digital music
distribution.
Music website operators (including MP3.com in its written
testimony) often propose that digital music distribution be governed by
a ``blanket licensing'' scheme without further elaborating on the
complexities of current blanket licensing. NMPA believes that blanket
licensing is inappropriate to the licensing of digital phonorecord
deliveries, for the following reasons.
Blanket licensing is a process that the performing rights societies
(e.g. ASCAP, BMI and SESAC) use to license and collect performance
royalties from radio and television stations for performances of songs
on radio and television. Created during the World War I era to address
the practicalities of keeping track of the public performance of
musical works on radio and in live performances, the blanket license is
premised on the impracticality of reviewing every radio or television
station's play log or programming for every minute the station is on
the air or every location where the music is played. Instead,
statistical sampling of a smaller number of radio and television
stations is employed to estimate how many times a particular work is
performed.
Sections 111 and 119 of the Copyright Act establish limited
compulsory licenses for the retransmission of certain broadcast signals
under modified blanket licensing. Royalties deposited pursuant to the
terms of these compulsory licenses are subject to a complex, two-phase
distribution proceeding. In phase one, groups of eligible rights
holders demonstrate how much of the overall royalty pool should be
allocated to each group. In phase two, disputes regarding the
allocation of royalties among claimants within each group are resolved.
Such a system may be appropriate in the context of the transmission of
copyrighted material employing technologies that, at least for now, do
not provide a ready means for identifying individual rights holders. It
is not appropriate, however, to impose by law a licensing regime
developed for the specific facts of the cable or satellite industries
where (as in the case of certain Internet music services) the
transmitter is the originator of the transmission and has control over
the material being made available to subscribers, and where technology
is available to facilitate accurate licensing on behalf of the affected
rights owners.
It is inaccurate for music website operators to state that blanket
licensing resolves technical licensing problems in the digital era.
First, the compulsory license of section 115 is available to any entity
wishing to distribute music over the Internet. Second, website
operators routinely collect information on millions of visits to their
websites which they use in marketing their products and attracting
advertising revenue. It is disingenuous for the same website operators
to claim that it is impractical for them to account for each use of the
works that they are licensing (as a justification for blanket
licensing) when they already have that detailed information in digital
form in their databases. In other words, website operators are ideally
equipped for this kind of accounting task.
The principal reason for advocacy of a blanket license by web-based
music services is that it transfers the royalty distribution burden
from users to copyright owners in a manner that costs the creators of
the work significantly more than per-use accounting. Digital
technologies are particularly well suited, however, to performing the
accounting tasks associated with licensing uses of works in a networked
environment and ensuring accurate payments to the appropriate rights
owners and creators. Congress recognized this fact when it enacted
section 1202 of the Copyright Act to protect copyright management
information from intentional interference.
Question: Mr. Murphy: Could you comment on the publishing issues
and how you believe your members will be able to meet the demands of
licensing hundreds of thousands of songs where you have in the past
licensed ten to twelve at a time?
Answer: The assertion that HFA can only license ten to twelve songs
at a time is inaccurate. In recent years, HFA has routinely issued
licenses for approximately 250,000 titles annually. Everyone at HFA is
aware, however, that the digital economy is changing the licensing
paradigm from individual licenses to bulk licenses, and we are adapting
to this new reality promptly--along with the rest of the music
industry. Our transformation is not complete, and the process has not
been error free, but we are confident .that HFA has made rapid progress
and is performing as well as or better than any other digital music
licensing entity. HFA anticipates it will have a smoothly functioning
digital licensing mechanism in the very near future.
Here are some examples from the HFA-MP3 relationship to prove our
point. Presently, HFA and MP3 are working under the terms of an interim
license under which the MyMP3 service may operate while permanent
licenses are issued. This is a critical fact that MP3 omitted entirely
from its testimony. With respect to permanent licenses, MP3 has
submitted a database of 914,914 titles for licensing, and HFA has
completed a file matching and validation search on each one. As of
April 5, 2001 HFA had issued permanent licenses for 32,885 songs.
Between April 5 and April 20, 2001, HFA issued permanent licenses for
an additional 131,072 songs. In conducting our analysis of the MP3
database, HFA determined that 64,482 were duplicate requests. In other
words, HFA has reviewed the entire file and has resolved (by permanent
licensure or by confirmation that a request was a duplicate) 228,439 of
the records. The ``10 to 12 licenses at a time'' criticism is simply
misplaced.
There is no question that a substantial number of requests are
pending. A significant portion of the unresolved requests, however, are
due to incomplete information submitted by MP3. We continue to work
with MP3 to perfect the songclearance mechanism so that we can issue
licenses for whatever number of songs that MP3 submits to us. It should
be noted, however, that users of the copyrighted material have
responsibilities as well. A company cannot simply ``rip'' CDs with
impunity (that is, disassemble lawfully purchased CDs which contain the
necessary licensing information), disregard data retention and quality
requirements in this process, and then blame the licensing entity for a
failure to respond promptly. A substantial portion of the 686,000
titles that are pending are due to MP3's incomplete database. HFA is
committed to resolving the pending MP3 license requests; but we ask
that the necessary minimum identifying data be submitted to us so that
we can ensure proper compensation of the lawful copyright owners.
Question: Mr. Murphy: You have testified that the Harry Fox Agency
has provided MP3. com with an electronic copy of its licensing database
and I understand you will not support litigation against MP3.com while
you mutually attempt to address problems faced in issuing licenses for
these songs.
Answer: The Chairman's understanding on this point is correct. The
President of HFA (Gary Churgin) confirmed this fact in a letter to
MP3.com dated March 29, 2001.
Question: I have some questions about how this is working
practically, and must how the clearance process will work. First, how
many song titles are on that database and does the Harry Fox Agency
represent all of the publishers for each of those songs? If not, with
respect to how many of these songs does the Harry Fox Agency represent
100 percent of the publishers?
Answer: MP3 has advanced the notion that HFA must represent all of
the owners of each work in order to issue a license--which betrays a
fundamental misconception of the copyright law on this point. 17
U.S.C.Sec. 201(a) states: ``Copyright in a work protected under this
title vests initially in the author or authors of the work. The authors
of a joint work are co-owners of copyright in the work.'' The leading
treatise notes that ``one joint owner'' has the right ``to license the
work without the consent of the other joint owners'' and ``an
authorization to [a user] from one joint owner will be an effective
defense to an infringement action brought by another joint owner.''
NIMMER ON COPYRIGHT Sec. 6.10. A long series of cases encompassing most
of the major federal circuits is cited in support of these
propositions, which we will not repeat here. Id. The result of this
well-settled aspect of copyright law is that HFA need not represent
``all of the publishers for each of the songs'' in order to issue a
license upon which MP3 may rely; if HFA represents one co-owner of a
musical work, that is sufficient to issue a license.\1\
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\1\ In the event HFA licenses through one joint owner, that owner
owes an accounting for profits to the other co-owners. See Nimmer
Sec. 6.12[B].
