[Senate Hearing 113-824]
[From the U.S. Government Publishing Office]
S. Hrg. 113-824
THE AT&T/DIRECTV MERGER: THE IMPACT ON COMPETITION AND CONSUMERS IN THE
VIDEO MARKET AND BEYOND
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
OF THE
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
JUNE 24, 2014
__________
Serial No. J-113-66
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
DIANNE FEINSTEIN, California CHUCK GRASSLEY, Iowa, Ranking
CHUCK SCHUMER, New York Member
DICK DURBIN, Illinois ORRIN G. HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island JEFF SESSIONS, Alabama
AMY KLOBUCHAR, Minnesota LINDSEY GRAHAM, South Carolina
AL FRANKEN, Minnesota JOHN CORNYN, Texas
CHRISTOPHER A. COONS, Delaware MICHAEL S. LEE, Utah
RICHARD BLUMENTHAL, Connecticut TED CRUZ, Texas
MAZIE HIRONO, Hawaii JEFF FLAKE, Arizona
Kristine Lucius, Chief Counsel and Staff Director
Kolan Davis, Republican Chief Counsel and Staff Director
------
Subcommittee on Antitrust, Competition Policy and Consumer Rights
AMY KLOBUCHAR, Minnesota, Chairman
CHUCK SCHUMER, New York MICHAEL S. LEE, Utah, Ranking
AL FRANKEN, Minnesota Member
CHRISTOPHER A. COONS, Delaware LINDSEY GRAHAM, South Carolina
RICHARD BLUMENTHAL, Connecticut CHUCK GRASSLEY, Iowa
JEFF FLAKE, Arizona
Caroline Holland, Democratic Chief Counsel
Bryson Bachman, Republican Chief Counsel
C O N T E N T S
----------
JUNE 24, 2014, 2:36 P.M.
STATEMENTS OF COMMITTEE MEMBERS
Page
Klobuchar, Hon. Amy, a U.S. Senator from the State of Minnesota.. 1
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont,
prepared statement........................................... 105
Lee, Hon. Michael S., a U.S. Senator from the State of Utah...... 3
WITNESSES
Witness List..................................................... 37
Downes, Larry, Project Director, Georgetown University, Center
for Business and Public Policy, Washington, DC................. 12
prepared statement........................................... 84
Keyser, Christopher, President, Writers Guild of America, West,
Inc.,
Los Angeles, California........................................ 8
prepared statement........................................... 57
Lieberman, Ross J., Senior Vice President of Government Affairs,
American Cable Association, Washington, DC..................... 14
prepared statement........................................... 96
Stephenson, Randall, President, Chairman, and Chief Executive
Officer, AT&T Inc., Dallas, Texas.............................. 7
prepared statement........................................... 38
White, Michael, President, Chairman and Chief Executive Officer,
DIRECTV, El Segundo, California................................ 5
prepared statement........................................... 47
Wood, Matthew F., Policy Director, Free Press, Washington, DC.... 10
prepared statement........................................... 68
QUESTIONS
Questions submitted to Larry Downes by Senator Klobuchar......... 110
Questions submitted to Ross J. Lieberman by Senator Klobuchar.... 111
Questions submitted to Randall Stephenson by Senator Franken..... 112
Questions submitted to Randall Stephenson by Senator Klobuchar... 106
Questions submitted to Michael White by Senator Klobuchar........ 108
Questions submitted to Matthew F. Wood by Senator Klobuchar...... 109
ANSWERS
Responses of Larry Downes to questions submitted by Senator
Klobuchar...................................................... 113
Responses of Ross J. Lieberman to questions submitted by Senator
Klobuchar...................................................... 118
Responses of Randall Stephenson to questions submitted by
Senators Franken and Klobuchar................................. 119
Responses of Michael White to questions submitted by Senator
Klobuchar...................................................... 129
Responses of Matthew F. Wood to questions submitted by Senator
Klobuchar...................................................... 131
MISCELLANEOUS SUBMISSIONS FOR THE RECORD
American Federation of Labor and Congress of Industrial
Organizations
(AFL-CIO), William Samuel, Director, Government Affairs
Department, June 25, 2014, letter.............................. 133
Communications Workers of America (CWA), Larry Cohen, President,
June 20, 2014, letter.......................................... 134
National Association for the Advancement of Colored People
(NAACP) and National Association of Black Owned Broadcasters
(NABOB), Hilary O. Shelton, Director, NAACP Washington Bureau,
and Senior Vice President for Policy and Advocacy, and James L.
Winston, NABOB Executive Director and General Counsel, June 23,
2014, letter................................................... 135
THE AT&T/DIRECTV MERGER: THE IMPACT ON COMPETITION AND CONSUMERS IN THE
VIDEO MARKET AND BEYOND
----------
TUESDAY, JUNE 24, 2014,
United States Senate,
Subcommittee on Antitrust, Competition Policy and
Consumer Rights,
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:36 p.m., in
Room SD-226, Dirksen Senate Office Building, Hon. Amy
Klobuchar, Chairman of the Subcommittee, presiding.
Present: Senators Klobuchar, Franken, Blumenthal, Lee, and
Cornyn.
OPENING STATEMENT OF HON. AMY KLOBUCHAR,
A U.S. SENATOR FROM THE STATE OF MINNESOTA
Chairman Klobuchar. Good afternoon. Welcome to this
afternoon's hearing. We are here today to examine a proposed
merger that would combine the second largest and fifth largest
video providers in the country. It is also a combination of two
top competitors in their respective industries: satellite
television and wireless phone service.
DIRECTV has a large national presence with 20 million video
subscribers, second only to Comcast's 22 million subscribers.
AT&T is one of the Nation's top two wireless providers with
116 million subscribers. AT&T's video service, called ``U-
verse,'' has a more limited reach with 5.7 million subscribers,
but it is the fastest-growing cable service in the country.
AT&T also continues to grow its wireline and broadband
business.
We are not here today to judge whether the merger is better
for the bottom lines of these two companies or their
shareholders. We will leave that to them and to Wall Street. We
are here today to make sense of what this will mean for
consumers--consumers who are feeling the squeeze as their
cable, satellite, and broadband bills rise, consumers who want
better and more choices for the type and amount of programming
they are offered, and consumers who want more online video
options.
The proposed combination of AT&T and DIRECTV in many
respects appears to combine services that are largely
complementary. AT&T has the broadband and wireless capabilities
that DIRECTV lacks, and DIRECTV has a top-performing video
service with the scale AT&T needs to lower its programming
costs.
These points have merit, and AT&T's promise to expand its
broadband reach, especially into rural areas, is a compelling
aspect of this proposed deal. But our inquiry cannot stop
there. We need to ensure that these benefits will not be
outweighed by diminished competition or harm to consumers.
We know that robust competition keeps prices in check,
incentivizes competitors to offer better choices and service,
and promotes innovation. Yet this merger will result in some
consumers losing a choice of video providers. AT&T and DIRECTV
currently compete head to head in roughly 25 percent of the
country, including large metro markets such as Chicago, Dallas,
Los Angeles, San Francisco, and Atlanta. AT&T and DIRECTV say
that together they will be able to offer a better bundle of
Internet and video service to compete against cable company
bundles.
But the fact remains that this merger will eliminate a
competitive video provider, so we need to ask: What is the
competitive dynamic in these markets? Will fewer competitors
mean higher prices and lower-quality service? Will AT&T
actually pass the cost savings they get from lower programming
costs to consumers? And will AT&T have the incentive to
continue to expand its competitive and fast-growing U-verse
video service?
Consumers are also impacted by consolidation of pay-
television providers because it means fewer outlets for
independent programming. Will taking out one of the video
distributors that writers and independent programmers have to
pitch their new TV programs or channels to ensure consumers
will have access to diverse programming? Both in this merger
and the Comcast/Time-Warner Cable merger, we have heard
concerns from the small independent content providers about the
risks of consolidating down to just a few large video
distributors.
Beyond the video market, AT&T is a dominant player in
wireless phone service. Earlier I mentioned consumer demand for
online video. People are consuming more and more video on their
mobile phones. As this happens, video content will become an
important commodity to wireless providers.
That brings us to an aspect of this deal that has sports
fans talking, and they like to talk. Assuming DIRECTV renews
its deal with the NFL, AT&T will have the rights to the NFL
Sunday Ticket package. It has expressed a desire to be able to
offer that programming to its wireless subscribers. How will
AT&T's improved access to highly desirable content through its
leverage of 26 million video subscribers impact the competitive
landscape of the wireless market?
Finally, when discussing this merger, we cannot do so in a
vacuum. The potential merger of AT&T and DIRECTV comes on the
heels of the proposed combination of Comcast and Time Warner.
These proposals have led to speculation that programmers, such
as Viacom and CBS, will seek to merge.
Now, big is not automatically bad and can often be good in
the right circumstances for economies of scale. But this
consolidation poses a fundamental question: As broadband,
video, and wireless markets begin to converge, what telecom
ecosystem will best serve consumers both in the present and in
the long term? What will be the tipping point when it comes to
consolidation?
These are the kinds of questions our Subcommittee as well
as the antitrust agencies ought to keep in mind when evaluating
this merger and weighing what the future holds for consumers.
These are the types of issues we are going to be discussing
this afternoon. We look forward to hearing from our witnesses,
and now I turn it over to my Ranking Member, Senator Lee.
OPENING STATEMENT OF HON. MICHAEL S. LEE,
A U.S. SENATOR FROM THE STATE OF UTAH
Senator Lee. Thank you, Madam Chair. Today's hearing, of
course, involves AT&T's recent announcement of its intention to
acquire DIRECTV. AT&T and DIRECTV are well-known and very
successful companies. AT&T is primarily a provider of mobile
and fixed telephone, but it has in recent years made impressive
inroads in the markets for video and high-speed Internet.
DIRECTV, on the other hand, is a satellite video provider.
It has grown to become one of the largest multi-channel video
programming distributors in the country with currently around
20 million subscribers.
The companies do not, for the most part, compete in the
same markets. The primary products offered by these two
companies are, for the most part, not substitutes but, rather,
they are complements. Mergers of complements have the potential
to create efficiencies that a merger of substitutes may not,
and such transactions have traditionally been approved.
This merger has, nonetheless, attracted attention. The
markets for video and Internet are extremely important to
consumers, and this transaction is occurring just months after
Comcast and Time Warner, two large players in the markets for
video and Internet, announced their intention to combine.
In addition, AT&T and DIRECTV do offer substitute video
products in some parts of the country, and the transaction has
the potential to affect the competitive landscape in those
areas.
As always, the guiding principle for our antitrust analysis
is consumer welfare. Indeed, as Robert Bork wrote in ``The
Antitrust Paradox,'' ``Competition must be understood as the
maximization of consumer welfare.''
In antitrust, as in other areas of public policymaking,
competitors often stand to benefit from Government regulations
or restrictions imposed on their rivals. As much as any other
entity, competitors to merging parties have a constitutional
right to petition and lobby the Government. They often have
valuable information and insight into markets that will be
affected by the proposed transaction at issue. And in many
cases, competitors simply want to ensure that antitrust
enforcers protect competition and ensure a level playing field.
At the same time, history and experience have taught us
that competitors can and often do seek to use the antitrust
process to gain an advantage for themselves. It is, therefore,
essential that we remain on guard to ensure that the government
process not be used to pick winners and losers in the
marketplace. Where our policies and our approach to antitrust
ensure that free markets operate effectively and consumers
choose the winners and losers, we obtain the very best outcome
for the country.
