Witness Testimony

Mr. Gene Kimmelman
Senior Director
Public Policy and Advocacy Consumers Union
1666 Connecticut Avenue, NW, Suite 310
Washington, DC, 20009-1039

Oversight of the Satellite Home Viewer Improvement Act
Subcommittee on Telecommunications and the Internet
March 10, 2004
10:00 AM

Introduction 

Consumers Union[1] has traditionally viewed the Satellite Home Viewer Improvement Act (SHVIA) as an important, but small piece in the overall goal of promoting more competition to cable monopolies.  We had hoped that by putting satellite on equal footing with cable -- paying the same prices for the same programming -- satellite would start creating downward pressure on cable rates and promote improved quality programming, including digital and High Definition Television. 

In 1999 we testified before this and other committees describing the importance of treating Direct Broadcast Satellite (DBS) providers fairly and equitably with cable and other Multichannel Video Programming Distributors (MVPD), including allowing DBS to carry and distribute local channels in order to better compete with the local cable monopolies.[2]  Now that SHVIA nears expiration, it is time to assess how the Satellite Home Viewer Extension Act can work to benefit consumers. 

Unfortunately, inadequate competitive forces, industry consolidation, relaxed ownership rules, and lax regulatory oversight plague a market in which satellite has yet to become -- and may never become -- a full alternative to cable. 

Ineffective Competition and Market Domination 

While satellite has made significant inroads in rural and upscale markets (e.g., where consumers demand substantial sports, movie, or other specialty programming beyond the basic tiers), cable's only effective price competition is a second cable system.  But these second cable systems, also known as "overbuilders" or Broadband Service Providers (BSPs), are only available to 2 percent of America's households.  This is a shame because the Government Accounting Office (GAO) found last month that a second cable company's "entry into a market benefited consumers in the form of lower prices for subscription television, high-speed Internet access, and local telephone services.  Incumbent cable operators often responded to BSP entry by lowering prices, enhancing the services that they provide, and improving customer service."[3]   

The GAO goes on to say that, "The combined effect of BSP entry and incumbent companies' response provides significant benefits for consumers. The rates for telecommunications services were generally lower…(f)or example, expanded basic cable television rates were 15 to 41 percent lower in 5 of the 6 markets with a BSP when compared with their matched market."[4]  If cable companies, when confronted with a competitor, can lower rates by 15-41 percent, enhance services and improve customer service, then surely there is room to lower prices and improve service across America.  

The problem is that very few Americans live in areas where they can take advantage of the fruits of head-to-head competition.  In the rest of the country, satellite is the only competitor to monopoly cable.[5]  And satellite has failed to offer effective competition for several important reasons, as described in the attached report (see Appendix A). In fact, satellite’s major impact on cable involves local channels -- something has only done in larger markets-- and even then, it only pressures cable to offer more channels, not lower prices.[6] 

During the period when satellite subscription increased to cover about 20 percent of the multichannel TV market, cable rates soared almost three-times faster than inflation -- up about 53 percent -- since Congress launched rate deregulation in the 1996 Telecommunications Act.  Today, if consumers nationwide had a second cable wire serving their community, instead of one cable company and two satellite providers, they could be saving as much as $4.5 billion a year (see Appendix A).[7] 

Monopoly cable companies have attempted to block or slow-roll efforts to promote competition. The largest cable operators never compete with one another, and instead grow through mergers and swapping systems amongst themselves to create regional clusters that undermine the growth of head-to-head competition head-to-head with cable. Without competition, large operators and regionally clustered systems have more muscle to impose price increases.[8]

Industry Consolidation 

Recent consolidation involving a national broadcast network that owns cable programming, and a satellite distributor, only makes the competitive landscape worse for consumers. News Corp's recent purchase of DirecTV, the largest satellite provider, brings the Fox TV network and numerous cable channels into a company that was supposed to compete against cable. News Corp's Chairman and CEO Rupert Murdoch said after he purchased DirecTV that “we’re not going into a price war with anyone.”[9]  

If competition in the multichannel video market had performed up to its hope and hype, the News Corp./DirecTV merger might not have been so threatening. But in light of the failure of deregulation, it presents a problem for public policy that cannot be ignored. There are two points of power in the marketplace--distribution and program production. The problem with a merger  of News Corp. and DirecTV is that it combines the two.  