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With respect to the second part of the question, the number of
songs for which HFA represents at least one owner is constantly
changing (and growing). The now over 27,000 music publisher principals
represented by HFA have historically owned or administered
approximately 90% of the compositions in the American repertoire. HFA's
publisher principals collectively own more than 2.5 million copyrighted
musical works. We are continually acquiring more titles and publishers.
Question: Second, online music services such as MP3.com have
testified that they want to offer consumers access to a vast library of
music, exceeding 900, 000 titles. For those songs whose publishers are
not represented by Harry Fox, could you help us understand how an
online music provider would go about identifying the publishers and
obtaining licenses from them?
Answer: Some background information on the 914,914 titles in the
MP3 database is necessary. First, 64,482 of the titles are confirmed
duplicates. Second, an unspecified portion of the 914,914 were placed
there by MP3 through their music hosting service for independent
artists (without record label affiliation and in most cases not
containing copyrighted musical work). It is obvious that HFA would not
have these MP3-facilitated songs in its database.
In the relatively rare instances where MP3 presents sufficient
licensing information \2\ to HFA, and HFA represents none of the
copyright owners of the underlying musical work, MP3 (or any other
online music provider) could do the following to identify the publisher
and obtain a license: (1) directly contact the publisher, which would
be listed in the sound recording license that the music provider must
obtain from the record labels (most of the artists are affiliated with
such labels); or (2) use the compulsory license provisions of section
115(b) of the Copyright Act and either determine the copyright owner
from the Copyright Ofce records or, in the case no such owner is
listed, file notice with the Office pursuant to that section (and its
implementing regulations at 37 CFR Sec. 201.18 \3\) and distribute the
work pursuant to the statutory compulsory license.
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\2\ In the case of a previously issued CD, a licensable match
requires the song title and two of the following: (1) artist, (2)
album, or (3) catalogue number or UPC code.
\3\ A good summary of the compulsory licensing mechanism for music
is found in Copyright Office Circular 73, available at the Office's
website: http://www.loc.gov/copyright/circs/circ73.pdf
Question: Third, given that there are many songs whose publishers
are not represented by the Harry Fox Agency and that even where you
represent a publisher claiming an interest in a song there may be other
publishers in that same song that you don't represent, do you have any
practical suggestions for businesses like MP3. com who have paid the
major rights holders in most of their music library to avoid
infringement suits from the myriad smaller, independent publishers and
other rights holders who might have some interest in one or more of the
many songs they offer?
Answer: There is no ``given'' that ``many songs'' are published by
entities not represented by HFA. As noted above, the over 27,000
publisher principals represented by HFA have historically owned or
administered approximately 90% of the compositions in the American
repertoire, and the recent growth in the number of publishers whom HFA
represents is substantial. Furthermore, also as noted above, when HFA
represents one owner of a musical work, it may license a third party to
use the work, and that party is insulated against an infringement
action by any other co-owners.
In the relatively rare circumstance when HFA represents none of the
publishers of a work that MP3 seeks to use, as mentioned before, we
suggest: (1) contacting the publisher directly, after identifying the
publisher through either Copyright Office records or through the
information contained on the sound recording license; or (2) invoking
the compulsory license in section 115 and filing ``notice of
intention'' to use the work with the Copyright Office.
Questions from Senator Leahy
Question 3: Concerns have been expressed that ``copyright
management'' measures being developed by copyright owners to control
the distribution of their digital works may erode the first sale
doctrine. If a customer pays for the personal use of a copyrighted
work, the rights holder may use technological means to ensure that the
work is not posted on a web site for use by others. Do you believe that
the marketplace will sort out the scope of copyright management
measures since customers who believe they are not getting what they pay
for will simply stop buying?
Answer: The question raises several issues. First, is there a need
for an expanded ``digital first sale doctrine'' as some have suggested?
NMPA believes the answer is no. The first sale doctrine, in section 109
of the Copyright Act, provides, in pertinent part,
Notwithstanding the provisions of section 106(3), the owner of a
particular copy or phonorecord lawfully made under this title,
or any person authorized by such owner, is entitled, without
the authority of the copyright owner, to sell or otherwise
dispose of the possession of that copy or phonorecord.
The Digital Media Association (``DiMA'') and other advocates of
expansion of the first sale doctrine argue that a consumer who
purchases a digital download should be able to forward that download to
someone else, provided the consumer deletes her original copy. A
similar proposal was offered during consideration of the Digital
Millennium Copyright Act and rejected by Congress because Members
recognized that: (1) unlike in the physical world, in the digital
context the owner of a copyrighted work did not relinquish the original
copy, and (2) relying on the ``honor system'' to ensure that the
``original'' copy would be deleted or otherwise rendered inaccessible
in the digital environment would open the door to widespread abuses and
encourage disrespect for the law. The advent of Internet-based peer-to-
peer file propagation software has demonstrated that Congress's
concerns were warranted. In addition, it is inconsistent for DiMA to
advocate a philosophy that copyright is an anachronism in the digital
age but then ask Congress to apply an inapplicable copyright concept to
restrict the right of songwriters and publishers to apply digital
rights management technology to protect their creations.
Forced to acknowledge that the ``honor system'' would not work, in
law or in practice, DiMA now asserts that technologies are available to
enforce the limits of a digital first sale doctrine. But there is no
evidence that consumers desire or would benefit from a change in the
law that would result in the deployment of ``forward and delete''
technologies. As the Senator's question implies, the pertinent inquiry
is not whether technology can be deployed to police a first sale
privilege, but whether controls can be employed to serve the legitimate
interests of copyright owners in curbing unauthorized uses of their
works and the desire of consumers to enjoy works in new ways. NMPA
believes that the marketplace is the only venue flexible enough to
respond to this challenge effectively in the many contexts and business
models in which it is likely to arise.
Finally, it is important to recall that Congress has examined the
first sale doctrine as it relates to works in digital form in at least
three instances and, each time, has found that the special
vulnerability of such works warranted an exception to--rather than an
expansion of--the first sale privilege. In responding to the
introduction of compact disc technology by enacting the prohibition
against the unauthorized rental of phonorecords, in making that
prohibition permanent, and in enacting a similar provision prohibiting
the unauthorized rental of copies of computer programs, Congress has
recognized that allowing exercise of first sale privileges in copies of
works in digital form would lead to unacceptable levels of copying that
would prejudice the legitimate interests of copyright owners. Certainly
the concerns underlying these legislative reforms apply with equal
magnitude with regard to the reproduction and distribution of copies
over the Internet.
Question 5: The Copyright ice issued a Notice of Inquiry on March
9, in response to a petition by the RIAA, stating that: ``there is
considerable uncertainty as to the interpretation and application of
the copyright laws to certain kinds of digital transmissions of
prerecorded musical works. It is also apparent that the impasse
presented by these legal questions may impede the ability of copyright
owners and users to agree upon royalty rates under section 115. . .. ``
66 Fed. Reg. 14099, 14101 (2001).
Question (A): Do you agree with this statement and, if so, please
explain how the uncertainty over the legal questions presented in the
petition is affecting voluntary licensing agreements for new online
music services?
Answer: NMPA filed comments in response to the Notice of Inquiry on
April 23. Those comments made clear that NMPA does not agree with the
statements and explained the reasons why it believes the existing legal
framework is adequate to allow marketplace to address licensing issues
that have arisen as well as those that might arise in the future. A
copy of those comments is attached to this response.
