Hearing - Escalating Cable Rates - Causes and Potential Solutions

Federal News Service

HEADLINE: HEARING OF THE SENATE COMMERCE, SCIENCE, AND TRANSPORTATION COMMITTEE

SUBJECT: ESCALATING CABLE RATES: CAUSES AND POTENTIAL SOLUTIONS

CHAIRED BY: SENATOR JOHN MCCAIN (R-AZ)

WITNESSES: PANEL I: MARK L. GOLDSTEIN, DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES, GENERAL ACCOUNTING OFFICE;

PANEL II:

JAMES O. ROBBINS, PRESIDENT AND CEO, COX COMMUNICATIONS;

GEORGE BODENHEIMER, PRESIDENT, ESPN, INC. AND ABC SPORTS;

GENE KIMMELMAN, DIRECTOR, CONSUMERS UNION; MARILYN PRAISNER, MONTGOMERY COUNTY COUNCIL, ROCKVILLE, MARYLAND;

RODGER L. JOHNSON, PRESIDENT AND CEO, KNOLOGY, INC.

LOCATION: 253 RUSSELL SENATE OFFICE BUILDING, WASHINGTON, D.C.

BODY:

SEN. WYDEN: Thank you, Mr. Chairman. And it just seems to me it's not going to be acceptable to consumers to find that every time they turn around cable rates go up, triple the rate of inflation. And consumers keep waiting for prices to level off somehow and instead millions of our consumers are being force fed new channels and new features that certainly many don't want. And I looked at the GAO report in some detail and there are some important issues that need to be examined with respect to a la carte offerings.

For example, the GAO reports says that a basic cable package today averages around 25 channels. The next tier up, expanded basic, averages about 36 more. So that is a pretty big jump from 25 straight to 61. And right now a consumer must choose one or the other and isn't free to decide which particular channels would be included in either package.

So it seems to me that even if you didn't go to some of the full a la carte pricing options that have generated so much industry opposition, it ought to be possible to provide consumers with a broader range of choices and still more stable pricing.

And my sense is that the ball is in the industry's court right now. If the industry continually makes the argument, look, you're not going to have these additional channels that you want for say programming that's important for a minority group, something I support, without all these extra prices, a lot of us aren't going to swallow that argument any more. I think it's our view that the industry has sufficient technological expertise and business savvy to figure out a way, working with the Congress of the United States, to make sure that people are in a position to decide for themselves what choices they want, or whether they want more channels and the additional prices.

So I think it's important that we go through some of the technical issues this morning, Mr. Chairman. Certainly the technical barriers to a la carte ought to be shrinking. The GAO notes that advanced converter boxes and TVs with built-in converter box capability are growing more common. Some of the technical issues to a la carte pricing seemed to be moving in the direction of consumer choice. I'm glad you're holding this hearing. I look forward to working with you and people from a variety of positions on this, to figure out a way so we can align the choices people want in this country, the prices they can afford. And I thank you.

SEN. WYDEN: Thank you, Mr. Chairman.

Mr. Goldstein, let's look at sports costs because it seems to me this is a pretty clear example where there are absolutely no incentives to keep sports programming costs down and it seems to me the concept of a la carte pricing, you know, might change that. You know, you've got a situation now where, in effect, the sports channels pay the leagues a gazillion dollars for TV rights, and then all of that is made up with the sky high contracts with sports leagues and teams, and the costs of programming just goes up and up. Start by telling me what incentives exist today to hold down the cost of sports programming?

MR. GOLDSTEIN: Senator, I'm not really sure that that was part of what we looked at. One of the things that we did find is that if you --

SEN. WYDEN: But if you would, tell me what incentives in today's world of pricing would exist? I'd just like your opinion because I've given you an example of why I think a la carte would work in that area. So if you would, in your opinion tell me what incentives exist today to hold down sports programming costs?

MR. GOLDSTEIN: I think, Senator, actually when it comes to sports programming, if there was an area where a tiering process could work, the most likely place that it could work would be the sports world because you go to-you have-the technology that you would need for a broad a la carte doesn't apply here because it's fairly narrow; you can block. You have a very obviously loyal base of fans that would be willing and eager to have that kind of a property. But when we talk to the sports leagues and sports networks we still encounter the same kind of issues that we did more broadly with a la carte, in that they were not eager to-they said they would not be eager to sell their programming in that way because it would limit the size of the audience that would see their shows, and obviously affect advertising.

SEN. WYDEN: Well, I appreciate you're at least saying that this is an area where conceivably it could work, because right now-and it's sort of a textbook for walking through this whole question. There aren't any incentives today. And in fact all the incentives are for just paying the leagues a boatload of money. The leagues make up for it with these gigantic contracts, and the consumer gets shellacked by it. And I appreciate your answer.