Applying these principles to this transaction will require
a close look at those areas where the transaction may impact
competition, such as where AT&T and DIRECTV currently compete
for video subscribers. It requires scrutiny of the market for
programming where consolidation is reducing the number of
buyers of video content and may potentially impact the range of
choice of content that may be available for consumers going
forward.
This transaction's effect on the practice of bundling and
the impact of that practice on consumers also merits some
discussion. Proper antitrust principles, however, also require
due weight to be given to the procompetitive ramifications of
the proposed acquisition.
AT&T has committed to expand high-speed Internet access to
some 15 million Americans who otherwise may not have such
access. The market for high-speed Internet in some respects is
both more important to consumers in the long term and suffers
from less competition than the market for video. This deal may,
thus, offer some real efficiencies and benefits to consumers,
including innovation in a new Internet distribution
technology--technology that might not obtain if the deal were
blocked.
Markets, of course, change rapidly, and nowhere is this as
true as it is for markets in technology-drive industries, such
as voice, video, and Internet. In response to such changing
circumstances and as we have seen with increase frequency of
late, incumbent companies may seek to consolidate. In some
cases this behavior may be part of a nefarious attempt to
forestall change to prevent new products or new technologies
from making an incumbent obsolete. In other cases, however,
this kind of behavior simply represents intelligent business
planning to adapt to and take advantage of new trends.
Accordingly, in fast-moving markets, consumers may be
harmed by Government intervention just as easily as they may be
harmed by consolidation. And it is essential that in
considering important transactions, such as the one before us,
we apply rigorous economic analysis and ground our conclusions
in the evidence. By ensuring that we protect competition and
not any individual company or competitor, we can help create
market conditions that benefit consumers and promote economic
development.
Thank you, Madam Chair.
Chairman Klobuchar. Thank you very much, Senator Lee.
We are going to now start with our witnesses. I also want
to thank Senator Blumenthal for being here. And I would like to
introduce our distinguished witnesses.
Our first witness is Mr. Michael White. Mr. White is the
president, chairman, and chief executive officer of DIRECTV.
Before joining DIRECTV, he served in a number of management
roles at Pepsi and as a private management consultant.
Our second witness is Mr. Randall Stephenson. Mr.
Stephenson is the chairman and chief executive officer of AT&T.
Previously he was AT&T's chief operating officer and a senior
executive at Southwestern Bell Telephone Company.
Next we will hear from Mr. Christopher Keyser. Mr. Keyser
is the president of the Writers of Guild of America, West. He
has created and worked on a number of popular television shows,
including creating ``Party of Five.''
Do you watch that?
[Laughter.]
Chairman Klobuchar. You do not have to answer.
Senator Lee. I do not. I am sorry.
Chairman Klobuchar. It is still popular, though, just
because he does not watch it. It is okay.
The next witness will be Mr. Matthew Wood. Mr. Wood is the
policy director of Free Press. Prior to joining Free Press, Mr.
Wood worked at the public interest law firm Media Access
Project and in the communications practice groups of two
private law firms in Washington, DC.
Then we will hear from Mr. Larry Downes. Mr. Downes is an
Internet industry analyst and author. He is currently serving
as the project director of the Evolution of Regulation and
Innovation Project at the Georgetown Center for Business and
Public Policy.
And our final witness will be Mr. Ross Lieberman. Mr.
Lieberman is the senior vice president of government affairs
for the American Cable Association, where he represents small-
and medium-sized independent cable operators. He previously
worked for EchoStar Communications, which is the parent company
of Dish Network.
Thank you all for appearing at our Subcommittee's hearing
to testify today. I now ask our witnesses to rise and raise
their right hand as I administer the oath. Do you affirm that
the testimony you are about to give before the Committee will
be the truth, the whole truth, and nothing but the truth, so
help you God?
Mr. White. I do.
Mr. Stephenson. I do.
Mr. Keyser. I do.
Mr. Wood. I do.
Mr. Downes. I do.
Mr. Lieberman. I do.
Chairman Klobuchar. Thank you.
Okay. Why don't we begin with Mr. Michael White.
STATEMENT OF MICHAEL WHITE, PRESIDENT, CHAIRMAN, AND CHIEF
EXECUTIVE OFFICER, DIRECTV, EL SEGUNDO, CALIFORNIA
Mr. White. Thank you. Good afternoon, Chairwoman Klobuchar,
Ranking Member Lee, and Members of the Subcommittee. My name is
Mike White, and I am CEO of DIRECTV. Thank you for inviting me
to testify on AT&T's proposed acquisition of DIRECTV.
For any business to succeed in the long term, it must
satisfy its customers' needs better than the competition day in
and day out, and this transaction will us at DIRECTV do exactly
that. By combining complementary assets and products, we will
be able to offer new services to our customers at a better
value. We will help consumers watch the video they want,
increasingly when they want it, and increasingly where they
want it and on the many devices of their choice. And we will be
well positioned to compete long into the future.
I would like to briefly describe DIRECTV's perspective on
this transaction. Historically, DIRECTV is a remarkable
American success story. We have competed aggressively,
delivering more high-definition channels, a clearer sound and
picture, more advanced equipment, and consistently better
customer service than cable over the years. And, frankly,
Congress has also had a lot to do with our success, making sure
that we could acquire the programming our subscribers demanded,
particularly in our early years.
In recent years, however, much has changed, particularly
the growth of broadband. If we at DIRECTV want to continue to
compete effectively in today's increasingly Internet-driven
economy, we must adapt as well, in four ways:
First, we must provide an integrated bundle of services
because consumers increasingly demand better bundles of both
video and broadband. And, in fact, broadband is now the more
important element of the two for many of our subscribers.
Second, we must serve those who want over-the-top
offerings. Young subscribers in particular want services like
YouTube, Netflix, and Hulu. And you need a broadband platform
if we are to be able to meet that need as well in the future.
Third, we must continue to optimize our own video service
as technology changes. Cable's two-way infrastructure lets it
offer features such as remote DVRs and video-on-demand
programming stored in the cloud. In fact, soon cable will offer
other cloud-based features like lookback, and cable operators
are increasingly leveraging the cloud to improve their service
more quickly and easily. We, too, will need to do all of this
if we intend to continue to compete and keep up.
And, finally, we will have to continue to effectively
manage content cost increases. Rising content costs, far and
away the largest element for any distributor, challenge all
video providers. Yet bundled competitors can handle this
somewhat better because they earn revenue from multiple
services.
Historically we at DIRECTV have attempted to remain
competitive by offering something called ``synthetic bundles,''
in which the video and the broadband are provided by two
separate companies but marketed together.
Synthetic bundles, however, make for a bad customer
experience: customers have to talk to two sales
representatives, wait for two different installation
appointments, pay two separate bills, and make two calls every
time they have a problem.
And synthetic bundles are also somewhat more expensive
because each company seeks its own margin on its contribution
to the bundled service.
We believe this transaction will help us meet all of these
challenges head on. It combined DIRECTV's premier video assets
with AT&T's unique broadband and wireless assets. It will mean
better bundles. It will mean better video. It will mean lower
content costs because of the additional value we can now offer
programmers. And it means more and better broadband to 15
million new locations predominantly in rural areas. And,
finally, it means more innovation, particularly as it relates
to wireless video offerings.
If you put it all together, you get a transaction that lets
us better serve our customers, unlock incremental growth
opportunities that will create jobs, and sustain our long-term
competitiveness--a transaction, in other words, that opens up a
world of new possibilities for DIRECTV's subscribers.
Thank you again for inviting me today, and I very much look
forward to your questions.
[The prepared statement of Mr. White appears as a
submission for the record.]
Chairman Klobuchar. Thank you, Mr. White.
Mr. Stephenson.
STATEMENT OF RANDALL STEPHENSON, PRESIDENT, CHAIRMAN, AND CHIEF
EXECUTIVE OFFICER, AT&T INC., DALLAS, TEXAS
Mr. Stephenson. Thank you, Chairman Klobuchar, Ranking
Member Lee, and Members of the Committee. I am Randall
Stephenson, chairman and CEO of AT&T, and I also appreciate the
opportunity to visit with you about what we think are
significant consumer and strategic benefits of the transaction.
This is unlike most mergers because it primarily combines
companies with complementary products and capabilities--
DIRECTV's pay-TV service and AT&T's broadband service--and the
rationale for us coming together is really simple: it is about
meeting consumer demand.
Customers are looking for bundles that combine TV and
broadband service. That is because of the greater value and the
convenience they get, and it is something that today they do
get from our cable competitors nationwide.
Now, as Mike said, DIRECTV has the premier pay-TV service
in the U.S., but it does not have a broadband network. And to
effectively compete against cable for broadband customers, AT&T
markets bundles of services, mostly broadband and TV, even
though our video service is not profitable. In fact, fewer than
140,000 of our TV customers--that is less than 2 percent of
them--purchase TV service on a stand-alone basis. We do not
actively market stand-alone video because we do not make any
money on it.
Today 60 cents of every video dollar we earn goes straight
to the programmers. In addition, we can offer video in only a
small portion of the country, less than a quarter of U.S.
households, and we do not even cover all of the broadband
footprint that we have built. And that is due to technology and
economic limitations.
As a result, there is no significant competitive overlap
between AT&T and DIRECTV in the products that consumers are
overwhelmingly demanding today, and that is a broadband video
bundle. The consumer benefits of this transaction are
significant. Being able to offer DIRECTV nationwide is a game
changer as it relates to the economics of deploying broadband.
It will allow us to expand and enhance broadband service to at
least 15 million locations across 48 States, mostly those in
rural areas. This is in addition to the broadband expansion
plans that we have already announced, and it directly results
from the synergies created by the transaction. This new
broadband commitment includes 13 million rural locations, 85
percent of which are outside of our traditional fixed-line
footprint.
We think this is really big news for rural America. We
estimate that nearly 20 percent of these consumers today have
no access to wireline broadband service and that another 27
percent are hostage to only one provider. For many of these 13
million consumers, AT&T's service will be the fastest service
available, and for some it will be their first chance for truly
high-speed broadband.
The transaction also allows us to expand our one-gigabit
service to 2 million additional locations, so all told, we will
be able to serve 70 million customer locations with broadband.
This transaction will allow us to price more competitively and
provide consumers a higher-quality experience, which in turn
will result in cable companies' pricing more competitively as
well in all their products.
Consumers will receive greater convenience with a single
point of contact for ordering, installation, billing, and care.
We will be able to accelerate the development of new over-the-
top video services offered by AT&T and Netflix and Amazon and
Hulu and so many others, and deliver them to any screen. This
is the exciting part. It can go to a mobile phone, computers,
tablets, cars. We are even working on delivery to airplanes.
We operate in a competitive environment that is only
becoming more competitive. The cable companies already dominate
both broadband and video, and Google Fiber, Netflix, and even
faster wireless services are transforming the competition
daily.
This transaction gives AT&T the capabilities to be a more
effective competitor to cable, and I want to assure the
Committee and I want to assure our customers as well that we
will do these things while meeting or exceeding the FCC's net
neutrality standards and extending our best-in-class diversity
and labor practices to the employees and suppliers of the
combined company.
So again, thank you for the opportunity, and I look forward
to your questions.
[The prepared statement of Randall Stephenson appears as a
submission for the record.]
Chairman Klobuchar. Thank you very much, Mr. Stephenson, we
also discovered up here that you wrote for ``L.A. Law,'' and he
had seen that one.
[Laughter.]
Chairman Klobuchar. I just wanted to make you feel better.
STATEMENT OF CHRISTOPHER KEYSER, PRESIDENT,
WRITERS GUILD OF AMERICA, WEST, INC., LOS ANGELES, CALIFORNIA
Mr. Keyser. Chairman Klobuchar, Ranking Member Lee, I
forgive you for not being a fan of my work. You are not alone.
