Opening Remarks

• The Honorable John McCain
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  Opening Remarks

  The Honorable John McCain

  · Today, the Committee examines the continued escalation of cable rates. The FCC’s most recent report found the overall average monthly rate for consumers subscribing to a cable or satellite service increased 8.2% from 2002 to 2003. Since 1996, cable rates have increased 56% or nearly 3 times the rate of inflation. · In order to better understand the cause of soaring cable rates, I asked the General Accounting Office (GAO) to conduct a review of these increases. GAO released its report last fall, and its principal finding was not surprising: competition matters. As stated in the first sentence of the report: “Competition leads to lower cable rates and improved quality.” · More surprising was the significant impact that competition from a wired competitor has on cable rates, and the insignificant impact competition from satellite television has on these rates. The GAO report found that competition from another wired competitor resulted in the incumbent cable operator’s rates being 15% lower. A subsequent study from GAO suggests that in some markets the presence of wired competitor may reduce rates an astounding 41%. By contrast, GAO concluded that satellite service has a minimal effect on lowering incumbent cable prices. · Unfortunately, only 2% of all markets have a wired competitor. But the implication of these findings is that incumbent cable companies face little price competition, and 98% of consumers are being taken to the cleaners as a result. · I look forward to hearing suggestions today about whether there are barriers to entry that need to be addressed to facilitate more competition to cable. But we must also consider other solutions that will give consumers more control over how they purchase video services. · When it comes to purchasing cable channels beyond the basic tier today, consumers have all the “choice” of a Soviet election ballot. One option – take it or leave it. You want ESPN? You must buy 40-plus channels of expanded basic. You want CNN? You must buy 40-plus channels of expanded basic. You want Comedy Central? Well, you get the idea. · This dearth of choice comes from an industry that has proclaimed its indignation at the injustice of being forced to carry “unwanted” broadcast stations. The cable industry challenged the so-called “must carry” rules of the 1992 Cable Act to the Supreme Court. Today it is arguing at the FCC about the gross inequity that would result from cable systems being forced to carry unwanted digital channels under a “multicast must carry” regime. Well, the current “must purchase” regime for consumers is equally unfair. So, I encourage the industry to find a consistent message for itself – if they want choices, provide the same choices to your customers. · Not surprisingly, cable channels argue that giving consumers more choice over what they purchase is threatening to their respective business plans. Any business that has the benefit of conscripted purchasers would be foolish to give up that guaranteed revenue. But in a free market, sellers must convince buyers to purchase their services. There are no guarantees. · Moreover, no one has suggested that cable companies should be prohibited from continuing to offer an expanded basic tier. An a la carte pricing model would merely add more pricing choices for consumers. The cable industry regularly touts the value its expanded basic tier delivers to consumers noting that it “costs less than taking a family of four to a movie or professional sporting event.” If the expanded basic tier is such a great value, then one would expect few consumers to choose per-channel pricing, and the “chicken little” predictions from the industry about the impact of expanding consumer choice should prove baseless. If, on the other hand, consumers reject the expanded basic tier in large numbers, then it would demonstrate that today’s “must purchase” regime is unfair to consumers. · Just yesterday, consumer choice was dealt another blow. Although a reported 91% of Cablevision customers chose not to purchase the YES Network when given the choice last year, an arbitrator’s decision will compel all expanded basic customers to take the channel. And as one would expect, the rates of these subscribers will go up. · If anyone doubts the public interest in more choice, they should read the correspondence that comes into my office. A few months ago I received an e-mail from a gentleman who wrote, “A year ago I had 40 channels and was happy. [Then my cable company] rewired the town. No one asked them to do it. Then they increased our channels to 70. No one asked them to do it. Then they [doubled our rate]. They said take it or leave it. I asked for the 40 channels back and a lower bill. [T]hey said no. I like the idea of a la carte.” · We will certainly have more discussion on this issue today. I thank the witnesses for being here.