Let me ask you, if I might, about your finding with respect to infrastructure investment. You said that this was one of the key areas that led to price increases. Everybody thinks advanced infrastructure is great: more channels, digital service, high speed Internet access. But you've got a situation again where a lot of folks are paying for the upgrades and how is it fair, in your opinion, if they don't want that?

MR. GOLDSTEIN: Senator, we didn't --

SEN. WYDEN: I'm asking for your opinion. I just would like-you gave me your opinion with respect to sports programming. But give me your opinion --

SEN. McCAIN: Senator Wyden, could I remind you that they really are asked to conduct studies and they'd like to keep their job.

(Laughter.)

SEN. WYDEN: All right.

MR. GOLDSTEIN: Thank you, Mr. Chairman.

SEN. WYDEN: Then how does it ensure that markets are competitive, with that kind of approach? I mean, that's a factual question. Tell me how that promotes a more competitive market?

MR. GOLDSTEIN: I think I'll ask Ms. Abramowitz if she would take this for me, thank you.

(Laughter.)

MS. ABRAMOWITZ: I think --

MR. GOLDSTEIN: She doesn't like her job.

(Laughter.)

MS. ABRAMOWITZ: I think that the --

SEN. WYDEN: This is an area you looked at.

MS. ABRAMOWITZ: Absolutely. I think that the infrastructure investment that was, you know, very considerable is basically a reflection of the coming competition from the DBS industry. When DBS came into the market in the mid '90s, most cable systems in this country were not digital. And DBS came in with this huge offering of channels compared to a standard cable package, and that's really what drove that infrastructure investment.

Now, you're right that in the end what it provided to consumers was a variety of services, many of which a particular consumer may not be interested in purchasing. In the market the prices sort of get set based on, you know, what sort of the average consumer is interested in buying. And the number of cable channels did increase dramatically and from-you know, before the digitalization to after, and I think that that's a lot of the reason some of those costs were passed on to consumers. But it also is passed on in the form of digital tiers and cable modem services.

SEN. WYDEN: Now, small cable operators in my state, Mr. Goldstein, have said that in order to get a channel they know their subscribers want, sometimes they have to take a bunch of additional channels as well, because the same media conglomerate owns the multiple channels and wants them all carried. So in effect the local cable operator can't just select the channels it wants. What I'd like to know is how common is that practice? There are some questions with respect to the statute and it being rooted in retransmission consent. But how common is that?

MR. GOLDSTEIN: Our understanding is that it's very common. It happens all the time and throughout the country.

MS. ABRAMOWITZ: Right. I mean, I think almost everyone we spoke to described contracts where multiple channels were sold at the same time, particularly if they were broadcast owns.

SEN. WYDEN: Well, Mr. Chairman, without asking Mr. Goldstein his opinion with respect to the implications of it, but it seems to me that these answers indicate to me that if an additional-an individual cable system wanted to try a new business model, perhaps on the theory that consumers want more choice, my sense is there are a lot of reasons for doing that. And I look forward to exploring with you the ways to get it done. Thank you.

SEN. McCAIN: Thank you, Senator Wyden.

SEN. WYDEN: Thank you, Mr. Chairman. I want to stay at this sports issue, Mr. Bodenheimer, because two hours ago I started this hearing by saying I didn't think there were any incentives to hold sports costs down. The General Accounting Office, in response to my questions, said that the area where it was most likely to make sense to have a tiered model was in the sports area. And I want to walk you through a couple of these issues. Let me stipulate I got to go to college on a basketball scholarship, so I live for sports. And I think the people are going to choose it under any of these kinds of scenarios.

You said that competition will discipline prices.

I think we all, you know, agree with that. And certainly for the most part high prices scare away consumers, so that producers have incentives to keep the price down. But even given what we have just seen in discussion with you all and Mr. Robbins with Chairman McCain, consumers don't get to decide in this area whether the price is too high. In fact, they're not even going to know what the price of ESPN is, because it's all bundled into one broad kind of package.

So my question is, given that consumers don't get to see the price, don't even get to decide for themselves whether that price makes sense to them, take us specifically through the incentives that now exist for ESPN to hold down costs?

MR. BODENHEIMER: Well, with all due respect to the GAO, it couldn't be any more simple. Like any businessman, I'm incented to keep my expenses low when I have a limit on what kind of revenues that I can bring in. ESPN has two principal revenue streams. We have the revenue we get from our distributors, the cable and the satellite operators. And as you just heard Mr. Robbins say, we came to an agreement whereby he was satisfied we'd reached an appropriate value for ESPN. But I have capped that now for nine years.

