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S. HRG. 109–333

VIDEO COMPETITION IN 2005: MORE CONSOLIDATION, OR NEW CHOICES FOR CONSUMERS?

HEARING

BEFORE THE

SUBCOMMITTEE ON ANTITRUST, 

COMPETITION POLICY AND CONSUMER RIGHTS

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

OCTOBER 19, 2005

Serial No. J–109–43

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

ARLEN SPECTER, Pennsylvania, Chairman 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

JOHN CORNYN, Texas 

SAM BROWNBACK, Kansas 

TOM COBURN, Oklahoma 

PATRICK J. LEAHY, Vermont 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERBERT KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

MICHAEL O’NEILL, Chief Counsel and Staff Director 

BRUCE A. COHEN, Democratic Chief Counsel and Staff Director 

SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY AND CONSUMER RIGHTS

MIKE DEWINE, Ohio, Chairman 

ARLEN SPECTER, Pennsylvania 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

LINDSEY O. GRAHAM, South Carolina 

SAM BROWNBACK, Kansas 

HERBERT KOHL, Wisconsin 

PATRICK J. LEAHY, Vermont 

JOSEPH R. BIDEN, JR., Delaware 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

PETER LEVITAS, Majority Chief Counsel and Staff Director 

JEFFREY MILLER, Democratic Chief Counsel 

(III)

C O N T E N T S

STATEMENTS OF COMMITTEE MEMBERS

Page 

DeWine, Hon. Mike, a U.S. Senator from the State of Ohio ................................ 1

prepared statement .......................................................................................... 76

Feingold, Hon. Russell D., a U.S. Senator from the State of Wisconsin, prepared statement ................................................................................................... 78

Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin ....................... 3

prepared statement .......................................................................................... 85

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, prepared 

statement .............................................................................................................. 87

WITNESSES 

Aquino, Peter D., President and Chief Executive Officer, RCN Corporation, 

Herndon, Virginia ................................................................................................ 11

Britt, Glenn A., Chairman and Chief Executive Officer, Time Warner Cable, 

Stamford, Connecticut ......................................................................................... 5

Cleland, Scott, Founder and Chief Executive Officer, Precursor, Washington, 

D.C. ........................................................................................................................ 12

Cooper, Mark, Director of Research, Consumer Federation of America, Washington, D.C. ........................................................................................................... 14

Gorshein, Doron, Chief Executive Officer, The America Channel, LLC, 

Heathrow, Florida ................................................................................................ 9

McCormick, Walter B., Jr., President and Chief Executive Officer, United 

States Telecom Association, Washington, D.C. ................................................. 8

McSlarrow, Kyle, President and Chief Executive Officer, National Cable & 

Telecommunications Association, Washington, D.C. ......................................... 6

SUBMISSIONS FOR THE RECORD 

Aquino, Peter D., President and Chief Executive Officer, RCN Corporation, 

Herndon, Virginia, prepared statement ............................................................. 32

Britt, Glenn A., Chairman and Chief Executive Officer, Time Warner Cable, 

Stamford, Connecticut, prepared statement ...................................................... 49

Cleland, Scott, Founder and Chief Executive Officer, Precursor, Washington, 

D.C., prepared statement .................................................................................... 60

Cooper, Mark, Director of Research, Consumer Federation of America, Washington, D.C., prepared statement ....................................................................... 72

Gorshein, Doron, Chief Executive Officer, The America Channel, LLC, 

Heathrow, Florida, prepared statement ............................................................. 80

McCormick, Walter B., Jr., President and Chief Executive Officer, United 

States Telecom Association, Washington, D.C., prepared statement .............. 90

McSlarrow, Kyle, President and Chief Executive Officer, National Cable & 

Telecommunications Association, Washington, D.C., prepared statement ..... 96

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VIDEO COMPETITION IN 2005: MORE CONSOLIDATION, OR NEW CHOICES FOR CONSUMERS? 

WEDNESDAY, OCTOBER 19, 2005 

UNITED STATES SENATE, 

SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY AND

CONSUMER RIGHTS, OF THE COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:04 p.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Mike DeWine, 

Chairman of the Subcommittee, presiding. 

Present: Senators DeWine, Hatch, and Kohl. 

OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR 

FROM THE STATE OF OHIO 

Chairman DEWINE. Well, good afternoon. We welcome all of you 

to the Antitrust Subcommittee’s hearing entitled ‘‘Video Competition in 2005—More Consolidation, or New Choices for Consumers?’’ 

Today we will examine two important current issues: first, the purchase of Adelphia by Comcast and Time Warner Cable; and second, 

entry into the video marketplace by the Bell companies. 

These two events push the industry in different directions. There 

is a consolidation with the loss of Adelphia, with an increase in 

choices for consumers as overbuilders, Internet companies and the 

telephone companies roll out video services. These differing market 

dynamics are representative of the tremendous changes occurring 

more generally in the entire telecommunications and video marketplace, and these changes have broad, competitive implications 

which must be explored. 

Individually, each event is worth some attention, and accordingly, we will, of course, examine them today. To begin, Comcast 

and Time Warner Cable proposed to divide up Adelphia’s cable operations in various markets around the country. This will make the 

two largest cable operators in the United States even larger. Many 

have concerns about this small but potentially significant increase 

in concentration. 

For example, what effect, if any, will this change have on the 

availability of independent programmers to break into the marketplace? Will the deal give Time Warner and Comcast a greater ability to strike exclusive deals with other programmers, or greater incentive to utilize the so-called ‘‘terrestrial exemption’’ to prevent 

competitors from gaining access to their programming. These are 

issues which we intend to explore this afternoon. 