Witness Panel 2

• The Honorable Marilyn Praisner
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  Witness Panel 2

  The Honorable Marilyn Praisner

  Good Morning Mr. Chairman, Senator Hollings and Members of the Committee. My name is Marilyn Praisner. I am a member of the County Council of Montgomery County, Maryland. I am testifying today as the Chair of TeleCommUnity and the Chair of the National Association of Counties’ Telecommunications & Technology Committee. TeleCommUnity is an alliance of individual local governments and their associations, which seeks to refocus attention in Washington on the principles of federalism and comity for local governments’ interests in telecommunications. NACo is the national association of the nation's 3,066 counties and seeks to ensure county officials’ voices are heard and understood in the White House and the halls of Congress. I. ONLY REAL COMPETITION RESULTS IN LOWER RATES. Mr. Chairman, in response to the GAO’s cable rate report, you are quoted as stating: "Consumers in the few markets with a choice of a second cable company pay 15 percent less for cable. The apparent implication for all other consumers is that they continue to be fleeced by their cable operators. " We agree with your conclusion and thank you for the invitation to testify this morning. In my testimony I seek to impart four thoughts: · Local governments agree with you that only real competition creates downward pressure on rates –and real competition for cable exists only when a second wireline provider is present. · Local rate regulation was thought to be a substitute rate restraint in the absence of competition, but FCC actions have frustrated rate regulation efforts by local franchising authorities. In addition, there are real limitations found in the Telecommunications Act which limits regulation to the basic programming tier. For example, were a local government to determine that an operator’s basic rate was above that set by a competitive market, operators can limit choices on the regulated tier and move attractive programming to an unregulated tier. The result being that subscribers pay the higher rate selected by the operator. · A la carte pricing could be a definite improvement over the current tier pricing system if it provides consumers direct control and choice over the channels they buy and the content that is coming into their homes while avoiding price manipulations by the cable operator. · A la carte pricing is not, however, a solution to the real problem with cable--the lack of effective competition in the transmission platform. This monopoly transmission ownership gives the cable operator monopoly pricing power over the consumers and monopsony pricing power over the programmer. II. WITHOUT WIRELINE COMPETITION, CABLE RATES WILL CONTINUE TO RISE. Two studies, one conducted by the GAO at the request of this Committee, and a second study done by the FCC, have independently documented that cable rates are lower in areas where a competing cable service is available from a second wireline provider. The GAO study found cable rates to be 17% lower, and the FCC found rates were 8% lower. The challenge arises in that according to the FCC, only 2% of the 33,246 cable communities have overbuild cable competition, and it appears that the cable industry intends to keep it that way. The GAO found that the seven largest cable operators serve 83.8% of all cable subscribers and the top seven do not compete against each other in any market. These numbers take on even greater meaning when the size of incumbent MSO and competitors are compared. The total subscriber counts of the three largest overbuild/competitive cable operators combined serve only slightly more than half the number of subscribers of Mediacom, the seventh largest MSO. The competitive cable operators together serve less than four percent of the number of subscribers Comcast serves. Comcast is the nation’s largest cable operator with over 21 million subscribers. The National Association of Telecommunications Officers and Advisors, the association that represents local cable regulators, testified before the Senate Judiciary Subcommittee on Antitrust, Competition and Business and Consumer Rights on February 11, 2004. In that testimony, NATOA ratified the findings of the FCC and GAO, described in detail various problems that have prevented the success of cable overbuilds, and pointed to specific legislative changes that might open the door to more overbuilders. However, experience with overbuilding makes local government believe that competition will continue to be scarce. · Direct Broadcast Satellite (DBS) Service Does Not Constrain