NMPA does not believe that there is ``considerable uncertainty as
to the interpretation and application of the copyright laws to certain
kinds of digital transmissions of prerecorded musical works.'' In
enacting the Digital Performance Rights in Sound Recordings Act in
1995, Congress extended the existing compulsory license in section 115,
which covers the making and distribution of phonorecords of protected
musical compositions, to certain Internet uses.
In enacting these important changes into law, Congress did not
attempt to anticipate every possible business model for making music
available to Internet users. Nor, as we discuss below, did Congress
assign that burden to the Copyright Office. Rather, it provided general
definitions establishing the principle that songwriters and music
copyright owners--like record companies--should be compensated fairly
and in a manner that reflects the economic significance of those
business models for current as well as new sources of publisher and
writer income.
We believe the model Congress has adopted is working, and can
continue to work for the benefit of songwriters, music publishers,
record companies and companies seeking to offer innovative music
services. Music publishers, through HFA, have already issued licenses
to more than 30 music service providers covering downloads as well as
interactive streaming services, and we are prepared to license others.
There is no question that some have constructed specious arguments
to evade the obligation to pay reasonable royalties for covered
services. Napster, for example, has argued that its ``service,'' which
provides the means for the distribution of billions of unauthorized
downloads of protected music, is exempt from infringement liability and
royalty payment obligations under a parade of theories, including the
assertion of a defense under the Audio Home Recording Act, a ``staple
article of commerce'' defense, and claimed eligibility for a ``safe
harbor'' under the service provider liability provisions of the Digital
Millennium Copyright Act. We are gratified that, as to each of these
purported defenses and privileges, both the Ninth Circuit Court of
Appeals and Judge Patel's court have found that music publishers and
record companies are likely to prevail on the merits.
What is needed now, in NMPA's view, is for entrants into the
digital music services market to cease efforts to evade their
responsibilities under the law and to engage in good faith efforts to
obtain the required licenses. Voluntary negotiations, under the regime
established by Congress, in NMPA's view will yield the fairest result
for music creators and copyright owners, for commercial users of their
works, and for consumers. In the event voluntary negotiations fail,
Congress has provided for an arbitration mechanism that will resolve
disputes and allow the music to be used.
Question (B): In 1995, the Digital Performance Right in Sound
Recordings Act expanded the scope of the mechanical license, under 17
U.S. C. sec. 115, to include the right to distribute, or authorize the
distribution of, by digital transmission both hard copy phonorecords
and ``digital phonorecord deliveries'' or ``DPDs. `` DPDs are defined
in the Act but a subset of DPDs, called ``incidental DPDs `` which are
also subject to the mechanical licensing process, are not defined. One
of the issues before the Copyright Office is to determine what is and
what is not an ``incidental DPD. `` Is this a question that the
Copyright Ofce for the Congress should determine in the first instance?
Answer: Congress has already spoken to this question, and it has
expressed a strong preference for the resolution of these issues
through voluntary, private negotiations. As the Senator observes,
Congress expressly defined the term ``digital phonorecord delivery''
(``DPD'') in its 1995 amendments to section 115. It did not, however,
create a statutory classification known as ``incidental digital
phonorecord delivery.'' In fact, Congress did not even use the term
``incidental digital phonorecord delivery'' in section 115. Instead, it
merely directed that any ``rates and terms'' for DPDs established
through voluntary negotiations or arbitration proceedings distinguish
between (1) digital phonorecord deliveries where the reproduction or
distribution of a phonorecord is incidental to the transmission which
constitutes the digital phonorecord delivery, and (2) digital
phonorecord deliveries in general.'' 17 U.S.C. sec. 115(c)(3)(C).
Had Congress wished to create pre-defined, static categories known
as ``incidental DPDs'' and ``general DPDs,'' it certainly could have
done so. It did not. Nor did Congress choose to assign responsibility
for creating such static definitions to the Copyright Office, which it
certainly could have done. Instead, it wisely recognized that the
distinction of ``incidental'' versus ``general'' could only be made in
the fact-specific context of a voluntary rate-setting negotiation or a
Copyright Arbitration Royalty Panel (``CARP'') proceeding and with
respect to the particular business models and technologies known at the
time.
The legislative history of section 115 supplies a number of
illustrative examples of DPDs that might be considered ``incidental''
to the making of transmissions constituting DPDs, but does not suggest
that an exhaustive list would be possible or at all necessary to
create. Congress's approach clearly demonstrates that it sought to
leave the ``incidental'' and ``general'' DPD concepts flexible and
subject to definition through voluntary negotiations or arbitration
based upon the specific activities and technologies at issue at the
time. NMPA urges that the approach adopted by Congress be given the
opportunity to work.
Question (C): The Copyright Office is currently considering the
applicability of the section 115 mechanical license to two new services
for the delivery of music: ``On-demand streaming'' (which permits users
to listen to real-time streamed music they want when they want it) and
``Limited Downloads'' (which permits users to download music for
listening for only a limited time). According to the Notice of Inquiry,
these types of services were not ``anticipated'' when the Congress
expanded the scope of section 115 to cover digital transmissions. Is
legal uncertainty over the applicability of section 115 to these new
services having any effect on the deployment of such services and, if
so, please explain what that effect is?
Answer: As we have discussed, Congress did not create static
categories in section 115 and provided, in the legislative history,
only a non-exhaustive list of examples of what might constitute an
incidental digital phonorecord delivery, based upon the technologies
known at the time. No effort was made to anticipate or prospectively
deal with any new technology.
But saying that certain services were not anticipated in section
115 will not lead one to the conclusion that section 115 does not
provide the mechanism for dealing with the new services discussed in
the Notice or Inquiry or any others that might arise in the future.
Congress established its clear preference for issues related to the
licensing of new, interactive music services to be dealt with in
private, voluntary negotiations and, if those negotiations fail, by
arbitration before a Copyright Royalty Arbitration Panel. This decision
by Congress was the appropriate one in 1995 and remains so. To have
chosen otherwise--or to choose otherwise now--would invite every new
entrant into the online music market to bring what should remain
private business matters to Congress or to the Copyright Office. Others
might simply be tempted to use Congressional or regulatory pressure on
rights owners and creators in an attempt to exact a more favorable
deal. This is hardly a prescription for rapid introduction of
legitimate services for the distribution of music or any other form of
creative content.
As noted above, voluntary negotiations have resulted in the
issuance of licenses for rights in musical compositions to more than 30
companies. NMPA is pleased to report that it is involved in
negotiations with affected users over potential rates for the very
services outlined in the Copyright Office Notice of Inquiry. Progress
in these voluntary negotiations is being made. It is apparent to us,
however, that any progress toward voluntary resolution of licensing
issues would be undermined by injecting these business decisions back
into the policy arena before the regime set out by Congress in 1995 has
been given an opportunity to work.