Members of the Subcommittee----
Senator Lee. I want to be clear I am sure it is a great
show.
Mr. Keyser. Thank you for the opportunity to appear before
you today. My name is Christopher Keyser, and I am the
president of the Writers Guild of America, West. I have been a
working television writer, as you said, for 25 years.
On behalf of my guild, I have come here today to speak
against the AT&T/DIRECTV merger, and because I cannot help
myself, here is a story.
The writers I represent, more than 8,000 of them, and the
members of our sister guild, the Writers Guild of America,
East, write feature films and local news. But what matters in
this conversation is that we also create virtually all of the
scripted programming that you watch on television now or
through video services such as Netflix and Amazon, and that
will become important in a minute.
That programming is at this moment the most influential
creative product in the country and indeed in the world.
Nothing has the power and the reach of television.
But two decades of mergers and consolidation have reduced a
once vibrant market of diverse and independent production to
the point where now seven companies own 95 percent of what you
watch on TV. Networks and studios have become one. They control
both content and delivery. They determine what I am allowed to
write and what you are allowed to watch.
Into that world only recently has come the Internet, and
suddenly the Internet has opened up a possibility of enormous
new content and creativity, a host of new voices, new content
creators, new distributors. Potentially this is the most
exciting time for audiences and writers, anyone who cares about
diversity and the vibrancy of the creative output of this
country. It is a very American thing, which brings us back to
the merger.
It is no accident that a flurry of mergers is occurring in
response to the potential democratization of the entertainment
industry. The largest multi-channel video programming
distributors and Internet service providers have every reason
to fear and every incentive to limit the growth of online video
competition that could threaten its dominance.
If this merger and the Comcast merger are approved, the two
resulting companies will control more than half of the MVPD
subscribers and half of the wired Internet access market. They
will have unprecedented power to control the content that
passes to you.
So what do we know that will happen as a result? Well, we
know, because they have said so, that they will use their power
to force content providers to accept below-market rates for
their product. It is a stated goal of the merger to reduce
affiliate fees.
So the problem is that these fees have fueled the recent
boom in creative programming, particularly on cable, and
reduced those fees through the outside power of monopoly, and
the result is less creativity, less product, and less
innovation.
The second thing we should fear and of which we can be
virtually certain is that a combined AT&T/DIRECTV will follow
in the footsteps of Comcast and use its power to discriminate
against unaffiliated video content providers. AT&T has already
said that it is in favor of paid prioritization, because when
you control access to 50 percent of consumers, those who want
to deliver their products are so beholden to you that they
cannot afford to refuse your conditions. And those who cannot
or do not pay will find their products metaphorically on the
hidden shelves in the back corner of the store.
Because the power to control the pipeline actually trumps
the power to create, it brings with it the power to undermine
the revolutionary quality of the Internet itself, and that is
precisely the issue the FCC is dealing with today.
The one thing we know as writers is that character is
destiny, and the character of these companies is not in doubt.
You do not gain access to half of the market without
prioritizing your shareholders over the American people.
As Comcast/Time Warner begat AT&T/DIRECTV, so, too, will
this merger beget more consolidation in response. And then the
merger of content creators, desperate for leverage against two
powerful distributors, will come in time. They are already in
the air. Eventually these behemoths of video distribution will
seek, as every incumbent media giant has before in history, to
own its own content or to produce--or to buy other content
providers. And the Internet, which might have been a new
frontier, will become like broadcast television before it. And
those of us who write for a living, who love stories and the
vibrant marketplace of ideas, who believe that a culture is
defined at least in part by the quality of the art it creates,
who believe in the American ideal of limitless voices, will
mourn a missed opportunity.
We have seen this story before. We begin it again today,
and we may believe, or some may tell you, that this time we can
change the ending. But as a writer, I know this much. If you
put the butler in line to inherit and you give him a
candlestick in the drawing room, someone is going to end up
dead by the last act.
I have come here today to ask that regulators make the
right choice, one that serves the public interest, and deny
these mergers.
Thank you for your attention. I look forward to your
questions.
[The prepared statement of Christopher Keyser appears as a
submission for the record.]
Chairman Klobuchar. Very good. Thank you.
Mr. Matthew Wood.
STATEMENT OF MATTHEW F. WOOD, POLICY
DIRECTOR, FREE PRESS, WASHINGTON, DC
Mr. Wood. Good afternoon, Chairman Klobuchar, Ranking
Member Lee, and esteemed Members of the Subcommittee. Thank you
for having me back to talk about this merger and what it means
for video and broadband competition and consumers.
Free Press works for open, universal, and affordable
Internet access. To do that, we also keep a watchful eye on
consolidation in media and telecom, and we have had an eyeful
lately with all the deals that are pending or in the works.
There is no good reason for any of these mega mergers,
including this combination of DIRECTV, the Nation's second
largest video provider, with AT&T. It is just more
concentration, less competition, and the same old promises used
to sell these bad deals to the public. Each time it goes
shopping, AT&T comes before you hoping you are ready to believe
almost anything and that you have a very short memory.
How else to explain AT&T's counterintuitive claim that
eliminating competitors somehow leads to more competition? How
else to explain so-called merger-specific benefits that
actually have nothing to do with the merger and provide no real
benefits?
AT&T has made the same promises for deals stretching back
over the past decade. It is better at making promises than
keeping them. This deal would give us what the Department of
Justice calls ``highly concentrated markets'' everywhere AT&T
offers pay TV. Going from four choices down to three where AT&T
offers video today is not a net win, no matter how AT&T spins
it.
If this all sounds familiar, it should. Three years ago,
you also heard that taking out a wireless rival would increase
competition. AT&T said T-Mobile was not a real competitive
threat anymore. It said AT&T could not invest in rural America
without that merger. Those claims are no more convincing today
than they were then, and the numbers here, as measured by DOJ,
are even worse.
There are 64 TV markets where nearly all of AT&T's video
subscribers reside. All 64 would be highly concentrated after
this deal. Antitrust authorities say such mergers are likely to
``raise prices, reduce output, diminish innovation, and
otherwise harm customers.''
AT&T counters that it would save costs on video
programming. Yet while AT&T may lower its own costs by
acquiring more scale, analysts believe the company is
overstating those savings. And no matter how big they are,
there is no guarantee and really no likelihood that AT&T would
pass these savings along to its customer.
Search high and low through the deal descriptions that AT&T
has filed this month, and if they wanted to make a promise to
reduce prices, they could have done so in simple and uncertain
terms. They did not.
Instead, AT&T says that over-the-top video keeps prices in
check, but ignores the control that broadband providers have
over these online services. And while a growing number of
consumers are cutting the cord on pay TV, that number is still
small compared to the number of pay-TV subscribers that remain.
AT&T also argues that DIRECTV is not a real competitor
because customers only want bundles today. But the idea that
this deal would let AT&T compete more vigorously against
bundled cable services is not borne out by the facts. For one
thing, customers want choices not forced bundles to make them
buy services they do not want. And AT&T and DIRECTV already
partner to sell bundles today, the synthetic bundles you have
heard about from the other witnesses. But AT&T charges DIRECTV
customers more than twice as much for broadband in those
packages as it charges its own U-verse TV customers. If we had
working markets and reasonable resale policies, we could
promote competition and let people choose their bundles, too.
With nothing else to offer, AT&T recycles its past
promises, stretching past that failed T-Mobile merger in 2011
to Bell South in 2006, saying mergers let it provide more and
better broadband. It has not always kept these promises. It has
just kept people waiting. And AT&T never explains adequately
how these new assurances add anything to its prior commitments
and deployment plans. It says it will expand broadband at 15
million customer locations after this deal, but 13 million of
those get fixed wireless.
Forget for a moment that this wireless products promised
for rural America is inferior. Forget that AT&T told consumers
last month that wireless service was already available
nationwide. AT&T could provide a serious broadband upgrade if
it would stop making airy promises and just invest.
Between the cash, stock, and debt, AT&T would spend nearly
$70 billion to acquire DIRECTV. This is wasteful capital
allocation plain and simple, because AT&T could spend that
money to triple the size of its current fiber footprint,
signing up more video subscribers than DIRECTV has today in the
process.
AT&T may believe that you have forgotten the last time you
heard these promises, but I do not think that you have. You
know to look under the hood and not buy a used car based on the
new paint job alone. So if you hear the only way to promote
competition is to kill it, you wonder how that could be true.
If you hear that we need less video competition to get more
broadband, you wonder why. And if you hear the same company
promising better broadband is just around the corner, always
just one more merger away, you wonder when. When will AT&T stop
throwing money at mergers and start investing for real?
Thank you very much, and I look forward to your questions.
[The prepared statement of Matthew F. Wood appears as a
submission for the record.]
Chairman Klobuchar. Thank you, Mr. Wood.
Mr. Larry Downes.
STATEMENT OF LARRY DOWNES, PROJECT DIRECTOR, GEORGETOWN
UNIVERSITY, CENTER FOR BUSINESS AND PUBLIC POLICY, WASHINGTON,
DC
Mr. Downes. Chairman Klobuchar, Ranking Member Lee and
Members of the Committee, thank you for this opportunity to
testify.
My name is Larry Downes. Based in Silicon Valley for the
last 20 years, I am an Internet industry veteran and the author
of several books on the information economy, innovation, and
the impact of regulation.
But for the past 3 years, I have been involved in a
research project focused on the changing nature of technology,
market disruption, and competition performed in conjunction
with the Accenture Institute for High Performance. Our recently
published findings demonstrate that technological and market
forces have put unprecedented and accelerating pressures on
incumbent businesses, especially those subject to a long
history of regulatory oversight.
Like many of the industries we studied, the video
marketplace is in the midst of a profound and exciting
transformation--at least for consumers and entrepreneurs. For
both AT&T and DIRECTV, on the other hand, that transformation
poses a daunting triple play of threats to their current
business model:
Number one, the rise of a few very powerful content and
distribution companies, including Disney, Fox, and CBS, have
weighed the scales in program carriage and other negotiations
strongly on the side of the programmers, bloating channel
bundles and raising prices for consumers even as many users
demand more a la carte solutions.
Number two, hundreds of largely unregulated, Internet-based
content providers, including Google, Amazon, Apple, Aereo and
Netflix, are experimenting wildly with new technologies and new
business models for producing, collecting, distributing, and
monetizing a cornucopia of new and old programming.
Number three, in developing strategies both to compete and
cooperate with these and other threats, AT&T and DIRECTV are
severely constrained by decades of policy compromises designed
to resolve earlier conflicts between old business models and
new technologies. Taken together, they form a sclerotic tangle
of interconnected, contradictory, and in many cases
counterproductive limits on the ability of both companies to
adapt to the accelerating pace of change, often for reasons
that no longer serve any public interest.
I want to say a little bit more about all three of these,
which I discuss in detail in my written testimony. But first
let us acknowledge that the true driver of change in the media
market and the real source of competitive pressure is the
exploding availability of increasingly better and cheaper core
technology components--the principle known as Moore's Law.
Innately familiar with the faster, cheaper, smaller promise
of Moore's Law, consumers now demand access to the full range
of content anytime, anywhere, and on whatever device they
happen to be nearest. And with the continued deflation of
component costs, that content and the networks to deliver it
will continue to evolve from today's high-definition standard
to 4K or ultra-high definition and to future innovations.
This ongoing disruptive innovation means that predicting
future consumer demand has become largely impossible. Preferred
forms of bundling and pricing have splintered with each user
demanding their own unique configuration, one that will change
on a whim.