Cable Rates. While the cable industry has touted the threat posed by DBS, both the GAO and FCC in their research failed to conclude that DBS competition has a limiting effect on cable rates. The National Cable Television Association (“NCTA”) claimed otherwise to the FCC, stating that cable's market power is restrained to the extent that there are competitive alternatives available to customers if a cable operator attempted to raise its prices. Local governments believe there are several factors that prevent DBS from being a true “competitive alternative” for major television market cable customers and thus from restraining cable prices: o Non-Interchangeable Equipment. It is easier for customers to switch between wireline competitors using cable modem and set-top boxes than it is for customers to switch between dish systems and cable boxes. o No High-Speed Two-way Service. DBS does not offer two-way high-speed data services comparable to DSL or cable modem. This means a DBS subscriber must still subscribe to a wireline service. o Provision of Local PEG and Broadcast Channels. In the GAO study, 47% of respondents cited the ability to receive local broadcast and cable channels from the same provider as a major reason for selecting cable, and DBS providers confirm that provision of local broadcast channels increases subscription rates. Yet local broadcast channels are offered by DirecTV or Echostar in only 62 of 210 television markets and local channels are offered by both providers in only 41 markets. In addition, DBS does not carry local Public, Educational and Government Access (PEG) programming. III. CONSOLIDATED CABLE INCUMBENTS ARE USING AGGRESSIVE MARKETING TO ELIMINATE WIRELINE COMPETITORS. It is apparent that cable operators understand that other wireline providers provide the greatest competition. Competitive broadband providers, including nascent cable system overbuilders, have complained of incumbent cable operators using aggressive marketing tactics to drive these small competitors out of the market entirely – including deeply discounted introductory rates, e.g., $24.95 per month for 200 channels compared to $77.90 per month in a neighboring community without wireline competition; cash bonuses, e.g., $200 to switch to the incumbent’s cable service and another $200 to switch to the incumbent’s Internet service; and forgiveness of old debt owed by subscribers to the incumbent. It is also unclear whether the neighboring community’s rates are being increased to offset the discounted price offered in the competitive neighborhood. The NATOA testimony in February attached a detailed study of these practices which the Committee will find useful and informative. All of these factors together mean: · Cable prices go down when there is wireline competition; · Cable prices do not go down when there is no wireline competition or when there is competition only from non-wireline providers. We believe any effective legislative attempt to reduce cable rates should focus in part on encouraging wireline competition. Any legislative reform of programming requirements should examine how cable operators may be using vertical integration and monopsony power to control competitors’ access to programming to discourage competition. This issue should be addressed explicitly before considering cable operator requests for more control over programming. IV. A LA CARTE OFFERINGS ARE AN IMPROVEMENT OVER CURRENT TIERS, BUT ALONE WILL NOT PROTECT CONSUMERS. Cable rates will continue to rise significantly so long as cable incumbents exercise substantial monopoly and monopsony pricing power over cable consumers. Programming cost increases are not the primary culprit. The increases in cable rates since 1992 continue to run more than twice the rate of inflation. Programming costs explain only about 20-30% of this phenomenon. In my jurisdiction, Montgomery County, Maryland, consumers have brought me a range of complaints about the dominant cable operator. We are seeing very high prices, with annual increases faster than the local rate of inflation. Cable rates have gone up each of the last three years by 3 to 4 times the rate of inflation. The "basic preferred" tier went up 9% and the "packages" went up 18%. We are seeing the same price differentials attributable to cable overbuilds observed by GAO. For example, in the District of Columbia, where there is competition to Comcast rates are $5.50/month lower for expanded basic ($3.00 lower for cable modem with cable TV and $3.00 lower for cable modem without cable TV). DC and Montgomery County are in the same metro area and prices and costs for programming and operations should be the