Question (D): Various music publishers filed suit in December 2000
against UMG for copyright infringement alleging that UMG was copying
sound recordings on servers for its new online music subscription
service, Farmclub.com, and stating that: ``UMG recently obtained a
judgment from this court that the operator of another Internet music
service, MP3.com, Inc., had willfully infringed UMG's sound recording
copyrights by placing copies of those sound recordings on its public
servers--precisely what UMG has done here without plaints permission.
`` Would clarifying the scope of the mechanical license under section
115 of the Copyright Act in the context of such new online music
services help avoid the undue delay and undue distraction from
litigation?
Answer: No, clarification of section 115 would not have avoided the
need for the litigation against UMG.
UMG has admitted in the litigation that it made computer server
copies of copyrighted musical works and that these constitute
phonorecords. Instead of seeking a license for these actions, it
attempted to rely on licenses previously obtained from HFA that were
expressly limited to CD's, audiocassettes, and LP's. No clarification
of the statute would help avoid a dispute such as this. UMG has
alternatively argued that there was no need for a license because the
server copy was not distributed. If this were the case, then only the
reproduction right in section 1060) was violated, the compulsory
license under section 115 was not available, but UMG is liable
nonetheless for infringing the exclusive reproduction right of the
plaintiffs. Even under this alternative argument, no statutory
clarification would have helped avoid the litigation. HFA and UMG are
sophisticated members of the music industry with ample access to legal
counsel: there is no possibility that one of the parties to the
litigation ``misunderstood'' the law such that a statutory
clarification is needed.
Question from Senator Kohl
Question: While all of the panelists are primarily concerned with
access to the online entertainment marketplace, they must also
understand that they have a responsibility to parents. The Internet
makes it even more difficult for parents to police the songs that their
children hear, the images they see and the games that they play. I'd
like the panelists to discuss what their company or industry plans to
do to help parents as online entertainment becomes more readily
accessible to all consumers, especially children.
Answer: With the exception of the sheet music market, music
publishers do not generally sell a ``product'' directly to consumers.
Rather, they license a separate business entity--usually a record
company--to make and distribute recorded versions of that music. Thus,
as a general matter, music publishers are not involved in the marketing
of recorded music to the public, and have no right or ability to
control the advertising, packaging or labeling of sound recordings
issued by record companies.
Music publishers believe that government intrusion into decisions
about the content of a musical work raises important First Amendment
concerns. Indeed, the Federal Trade Commission has stated that First
Amendment concerns dictate that industry self-regulation should prevail
in determining practices in connection with the marketing and labeling
of works for explicit content. NMPA supports that view.
At the same time, however, music publishers understand the concern
of parents who wish to know more about the music to which their
children listen. NMPA is troubled, therefore, by the findings of the
Federal Trade Commission's April 24 followup report on the marketing of
violent entertainment to children. The FTC observed that the
``recording industry, unlike the motion picture and electronic game
industries, has not visibly responded to the Commission's [September
2000] report'' urging all three industries to move quickly toward more
effective self-regulation both in limiting the advertising of
inappropriate material to young audiences and in providing rating
information useful to parents.
The follow-up report noted, among other things, that none of the
major record company or artists web sites it surveyed provided links to
an educational web site that could provide parents and other consumers
with information about the record industry's system for labeling
explicit content. NMPA would encourage the record industry to develop
and implement such as site, and NMPA would be pleased to assist in the
education effort by establishing an appropriate link from its own web
site and encouraging individual music publishers to do the same.
Moreover, we stand ready to explore with the recording industry other
ways in which we might assist in promoting the availability of
information about parental advisory labels.
Finally, we would note that HFA posts lyrics to some of the titles
its publishers own or administer at its ``songfile'' website and also
posts a disclosure at the page where such lyrics may be viewed that
some of the lyrics may not be appropriate for children.
SUBMISSIONS FOR THE RECORD
Statement by Comcast Corporation
Comcast Corporation thanks the Antitrust subcommittee for the
opportunity to submit this brief statement for the record.
Our experience as a competitor in the multichannel video
marketplace demonstrates the great effectiveness of the
Telecommunications Act of 1996 in promoting competition and delivering
benefits to consumers. Comcast constantly responds to increasing video
and broadband competition by expanding investment, improving operations
and customer service, and delivering new products. We urge Congress and
the FCC to continue the legislative and regulatory stability that has
given the financial markets the confidence to support us and our
competitors in bringing new products to market; this stability is
essential to the continued growth and expansion of competition.
Comcast Corporation is the nation's third largest cable operator
serving more than 8.4 million customers in 26 states, as well as
providing high-speed Internet service through cable modems available to
more than 6.4 million households in over 20 markets. In addition,
Comcast holds ownership interests in various programming networks.
Comcast subsidiaries also provide wired local exchange telephone
service in Florida, Maryland, and Virginia, and long-distance service
in 14 states.
Evidence of Competition
In sharp contrast to the conditions that prevailed when Congress
passed legislation in 1992, competition in the video marketplace today
is vigorous and accelerating. Almost every customer of Comcast has more
than one alternative choice for their television service. Two direct-
to-home broadcast satellite (DBS) companies, DirecTV (with 13 million
customers, larger than all but the two biggest cable companies) and
DishTV (with nearly a million customers, larger than all but the top
ten cable companies), sell their products through hundreds of stores
like Circuit City, Radio Shack, and Best Buy, and directly through
newspaper and radio advertisements. The passage of the Satellite Home
Viewer Improvement Act in November 1999 allows DBS to retransmit local
TV stations to most US households. As a result, DBS is adding
subscribers at the rate of more than 8,300 a day, a pace three times
that of cable's subscriber growth, with the result that 70% of new DBS
customers are in areas served by cable.\1\ These satellite services are
well-funded, formidable competitors with distinctive and attractive
programming offerings for customers.
---------------------------------------------------------------------------
\1\ Annual Assessment of the Status of Competition in Markets for
the Delivery of Video Programming, Seventh Annual Report, CS Docket No.
00-132, FCC 01-1 at para. 8 (rel. Jan. 8, 2001); Alan
Breznick, ``Cable Operators Aim for Steady Flow of New Digital
Services,'' COMMUNICATIONS DAILY, Sept. 22, 2000, at 3; ``Skyfonnn:
Smug in the Enemy Camp,'' CABLEFAX DAILY, Sept. 22, 2000, at 1
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Terrestrial providers are also an increasingly important source of
competition. For instance, in Comcast's home of Philadelphia,
Popvision, the wireless cable company with over 10,000 local customers,
has been serving Philadelphia for years and actively markets its
service throughout the region. There are also numerous companies that
serve apartment and condominium buildings. Every one of these
companies, including Comcast, offers a distinct range of service and
price options. Competition among all of them is robust.