Already held back by the anchor of a growing regulatory
burden, new business pressures on regulated multi-channel video
programming distributors are now arriving separately and
together from two principal disruptors: mushrooming programming
costs and the explosion of largely unregulated over-the-top
video services. And while the FCC finds that the average price
per channel has declined the number of channels continues to
expand on average from 44 to 150 since 1995. Premium channels
are often used as bargaining chips to promote less popular
content. Cable customers pay as much as $6 a month just to
cover the cost of ESPN, whether they watch it or not.
The net result is rising prices for consumers, increasing
their incentive to cut the cord to MVPD services and look for
alternatives. Right on cue, unregulated over-the-top content
providers are experimenting with abandon, finding new ways to
produce, collect, distribute, and monetize old and new
programming. Netflix alone has more than 30 million customers
in the U.S., and like other OTT providers, has begun producing
its own premium proprietary content.
Falling costs for core computing technology also means
consumers themselves now contribute significantly to the bounty
of new content and access choices. Users upload 100 hours of
new video every minute just to YouTube, and many user channels
have millions of viewers. Crowdfunding sites are flooded with
proposals for content production, many of which are
oversubscribed.
These new models are thriving because consumers want more
options than the current regulated industry structure makes
possible, or at least at the clock speed of Moore's Law.
Thus, I see the proposed transaction as a largely defensive
move, one that makes sound strategic sense. To remain
competitive, AT&T needs the audience DIRECTV has already built.
U-verse needs larger audiences to improve its bargaining
position with programmers and to achieve economies of scale for
the content it licenses.
DIRECTV, likewise, needs the broadband network AT&T has
built, and to participate in, let alone compete with, the
expanding universe of OTT services, DIRECTV quickly requires
the native ability to integrate broadband Internet with
produced content. With a native broadband offering, DIRECTV
will remain a viable competitor, enforcing market discipline on
cable-based, satellite, and other MVPDs. This transaction
presents few, if any, of the traditional markers for concern,
either under antitrust law or the FCC's public interest
standard. The result should be more competitive pressure, both
within the supply chain and in the market as a whole.
I thank you again for the opportunity to testify, and I
look forward to your questions.
[The prepared statement of Larry Downes appears as a
submission for the record.]
Chairman Klobuchar. Thank you very much, Mr. Downes.
Mr. Lieberman, welcome back.
STATEMENT OF ROSS J. LIEBERMAN, SENIOR VICE
PRESIDENT OF GOVERNMENT AFFAIRS, AMERICAN CABLE ASSOCIATION,
WASHINGTON, DC
Mr. Lieberman. Thank you. An unprecedented wave of
consolidation is occurring within the video programming and
distribution industries that will transform the competitive
market and consumer experience. This is cause for concern.
Congress and regulators, therefore, must not only review
pending deals; it must also examine and act to address the
underlying market problems fueling them.
Focusing on AT&T's deal, it is important to realize DIRECTV
is not only a nationwide paid-TV provider, it is also a
programmer, with interests in three regional sports networks
and national programming. This gives DIRECTV an economic
incentive and ability to charge its rivals higher fees for its
programming, especially its regional sports networks.
Smaller cable operators are concerned that this deal will
lead DIRECTV's programmers to hold out for even higher rates.
With 26 million subscribers, AT&T and DIRECTV combined will
command better programming deals than DIRECTV would alone. This
means higher video profits for both DIRECTV and U-verse
services.
Regulators have accepted that as the per video subscriber
profits of a vertically integrated pay-TV provider rise, so
does its interest in boosting its rivals' costs for its
programming. Accordingly, pay-TV providers will feel the pinch
when negotiating for DIRECTV's programming, and their customers
will pay.
Regulators should not approve the merger without addressing
this matter. While DIRECTV remains subject to program access
rules, as an FCC condition from a prior deal, it is no longer
subject to an arbitration condition. However, readopting this
same arbitration condition is not enough. It had design flaws
that left smaller cable operators underprotected. To shield
these operators fully, these defects must be eliminated.
Congress and regulators must also look at the bigger
picture by reviewing existing rules to ensure that industrywide
problems, particularly those driving consolidation, are
addressed. This will ensure consumers continue to benefit from
a competitive pay-TV marketplace that includes smaller
operators.
ACA members have long raised alarms about large
broadcasters' and programmers' increasing rates and carriage
demands and their discriminatory pricing practices. The
programming costs for a smaller cable operator is significantly
higher than for a larger provider. The spread, thought to
average around 30 percent, puts ACA members at a substantial
disadvantage to bigger competitors like DIRECTV, Dish Network,
and Comcast.
AT&T's desire to acquire DIRECTV does not surprise smaller
cable operators. Even though AT&T's subscriber base nearly
exceeds that of all smaller cable operators combined, its modus
for buying DIRECTV point to it facing similar market problems.
Like ACA's members, AT&T also understands its competitive
standing is likely to worsen if the Comcast-Time Warner Cable
and Comcast-Charter deals are approved.
While AT&T can lower its programming costs and better
compete by buying DIRECTV, smaller cable operators cannot
because they lack AT&T's financial scale. Unable to spend their
way out of trouble, these video providers will struggle to
remain viable.
Some critics of AT&T's deal raise concerns about the number
of pay-TV providers decreasing from four to three in U-verse
territories. In rural areas, where three video service
providers typically exist, programming cost issues have driven
some smaller cable operators to closed systems, leaving
consumers with only two satellite TV providers.
Although the slow but steady decrease in competition in
rural areas has not yet generated much concern from Washington,
it should, because it is harmful to rural America and often
signals wider market problems.
These trends are not irreversible. Congress and regulators
can take action to prevent ACA members and their customers from
simply being unreasonably disadvantaged compared to their
larger competitors.
In conclusion, there are three areas where oversight and
action would be meaningful: first, by examining and addressing
programmers' discriminatory pricing practices against smaller
pay-TV providers; second, by modernizing program access rules
by updating the FCC's definition of a buy-in group, which is
the way smaller operators buy programming; and, third, by
updating the FCC's outdated regulatory fee categories so all
pay-TV providers, including DIRECTV and Dish, pay their fair
share.
Thank you, and I look forward to your questions.
[The prepared statement of Ross J. Lieberman appears as a
submission for the record.]
Chairman Klobuchar. Thank you very much.
We will start with you, Mr. Stephenson. You noted in your
statement that the merger presents no significant competition
overlap. Do you consider DIRECTV to be a competitor in the
markets where you do overlap? I think it is something like 30
million consumers and 25 percent of the country.
Mr. Stephenson. To your point, 75 percent of the country,
we do not compete. In 25 percent of the country, we do have a
network that can deliver video. As I mentioned in my comments,
we do not actively market a stand-alone video product, which is
what DIRECTV sells. We lose money on video. So what we do is
bundle video with broadband. Video is the vehicle by which we
sell and market broadband, quite candidly. And so if you look
at our customer base of video, 5.7 million, less than 140,000
of those are what we would call ``stand-alone video
customers,'' the type of customers that Mike pursues in the
marketplace.
So our video footprint does overlap 25 percent of the U.S.,
but we are a bundle provider. We sell bundles of broadband and
video, and we sell video only to facilitate selling broadband.
Chairman Klobuchar. Mr. White, just 3 months ago, you said
that half of America has ``a very robust telco competitor'' to
your service, and we know that AT&T is one of the country's
major telephone companies. In November, you said this was a
highly competitive industry and that that has certainly gotten
more true with the telcos entering the business and being very
aggressive. Finally, last August, you said the biggest chunk of
your new subscribers are former cable and telco consumers.
So do you see this overlap of competition? Are you
concerned? Do you think that there should be concern for those
consumers?
Mr. White. Well, certainly if you take both Verizon and
AT&T and you add up the homes passed, I guess you get about 50
million homes, so that is kind of half of America, a little bit
less than half of America, I would guess, that there are homes
passed. But as Randall said, they are fairly small at 5
million-plus subscribers right now. So certainly in those
overlap areas, there are--you have to look at the pluses and
the minuses. And, again, I would start with--in any deal, you
have to look at the total picture. In our case, in the 75
percent of America where we do not compete, there is a
significant benefit to consumers of 15 million homes that will
get better broadband. In addition, DIRECTV will be a stronger
competitor because we will be able to market broadband bundles
to 38 million homes outside of where we compete.
In the areas where we compete, I also would argue that the
consumer is going to get better choice, because today DIRECTV
does not have a seamless bundle in those markets, and by the
same token, AT&T is constrained as to how aggressively they can
compete because of their high cost of content.
Chairman Klobuchar. One of the things that people are
really focused on--and certainly we asked a lot of questions in
the last hearing on the Comcast merger--is what is going to
happen with the prices for consumers. And in your written
testimony, Mr. Stephenson, the only mention of prices about
this transaction is that it will ``allow us to price all of our
services more competitively.'' What does that mean? Does this
mean that consumers will actually see less costly service? Or
does it just mean there is going to be downward pressure? And
that is what we are trying to figure out here, what this means
for consumers.
Mr. Stephenson. Yes, we use that terminology ``downward
pressure'' for a simple reason. The largest cost component in
the video business is content programming. As I said in my
opening comments, for every dollar we bill for video, 60 cents
goes out the door to the programmers before we buy set-top
boxes and do customer care and send a bill and roll a truck out
to provision the service.
So what drives prices in this industry are content costs,
and content costs for all of us are growing roughly 8 percent
per year, and we are raising rates about half that pace to try
to keep up with the content costs.
As we put these two companies together, one of the primary
benefits of it is we create a very, very compelling opportunity
for the content providers. We have a larger video footprint.
Mike has some very deep relationships with programmers. We
believe the AT&T content costs will begin--and we feel very
strongly--to look more like the DIRECTV content costs.
Chairman Klobuchar. But does that mean that consumers will
see the price decrease?
Mr. Stephenson. So in a highly competitive environment like
video and broadband, when you have margin, the margin typically
gets competed away. And so when we modeled this--we actually
brought in an economist who used to serve at the DOJ to model
this thing for us. His modeling says even before you get to the
programming synergies, the bias ought to be downward on
pricing. There will be downward pricing pressure not just for
us but for the cable providers as well. There will be downward
pricing pressure on both their bundles, their stand-alone
video, and stand-alone broadband products.
Chairman Klobuchar. And if you see this downward pricing,
will the U-verse customers for whom AT&T, as you have noted,
pays higher programming costs, will they realize the benefit,
or do you think it will be spread in cost savings out among
video, including DIRECTV customers? The cost savings?
Mr. Stephenson. The what?
Chairman Klobuchar. The cost savings that you are going to
see, are they just going to go to those U-verse customers, or
are they going to be spread across all the customers?
Mr. Stephenson. There are going to be a lot of cost savings
outside of programming. For example, we roll--when Mike sells a
synthetic bundle today, he rolls a truck to the house; we roll
a truck to the house. Mike sends a bill; we send a bill. When a
customer has a care problem, they call one--two numbers. When
you put the two companies together, it will be one truck roll,
it will be one bill, it will be one sales call, and so forth.
So there are a number of synergies and savings that will go
forward as a result of this.
Chairman Klobuchar. Mr. Wood, do you see it a different
way?
Mr. Wood. It does not sound like these synthetic bundles
have been all that well synthesized in some ways because with
resale you could have a single company taking care of the
customer. And as I note in my written testimony, it is actually
$34 a month when you buy AT&T broadband through DIRECTV and $14
a month--14 and change--for that same product to an AT&T
customer.
So we think that the bundling is obviously a benefit to
some if people want to bundle, but the benefits of combining
the two companies outweigh--or are overstated and outweighed by
the dangers of the harm to competition here.