same. Cox TV (in Fairfax County) is $3.00/month lower for expanded basic and $6.00 lower for cable modem services with and without cable TV. We are seeing cable services being moved between and among tiers with little or no explanation or warning. Consumers routinely complain that they are not offered the lowest available prices or accurate descriptions of their purchasing options when they call the company. The company is bundling cable modem and video services together in a manner that confuses any comparison pricing with DSL. The company appears to be forcing consumers to pay for digital converters and digital tier services when the consumer is seeking to buy pay-per-view and pay channels, despite the anti-buy-through language of the federal law. Most of the problem is caused by lack of effective competition. This allows cable operators to exercise their maximum pricing power to charge "whatever the market will bear" and to offer a quality of service only sufficient to maintain subscribership, not sufficient to make customers happy. Local government had hoped the 1992 Cable Act amendments would result in some pricing restraints. Other than the period of the FCC-imposed rate freeze in 1993-94, however, federal rate regulation has not changed the price trend line. In part, this is because the 1992 amendments are unnecessarily complex and obtuse. In part, this is because the FCC over the last twelve years has not aggressively sought to restrain cable prices within the power Congress granted. For this reason, NACo and TeleCommUnity would support a la carte offerings as part of a general repair to the existing cable rate regulation system. A la carte could be a means to provide consumers greater control over what they purchase. It might reduce some cable operator monopsony pricing power over programmers, similar to the must-carry/retransmission developments for over-the-air broadcasters. We also agree that a la carte offerings could permit parents greater control over what programming comes into their home. This does not necessarily mean lower prices for all consumers. A la carte offerings will not fully insulate consumers from aggressive pricing by cable operators holding substantial monopoly pricing power. It is also important to carefully consider whether and how to mingle a la carte channels with the existing tier system of rate regulation. In the past, cable operators used their control over à la carte tier pricing as a means to charge more, not less, per channel. In 1994, the initial cable rate regulation rules exempted single-channel à la carte offerings. Operators began offering à la carte channels on a single and à la carte tier package basis. The single channel price, however, was so high that it only made sense to purchase à la carte channels as a tier package. However, because each channel in the à la carte tier was technically available as a single à la carte channel, cable operators claimed that the à la carte tier package was not subject to rate regulation (as other programming tiers were). On an ad hoc basis, the FCC permitted this à la carte tier arrangement so long as six or fewer channels were packaged together. Ultimately, the FCC found no sufficient justification for the tier restructuring “other than to avoid rate regulation.” Despite this finding, however, the FCC neither prohibited this evasion, nor sanctioned the operators for trying to avoid compliance with rate regulation rules. We believe the FCC’s response provides an explicit warning to the Committee if it seeks to expand a la carte offerings without fundamentally reconsidering the existing rate regulation structure. The FCC's ruling has provided an implicit incentive for cable operators to aggressively interpret the existing rate rules to their benefit. À La Carte Pricing Could Result in Channel Substitution, Not Lower Rates. Local government is not in a position today to recommend a particular form of a la carte roll-out. Our experience with cable rate regulation demonstrates the law of unintended consequences when the cable industry is able to game the system to its benefit. For now, we recommend the Committee study several different approaches. We remain committed to the goal that a package of basic PEG, broadcast and cable services should be available to all residents at a reasonable, fixed and predictable price. In addition, the rollout of digital technology offers the opportunity for true a la carte offering of all other services not part of a basic package. However, the problem is complex on a mixed analog/digital system. In this mixed world, operator-owned programming interests may affect decisions as to which channels