Similar competition is growing in other communities served by
Comcast. RCN, with $6.56 billion in available capital, is providing
service in the Washington, DC market to 352,000 customers. RCN reports
cable penetration of 30% and local phone penetration of 20% in its
service areas.\2\ Knology provides multichannel video service in
communities including Charleston, South Carolina, Panama City, Florida,
Huntsville, Alabama, Knoxville, Tennessee, and Augusta, Georgia. SBC
Communications operates Americast services in 16 Michigan communities,
and provides video service in the entire state of Connecticut, while
several new overbuilders and OVS providers are seeking to enter the
market.\3\
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\2\ RCN has agreements to serve 20 communities around Philadelphia
and Union, New Jersey and is currently building or serving in dozens of
townships in Delaware County, Pennsylvania. RCN is also currently
providing OVS service under the Starpower name in Washington, DC and
Gaithersburg, MD. RCN has been awarded cable franchises in Arlington,
VA (scheduled to commence service 1Q2002), Prince George's County, MD,
and Montgomery County, MD. RCN also is in negotiations in Baltimore
County, MD, Alexandria VA, and Reston (Fairfax Co.), VA, as well as
several communities in the Philadelphia and New Jersey areas.
\3\ BroadbandConnect has obtained OVS franchises in 30 Maryland
communities in the Baltimore and Washington, DC areas.
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Comcast Responses to Increasing Competition
Comcast is responding to this competition by continuing to invest
to upgrade its operations, and delivering new video and broadband
services so that its customers enjoy an increasing array of service
choices. Comcast Digital Cable offers more than 170 channels of
programming with CD quality sound to 95% of its customers, with more
than 1.35 million subscribers at year-end 2000, doubling the 1999
level, with stated expectations of over 2 million customers by year-end
2001.\4\ Comcast's high speed cable Internet service, Comcast@Home, has
400,000 customers, and is available to over 4.4 million households in
20 markets, with 7,400 new modem customers added each week. Other
products are on the horizon, as Comcast expects to launch Video-On-
Demand in 2001 and Interactive TV by year-end 2002.\5\
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\4\ Comcast's Digital Basic Tier offers more than 200 channels of
programming with CD quality sound. Digital Plus Tier offers over 280
channels with 45 premium channels available in 40 systems, with an
interactive screen guide that allows customers to search for programs
by title, time, channel or category.
\5\ Comcast is a leader in developing IP telephony, and plans
comprehensive entry into phone markets by 2002.
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For its existing analog cable customers, Comcast continues to
provide a variety of options by structuring program service offerings
to offer three or more levels of service, including a lowprice basic
service for between $9-12 consisting of local broadcast stations plus
C-SPAN. The prices for Comcast's cable service offerings remain well
below the national average price per channel for comparable services,
according to FCC figures,\6\ despite continued pressure from rising
input costs due to significant upgrades and programming costs.\7\
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\6\ Implementation of Section 3 of the Cable Television Consumer
Protection and Competition Act of 1992; Statistical Report on Average
Rates for Basic Service, Cable Programming Services, and Equipment,
Report on Cable Industry Prices, FCC 01-49, MM Docket No. 92-266,--FCC
Rcd--(released February 14, 2001) (``FCC Cable Price Report'').
\7\ The FCC's recent Report on its annual price survey also
acknowledged these trends of rising upgrade and programming input costs
as major factors for explaining pricing for multichannel video service.
See FCC Cable Price Report.
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In order to develop and deploy these services, Comcast has spent
$3.2 billion for fiber optics and system upgrades over the past four
years. More than 86% of Comcast customers are now served by systems of
550 MHz or greater, and 70% of customers are served by systems of 750
MHz or greater. Every month, Comcast upgrades plant serving nearly
250,000 homes.
Comcast also has made substantial investments in creating local and
regional programming networks, including regional sports networks, to
provide programming of particular interest to the communities we serve.
Comcast SportsNet (``CSN'') in Philadelphia is made available to RCN
and all other terrestrially based competitors to cable television who
carried ``PRISM,'' the predecessor home-team sports network in
Philadelphia, but not to'DBS operators, who did not seek to carry
PRISM. This approach is not only consistent with the law, but in fact
exceeds the legal requirements imposed on CSN by the ``program access
rules.'' Congress deliberately and explicitly chose not to apply the
``program access rules'' to terrestrially distributed programming
networks, presumably because Congress wanted to encourage the
development of locally-oriented and regionally-oriented programming
networks, and did not want to burden those networks with additional
regulation. CSN--a terrestrially distributed regional service--is made
available to RCN and other competitors to cable television even though
there is no legal obligation to do so. In addition, it is important to
note that, in the interest of ensuring that no Philadelphia sports fan
would be denied the opportunity to see their teams, Comcast returned a
substantial number of Philadelphia professional sports games to free
over-the-air broadcast television (under a previous owner, one of the
teams had been removed completely from over-the-air TV).
CSN's decision to distribute its signal by terrestrial means was
not an evasion of the FCC's program access rules or any other law. CSN,
like many other local and regional networks, uses terrestrial
distribution technology to reach its customers because it is far
cheaper and more efficient than satellite delivery. The FCC carefully
investigated claims by DirecTV and EchoStar and confirmed these facts;
the FCC also found that CSN had not engaged in any conduct designed to
``evade'' the FCC's program access rules.
Even without CSN, DirecTV and EchoStar are fully capable of
competing with their cable operator competitors in the provision of
local sports programming. As stated in its own advertising, DirecTV has
more sports programming than anyone else, with over 20 sports networks,
including full season sports subscription packages. Moreover, both
DirecTV and EchoStar already carry most of the games shown on CSN
through arrangements with other programmers. DirecTV also has its own
exclusive sports programming (including its extremely popular NFL
packages) that is not available to Comcast or to any other cable
operator--or, for that matter, to EchoStar's Dish TV (which has sued
DirecTV for the right to carry NFL programming).
In view of the DBS industry's exclusive sports programming
arrangements, its complaint that it cannot compete without CSN seems
disingenuous. But the claim is also incorrect. DirecTV has a higher
percentage of subscribers in the Philadelphia market than it does in
the New York, Boston or Hartford-Springfield markets, where it does
carry regional sports networks.
RCN does carry Comcast SportsNet, and has done so since the minute
RCN switched on its Philadelphia-area service. RCN's contract with CSN
is identical in all key respects to CSN's contracts with its other
affiliates. Last year, CSN gave all of its affiliates--including
Comcast, Time Warner, Popvision and RCN--short-term agreements, all of
which expired on the same day, while CSN reviewed significant business
restructuring opportunities. As RCN has been told, once that business
restructuring process is completed, CSN will resume offering its
affiliates standard multi-year agreements on terms standard in the
industry. RCN has not been singled out for differing treatment or
required to agree to materially different contract terms than CSN's
other affiliates.
Comcast's Commitment to its Communities
Comcast has deep local roots in the communities it serves, and
looks to strengthen those roots by showing its community commitment,
particularly in the area of education. For example, Comcast has led the
cable industry's commitment to provide schools with free highspeed
cable Internet service; over 1000 schools and 250 public libraries are
now receiving free cable Internet service from Comcast. Comcast will
connect an additional 750 schools as part of its entry into the
Washington, DC metropolitan area. In addition, the Comcast Foundation's
primary focus is to enhance education initiatives in Comcast
communities. The Foundation announced a $60,000 grant in 2000 for Cable
In The Classroom to support teacher Internet training initiatives in
the Washington, D.C. area through the Comcast Technology Academy. More
than 1,000 teachers in Montgomery County, Maryland have already taken
advantage of the free technology training, and the program will be
expanded this year. These are only two examples of creative and
significant community involvement by Comcast.
