Hearing of the Senate Commerce, Science, and Transportation Committee

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. GORDON SMITH (R-OR): Thank you, Senator McCain-Mr. Chairman. I'd like to put my full statement in the record, if I may.

SEN. McCAIN: Without objection.

SEN. SMITH: And simply summarize my observation that as a consumer of television, I'm amazed at the amount of competition, the amount of choice that there is in our living rooms today. In fact, I think because of DirecTV and EchoStar, their dish network, we're seeing remarkable assaults on cable and I think far better than we to regulate how they market. Competition will ultimately drive this better than we can.

I join in Senator Brownback's concern about bundling things which are out of category or inappropriately bundled. But I also want to say that-and it may not be a perfect analogy, but if the federal government told me that in order to sell Campbell's soup I had to sell 30 million pounds of peas before I could sell 20 million pounds of corn, it would be a terrible distortion of the marketplace. And I think these men and women of cable are-I think are getting the message.

But I think understanding what you bundle and how you market and how you make their bottom line is important for us to permit and then watch the marketplace work, because it will do a better job than we can.

And so with that, Mr. Chairman, I'll include my statement in the record and listen with interest to this --

SEN. McCAIN: Thank you.

SEN. SMITH: Thank you, Mr. Chairman.

I'd like to pursue the a la carte option. It's my understanding that there are a number of channels that are now well accepted and subscribed, the History channel, maybe Discovery Channel, the Golf Channel, that when they were a la carte weren't making it and were going to die. But when bundled they ultimately attracted enough viewer-ship they could probably survive an a la carte offering. Well, that leads me to wonder if we're dictating what gets a la carte and what gets bundled, we may miss some programming that ultimately could develop into very popular programming. Can you comment on that? Is my perception accurate in that?

MR. GOLDSTEIN: I think it is. One of the concerns we had, frankly, in talking to people was that you would actually be losing some channels and some networks, and it's based on a lack of viewer- ship that they could not-couldn't' get enough subscribers, couldn't get enough advertisers.

SEN. SMITH: So allowing cable to bundle does help the consumer because it gives us more choices.

Is that correct? The economics wouldn't allow some to survive if they were not bundled?

MR. GOLDSTEIN: That's a distinct possibility, as I said. That is certainly something that was brought up.

SEN. SMITH: Isn't that the case with the History Channel in the past, the Golf Channel in the past, Discovery Channel in the past? Do you know if --

MR. GOLDSTEIN: I don't specifically know.

MS. ABRAMOWITZ: I think the Golf Channel, we heard that it was an a la carte offering at first or --

SEN. SMITH: And was going to die if it --

MS. ABRAMOWITZ: And it wasn't doing well and it was put on the tier.

SEN. SMITH: Okay.

MS. ABRAMOWITZ: But other than that, we don't have any specifics.

SEN. SMITH: Thank you, Mr. Chairman.

SEN. SMITH: A follow up on my colleague from Oregon's questioning. What percentage of sports is watched on networks, and what percent is watched on cable? And I guess-and I'm also hearing here that most of the cables owned by the networks. Is that right?

MR. BODENHEIMER: I'll try the first part of your question. I don't have this down in my head, Senator, but I'll estimate that cable sports is 35-40 percent of sports viewing in the country, measured by ratings.

SEN. SMITH: Sixty-five percent being on networks?

MR. BODENHEIMER: Correct.

SEN. SMITH: And isn't it a fact that most of what goes-are all the cable companies owned by networks? Or are there some that --

MR. : No.

SEN. SMITH: Okay. I didn't think so, but I think I've heard there are a few. ABC owns a cable company.

Wouldn't most of the increases to athletes from TV revenue go then through the networks and not the cable? Or is it all just factored in?

MR. BODENHEIMER: We, as a TV network, whether we be-our broadcast hat on or cable, we have no control over what the athletes are paid by the team owners.

SEN. SMITH: Do you feel pressure from them, from the leagues, that they're passing those on to you, though?

MR. BODENHEIMER: Well, like any --

SEN. SMITH: Do you ever push back? That's what I'm asking.

MR. BODENHEIMER: Oh, yeah. No, I push back a regular part of my day.

SEN. SMITH: Okay. No, I want that to come out because I want every-I hope everybody understands there are market forces here that may not be perceptible by us on this dais.