will be offered as part of a non-basic package or as à la carte channels. This is especially true with the growing convergence of cable companies and entertainment companies. Congress should be concerned about channel substitution which does not necessarily save the consumer money. For example, assume in New York City that Cablevision agrees to carry YES Network, drop ESPN from its expanded-tier programming, and make ESPN available as a separate à la carte channel. If there are no substantial savings in programming costs between YES and ESPN, or if programming cost savings are not passed onto subscribers, then the subscriber who did not want sports programming would see no price reduction, and the subscriber who wanted ESPN will have to pay the same price to receive ESPN-less programming or a larger price to receive the same programming with ESPN. V. CABLE OPERATORS HAVE NOT PRESENTED VERIFIALBE PROGRAMMING COST DATA. Despite cable operators’ claims that prices have risen as a result of programming cost increases, they have never provided local government with verifiable programming cost and revenue data to evaluate the impact of programming costs on cable rates. Notwithstanding the fact that a Justice Department investigation and an informal SEC inquiry related to the accuracy of operator-reported data are currently pending, Congress should require the cable industry to provide specific information about all channel programming costs, programming launch fee revenue, and corporate allocation of volume discounts. · Actual Programming Costs. Cable operators submit only their basic tier channel programming costs to local governments as part of the rate regulation process and do not routinely submit any programming costs to the FCC. Thus, cable operators do not disclose to any regulatory body what they are paying for most of their programming. · Accounting Treatment of Launch Fee Revenue. Cable operators receive substantial “launch fees” from programmers – i.e., fees for adding new channels to cable systems, for advertising new channels on existing channels, in program guides, on or with subscriber bills, and for other channel launch-related services – but do not uniformly treat them as programming revenues which offset total programming costs. · Allocation of Volume Discounts. Cable operators often delay, or refuse to comply, with local government requests to disclose terms of their programming contracts, thus making it difficult to determine how volume discounts are allocated. In at least one instance, franchise-level reported programming costs were greater than the operator’s actual costs because the operator negotiated volume discounts for programming, but charged its local franchises as if no discount had been obtained, booking the difference as profit for the corporate parent. According to the 2001 Annual Report COMCAST filed with the SEC: “[O]n behalf of the company, Comcast secured long-term programming contracts . . . Comcast charged each of the Company’s subsidiaries for programming on a basis which generally approximated the amount each subsidiary would be charged if it purchased such programming from the supplier . . . and did not benefit from the purchasing power of Comcast’s consolidated operations.” VI. THE FCC HAS COMPLICATED THE REGULATION OF CABLE RATES. The Committee needs to consider its oversight and instructions to the FCC. In the view of local government, the FCC has not adopted cable rate regulations that ensure reasonable rates. There are numerous ways in which the FCC has failed to establish or interpret rate regulation rules in a manner that ensures reasonable rates for subscribers. FCC inaction and delays make local rate regulation less effective, encourage operators to use the FCC appeals process as a means for running out the clock, and ultimately deny subscribers the protection from unreasonable rates that Congress intended. We need to establish a more effective process for supporting local rate regulation. VII. CONCLUSION Local government has used its cable franchising authority to promote deployment of advanced services and has protected subscribers to the extent it has not been preempted by the FCC or Congress. Increased wireline competition is needed to reduce subscriber rates. Congress should: · Require operators to disclose actual programming costs. · Review the lessons to be learned from the 1994 à la carte tier pricing rules before implementing à la carte pricing in 2004. · Instruct the FCC to implement rate regulation and à la carte rules in a manner that prohibits unreasonable rates, eliminates consumer abuses, and reflects the reality of today’s non-competitive markets.