Customers in the multichannel video marketplace enjoy more and more
choices from more and more providers of video service, driven by the
massive investments in better technology encouraged by the 1996
Telecommunications Act. Comcast believes that its responses to
competition have produced many benefits for its customers. We urge
Congress to continue the pro-competitive and deregulatory policies that
have helped to create this atmosphere.
Comcast respectfully submits and appreciates the Committee's
consideration of this statement regarding the state of video
competition.
Statement of the Federal Communications Commission, Cable Services
Bureau, Washington, DC
Introduction
Section 628 of the Communications Act of 1934, as amended
(``Communications Act''), requires the Federal Communications
Commission to report annually to Congress on the status of competition
in the market for the delivery of video programming. The Commission
submitted its Seventh Annual Report (``2000 Report'') to Congress on
January 8, 2001.
Summary of Findings in the Seventh Annual Report
In the 2000 Report, the Commission found that overall competitive
alternatives and consumer choices continue to develop. Cable television
still is the dominant technology for the delivery of video programming
to consumers in the multichannel video programming distribution
(``MVPD'') marketplace, although its market share continues to decline.
As of June 2000, 80 percent of all MVPD subscribers received their
video programming from a franchised cable operator, compared to 82
percent a year earlier.
The following presents the status of competition in the market for
the delivery of video programming, the general trends that have
occurred in the competitive environment between June 1999 and June
2000, and barriers to entry that continue to exist. (See also
Attachment.)
mvpd subscriber growth
The total number of subscribers to both cable and non-cable MVPDs
(e.g., direct broadcast satellites or DBS, multipoint multichannel
distribution systems or MMDS, satellite master antenna television
systems or SMATV, open video systems or OVS) continues to increase. A
total of 84.4 million households subscribe to multichannel video
programming services as of June 2000, up 4.4 percent over the 80.9
million households subscribing to MVPDs in June 1999. This subscriber
growth accompanied a 2.4 percentage point increase in MVPDs'
penetration of television households to 83.8 percent as of June 2000.
The number of cable subscribers continued to grow, reaching
67.7 million as of June 2000, up about 1.5 percent from the
66.7 million cable subscribers in June 1999.
The total number of non-cable MVPD subscribers grew from 14.2
million as of June 1999 to 16.7 million as of June 2000, an
increase of almost 18 percent.
The growth of non-cable MVPD subscribers continues to be
primarily attributable to the growth of direct broadcast
satellite (``DBS'') service. Between June 1999 and June 2000,
the number of DBS subscribers grew from 10.1 million households
to almost 13 million households, which is nearly three times
the cable subscriber growth rate. DBS subscribers now represent
15.4 percent of all MVPD subscribers.
Cable operators reported that DBS service has captured, on
average, an estimated 14.7 percent share of television
households in their service areas in 2000 (18 percent in rural
and 11.8 percent in urban areas) compared to a 10.4 percent DBS
share of households reported in the 1999 price survey report.
In addition, the Commission found that the demand for cable
service is somewhat sensitive to DBS penetration. This finding
also suggests that DBS is a substitute for cable service. The
difference between cable and DBS prices has declined and recent
DBS price increases have been of a similar magnitude as those
for cable. According to one study that compared 1999 cable and
DBS prices, DBS's average programming price was $29.50 per
month while large multiple system owners' (``MSOs'')
programnung prices averaged $30.56 per month.
There also have been a number of additional cable overbuilds
in the last year.
While the Commission has certified new open video systems,
some open video system (``OVS'') operators have converted
portions of their systems to franchised cable operations.
Over the last year, the number of subscribers to larger-than-
DBS home satellite dishes (``HSD'') and multichannel multipoint
distribution system (``MMDS'') subscribers continued to
decline. However, the number of satellite master antenna system
(``SMATV'') subscribers has increased slightly between June
1999 and June 2000.
cable rates
During the period under review for the 2000 Report, cable rates
rose faster than inflation. According to the Bureau of Labor
Statistics, between June 1999 and June 2000, cable prices rose 4.8
percent compared to a 3.2 percent increase in the Consumer Price Index
(``CPI''), which measures general price changes.
Pursuant to Section 623 of the Communications Act, the Commission
is required to conduct an annual survey of cable rates. As reported in
the 2000 Annual Survey of Cable Rates:
As of July 1, 2000, cable operators facing competition
charged, on average, $32.40 per month, an increase of 5.8
percent over 1999, while cable operators not facing competition
charged $34.11, also a 5.8 percent increase. [The Consumer
Price Index for all goods and services rose by 3.7 percent over
the same period.] The differences between the average rates
charged by competitive and non-competitive cable systems were
$1.71 and $1.62 for 1999 and 2000, respectively.
On a per channel basis, rates charged by competitive operators
remained stable at $0.57 per channel during the year ending
July 2000. For the noncompetitive group, per channel rates
increased from $0.65 to $0.66, a 1.5 percent increase, over the
same period. The average number of channels offered by
competitive cable systems was 59.9 in July 2000, an increase of
4 percent over a year earlier. For non-competitive cable
systems, the average number of channels offered was 54.8 in
July 2000, an increase of 5.4 percent over the previous year.
Non-video service offerings also increased in 2000. As of July
1, 2000, the percentage of surveyed cable operators that
offered a digital programming tier doubled to 54 percent from
27 percent a year earlier. Of the surveyed cable systems, 47
percent offered Internet services and 7 percent offered
telephone services.
Concurrently with these rate increases, capital expenditures for
the upgrading of cable facilities increased (from $5.6 billion in 1998
to $10.6 billion in 1999, an increase of 89.3 percent), the number of
video and non-video services offered increased, and programming costs
increased (license fees increased from $4.9 billion in 1998 to $5.5
billion in 1999, or 12.2 percent, and programming expenses increased
from $4.9 billion in 1998 to $5.8 billion in 1999, or 16.2 percent).
The available evidence indicates that when an incumbent cable
operator faces ``effective competition,'' as defined by the
Communications Act, it responds to such head-to-head competition in a
variety of ways, including lowering prices or adding channels without
changing the monthly rate, as well as improving customer service and
adding new services such as interactive programming.
competition from lecs
The Telecommunications Act of 1996 (``1996 Act'') removed barriers
to local exchange carrier (``LEC'') entry into the video marketplace in
order to facilitate competition between incumbent cable operators and
telephone companies. At the time of the 1996 Act, it was expected that
LECs would compete in the video delivery market and that cable
operators would provide local telephone exchange service.
The 2000 Report found that there had been an increase in the
amount of video programming provided to consumers by telephone
companies, although the expected technological convergence that
would permit use of telephone facilities for video service had
not yet occurred.
In the 2000 Report, the Commission found that the rate of
entry by LECs into the MVPD marketplace appears to be slowing,
even by the most aggressive telephone companies, and several
LECs have reduced or eliminated their MVPD efforts. Many
incumbent local telephone exchange carriers appear to have
decided to exit the facilities-based video programming business
and instead are seeking to market DBS service to their
customers.
While the 1996 Act created the OVS framework as a means of
entry into the video marketplace by LECs, few telephone
companies have sought certification.