On the advertising side I couldn't be in a more competitive world. There's about $12 billion of advertising up for grabs in the national cable advertising business, and I've got a sales force that fights tooth and nail for every unit we can buy-excuse me, sell. So I can't just dictate how much ad revenue we're going to bring in. So on my two major revenue streams, I'm capped on my affiliate side and I'm in a dogfight with a hundred other cable networks and broadcast networks for ad revenues. So that's my incentive to keep my costs low.

SEN. WYDEN: I think it's fine to say you and some other powerful interests should negotiate and try to bargain. But what you're excluding is the big bargaining force out there, which is the consumer and the consumer knowing what prices are. And I think you still have locked those people out of what is just Economics 101: markets driven by consumers. So given the fact that you have some bargaining power, given advertisers and the like, what gives the consumer any bargaining power knowing that in effect they can't even find out what the price is for your service because of the bundling of the package?

MR. BODENHEIMER: Well, two things there. Number one, as the industry has progressed, more and more people are reporting what wholesale costs are paid by cable operators and satellite in the newspaper. In fact, I saw today in the USA Today over my morning coffee what our wholesale fee is. So it's certainly not in a shroud of secrecy any more.

SEN. WYDEN: You're saying consumers are able now to figure out wholesale prices in this area?

MR. BODENHEIMER: It's in the USA Today, today. In the point that DirecTV is making that they don't wish to pay any further programming increases, they have printed a bar chart.

SEN. WYDEN: If you had a la carte pricing in the sports area, the area where GAO said it was most likely, wouldn't you have a situation where sports channels would worry that if they had to pay the NBA or NFL these huge sums, that that could serve as a price restraint because you'd have to worry about the sky high contracts and you could end up causing sports programming to drop?

MR. BODENHEIMER: I'm sorry, I don't follow your question.

SEN. WYDEN: If you had a la carte pricing, sports channels would have to worry that if they paid the NBA and the NFL a gazillion dollars for a particular contract, they might end up losing subscribers because that would ripple all the way through the system. What is wrong with that argument?

MR. BODENHEIMER: I have to worry about that every day under the existing environment. I've got to negotiate contracts with cable and satellite operators. These contracts are continually evolving. As you've seen right here in this committee, there are disputes over what the fair value of that is. I've got to deal with the advertisers, I've got to keep my ratings up. I'm in that fight every day, Senator.

SEN. WYDEN: I don't think you have to worry about it at all. You cook your deal with the advertisers and some of these other powerful interests, and the consumer pays whatever it's going to be because we know consumers love sports. And what Senator McCain and I are trying to do is get you to tell us about how you're going to let the consumer use the marketplace in line with the free enterprise system. You have locked them out. Consumers want sports. I certainly want sports. And now you've got a situation where we're going to tell you you can get sports as long as you pay for all of these ballooning costs. And we think that's wrong. Let me just --

MR. BODENHEIMER: May I just --

SEN. WYDEN: If I might, I only have another minute. Mr. Chairman, I want to let Mr. Bodenheimer have another comment, and if I could ask one last question?

MR. BODENHEIMER: Thank you very much. I just want to add one point. There is an awful lot of sports programming on broadcast television. I happen to run one of those divisions. Those broadcast stations are carried in the broadcast basic and 10 percent of Americans, nearly-of television homes, 10 million people today already make the election that you just said doesn't exist. They just say, "I've got enough sports on my broadcast basic for $12 and I'm happy with that." That often gets overlooked here. Ten percent of Americans don't select the big broad cable package that ESPN is on.

SEN. WYDEN: And 90 percent of the consumers, by your calculus, have no marketplace power. They don't even know what the price is. That's what's wrong and hopefully will change.

Mr. Kimmelman, if I can just get one question for you. With respect to cable consolidation, if a small handful of cable companies continued to have this level of marketplace domination, isn't that going to continue to affect programming choices and also prices?

MR. KIMMELMAN: Absolutely. And I would just broaden it, Senator Wyden. It's a small handful of media companies because in this instance it is cable companies who own programming, like Time-Warner. It is ESPN, owned by Disney, which also owns ABC, which may be bought by ComCast, a major cable company. It is DirecTV, one of those two satellite companies out there who are supposed to be competing against cable, now owned by Newscorp, the owner of the FOX Network. FOX regional sports channels, FX and on. It is a handful of companies who all make their money from programming, and only three distribution channels to the public in most communities: one cable, two satellite. If they can control the price of the programming going out on both, they control prices and they control what you get to see. And I see an ever escalating spiral as these few companies gain more power.

SEN. WYDEN: Thank you, Mr. Chairman.

SEN. McCAIN: Thank you.