Chairman Klobuchar. All right. We have been talking about
the importance to consumers of price competition and what the
loss of a competitor would mean, but I want to quickly turn to
programming. DIRECTV has and is currently renegotiating the
rights to NFL Sunday Ticket, which has every out-of-market NFL
Sunday game. Some commentators have said that this merger is
all about Sunday Ticket as opposed to some of the people that
Mr. Keyser represents.
Does NFL Sunday Ticket, Mr. White, help you differentiate
your product and compete with cable companies and telephone
companies?
Mr. White. Yes, it does. We have had a 20-year relationship
this year with the NFL. We both, I think, benefited by that
relationship. Our contract expires after this coming season, so
we are in discussions about extending that contract. And we are
very optimistic and hopeful that we will be able to do that. We
have an excellent relationship with the NFL.
Chairman Klobuchar. And, Mr. Stephenson, your merger is
contingent on DIRECTV renewing its contract with the NFL for
Sunday ticket. Is that right?
Mr. Stephenson. Yes, that is correct.
Chairman Klobuchar. And what are your plans? Would AT&T
seek to expand the reach of Sunday Ticket to its wireless
platform?
Mr. Stephenson. So DIRECTV in the current agreement has the
rights for their Sunday Ticket subscribers to distribute that
content to their mobile devices, and when we have, you know,
100 million mobile subscribers, we would envision taking
advantage of that situation and allowing our customers who also
subscribe to the Sunday Ticket to access that on any device
anywhere, anytime they wanted.
Chairman Klobuchar. Okay. Anyone else have a different view
of--okay. Mr. Lieberman, one last question on the sports, and
then in my next round, I will ask you a few questions here, Mr.
Keyser.
DIRECTV owns three regional sports networks in Pittsburgh,
the Rocky Mountain region, and the Pacific Northwest. How does
ownership of regional sports networks by DIRECTV or any other
distributor impact competition? Do you think the DOJ and FCC,
if they approve the merger, should consider conditions
regarding regional sports network ownership?
Mr. Lieberman. Thanks for the question. When a pay-TV
provider owns programming, they have an incentive and ability
to charge higher prices to their rivals. This has been a
conclusion that has been reached in many transactions in the
past, ones involving DIRECTV, ones involving Comcast. This is
going to be a situation that will happen in this deal as well,
as a result of DIRECTV owning the regional sports networks, as
you note.
Smaller cable operators carry this programming. They are
concerned about their prices for that programming going up, so
it is important that as part of this deal that the FCC readopt
conditions, the way it has been addressed before is through
arbitration conditions, to address this harm.
Chairman Klobuchar. All right. Thank you very much.
Mr. Lee.
Senator Lee. Thank you, Madam Chair.
Mr. Stephenson, the antitrust agencies' 2010 horizontal
merger guidelines confirm an important part of any antitrust
analysis involves inquiring into the potential efficiencies
that the proposed transaction might deliver, that it might
produce or create? The guidelines state that the agencies will
credit these merger-specific efficiencies only if they are
merger-specific; that is to say, if and only if they will occur
as a result of the merger and that they would not occur in the
absence of the merger, or in the absence of some other event
comparable to the merger in terms of any anticompetitive
effects the merger might have.
And so my question for us is: What procompetitive
efficiencies do you see associated with this merger? And could
those efficiencies be achieved in the absence of the merger?
Mr. Stephenson. The primary efficiency that we have talked
about are the efficiencies from buying programming, content,
and we expressed to the street an objective of achieving $1.6
billion per year reduced costs within 3 years, obviously the
lion's share of that being from the programming efficiencies.
The other efficiencies are what I discussed previously: one
truck roll when we provision service, one bill, one customer
care call, one sales call. And we have a history of putting
these types of efficiencies into the marketplace and telling
our owners our objectives. We have, I believe, a spotless
record of achieving those efficiencies.
So we believe the $1.6 billion run rate number is a very
achievable number, feel highly confident that we will hit that
number.
Senator Lee. And that part is just from the programming?
Mr. Stephenson. That is largely the programming. The other
part is from one truck roll to the house, one bill, one
customer care call, et cetera. And then----
Senator Lee. And really quickly on that, what is your
response to Mr. Wood's point about the fact that if you
synthesize the synthetic agreements better, you could achieve
the same thing without the merger?
Mr. Stephenson. It is really easy to say. It comes off the
tongue really easily. Mike and I have tried this for a number
of years, and we have worked it really hard. I have tried it
with Dish satellite before, and it is a very difficult thing to
accomplish for the simple reason that we do expect to make
money off our broadband products; he expects to make money off
his TV product. So you start to stack margins for the customer.
And what happens when you put the two companies together,
you gain the efficiencies. It allows you to pull that margin
stacking out and the customer benefits. At the end of the day,
you have a more elegant, seamless IT process, care process. It
is just a more elegant way of doing it.
Senator Lee. I interrupted you a minute ago. You were
making a second point.
Mr. Stephenson. Yes, there is another major efficiency and
benefit that comes from this transaction, and that is, as I
mentioned in the beginning, we lose money on video. As we move
our programming costs to look more like DIRECTV's programming
costs, it changes the dynamic of our video product. We suddenly
go from video being a loser to a profitable service. And now
our broadband build is not burdened by a money-losing
proposition on video.
What that allows us to do is to think differently about
broadband investment. We have the technology--we have been
working a long time--that we would like to use to roll
broadband out to rural America. It is wireless based. It gets
called ``inferior.'' It is superior to virtually anything that
is out there in these rural communities today. And when you put
a profitable video product attached to this capability, this
wireless technology, it is going to allow us to build
broadband, 15 to 20 megabits per second capability, to 13
million additional customer locations in rural America across
48 States. We think that is exciting. We think it is an
exciting opportunity for rural America.
It also changes the economics of our fiber build where we
are deploying fiber to the home. We have a significant build in
progress right now that we are consummating. We are going to
add 2 million more homes passed because of the economics, how
they change on this.
Senator Lee. This broadband, this is with existing
bandwidth you have already got, this does not require an
additional acquisition of bandwidth?
Mr. Stephenson. The places where we are deploying this, and
the reason rural is so beneficial is because rural is the place
where it is not congested, so we have 20 megahertz of wireless
spectrum that we can put to use with this product now.
Senator Lee. Okay. Mr. Downes, in your testimony you
referred to the role of Big Bang disruption in the video
market. Can you give us some examples of this, of how Big Bang
disruption has impacted markets in the past and explain why you
think this might have some relevance here?
Mr. Downes. Sure. Thank you, Senator. There is an old model
of how you think about innovation and disruption, and this was
that new products would enter the market, they would be worse
but cheaper, and that that meant that the incumbents had time
to respond and to incorporate those new technologies over a
long period of time. And what we found is that sort of, you
know, 50 years on now of Moore's Law making computers and a lot
of other components better and cheaper, it now comes that new
products often enter the market both better and cheaper at the
same time. One of the examples we used was GPS devices and how
they were disrupted by apps on smartphones that did the exact
same thing better and in that case free, so much, much cheaper.
And this is happening, it has been happening certainly in
communications, in computing, in the entertainment industry for
a long time. It is now moving into other industries. You know,
you can now embed computing onto pretty much anything at an
extremely low cost because it is small, it does not use much
power, and the components are increasingly very, very cheap.
This I think is what has really driven the massive amount
of innovation that happened with over-the-top services. The
over-the-top services are great, and it is not just these big
companies, not just Netflix and Hulu. It is individuals
creating their own channel and being able to distribute that
channel. They can produce the content much more cheaply, get
high-quality content, even scripted content, and be able to
deliver that over the Internet at just much, much lower cost.
That opens up the opportunity for a lot of innovation, and it
completely, frankly, catches the incumbents offsides because
they are waiting for the worst but cheaper alternative, and it
never showed up. It was the better and cheaper alternative that
happened to them.
Senator Lee. In the seconds I have left, Mr. Wood, do you
want to respond to Mr. Stephenson's response to your statement?
Mr. Wood. Senator, I was actually thinking about Mr.
Downes' question and response, which was that this Big Bang
innovation, we certainly have an explosion of over-the-top
innovation now, but it is all flowing over the wires and
wireless spectrum that AT&T control. So I think that that is
what we have to take into account when we hear that over-the-
top video is an answer. It is an answer, but it is not an
answer to the lack of competition we see in broadband and
facilities-based TV.
And I am sorry, sir, I would be happy to address Mr.
Stephenson's points if you have other questions about those,
but I am not sure which part of those you are after.
Senator Lee. So his response to your point about the
trucks. You believe that it was not--the synthetic mergers, the
synthetic bundles were not efficient because, as you put it,
they did not synthesize them correctly.
Mr. Wood. Right. I mean, I think that, again, with a
reasonable and nondiscriminatory resale market where companies
could actually have a single truck roll perhaps or a single
bill, the margin stacking you are hearing about maybe would not
be a problem. And at the end--and in response to Senator
Klobuchar's statement, too, you do not hear them saying that
there will actually be lower prices as a result of this. They
talk about downward pressure and economic theory. But what they
are really saying is we will have better margins perhaps for
our business, we will have lower costs. There is no indication
that, even if those savings are real, they will actually be
passed along to customers in any meaningful way.
Senator Lee. Okay. I will want to followup on that later,
but the Chair wields a gavel, and I do not want to----
Chairman Klobuchar. There we are. Okay. Or a candlestick,
as Mr. Keyser would say.
[Laughter.]
Chairman Klobuchar. Okay. Senator Blumenthal.
Senator Blumenthal. Thank you, Madam Chairman. I am not
going to compare candlesticks to gavels.
Chairman Klobuchar. We could have a whole Clue game going
on with Mr. White as opposed to Mrs. White, but we are not
going to go there.
[Laughter.]
Senator Blumenthal. I hope this exchange does not detract
from my time.
Chairman Klobuchar. No, it does not at all. Start afresh.
Senator Franken. I think it should.
[Laughter.]
Senator Blumenthal. Without any disrespect to Senator
Franken, I am going to play the part of the ordinary consumer,
and I have great respect for both of your companies and your
sincerity in the beliefs and the projections you have made
about what is going to be accomplished by this merger. But if I
am the ordinary consumer, I am rolling my eyes, because I have
seen this show before. In the communications landscape, I have
seen mergers, consolidation, and most importantly, inexorably,
relentlessly rising cable rates.
So I am very, very skeptical as a Senator, not just as a
consumer, because you are asking us to make two gigantic leaps
of faith: number one, that you are going to be able to achieve
cost savings by driving down the cost of content, and you have
testified very powerfully that content costs are rising; and,
number two, that those cost savings are actually going to be
passed along to consumers.
So let me begin with the first. As you know, about content,
even giants like Comcast and Time Warner have continued to see
rising costs in their content, and they have been unable to
achieve the cost savings that you are projecting. Tell me what
you are going to do to drive down the costs of content when,
just looking at the cost of sports, 17 percent of a cable
company's programming costs, today sports represent 38 percent
of a total bill for purchasing content, and the L.A. Times
recently found that sports channels represent more than 50
percent of the monthly cable bill, and those sports programming
costs are rising inexorably. So what specifically can you do?