Alternatively, only a limited number of cable operators have
begun to offer telephone service and their strategies for
deployment remain varied. Some MSOs continue to deploy
traditional circuit-switched telephone service. Others are
offering cabledelivered telephony on a limited basis, waiting
until Internet Protocol (``IP'') technology becomes available
before accelerating their rollout of telephone service, or
continuing to test such service.
broadband high-speed internet services
The most significant convergence of service offerings continues to
be the pairing of Internet service with other service offerings. There
is evidence that a wide variety of companies throughout the
communications industries are attempting to become providers of
multiple services, including data access. Cable operators continue to
make large investments to expand the broadband infrastructure that
permits them to offer high-speed Internet access.
Currently, the most popular way to access the Internet over cable
is through the use of a cable modem and personal computer. Virtually
all the major MSOs offer Internet access via cable modems in portions
of their nationwide service areas. A small portion of cable Internet
access is delivered through a television receiver rather than a
personal computer. Many cable operators also are planning to integrate
telephony and high-speed data access. There are now approximately 4.6
million subscribers to cable Internet services.
Like cable, the DBS industry is developing ways to bring advanced
services to its customers. For example, one DBS operator currently
offers a satellite-delivered highspeed Internet access service with a
telephone return path. Another DBS company now offers its subscribers
an interactive program guide and weather service and recently initiated
two-way Internet access service via satellite. There are approximately
40,000 subscribers to DBS high-speed data service.
Many SMATV operators offer local and long distance telephone
service and Internet access along with video service. In addition,
digital technology makes it possible for MMDS operators, who provide
video service in only limited areas, to offer two-way services, such as
high-speed Internet service and telephony. Two of the largest long
distance companies have acquired most of the larger MMDS operators with
the intent to use the acquired frequencies to provide two-way, non-
video communications services.
regulatory barriers
Non-cable MVPDs continue to report that regulatory and other
barriers to entry limit their ability to compete with incumbent cable
operators and to thereby provide consumers with additional choices.
Non-cable MVPDs also continue to experience some difficulties in
obtaining programming from both vertically integrated cable programmers
and unaffiliated programmers who continue to make exclusive agreements
with cable operators. In multiple dwelling units (``MDUs''), potential
entry may be discouraged or limited because an incumbent video
programming distributor has a long-term and/or exclusive contract.
Other issues also remain, e.g., how, and under what circumstances,
existing inside wiring in MDUs may be made available to alternative
video service providers, delays in gaining access to local rights-of-
way, pole attachment delays, and excessive rates.
Consumers historically reported that their inability to receive
local signals from DBS operators negatively affected their decision as
to whether to subscribe to DBS. The significant increase in DBS
subscribership between June 1999 and June 2000 has been attributed, at
least in part, to the authority granted to DBS providers to distribute
local broadcast television stations in their local markets by the
Satellite Home Viewer Improvement Act of 1999 (``SHVIA'') enacted on
November 29, 1999.
Under SHVIA, DBS operators can offer a programming package more
comparable to and competitive with the services offered by cable
operators. The two DBS companies now offers a package of local ABC,
CBS, NBC, and Fox affiliates along with a national PBS feed for $5.99 a
month in approximately 40 markets, which cover about one-half of all
television households. Moreover, in the last year, as required by
SHVIA, the Commission has adopted rules for satellite companies with
regard to mandatory carriage of analog broadcast signals,
retransmission consent, and program exclusivity that closely parallel
the requirements for cable service.
industry consolidations
Consolidations within the cable industry continue as cable
operators acquire and trade systems. As a result of acquisitions and
trades, cable MSOs have continued to increase the extent to which their
systems form regional clusters. By clustering their systems, cable
operators may be able to achieve efficiencies that facilitate the
provision of cable and other services, such as telephony.
The ten largest operators now serve close to 90 percent of all
U.S. cable subscribers. In terms of one traditional economic
measure (the Herfindahl-Hirschman Index or HHI), national
concentration among the top MVPDs has increased since last
year, although it remains below the levels reported in earlier
years.
DBS operators DirecTV and EchoStar rank among the ten largest
MVPDs in terms of nationwide subscribership along with eight
cable multiple system operators (``MSOs'').
Currently, 44 million of the nation's cable subscribers are
served by systems that are included in regional clusters.
satellite-delivered programming networks
The number of satellite-delivered programming networks has
decreased by two from 283 in 1999 to 281 in 2000. Vertical integration
of national programming services between cable operators and
programmers, measured in terms of the total number of services in
operation, declined from last year's total of 37 percent to 35 percent
in 2000, continuing a five year trend.
In 2000, one or more of the top five cable MSOs held an
ownership interest in each of 99 vertically integrated national
programming services.
The 2000 Report identifies 75 regional networks, 27 of which
are sports channels, many owned at least in part by MSOs.
Sports programming warrants special attention because of its
widespread appeal and strategic significance for MVPDs. There
are also 30 regional and local news networks that compete with
local broadcast stations and national cable networks (e.g.,
CNN).
The program access rules adopted pursuant to the 1992 Cable Act
were designed to ensure that other MVPDs can have access to vertically-
integrated satellite delivered programming on non-discriminatory terms.
The Commission recognizes that the terrestrial distribution of
programming, including, in particular, regional sports programming,
could eventually have a substantial impact on the ability of
alternative MVPDs to compete in the video marketplace. The prohibition
on cable exclusivity in the program access rules sunsets on October 5,
2002, unless the Commission finds that the prohibition continues to be
needed to preserve and protect competition and diversity in the
distribution of video programming.
additional findings for specific sectors of the mvpd market
In addition, with respect to particular distribution technologies
operating in markets for the delivery of video programming, the
Commission found the following:
Cable Systems: Since the 1999 Report, the cable television industry
has continued to grow in terms of subscribership (up to 67.7 million
subscribers as of June 2000, a 1.5 percent increase from June 1999),
revenues (an approximate 13 percent increase between year end 1998 and
year end 1999), audience ratings (non-premium cable viewership rose
from a 42 share at the end of June 1999 to almost a 46 share at the end
of June 2000), and expenditures on programming (an approximate 12
percent increase in program license fees paid by cable system
operators). However, the number of national satellite-delivered video
programming services, which had been increasing steadily in recent
years, decreased by two networks, from 283 to 281, between June 1999
and June 2000. The cable industry remains healthy financially, which
has enabled it to invest in improved facilities, either through
upgrades or rebuilding. As a result, there have been increases in
channel capacity, the deployment of digital transmissions that provide
better picture quality than can be offered through analog service, and
non-video services, such as Internet access. Cable operators also offer
telephony, although the use of integrated facilities remains primarily
experimental with limited exceptions.
Direct-to-Home (``DTH'') Satellite Service (DBS and HSD): Video
service is available from high power DBS satellites that transmit
signals to small DBS dish antennas installed at subscribers' premises,
and from low power satellites requiring larger satellite dish antennas.
The 2000 Report found that DBS had approximately 13 million subscribers
in June 2000, an increase of approximately 29 percent since the 1999
Report. Currently, there are approximately 15 million DBS subscribers.