The reach of News Corp's media empire is truly staggering. The following are highlights of some News Corp properties in the U.S.: 

• Broadcast Television Stations - 35 stations, including two broadcast stations in New York, Los Angeles, Dallas, Washington DC, Houston, Minneapolis, Phoenix and Orlando; 

• Filmed Entertainment - 20th Century Fox Film Corp., Fox 2000 Pictures, Fox Searchlight Pictures, Fox Music, 20th Century Fox Home Entertainment, Fox Interactive, 20th Century Fox Television, Fox Television Studios, 20th Television, Regency Television and Blue Sky Studios; 

• Cable Network Programming - Fox News Channel-the most watched cable news channel, Fox Kids Channel, FX, Fox Movie Channel, Fox Sports Networks, almost two dozen Fox Regional Sports Networks, Fox Sports World, Speed Channel, Golf Channel, Fox Pan American Sports, National Geographic Channel, and the Health Network; 

• Publishing - New York Post, the Weekly Standard, HarperCollins Publishers, Regan Books, Amistad Press, William Morrow & Co., Avon Books, and Gemstar-TV Guide International; 

• Sports Teams and Stadiums - Los Angeles Dodgers, and partial ownership in the New York Knicks, New York Rangers, LA Kings, LA Lakers, Dodger Stadium, Staples Center, and Madison Square Garden; 

News Corp's merger with DirecTV adds a new, nationwide television distribution system to News Corp's programming/production arsenal. DirecTV is the nation's largest satellite television distribution system, with more than 11 million customers and the ability to serve all communities in the United States. 

To News Corp, the sum is greater than its parts combined.  With the most prominent sports teams in their league, content creation and production, network and cable programming, and now their satellite distributor, News Corp has even greater market power than before.  Thanks to reduced regulatory oversight, the resulting company is a many-headed monster able to wreck severe damage to the market.  

While DirecTV has News Corp's content arm to use as leverage against its competition, the other satellite provider, Echostar's Dish Network, must buy much of its programming from its competitors, including cable companies, broadcasters or DirecTV's parent if it wants to sell the most popular programs.  When one satellite provider is given broad market power to raise programming prices, and the other is hamstrung by its competitors’ incentives to keep programming prices up, it doesn't inspire much confidence that satellite will become an effective competitor to cable any time in the near future. 

Although the Federal Communications Commission (FCC) imposed a number of conditions on this merger, preventing discriminatory treatment against cable and other satellite distributors, the Commission did nothing to prevent News Corp. from raising the prices on all of its programming to everyone in the market--including itself (DirecTV).  This drives up prices for all consumers without officially "discriminating" against any other multichannel video service providers.  Clearly, these conditions give consumers little hope that cable or satellite prices will fall in the future. 

Relaxed Media Ownership Rules 

In this environment, the FCC’s decision to relax media ownership rules -- allowing the most popular local TV broadcast stations to buy more stations in the same market, control the biggest local newspaper and numerous radio stations -- could enable giant national media companies to dominate individual local markets, exerting undue influence over what local political, social and cultural ideas receive the most attention. 

On June 2, 2003 the FCC made some of the most sweeping changes to this nation's media ownership rules.  For instance, the FCC: 

·        Repealed the Newspaper/Broadcast Television Cross-Ownership rule, allowing the biggest local TV station to buy the dominant or only newspaper in over 190 of America's 210 media markets, serving 98% of the U.S. population. Most Americans - 80 percent - still get their news from local TV and newspapers.  Allowing consolidation between those main sources of local news on the premise that the Internet and cable television have become the primary source of local information is not market reality.  Cable TV is primarily a distributor of national news, not local news.  News content on the Internet is almost entirely regurgitated from local TV and newspapers - it is another distribution channel, not a unique source of original reporting. 

• Raised the national audience cap that limited the percentage of households one company could reach through their local television stations.  While the FCC raised the percentage from 35 to 45, through the appropriations process last year, Congress settled on 39 percent. 

• Enabled media companies to own local TV "duopolies" and "triopolies," and allowed mergers between powerful TV stations in over 160 media markets representing 90 percent of the American viewing public, reducing competition and hindering diversity. 

• Eliminated consideration of any other public interest factors when reviewing mergers involving the properties described above. 

 Lax Enforcement           

As Appendix A shows, the FCC is in no position to act as an effective regulator.  Before even looking at the problem of escalating cable rates, "the FCC cannot even figure out how many cable subscribers there are."[10] Appendix A also describes how cable’s bundling television packages with high-speed Internet data services is anti-competitive and hurts satellite’s ability to compete for consumers.[11]  The FCC’s failure to analyze, much less prove cable’s claim that bundling television with Internet is good for consumers, is proof that they simply have not addressed the fundamental competitive issues in the real world.   

Future Mergers: Things Could Get Worse           

The broadcast networks that dominate prime-time and the integrated cable operators that dominate non-prime time have become thoroughly integrated into a tight cabal that controls the video dial. A handful of companies dominate the programming side of the multichannel video market. Moreover, each of the dominant programmers has guaranteed access to carriage on cable systems - either by ownership of the wires (cable operators) or by carriage rights conferred by Congress (broadcasters).  