Mr. Stephenson. I am going to start, and then I will let
Mike tag on. But the first part of it, Senator, is somewhat
mechanical, and that is, we have 5.7 million customers on the
AT&T U-verse platform that are paying significantly higher
content costs than DIRECTV is, and the lion's share of the
content cost savings is not necessarily that we are going to
drive down DIRECTV's programming costs. But the AT&T
programming costs will look like DIRECTV's over time. We feel
fairly confident in that. So what that will do----
Senator Blumenthal. You feel fairly confident? Can you
commit to us that you know it will be true? Do you have----
Mr. Stephenson. It has got to be negotiated, and we are
negotiating with some very good business people who have very
good business models and they are tough negotiators. But, you
know, we do believe that when you are a company that has 26
million subscribers in the U.S., 100 million wireless customers
who desire that content, that you are very attractive to the
programmers and the content developers, and so we do feel
fairly confident that we can get those programming costs to
look like the DIRECTV programming costs. That is the mechanical
piece that we believe can happen in a fairly short period of
time. We are not making any assumptions that DIRECTV, their
programming costs can go down. It is just that we can make the
AT&T costs look more like the DIRECTV costs.
Senator Blumenthal. And you think that is true, Mr. White?
Mr. White. Yes, but I think you are raising a very good
point. All of us--and I have been fighting content cost
increases because I hear from my customers all the time about
their frustration with the increase in their pay-TV bill. We
fought, I think, the good fight at DIRECTV. We have had a
number of blackouts with big companies as well as medium-sized
media companies. There is no easy answer to rising content
costs, frankly, but in this particular case, I think the
savings that Randall is referring to are specifically in
comparing their content costs to ours and trying to figure out
how we get their rates through negotiation to our rates and
where we already are. And that is what we are talking about in
terms of content costs. Beyond that I would say it is pretty
hard, as I said, to commit to lower prices on a pure play video
product because of the power of the content companies.
Senator Blumenthal. Well, let me take the next leap of
faith. Assuming just for purposes of this argument that you are
successful in driving down the costs of content and achieving
cost savings more generally, can you commit that those cost
savings will be passed along dollar for dollar to consumers?
Mr. Stephenson.
Mr. Stephenson. Dollar for dollar, no, sir, I cannot commit
to that. What I can commit is it is a highly competitive
industry, and margins get competed away in these industries.
That is why what we are submitting as support the econometric
models that the DOJ will use when they review this, and those
models strongly indicate downward pricing pressure.
Again, the prices will go down? I do not think we want to
intimate that. But what we do believe is the trends can be
changed--the programming costs going up 8 percent a year--and
that will mitigate the price increases that we are having to
pass along to consumers.
Senator Blumenthal. So the best you can tell us is that
price increases will be mitigated?
Mr. Stephenson. Slowed, yes.
Senator Blumenthal. In other words, the rate of increase
will be slowed.
Mr. Stephenson. We hope that would be the byproduct of
this.
Senator Blumenthal. That is the best you can promise us
will result from this merger?
Mr. Stephenson. Yes, sir.
Senator Blumenthal. Is that true, Mr. White?
Mr. White. I think you will see better value bundles. On
the pure play pay-television business, it is very difficult
because of the cost of content, which is far and away our
biggest cost. But we have not had a competitive broadband video
bundle, and I do think you will see better value for consumers
than we currently----
Senator Blumenthal. And what is your projection, Mr.
Stephenson, as to how much mitigation, how much reduction in
the rate of increase there will be? What percentage?
Mr. Stephenson. Well, as I mentioned, it is a bit episodic,
meaning it is event specific, getting the AT&T costs to look
like the DIRECTV costs. And so we believe that we can drop our
content costs by as much as 15 percent and maybe a little more.
Senator Blumenthal. And what percentage of that will be
passed along to consumers?
Mr. Stephenson. It is hard to say. I mean, I cannot even
tell what the prices of these services will be 6 months from
now. This is a hyper-competitive market. It moves literally by
the week. And so prices are changing in this market constantly.
You are trying to meet the competition. You are doing
promotional pricing on a regular basis. So it is hard to even
say what it will be 2 months from now, much less 3 years from
now.
Senator Blumenthal. Well, I feel like I am watching the
movie--I do not even remember what it was, but it just occurred
to me, you know, there is a line, ``It is complicated.'' And I
have this sense that we are watching a rerun here of--you know,
with all good intentions, you are telling us that you cannot
really give us the specifics, but we are not going to see any
drop in prices. At the best we will see some reduction in the
rate of increase. And I think a lot of consumers would find
that answer unsatisfying.
Mr. Stephenson. Yes, sir, I suppose one would have to
believe in the market and the market pressures and that market
pressures will compete margins away and cost savings will find
their way into prices, because the cost savings in this deal
are very specific, and they are fairly hard. And so if you
believe the industry is competitive, the margins do get
competed down.
Senator Blumenthal. Well, that is why I asked you--and my
time has expired. I apologize. But that is why I asked you
whether you could commit that those cost savings will be passed
along, if not dollar for dollar at least maybe 50 percent, 75
percent. Can you give us that answer?
Mr. Stephenson. Not here right now. I mean, we can get back
to you, but I cannot tell you exactly what those numbers will
be.
Senator Blumenthal. Thank you.
Thank you, Madam Chairman.
Chairman Klobuchar. Thank you.
Senator Cornyn.
Senator Cornyn. Thank you, Madam Chairman. Thank you all
for being here today, and Mr. Stephenson, of course, heads up a
Texas-based company, a small Texas-based mom-and-pop.
I find these kinds of hearings a little surreal in some
ways because, of course, we do not have jurisdiction over
whether this merger occurs or not. That is the Department of
Justice and the FCC. But I do think it is helpful to learn and
think more deeply about these issues. But I also remember that
there is a famous quote from Yogi Berra, who said, ``It is
tough to make predictions, especially about the future.'' And,
of course, we are having to make predictions about the future
here, and I wonder about the institutional competence of
Congress to do that. But I am certainly interested in what you
have to say.
I know there has been concern expressed in some testimony
already about how this merger affects rural consumers, but as
you know, Mr. Stephenson, we have large, expansive rural areas
in Texas. Would you reiterate or perhaps tell us what
advantages you think this merger would offer to those rural
consumers?
Mr. Stephenson. You bet. One of the elegant pieces of this
deal is Mike has a video distribution capability that is very
efficient for rural delivery of television. Getting broadband
to rural America, this Committee knows as well as anybody, it
is really difficult to get an economic basis for putting
broadband into rural America. The wireless technology that we
have developed, when you combine it with a profitable video
product, gives us an opportunity to get this wireless
technology deployed. It is good technology. This is high
performance technology, 15 to 20 megabits per second
capability. And just as an example, for our State of Texas,
Senator, we will pass almost 500,000 additional homes in the
rural areas of Texas with this technology. In Minnesota, it is
484,000. In Connecticut it is 94,000. These are hard
commitments. These are commitments we are willing to make and
do intend to make. We will build this out and pair it with a TV
product. We think this is an exciting opportunity for rural
America.
Senator Cornyn. I think it was Mr. Wood--and he can correct
me if I am wrong--who said that there was no good reason for
this merger, that you ought to spend the $70 billion building
out your broadband network independently. What is your response
to that?
Mr. Stephenson. I do not see the capital markets stepping
up volunteering to fund that kind of broadband build across
America. That is a mega capital commitment. If I were to come
out and announce a commitment to build that kind of fiber
deployment across America, you could have my successor
testifying in front of this Committee. The capital markets are
not there to finance it. We are always looking for more
efficient ways to deploy the technology, wireless, again,
referred to as ``inferior.'' It is actually superior. It has
better cost dynamics and allows us to get greater coverage of
broadband than fixed into rural America.
Senator Cornyn. Well, since I invoked his name, in
fairness, I will ask, Mr. Wood, would you care to respond to
that answer?
Mr. Wood. Sure. I think first of all, for the rural
benefits on the buildout, what is hard to follow is exactly
what is new here, because AT&T committed in 2006 with the Bell
South merger to provide broadband throughout its entire
wireline territory, some of that being wireless. This is, I
think, a commitment to expand that outside of the AT&T wireline
footprint. But, again, they also said last month that they were
providing a wireless home phone and Internet product throughout
the entire country at this point.
So the benefits for rural, regardless of how good the
technology is or how much better or worse it is than other
options, I think are hard to follow, once again, just because
we have heard these kinds of promises before, and it is not
entirely clear, to me at least, what is new and what is
specific to this merger.
When it comes to the fiber build in the capital markets, I
think that points to one of the problems we have here. Mr.
Stephenson describes that as a--was it a mega intensive capital
project? But, of course, when they expend that same amount of
money on a merger, their stock price goes up. And so what we
have is Wall Street and investors, who are perfectly free to
have that opinion, favoring mergers and actually dissuading
companies from investing in new builds without taking out
competition. Somehow AT&T can find the money and the purpose
and the reason to invest in fiber where Google Fiber goes
first--now, Google Fiber is not everywhere, but it has shown up
in a few places, and AT&T can invest there. We wonder why that
is not the case other places, and perhaps that is because it is
not all that competitive in other regions. If we had
competition, we might get investment.
Senator Cornyn. Well, Mr. Wood, what I understand Mr.
Stephenson to say is he thinks this is probably an investment
better calculated to return something on their investment for
their shareholders, and you see nothing wrong with that, do
you?
Mr. Wood. No, although I would note that when Google did
their fiber build in Kansas City, the early reports were
something like 75 percent take-up rate. So even with an average
take-up rate of something like 30 percent in the industry, we
think that this amount of money could be used to go past 71
million homes and to sign up 20 million or more new customers.
I would think that would be a profitable endeavor, but, of
course, I do not have access to AT&T's numbers for this deal
yet. We will be looking at those numbers as well during the FCC
process.
Senator Cornyn. Well, I wonder if some of you may comment
on this question. I noticed that in the written testimony one
of you mentioned the high cost of ESPN to pay-TV providers.
Another mentioned concerns about accessing regional sports
networks. And this entire merger is, as I understand it,
contingent on the ability of DIRECTV to renew its NFL Sunday
Ticket contract.
Why are these sporting events so valuable to pay-TV
providers? And how is the demand for athletic content
influencing the cost and structure of pay-TV? Mr. White, that
sounds like a good question for you.
Mr. White. Sure, Senator. Clearly, in today's world sports
is the one live event that you get people to watch and,
therefore, advertisers are interested in advertising against.
And so increasingly, in a more fragmented world, we are seeing
more and more it is sports that draws people together, and that
is where you see, as you pointed out, a significant pressure on
content costs is coming from sports. But it is still the one
thing folks gather around in the bar, the television in the
family room, or elsewhere to watch, is sports.
Senator Cornyn. Well, I am old enough to remember some of
the apocalyptic predictions that have been made over time about
what the future holds. I remember reading a book called ``The
Population Bomb,'' by B.F. Skinner, that said we were all going
to starve because the population would outpace the capability
to grow the crops and to produce the food to feed us. And that
thankfully did not prove to be true.
So I think that is the hard part about trying to evaluate
these kinds of deals that we are being asked to predict the
future, and you no doubt--I hope and trust you are in a much
better position to predict on behalf of your shareholders and
consumers what the future looks like in this very fast-moving
and complex area.
Thank you, Madam Chairman.
Chairman Klobuchar. Thank you very much.
Senator Franken.
Senator Franken. Thank you, Madam Chairwoman, and thank you
to all the panel here today. This is the second time in 3
months that the Members of this Committee have met to discuss a
deal that could transform the telecommunications industry.
Consumers are more dependent on this industry than ever before.
We need more investment in telecommunications, investment in
infrastructure, in customer service, and in new technologies.
Instead, the industry proposes more consolidation. Comcast
wants to buy Time Warner Cable, Sprint wants to buy T-Mobile,
and AT&T says that because of this they need to get bigger,
too.
To me that is not a good reason to approve a deal. We need
to examine this merger on its own terms. AT&T and DIRECTV have
explained why this is a good deal for them. As good corporate
citizens, they must also explain why this is a good deal for
consumers.