MR. BODENHEIMER: Well, on that note-excuse me for interrupting. I didn't allow you to --

SEN. SMITH: No, no. I want people to understand-you know, as best we can, to understand all of the market forces that are in play that we may not perceive through just a quick look at your industry?

MR. BODENHEIMER: You're seeing input costs and other expenditures moderate on a variety of levels. One example is the rate of increase that we had been seeking, which Mr. Robbins spoke about, and that we're doing with other cable operators. The rights fees that sports leagues are getting-not necessarily what they're asking for, but what they're settling for, is moderating in some cases. Whether that plays out to the top echelon of sports leagues remains to be seen, but it is moderating. And even retail cable pricing this year, I'm told, has moderated itself on a retail basis. So I think you're seeing some flattening of the marketplace that you were asking about.

SEN. SMITH: Mr. Robbins, the one thing I have heard that is of concern to me about bundling and-and I'm obviously revealing to you my bias against our getting involved and telling you how to market your product. But I think you lose the moral high ground if you're bundling pornographic channels with Nickelodeon and family offerings, and I would plead with you to post haste stop anything like that.

MR. ROBBINS: Senator, I don't think we've ever been there. I think what was referred to --

SEN. SMITH: But the implication is here in this hearing that that's happening.

MR. ROBBINS: Okay.

SEN. SMITH: Are you telling me that's not happening?

MR. ROBBINS: Let me be very clear. There was a reference earlier by one of your distinguished colleagues about the Playboy Channel with-I have it written down actually because I wanted to mention it. But the Playboy Channel has always been a pay channel, separately encrypted, locked out in households that don't want it. Never been on any kind of expanded basic tier of service.

SEN. SMITH: I don't know cause I don't take it, but I -- (laughter) -- but the implication is here that that's happening. Are there --

MR. ROBBINS: Well, that's a wrong --

SEN. SMITH: -- quasi pornographic channels that you bundle with --

MR. ROBBINS: No.

SEN. SMITH: How about the letter that Senator McCain read, though? People are writing to the chairman that they're subsidizing these other things. Are you refuting that? Are you refuting the premise of the letter to Senator McCain, that you're not bundling things that your customers are subsidizing with-they want Nickelodeon and they're having to pay for some quasi pornographic material?

MR. ROBBINS: No. There is no mixture in the analogue universe with pornographic channels or, again, the specific reference to the Playboy Channel. No. That is a pay service that is sold --

SEN. McCAIN: We're talking about things like MTV, Mr. Robbins, that parents may find offensive. I may not.

SEN. SMITH: And that's why I talked about it as quasi pornographic, because I do think if you can segregate-you will strengthen your position if you can segregate these kinds of offerings. If they are currently being bundled, I would try to regain the moral high ground and make sure they're not.

MR. ROBBINS: Well --

SEN. SMITH: I say that as someone who is not unfriendly to your-you know, your industry. I want to see you succeed and I do believe-I want to say for the record I do believe that many of the concerns being expressed by my colleagues will soon be remedied by a very vigorous marketplace that is emerging. If you're making a lot of money, you're soon going to have a lot of company. If your industry is making a lot of money, you're going to attract competition.

MR. ROBBINS: Senator, with all due respect, I think we have. The telephone companies are coming at us with a vengeance, the satellite companies are coming at us with a vengeance. Every day in our business is election day. People can turn off their cable and go to satellite. They can turn off and go to broadcast. They don't need us to live. Our future rests on how well we are serving our customer.

Let me just come back to the indecency point, though. You talked about Playboy and other channels. Some people may find MTV indecent. I don't watch MTV particularly, but therein lies I think a very tough call about the First Amendment-and I don't want to introduce all of that here.

But we in the industry I think are extremely sensitive to what's going on not only in the country but here in Washington, and are doing everything we can to give our customers choices such as the blocking capabilities that have been reported earlier this week. I mean, we appreciate your sensitivity and I like where you're coming from with respect to this industry. We need to fix our problems. We don't need your help to do so.

SEN. SMITH: I appreciate that. If you would be sensitive to that and if you can segregate Nickelodeon and MTV, I think that that is-gives you a strong position. And so whatever technologies you have there, I would recommend them. And I again would reiterate for the record I think that competition is coming and you know that. And hopefully if we hold this hearing next year, that will be reflected in the kind of results that-and consumer choices that are available that we can ascertain. Thank you.