Four entities -- ABC/Disney, Time Warner, Liberty Media (with significant investments in News Corp) and Viacom -- have ownership rights in 20 of the top 25 programming networks based on subscribers and prime time ratings (see Appendix B).[12] They account for over 60 percent of subscribers to cable networks, rendering this market a tight oligopoly. Other entities with ownership or carriage rights account for four of the five remaining most popular networks. Entities with guaranteed access to distribution over cable account for 80 percent of the top networks and about 80 percent of all subscribers' viewing choices on cable systems. 

Now that the country’s largest cable company, Comcast, is trying to buy Disney, a merged ComcastDisney could have the ability to drive up programming costs across the entire market, even higher than before.  

With ownership of the ABC network, numerous local broadcast stations, ESPN, and more, Comcast could have the same incentives and power in the market as News Corp possesses: both maximize their profits by raising programming prices and charging everyone in the market these inflated prices.  And the two companies would have undue power to decide which channels -- beyond what they two of them own -- are carried on their systems and therefore reach enough households to survive in the market. 

        In light of these market conditions, allowing content producers to merge with content distributors leads to fewer voices, decreased competition, homogenized viewpoints and higher costs for consumers.  

The Future of SHVIA 

There are a number of policy changes proposed to SHVIA's renewal that Congress must consider.  We believe that while some issues will hardly impact rising cable rates, a few are directly linked with enabling satellite to be a more effective competitor to the local cable monopolies.  This requires Congress to: 

• Extend SHVIA and equalize communications laws and copyright fees that cable and satellite companies pay local affiliates for carriage of their programming.  It's unfair that satellite pays twice as much as cable does per subscriber to carry the same programming over the same local channel being offered to the same subscribers; 

• Harmonize the compulsory license between cable and satellite.  If cable is granted a permanent compulsory license then satellite carriers should be treated equally to give them the regulatory certainty they need to compete with cable; 

• Expand previous laws designed to hold down cable rates and make popular TV channels available to cable's potential competitors; 

• Implement aggressive regulatory oversight of competitor's potential access to cable-owned programming, cable equipment, or programming that cable companies exert monopolistic influence over; and 

• Ensure consumers' access to valuable spectrum.  As satellite tries to distribute high definition signals from other markets to customers unserved by local high definition broadcast stations, broadcasters claim that importing these distant signals undermines localism.  Our record on localism is clear--we're strong believers in its importance to shape a community's debate over public policy.  But localism is not some absolute value that trumps all other policy concerns.  If one or two companies dominate local markets, that is no better for consumers than if national companies dominate local markets and reduce the number of local media voices. 

The Future of Consumer Protections Beyond SHVIA 

As it considers SHVIA and in light of the broader policy concerns we outline above, protecting consumers outside of limited legislation like SHVIA is essential.  Toward that goal, Congress should: 

• Reinstate the media ownership rules that the FCC rewrote on June 2, 2003 to protect the diversity, competition and localism of our news and information sources.  Ownership of programming should be independent of ownership of distribution.  

• Give consumers the ability to lower their cable costs by paying for only the channels they watch--and avoid paying for content they find offensive, distasteful, or just unappealing.  This would hold programmers accountable for their price increases.  A la carte programming would finally provide a balance to the market that's currently tilted toward those who own programming, and especially those who combine that with distribution. 

• Ensure that consumers have open and unfettered access to the analog television spectrum once broadcasters swiftly complete the transition to digital programming.  Returning that spectrum back to the people is one of the best chances we have to stimulate new growth and fresh innovation that can finally take on the multi-headed media giants. 

The evidence clearly demonstrates that it is important for Congress to take a broader look at the problems in the multichannel market and intervene far beyond SHVIA to promote market forces that result in greater competition and more diversity of independently owned media outlets. 

Consumers Union believes that the goal of promoting localism must be balanced by the goal of promoting diverse viewpoints in local and cultural matters, social issues and local news and information as generated by independent ownership of major local media outlets.  Localism is not just about protecting an incumbent broadcaster who can dominate a local news and information market. 

The important issue at stake here is how long will the digital transition take, and how long broadcasters will get to sit on the redundant analog spectrum?  The faster broadcasters complete the transition they so confidently demanded, the faster they can return unused spectrum licensees that can be, in turn, used to facilitate the successor to the wildly successful WiFi, potentially creating true competition to cable and telephone monopolies via the Internet. 

Conclusion 

Consumers Union therefore believes that, as policy makers reopen the debate about how satellite and cable competition will look, it should reauthorize SHVIA with changes and investigate the multichannel market as a whole.  It's clear that what is needed is to improve competition so that the market can work for consumers not against them. 

Appendix A (Adobe PDF)

Appendix B (Adobe PDF)

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