I just wanted to pick up on something that Senator Cornyn
said, not predicting the future. I remember when fin-syn was
rescinded in 1989, and there was testimony, Mr. Keyser, then
from the networks that this would not reduce independent
producing. But I remember people in the Writers Guild saying it
would. Who was right?
Mr. Keyser. I am afraid that we were right, Senator.
Senator Franken. So you were able to predict something
right, accurately, because it flowed from what fin-syn was--the
networks owned--were not allowed to own their programs, and
they wanted to be able to own them. And they said, ``Hey, we
are not going to favor our own programming. We want to get the
highest ratings possible. Why would we favor our own program?''
What was the percentage of independent programmers then and
what is the percentage now?
Mr. Keyser. Senator, I think it was somewhere between 70
and 80 percent before fin-syn and we are down to about 10
percent now, but much of that is reality programming. It is not
scripted programming.
Senator Franken. Right, so the prediction actually was
true, so we can see the future a little bit.
I would like to talk about how this merger would affect
consumer prices. Mr. Stephenson and Mr. White say they need
this deal to sell a better bundle. That is a package of TV and
Internet and phone services all rolled into one. But bundles
are only good for consumers if they actually offer cost
savings, not if they are structured to hide the true costs of
each service or force people to buy products that they do not
want. This merger would increase AT&T's bundling power, but I
am not sure that is what consumers want. Many of my
constituents complain to me about bundles. They feel that they
are getting a raw deal.
Mr. Wood, you are a consumer advocate. Should consumers be
concerned about AT&T having more bundling power?
Mr. Wood. Yes, I think so, Senator Franken. We have heard
this afternoon that margins get competed away in these business
because they are so competitive. I think what we see instead is
sometimes margins are taken away programming costs rise more
quickly than consumers are willing to pay those increases. But
the margins get shifted, and so even if a company's video
margins are declining, even the biggest, even Comcast, these
declining video margins--still high profitable, mind you, but
declining over where they once were, their overall company
margins are better because they are able to shift that revenue
and shift those profits into broadband in ways that I think are
attractive to the companies but necessarily good for their
customers.
Senator Franken. Mr. Stephenson, you have promised to offer
your customers a stand-alone Internet plan if this deal is
approved. Stand-alone plans are very important for consumers,
especially so-called cord cutters who do not want to pay for
expensive bundles. They just want the Internet. Many of my
constituents want this option, and my view is that you should
be offering it whether the deal is approved or not.
However, this is not the first time that AT&T has made this
promise. Back in 2006, when your company was acquiring Bell
South, you promised to offer your customers a stand-alone
Internet plan. But after that deal went through, you did not
advertise it. Instead, you hid the plan deep down in the terms
and conditions page of your website. Most of your customers did
not know that it existed. This sounds to me like a broken
promise, an example of consumers being forced into expensive
bundles that they do not necessarily want.
Mr. Stephenson, would you commit here today to selling a
stand-alone Internet plan that is clear and visible to
consumers?
Mr. Stephenson. Yes, sir, I will. I will commit it directly
to you. We have 11 million high-speed broadband customers
today. Of those, only half have our TV product. We very much
aspire to have a stand-alone broadband product. We are a
broadband company. That is our primary product that we sell in
the consumer home solutions space today. So, absolutely, I will
make you without equivocation that commitment.
Senator Franken. Thank you.
Let us talk about rural broadband. I have worked to get
rural broadband expanded. You know, I do not know why this
deal, which costs $67 billion, could not be invested in rural
broadband, Mr. Wood. And I have to say that many towns in
Minnesota--you mentioned Minnesota, Mr. Stephenson--are fed up
with being disconnected from the digital economy, and they have
taken matters into their own hands. They want to build their
own locally operated broadband networks. There is a lot of
evidence that these municipal networks provide excellent and
affordable service and they are good for the economy. Mayors,
city councils, and county boards across America want to invest
in municipal broadband, but in many States their hands are
tied. In some places, municipal broadband has been outlawed on
the grounds that it might compete with private companies. This
is blatantly anti-consumer, and I think it violates local
government rights.
Mr. Stephenson, AT&T reportedly spends a lot of money
lobbying for these anticompetitive laws, and that has worried
me about what you will do if you become a bigger player in
rural areas. Municipal broadband is a way for small towns to
take control of their economic destiny. If they want to build
it, the law should let them build it.
Mr. Stephenson, if cities want to build their own networks,
why should the law stop them?
Mr. Stephenson. Areas that are unserved with broadband, I
actually have no issue with what you said. Those where there
are private capital alternatives and private capital is
stepping in to build it, quite frankly, the idea of private
capital competing with taxpayer-provided capital just feels
inconsistent to us with what a free market system looks like.
But where it is unserved, it seems like a logical place for
Government to step in and provide a solution.
Senator Franken. But, in other words, you do not deny
spending capital, spending money on this legislation to prevent
municipal broadband?
Mr. Stephenson. I do not know if we have spent money or
not. I have personally advocated that where we are investing or
others are investing private capital, that we should not be
required to compete against Government taxpayer money. But
where it is unserved, then----
Senator Franken. Well, I know I have run out of time, and
so your answer is that you are not aware that AT&T has spent
money lobbying and has given money to groups that lobby to
prevent municipalities from setting up their own broadband?
Mr. Stephenson. I do not know where we have given
lobbying--I am not saying we have not. I just do not know.
Senator Franken. You do not know.
Mr. Stephenson. I do not know.
Senator Franken. Okay. Thank you.
Thank you, Madam Chair.
Chairman Klobuchar. Thank you, Senator Franken.
Just coming off the rural issue, a different piece of it,
Mr. White, DIRECTV's early focus--you and I have talked about
this--was rural America where satellite is often the only way
to go to get video service. You currently have more than 7.5
million subscribers, 36 percent of your customers in rural
areas. Serving rural America is important to me, as you know,
and to Senator Franken and many on this Committee.
Are you still committed to rural America? Will you commit
to carrying rural-focused programming after the merger with
AT&T? And I specifically note that AT&T is the only national
carrier that is not carrying RFD-TV, which is an independent
channel focused on rural America. And I am wondering what is
going to happen with that, but I will start with you, Mr.
White.
Mr. White. Sure. I think I will have an opportunity to
convince Randall that RFD-TV would be great for them to carry.
Chairman Klobuchar. That sound very good.
Mr. White. As we do at DIRECTV. But rural America is very
important to us. The satellite has unique advantages in rural
areas where we are not competing with fiber to the home. And I
think it continues to be important to us. Frankly, having 20
million subscribers is very important for our competitiveness
when we negotiate content deals. And so we want to have as many
customers that we can serve well as possible. We pay a lot of
attention to what our rural subscribers are interested in in
the way of content. We have over 150 independent networks that
we carry on DIRECTV. We think the diversity of that content is
important to our customers, and we intend to continue to
actively support those rural areas.
And I would say with regard to the discussion about
pricing, it is always hard for any business person to answer,
but you could not afford the capital to build out 15 million
homes broadband if it were not for this deal. And that is a
significant investment. So without a profitable video business
coupled with AT&T's capability to build that broadband, we
would not have it.
So that is where the real investment is. It makes that
investment a smart investment for our shareholders.
Chairman Klobuchar. Okay. Mr. Keyser, given recent media
consolidation, not just this deal, the number of independent
channels, as you well know, we just talked about it, has been
shrinking. And we have heard from many of the remaining
independent programmers that they are confronted with
challenges of getting their content to consumers. They claim
that they lack any real leverage in negotiations compared to
channels owned by major conglomerates with multiple cable
networks and/or broadcast networks. As a result, they often are
forced to accept smaller fees compared to channels that do not
rate as well, poor channel replacement, and more restrictive
distribution conditions that the non-independently owned
channels get.
You have member writers who partner with independent
programmers. Do you want to talk about this concern and what
you have seen?
Mr. Keyser. Thank you, Senator. Yes, we are very concerned
about that. I have had conversations with a number of
independent programmers who talk about the disadvantage they
are at in dealing already with DIRECTV even before it acquires
this additional competitive advantage, for example, policies
such as demanding most-favored-nation deals with those
independent programmers, which means that DIRECTV will pay only
the worst deal that those programmers get from any other
distributor.
In addition, they often put onerous restrictions on the
distribution of their content through the Internet, and those
are restrictions that are not placed on larger providers. All
of those pressures eventually will lead to less programming
opportunities for us, for writers, and for viewers who see that
content, and eventually probably will, in addition to that,
lead to mergers of content providers, which is the second thing
that we are worried about, in order to effectively compete
against distributors who have an enormous leverage in that one-
on-one negotiation over the cost of content and the
availability of that content, they will eventually need to--
they will need to merge.
At some point, Senator, if you have a chance, I would love
to speak about the question of content cost. I do not want to
interrupt now.
Chairman Klobuchar. I was getting at that. You can answer.
You have been kind of quiet here, you know, while making
candelabra jokes.
Mr. Keyser. You know, I am an independent producer----
Chairman Klobuchar. I think you can have an opportunity to
talk about----
Mr. Keyser [continuing]. Of answers in this panel.
Chairman Klobuchar [continuing]. Content costs. I was
asking about that in part in my question.
Mr. Keyser. There is a lot of conversation about content
cost. We have heard that it is 60 percent of the cost of doing
business, that costs are rising. Those are descriptive and not
normative conversations about what content costs are. Quite
apart from the question of whether a virtual monopoly is likely
to pass on its own efficiencies to its consumers, we ought to
point out that there is another transaction that is going on
here, which is the transaction between those who purchase the
product that content providers make and those who distribute
it, essentially provide the shelves.
They have every right to lower their costs as much as they
can through a fair market transaction. What they do not have
the right to do is to put the kind of pressure on that
transaction that occurs when they essentially own all of the
shelves. What that means is that if I need to sell my product,
if I am the person who makes a television program that a writer
writes and the audience wants to see and I have only one place
to put it, I have no ability to actually exact from the
transaction the fair cost of what I produce. And if that is
permitted to happen, what is going to end up happening is the
amount of product will be reduced, and that is bad for me as a
writer and all of my writers, but really in the long run, the
people who it is most--who it puts most at a disadvantage is
the consumer.
Chairman Klobuchar. You know, as we talk about this
consolidation and some of the issues you raised, you do start
to think, and we know we have had a lot of innovation in the
last few years, and from some major companies, but at what
point is it enough? You know, with the rumors of Sprint-T-
Mobile, with what we had with Comcast, what is that tipping
point when it is appropriate for antitrust laws to step in? I
do not know if anyone wants to take--Mr. Downes, you believe in
fair--in competition, but is there some point where everyone is
merging, where you have too much of this and too much
consolidation?
Mr. Downes. Well, of course, it is possible. I do not see
this as a particular risk now because, as I say, we keep
getting these increasing declines in the component costs of the
basic technology, and that is what is driving the real
innovation. That is what is really driving competition. I think
these mergers, this one in particular, is, as I said, a
defensive one. It is in response to rising pressure--good
pressure but rising pressure from over-the-top services, which
is where the real innovation is happening. It is unregulated,
and that is where we are seeing, you know, people figuring out
new ways of delivering content, new ways of producing content,
new ways of attracting audience, new ways of monetizing----
Chairman Klobuchar. Right, but how about the fact that the
prices keep going up for consumers?
Mr. Downes. Well, the prices of the programming bills are
going up because the large content providers are forcing larger
and larger bundles of channels onto the distributors. As I say,
the FCC says the actual average cost per channel keeps going
down, but if the bundle gets bigger, then you do not see that
in terms of any reduction.
Chairman Klobuchar. Mr. Wood and then Mr. Lieberman.