• Mr. Gene Kimmelman

  Vice President for Federal and International Affairs

  Consumers Union
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  Witness Panel 2

  Mr. Gene Kimmelman

  Click here for a Microsoft Word version of Mr. Kimmelman's remarks.

• Mr. James O. Robbins
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  Witness Panel 2

  Mr. James O. Robbins

  Mr. Chairman and distinguished members of the Commerce Committee, thank you for the opportunity to again join you to testify about cable television prices. As you are aware, the GAO’s analysis confirms that cable price increases reflect significant expenditures by cable operators in infrastructure, programming and customer service. Consumers have benefited tremendously from Cox Communications’ network and customer service improvements. Since 1996, Cox has invested considerably more than $12 billion of private risk capital to provide consumers and businesses digital video, high-speed Internet, and local and long distance telephone service. For cable TV customers, this investment translates into improved picture quality, highly reliable service and more channel choices. Our investment also has created the most robust high-speed Internet service on the market today and an unprecedented competitive choice for facilities-based, lifeline local and long distance telephone service. With these advanced products have come considerable customer service improvements, due to our investment in technology, skilled talent and training. The end result for customers – a tremendous value proposition, great convenience and high satisfaction – correlates directly to Cox’s infrastructure and customer service investments. Keeping cable TV affordable is a business imperative for Cox, due to formidable competition from Direct Broadcast Satellite and other providers. This year, Cox’s average cable price increase is approximately 3%, down from 5.3% last year, and well below the industry average. That price discipline, coupled with Cox’s technological advances and superior customer care, has resulted in lower DBS penetration in Cox markets – about half the industry average. But price discipline is increasingly difficult in the face of the rapid, unrestrained rise in the cost of programming. As affirmed in the GAO report, cable price increases are driven largely by rapidly rising programming costs. Over the past three years, FCC and GAO data indicate that sharply rising programming costs are the largest driver of increased cable prices. I have submitted for this hearing record an economic paper by William Rogerson, Northwestern University Professor and former FCC chief economist. This paper demonstrates that, for the period studied from 1999 to 2002, rising programming costs accounted directly for 42 percent of cable price increases across the industry. At Cox the number is even higher, because our retail rate increases are significantly less than the industry average. From 1999-2002, more than half of our rate increases were directly attributable to programming cost increases. In 2002, that number rose to 66 percent, meaning that after covering direct programming cost increases, just one-third of our price increases were left to cover ALL other increased indirect costs, including labor, customer service and technology investments. A significant contributing factor in the rise of programming costs is the continued misuse of retransmission consent rights. If Congress wants to address the problem of rising cable rates, it should consider reforming retransmission consent, particularly as it is being used by the Big Four television broadcast networks to foist unwanted channels, at inflated rates, on cable customers. Since retransmission consent was legislated in 1992, numerous channels have been added to Cox Cable customers’ channel lineups, at additional cost, primarily due to retransmission consent negotiations – not by consumer need, choice or demand. In addition, license fees for existing cable channels affiliated with broadcast networks have increased significantly, due to the leverage created by the ability of these broadcast networks to withhold distribution of their local stations. It’s very troubling to me that a consumer in Roanoke, Virginia may be required to pay more for a cable channel because a broadcast network is leveraging its retransmission rights. That misuse of retransmission consent in no way benefits, for example, the local viewers of the network-owned and operated station in Orange County, California – it only benefits the media conglomerate that owns the station. Contrary to the findings of the GAO’s case study, wireline overbuilds in Cox markets have had little impact on Cox’s cable rates, which reflect the steep fee increases we’re facing for cable programming. In fact, as submitted in detail for the record in this hearing, Cox Cable prices are virtually the same in Cox markets that face overbuild competition as they are in those that do not. We continue to increase the value proposition for Cox Cable customers as we introduce numerous service enhancements including digital cable, HDTV, Digital Video Recorders and Entertainment-on-Demand. The introduction of new technology also means enhanced tools to give parents more control over what their children are watching, including the V chip and program blocking. In particular, digital technology provides a highly secure, encrypted environment for adult programming, as well. For analog customers, Cox is providing traps to help them block programming they find unpalatable. And finally, Cox is launching a companywide consumer education program to help parents understand all of their parental control options, as well as where to find all of the great family-friendly programming available on cable. Meanwhile, Cox customers continue to have access to a low-priced, regulated lifeline basic tier, priced at roughly $12 a month, featuring 15 to 25 channels of programming. The GAO report notes that the a la carte sale of cable networks could drive up costs for cable customers. We agree. This technical and economic model does not work and is not in consumers’ best interest as it results in higher prices and fewer program choices. Competition is working and best serves American consumers. The GAO report agrees that competition spurs investment and provides more choice and value for consumers. Robust competition exists today among cable operators, DBS providers, overbuilders and telephone companies and will keep prices in check, to consumers’ benefit. Thank you.

• Mr. George Bodenheimer
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  Witness Panel 2