Between June 1999 and June 2000, the number of HSD subscribers,
measured as the number of HSD users that actually purchase programming
packages, declined from 1.8 million to 1.5 million, a decrease of 17
percent, that is likely due to subscribers switching to DBS. DirecTV
and EchoStar are among the ten largest providers of multichannel video
programming service. In June 2000, DBS represented a 15.4 percent share
of the national MVPD market and HSD represented another 1.8 percent of
that market.
Wireless Cable Systems: Currently, the wireless cable industry
(``MMDS'') provides competition to the cable industry in only limited
areas. MMDS subscribership fell from 821,000 subscribers to 700,000
subscribers between June 1999 and June 2000, a decrease of 14.7
percent. With the advent of digital MMDS and the Commission's
authorization of two-way MMDS service, it appears that MMDS spectrum
will be used to provide video services in limited areas, and that most
MMDS spectrum will eventually be used to provide high-speed data
services. Wireless cable represented a 0.8 percent share of the
national MVPD market in June 2000.
SMATV Systems: SMATV systems use some of the same technology as
cable systems, but do not use public rights-of-way, and focus
principally on serving subscribers living in multiple dwelling units
(``MDUs''). SMATV subscribership has increased approximately 3.5
percent since the last report, with the industry representing
approximately a 1.8 percent share of the national MVPD subscribership
as of June 2000.
Broadcast Television: Broadcast networks and stations are
competitors to MVPDs in the advertising and program acquisition
markets. They supply video programming directly to the approximately 20
percent of television households that are not MVPD subscribers.
Additionally, broadcast networks and stations are suppliers of content
for distribution by MVPDs. Since the 1999 Report, the broadcast
industry has continued to grow in the number of operating stations
(from 1599 in 1999 to 1663 in 2000) and in advertising revenues ($36.6
billion in 1999, a 5.7 percent increase over 1998). While audience
levels continue to decline, the four major television networks still
account for a 50 percent share of prime time viewing for all television
households. Broadcast television stations continue to deploy digital
television (``DTV'') service. There are 173 television stations on the
air broadcasting DTV signals, and digital simulcast of analog
programming continues to increase.
LEC Entry: The 1996 Act expanded opportunities for LECs to enter
the market for the delivery of video programming. In the 1999 Report,
the Commission noted that it appeared that the rate of entry into the
video marketplace by LECs might be slowing, even by the most aggressive
LECs, and that several LECs had reduced or eliminated their MVPD
efforts. This trend continued or accelerated in 2000. Most incumbent
local exchange carriers are seeking to sell their MVPD facilities,
preferring instead to market DBS service to their customers. One
notable exception is BellSouth, which continues to pursue a number of
methods for providing MVPD service. BellSouth has been the largest LEC
investor in MMDS licenses, with its service area covering approximately
3.5 million homes. However, in December 2000, BellSouth announced that
it was phasing out this service and transitioning existing subscribers
to EchoStar's DBS service. It has acquired 21 cable franchises in its
telephone service area with the potential to pass 1.4 millions,
provides service in 12 franchise areas, and is negotiating for
additional franchises. Previously, Ameritech was the most significant
LEC provider of in-region cable service, but recent reports indicate
that SBC, its current owner, seeks to sell these cable assets. Verizon,
which acquired GTE's 10 competitive and one non-competitive cable
franchises, is seeking to sell those cable assets. SNET, now also owned
by SBC, currently offers service to 30,000 homes in 29 Connecticut
localities, but is exiting the business. Qwest (formerly U S West)
continues to offer video, high-speed Internet access, and telephone
service over existing copper lines using very high speed digital
subscriber line (``VSDL'') in Omaha and Phoenix.
Open Video Systems: In the 1996 Act, Congress established a new
framework for the delivery of video programming-the open video system
(``OVS''). Under these rules, a LEC or other entrant may provide video
programming to subscribers, although the OVS operator must provide non-
discriminatory access to unaffiliated programmers on a portion of its
channel capacity. The Commission has certified 25 OVS operators to
serve 50 areas. RCN owns the only operating open video systems and
currently serves areas surrounding Boston, New York City, Washington,
D.C, and San Francisco. In several areas for which it holds OVS
certifications, or portions of these areas, RCN has converted its
systems to franchised cable systems. The number of OVS subscribers has
remained constant over the last year at approximately 60,000
subscribers. OVS subscribers now represent slightly less than 0.1
percent of all MVPD subscribers.
Internet Video: As of June 2000, 56 percent of the U.S. population
has Internet access. Real-time and downloadable video accessible over
the Internet continues to become more widely available and the amount
of content also is increasing. Despite the evidence of increased
interest in Internet video deployment and use, the medium is still not
seen as a direct competitor to traditional video services. Television
quality Internet video requires a high-speed broadband connection,
which most current broadband providers cannot guarantee. Also,
deployment of broadband is far from ubiquitous. However, Internet users
continue to download and use software for accessing Internet video and
Web sites dedicated to streaming video continue to proliferate.
Home Video Sales and Rentals: The home video marketplace includes
the sale and rental of video cassettes, DVDs, and laser discs. As in
past reports, the Commission considered home video sales and rentals
part of the video marketplace because they provide services similar to
the premium and pay-per-view offerings of MVPDs. Almost 86 percent of
all U.S. households have at least one VCR. The number of homes with DVD
players has grown rapidly since their introduction into the market. The
number of homes with DVD players was expected to reach between 10 and
12 million by the end of 2000. The newest home video technology, the
personal video recorder (``PVR''), was introduced in 1999. A PVR is a
device connected to a television set that uses a hard disk drive,
software, and other technology to digitally record and access
programming. In the last year, TiVo and ReplayTV, the two PVR
companies, have joined with MVPDs, equipment manufacturers,
advertisers, and programmers to incorporate PVR technology into set-top
boxes and develop content specifically for PVRs.
Utilities: Since the 1999 Report, several electric and gas
utilities have announced, commenced, or moved forward with ventures
involving multichannel video programming distribution. Utilities are
not yet major competitors in the telecommunications or cable markets,
but they generally possess characteristics, such as ownership of fiber
optic networks and access to public rights-of-way, that could
potentially help them become competitively significant. Moreover,
deregulation of utilities, accompanied by the advent of competition, is
prompting more utilities to diversify and find new revenue streams.
Starpower, a joint venture between RCN and PEPCO, continues to expand
the area where it offers voice, video, and high-speed Internet access
in the Washington, D.C., area. Last year, the Commission reported that
Seren, a wholly-owned subsidiary of Minneapolisbased Northern States
Power, offered cable and high-speed data access as an overbuilder in
several Minnesota communities. It also offers service in the San
Francisco Bay area and plans to expand its service area. Siegecom,
funded by Blackstone Capital and a joint venture of Southern Indiana
Gas and Electric and Utilicom, is offering bundled voice, video and
data access services in Evansville and Newburg, Indiana, and has
approached other communities about obtaining franchises. Digital Union,
a subsidiary of the local utility in Austin, Texas, plans to overbuild
the incumbent cable operator. Braintree, Massachusetts, granted a
franchise to the municipal utility and plans to begin cable service by
the end of 2000.
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