Mr. Wood. Interesting on that last point that we see
bundles actually leading to increased prices when they are
forced on people, but turning to your device cost point, Mr.
Downes, and your question, Senator, that is what happens when
we have a truly competitive market, is we actually see prices
dropping, not going up. So I think that is a fair comparison,
but we do not just expect to see prices only rising slightly or
rising less quickly than they would have otherwise. If there is
a truly competitive market and people are empowered to make
choices and actually have choices available to them, we should
see prices going down for technology, not simply treading water
or continuing to spiral out of control year after year.
Mr. Lieberman. For pay-TV providers, content costs are a
problem. They are rising very quickly.
The second problem deals with the discriminatory pricing
practices. Smaller operators pay 30 percent more for
programming than larger operators, and these operators that are
buying this program are often serving in rural areas. So when
we hear about this deal providing benefits to rural America
because AT&T is going to be able to lower their programming
costs to provide service in these areas, I am left here
thinking to myself that if there are concerns with the deal and
there are concerns about not having broadband in rural America
and service in rural America, that there are smaller operators
that are already there having difficulties--and telephone
companies as well having difficulties with programming prices.
If you can address that issue, either through an examination, a
report on what is going on, to better understand what that
problem is, you could then empower those operators that are
already in these markets to be more competitive in the market
and then to use the savings that they have to further deploy
broadband in their areas. It is a different approach to solving
the problem than just allowing mergers to happen.
Chairman Klobuchar. Okay. One last question before I turn
it over to Senator Lee I guess I will ask you, Mr. Wood, or
anyone else. We have heard concerns a little bit about what Mr.
Keyser was talking about, about MVPDs, including DIRECTV, that
demand very restrictive most-favored-nation or, as it is known,
MFN provisions that ensure that the MVPD gets the best contract
provisions independents provide to any other MVPD, regardless
of whether provision is negotiated as part of a broader
package. These most-favored-nation clauses can benefit
consumers in terms of ensuring better pricing, but are there
instances where MFNs can be anticompetitive and harm consumers?
And are they typically regarding pricing, or are they
increasingly about restricting content from being distributed
by online video providers?
Mr. Wood. I am happy to answer, Senator, but I am sure
others have views on this as well. I think that MFNs could
cause harm to customers, and that harm really stems from not
knowing what people are paying for each individual programming
choice. This is often referred to as ``a la carte'' in cable
parlance. And so whatever the MFN does to the price,
ultimately, or to increase the value of the service or to offer
people more or less choice, if consumers had more of a view
into what they are paying, not only for each programming stream
and each programming channel, but also for their broadband as
compared to their video programming, I think that kind of
transparency in pricing would help to, if not get rid of MFNs,
then alleviate some of the problems from them where people
would have a choice and some insight into what they are
actually buying and how much it costs.
Chairman Klobuchar. Okay. Mr. Keyser, do you want to add
anything? Then we will end with Mr. White, and then turn it
over to Mr. Lee.
Mr. Keyser. To me, the real question here, apart from what
Mr. Wood says, is that it is a two-part transaction, and the
important thing is that we have no guarantee that the consumers
get the benefit of increased efficiency on the part of the
combined companies. What we do know is that the negotiation
posture that they are able to take with those who provide them
the content, either independent producers or independent
channels, becomes unequal. In the long run that is
fundamentally unfair, and particularly unfair when there is no
indication that consumers are going to benefit from it.
Chairman Klobuchar. Okay. Thank you.
Mr. White. So, Senator, having been involved in these
negotiations for the last 5 years, including MFN or most-
favored-nation discussions, I can tell you exactly how it is
used. I think it of it as a seat belt. There is no transparency
whatsoever into what the content companies are charging my
competitors. Therefore, I am left there to fight on behalf of
my customers to say, Are we getting a fair deal? I am going to
fight hard for my customers to make sure that they are getting
a fair deal and that there are not other games being played.
And so the MFN is strictly a way to protect ourselves as a
defensive thing to make sure that when they come in and tell me
they want a 30-percent increase or a 50-percent increase--by
the way, our retransmission fees have been growing 55 percent
over the last 3 years--that I can at least have some
discipline, some check and balance to make sure that our
customers are not paying more than anybody else, particularly
our rural customers.
Chairman Klobuchar. Okay. Last, Mr. Lieberman.
Mr. Lieberman. Thank you. I would say it from the other
side as the smaller operators who often do not get MFN deals,
provisions in their contracts. When they negotiate with
programmers and they sometimes try to ask for different types
of deals, creative deals, deals that might address their
particular circumstances, programmers often tell them, ``I
cannot do that,'' and the implication is it is because it will
implicate MFN provisions that are in larger providers' deals.
So sometimes the ways they may be used as Mr. White has
described; in other cases, it is used to actually limit the way
that competitors or smaller providers are able to negotiate
their deals.
Chairman Klobuchar. Okay. Senator Lee.
Senator Lee. Thank you, Madam Chair.
Mr. White, I want to start by getting your response to Mr.
Keyser's point about the effect of the merger on your ability
to obtain content at below-market rates. Tell me what your best
response to that is.
Mr. White. That is not really part of our assumptions, nor
have we said that I am going to get anything--I do not think I
get anything below market rates, although I try, with the
content providers. So I think what we have been saying is that
in the U-verse geographies, the 5 million U-verse subscribers
are paying quite a bit more for the content than DIRECTV
customers do, and that we would get those savings.
As it relates to the rest of our business, you know, we
actually think there are opportunities for the programmers with
the wireless opportunities that AT&T has to find new ways to
monetize their content on other platforms.
Senator Lee. Okay. And so your assessment is that the net
impact of that would not leave the content providers without a
place to sell their product.
Mr. White. No, absolutely not. And we expect to have even
more channels carried over the top. So, for instance, today we
have Pandora and YouTube, but it requires Internet. And for us
to expand that to other opportunities of channels that want to
go over the top as an app, we need more Internet.
Senator Lee. Okay. Mr. Lieberman, you raised some concerns
about DIRECTV's vertical integration and specifically about the
prices that it could charge to its rivals for content that it
owns, that DIRECTV owns.
Mr. Lieberman. Yes.
Senator Lee. You also expressed some doubt as to whether
arbitration could take care of that, some of kind of
arbitration requirements could take care of that. Which content
in particular do you think DIRECTV could either withhold from
its rival--that it could withhold from its rivals? And why
don't you think arbitration agreements might work in that
context?
Mr. Lieberman. Sure. Thanks for the question. So,
generally, regional sports networks are the most in demand the
highest-priced programming, and vertically integrated operators
that own that programming have the highest incentive to charge
their rivals high prices for that. So, in particular, like Root
Sports Rocky Mountain, which covers Colorado as well as Utah, I
have nine members in Utah that carry this programming. They
also compete with DIRECTV, and they have to negotiate with them
for this programming. DIRECTV has an incentive to charge them
higher prices than they would charge to anybody that they would
not compete against.
This issue has been raised in other merger considerations
at the FCC, and the FCC has found this to be true with economic
theory as well as evidence. And what they have adopted is they
have said that existing program access rules are not enough,
that we need to--and their solution to it was baseball-style
arbitration, where, if there is a negotiation impasse, both
sides put in their best offer, and an arbitration decides what
is closest to fair market value.
It is an elegant solution that works well for larger
operators. The cost is estimated to be $500,000 to $1 million.
So if you have that kind of money and the program is--and the
cost differential is going to be that great, you go for it. But
the operators that--these nine operators I mentioned, like an
operator in Spanish Fork City has 5,000 subscribers, you are
not going to spend between $500,000 and $1 million to pursue
this remedy in order to save yourself, you know, a smaller
amount.
So there needs to be a remedy that is adopted to address
this problem, and there needs to be some new thinking on it in
order that all providers can benefit from it.
Senator Lee. Mr. Downes, as you note in your testimony, the
importance of broadband appears to be on the increase, you
know, as consumers are increasingly relying on that medium, and
not just for data but also for voice and even for video. Do you
see this trend continuing into the future? And how do you see
this particular transaction impacting that trend in the market
for high-speed Internet?
Mr. Downes. Thank you, Senator. So essentially we now have,
you know, almost complete convergence of a lot of different
technologies for distributing voice, data, video, have now all
pretty much converged on the Internet as the one set of
protocols that they are going to use and it does not really
matter anymore so much what tech--some technologies are better
for some things than others. But, yes, broadband Internet is
going to be the core of how not just content but how all
interactions happen, including, you know, the Internet of
things and home security and all the future services that are
going to be built on top of that network.
I think as far as this transaction is concerned, the one
thing that is very important to note is, with all due respect
to Mr. White, satellite is not a particularly good technology
so far; at least the physics of it do not seem to really work
very well as a way of communicating broadband speeds. And so if
DIRECTV is going to remain a viable competitor in this market,
it really needs not just better integrated broadband, but
really natively broadband technology, because, you know, it is
not just that I want to watch TV now and then I want to do some
Internet later. It is I am going to start watching a program on
one device, and I want it to pick up on the other device
exactly where I left it off. And that is not just about the
kind of business integration that the parties are talking
about. That is really a technical integration that is going to
be essential to deliver, I think, what are going to be next
generation broadband services.
Senator Lee. Mr. White, my sense of due process is such
that I feel the need to give you the chance to respond to Mr.
Lieberman's statement a few minutes ago.
Mr. White. Yes, so two quick points. One, I think that is
exactly why we are excited about this opportunity, is we get
broadband and we get it in many more places because we will
have a profitable video business married to a broadband
business, and it underpins the investments that AT&T is
promising.
The second thing I just wanted to say on the regional
sports networks, I would be the first to tell you that the
regional sports network business is a difficult business. We
have had our own challenges at DIRECTV in Los Angeles. But I
would also point out that the three RSNs that we have, in
Pittsburgh, in Colorado, and in Seattle, AT&T does not overlap
in any of those geographies and is not a factor. So it has
nothing to do with the merger.
Senator Lee. So this merger would not impact any of those
three RSNs?
Mr. White. Not at all, no.
Senator Lee. Okay. All right. Thank you. I see my time has
expired. Thank you.
Chairman Klobuchar. Okay. Well, I think we are done here,
and this has been a very good hearing with a lot of good
questions. I think that while we see that there are--the
services are complementary in many ways and there are some
benefits that have been laid out, we also see that there is
some estimates that 41 percent of the market share the two
companies have in Los Angeles, 42 percent in Dallas, 43 percent
in Atlanta, and so we have some issues there. And then also I
think that the witnesses have done a good job of laying out
some of the content concerns and the leverage issues, which I
am sure we will be exploring more with questions and
information to the Justice Department and the other agencies.
But I do want to thank the witnesses once again. You have
done a very good job. I do want to ask unanimous consent that
we include the following items in the record: a letter from the
Communications Workers of America supporting the merger; a
letter signed by the National Association for the Advancement
of Colored People, the NAACP; and the National Association of
Black-Owned Broadcasters that also notes some issues that I
think are very important.
Then we also have--okay, we have multiple copies of the
letter in case everyone wants one.
[The letters appear as submissions for the record.]
Chairman Klobuchar. We will keep the record of the hearing
open for 1 week, and I want to thank our great staff that have
been working on this hearing: Caroline Holland, right behind
me, whom many people know; and Kate Geldaker; as well as all of
the staff for Senator Lee and Senator Leahy and everyone who
has been involved in this hearing. These are complicated
matters. They are very important to consumers, and we look
forward to working on this in the months to come.
Thank you very much to all of you. The hearing is
adjourned.
[Whereupon, at 4:26 p.m., the Subcommittee was adjourned.]
[Additional material submitted for the record follows.]
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