  Mr. George Bodenheimer

  Thank you Mr. Chairman and members of the Committee. I appreciate the opportunity to speak with you this morning. I am President of ESPN and ABC Sports. ESPN is the distributor of two of the nation’s largest all sports programming networks, ESPN and ESPN2 as well as ESPNEWS, a 24-hour sports news channel, and ESPN Classic. We are also driving the digital transition with ESPN HD and we are expanding our reach with the recently launched ESPN Deportes, our 24-hour Spanish-language network. ESPN is, of course, not the only network delivering sports programming to consumers. Sports programming is on all four major broadcast networks, many top cable networks and all told more than 30 national and regional cable networks carry major sports properties. Sports programming is extremely popular and the acquisition of sports rights is highly competitive. If you are a sports fan, and 85% of Americans say they are, expanded basic cable in particular offers you a fantastic array of sports viewing options and sports are clearly one of the most important reasons why people subscribe to cable. Therefore, I would like to be very clear on one very important issue: it would be a consumer disaster for Congress to force ESPN and other channels out of the expanded basic lineup. Doing so will not address concerns over the retail price of cable or indecency. Instead, consumers will be angry and highly dissatisfied if their favorite sport or college team or conference is taken out of expanded basic and available only as a premium service for which they must pay more. As to indecency, neither a la carte nor the “family tier” would be an effective tool. Existing v-chip and related blocking technology offer better, less intrusive alternatives provided a reasonable and uniform indecency standard is applicable to all channels on the basic and expanded basic tier. GAO Report We were pleased to have cooperated with GAO in its report preparation and we concur with its primary conclusions. First, competition, not regulation, is the most effective way to provide consumers with the best products, the broadest choices and the best prices. Second, programming costs are not the primary driver of cable prices. It is simply wrong to blame ESPN for the retail price decisions of cable operators, and ESPN’s new distribution deals with moderating rates respond to concerns Congress or this committee may have had about ESPN’s impact going forward. We agree with GAO that a la carte distribution schemes – whether for all services or just directed at a particular genre – will only produce higher prices for all cable customers, less choice and the extinction of many channels that serve specific but important audiences. A la carte will force consumers to pay more for their programming and to rent or buy set-top boxes they don’t need or want. Every television would need such a box to activate a la carte and at $3 to $4 rental per box per month, consumers are looking at much higher costs, for fewer channels. Today, as you know, less than half of all televisions in America have a set-top box. A la carte will force all channels to expend millions of dollars in marketing and cable providers to spend huge sums on transaction costs to account for the churn brought upon by people adding and dropping channels. These costs will most likely be borne by customers, again in the form of higher, not lower, rates. Make no mistake about it, whether you call it a “family tier” or a la carte, the consumer will be hit with higher costs and less choice. Cable and Satellite Value and Choice Cable TV is a tremendous entertainment value, and for a growing and significant number of Americans, satellite is offering a similarly compelling choice for multi-channel video. Indeed, between the two, it’s clear that choice and competition have taken hold. Consider these facts: · Consumers already can choose to avoid programming they don’t want by subscribing to the broadcast basic tier. Some 10% of cable subscribers take only this service – over 25 channels in most markets for an industry average cost of about $14; · The major satellite providers, DIRECTV and Dish Network, are the fastest growing multi-channel distributors offering packages of 60 or more video channels starting at around $25 a month; · An average cable system offers between 60 and 70 channels for about $40 month and a growing array of other popular service like cable modems for Internet access and high-definition television; · Just in the past few months a new wireless service called U.S. Digital Television began offering subscribers in several cities a package of local high-definition broadcast signals and 11 of the most popular cable networks, including ESPN and ESPN2, for $20 a month. Indeed, consumers’ today have a wide array of purchase options and competition is here and growing. Government regulation causing the breakup of expanded basic would not serve any positive purpose. Consumers will not be happy – or grateful – if ESPN and other cable channels are ripped out of basic service so that cable subscribers are charged extra fees to see the programming they enjoy today as part of their basic cable subscription. Thank you.

• Mr. Rodger Johnson
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  Witness Panel 2

  Mr. Rodger Johnson

  Good morning. I want to express my appreciation to Senators McCain and Hollings for this opportunity to participate in this hearing and provide additional testimony regarding competition in the cable television market. I am pleased to represent both Knology and the Broadband Service Providers Association (BSPA), a trade association that represents companies the GAO referred to as wire-based competitors in its most recent studies sponsored by Senators McCain, DeWine and Kohl. Consumers are reaping the benefits of a $6 billion capital investment in new competitive networks. These new GAO Reports again document that customers in communities served by Broadband Service Providers, or BSPs, realize from 15% to 41% lower cable television rates than consumers in communities where there are no wire-based competitors. BSPs have shown that they not only provide consumers with demonstrable benefit on pricing and services, but they are proving the economic strength of their business model. This is attested to by Knology’s successful completion of it’s Initial Public Offering. This is the first IPO in the telecom/media sector in over three years. These BSP systems are models for the type of competition envisioned by Congress in passing the Telecommunications Act of 1996. The key issue for policy makers today, however, is whether current legislation fully supports the continuing development of competition for video services. Knology and the BSPA are primarily concerned with three issues that, if not addressed, could slow the deployment of new competitive broadband networks. First, regulators must not equate competition between cable and satellite with wire-based head-to-head competition. In our experience, despite the fact that satellite has a 22% national share, a fully upgraded cable provider often maintains a market share of 90% or greater in local markets when it is only competing against satellite providers. We do not believe that a market with 90% or more of subscribers concentrated with one provider should be deemed fully competitive. Senator’s DeWine and Kohl have sponsored a new GAO study to evaluate specific market structures. We ask for your added support for this study with the goal of having data by early fall. We further request that this market analysis become part of the FCC’s next annual assessment of competition at the end of this year. The second key issue is ensuring continued access to the content necessary to compete. Specifically, the protections of the 1992 Cable Act were limited to satellite-delivered programming. This type of protection was both necessary and effective to support the development of the Satellite segment of our industry. This was policy that truly encouraged the development of competition. These principles of fair access to content need to be extended to all types of delivery technology, whether it is satellite or terrestrial, and made a permanent foundation for the development of future desired competition. Third, the BSP industry is threatened by other types of anti-competitive actions by incumbent operators, such as targeted predatory pricing campaigns and other conduct designed to prevent entrants from getting a foothold in a particular market. Predatory pricing strategies are frequently subsidized by significantly higher prices in surrounding markets that do not yet have the benefit of facilities-based competition. The FCC has recognized the public harm inherent in predatory pricing and also disagreed that targeted discounts merely reflect healthy competition. We would also like to offer some comments regarding possible a la carte policies. There has been recent discussion about the potential for an a la carte policy to help contain rising cable rates on the bundles of channels that consumers are forced to buy in today’s structure. As you evaluate any a la carte policy, we strongly suggest that consumer focused a la carte policies should only be considered in conjunction with digitally delivered content. Implementing these structures on current analog channels would be both costly and problematic as channels in the analog tier cannot be readily manipulated electronically. There is significant momentum to migrate our systems and content to digital delivery and the application of any a la carte policies for consumer delivery of content should be considered only in conjunction with migration to digital. Today’s program access structure gives significant power to both vertically integrated and independent content producers. As a condition to carrying certain programming services that are demanded by a subset of our subscribers, we are required to bundle that programming with less desired programming on a tier available to all subscribers. The end result is that consumers frequently pay for high cost content or other content they really don’t want and some industry segments, like Sports, have artificially inflated their revenues. An alternative a la carte policy could require that distributors be given a la carte access to individual channels from content providers without artificial placement requirements. This would allow distributors to compete by offering unique content bundles to meet consumers’ real desires. This could produce lower prices to consumers without requiring a pure a la carte offering to consumers that cannot be technically supported for many years. Driven by freer competition, it is likely that you would see more focused packages of content for sports, family, movies, education or a variety of other target content categories. Full and free competition can help determine the level of a la carte offering desired by consumers. Today’s structure creates bundles heavily influenced by the content producers resulting in both forced carriage and forced placement of high cost or low demand content. In closing, Broadband Service Providers have shown that in markets they serve, consumers enjoy the benefits of lower prices for broadband services. In order to continue to expand the availability of competitive broadband services, policymakers need to recognize that the market for cable television is not fully competitive and take care to prevent incumbents from erecting artificial entry barriers. Moreover, access to content is a threshold issue that needs to be addressed as part of the new Telecom Legislation expected in 2005. I want to again thank you for this opportunity to be here and look forward to your questions.