2

While the Adelphia deal gives us some cause for inquiry, there 

is certainly a significant counterbalance to the questions it raises. 

As part of this deal, Comcast is giving up its 17 percent stake in 

Time Warner Cable and its 4 percent stake in Time Warner Entertainment, which will remove a large financial connection between 

the two competitors. Additionally, this consolidation also likely will 

lead to efficiencies and a greater ability for these cable companies 

to improve and expand their competitive offerings. 

We look forward today to hearing about how Time Warner plans 

to use this deal to enhance the experience of its consumers. 

Unlike the Adelphia deal, which is in its final stages, the entry 

of the phone companies into the video business is just in its infancy, but in the long run, this entry likely will foretell a much 

more significant change in the marketplace. While the phone companies are upgrading their networks and gearing up to enter video 

overbuilders like RCN are offering much needed competition in a 

number of communities, which is bringing prices down and providing valuable new services for consumers. We will hear today 

from RCN, as well as the U.S. Telecom Association, to examine 

how they view the marketplace. 

More generally, we will discuss with all of our witnesses what 

steps are needed to ensure a competitive future for the rapidly 

changing world of video and telephone service. As we all know, this 

marketplace is evolving at an extraordinary pace. The phone companies are beginning to offer video. The cable companies are getting into phone service, and the Internet continues to expand as a 

medium for all sorts of content. In just a few short years all of 

these industries may be completely transformed in ways we can 

only being to imagine here today. 

But vibrant competition is not a sure thing. We need to take active steps to make sure that these markets welcome competition 

and innovation, and that new entry is in fact encouraged. Franchising regulations, access to content and regulatory parity are important issues among many that must be addressed. We have to 

get it right if we want the market to thrive and provide the maximum choice in value for American consumers. 

For those reasons, as we consider the cable and telecommunications laws in the upcoming months, we need to understand 

whether current regulations are getting in the way of a more competitive market, and if so, then we need to figure out what different 

rules will help the marketplace create better products for consumers. This is a task that the Antitrust Subcommittee intends to 

undertake. Our hearing today is a first step toward learning what 

we need to do to do that. So I hope that all of our witnesses can 

testify not just about the specifics of the Adelphia deal and of new 

entry, but also more broadly about how we can help promote competition in these markets. 

The Subcommittee, I believe, really has an obligation, an obligation to examine current laws and regulations to make sure that 

new entrants into video service have a real opportunity to get into 

these markets, and in fact, to compete. At the same time, of course, 

we must respect and understand the regulatory burden already 

placed on incumbent cable providers and take care to ensure that 

3

their long-term efforts and network investments are not unfairly 

diminished by any changes we make in the legal structure. 

In the last 10 years the cable operators collectively have spent approximately $100 billion upgrading their systems and improving 

their offerings to consumers, all based on the current laws and regulations. We must keep that in mind as we consider modifying the 

competitive framework that guides the industry. 

This is truly a difficult balance to strike, but we must strike it 

correctly because the reward will be a vigorously competitive marketplace that will ensure the economic vitality of this important 

sector in our economy. Most importantly, it will help the consumer, 

and aid in the creation and deployment of new and better products 

and services for individuals and businesses in our country. Those, 

of course, are very worthy goals, and merit our strongest efforts. 

Let me at this point turn to Senator Kohl, the Ranking Member 

of this Committee, and my partner who I have worked with so 

many years on the Committee. 

STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM 

THE STATE OF WISCONSIN 

Senator KOHL. I thank you, Mr. Chairman, for holding this hearing today. 

As you know, we are at a crucial time for competition in the 

video industry. The decades-long control by local cable monopolies 

may finally be shaken by the promised entry of the giant telephone 

companies into video. But whether we are about to witness the 

birth of a new world of expanded choices for consumers will depend 

to a large extent on the policies adopted in the months ahead. 

Today’s hearing will address several topics crucial to the development of a truly competitive video market. First, what will be the 

impact for consumers of the acquisition of Adelphia by the Nation’s 

two largest cable competitors? Second, what are the policies we can 

adopt to ensure that important new competitors in the video market, such as the phone companies, are given a fair shot to compete. 

And third, how can we assure that independent voices have room 

to be heard in today’s media world? 

We continue to witness increased consolidation in the industry. 

The latest deal is the purchase of Adelphia by Comcast and Time 

Warner. Once the acquisition is complete, Comcast and Time Warner intend to swap local cable systems to greatly expand their regional presence. This clustering will lead to a very high market 

share, in several regions of the Nation as high as 70 percent, from 

the East Coast to California. Such clustering greatly increases the 

ability of the local cable franchise to gain exclusive rights to ‘‘must 

have’’ programming, effectively freezing out competitors. 

Increasing concentration also makes it much more difficult for 

independent programmers like our witness from America’s Channel 

to obtain carriage on major cable systems. 

Our democracy depends on the ability of independent voices to be 

heard. We should be deeply concerned when only programmers affiliated with cable companies or the broadcast networks seem to get 

carried on the cable giants, 

There is one significant piece of good news. The entry by the regional Bell companies into the video market. By challenging the 

4

cable monopoly, the efforts by companies like SBC and Verizon creates the exciting prospect of a real new competitive choice for millions of consumers. But we must ensure that undue roadblocks to 

the entry of the phone companies into video are removed. 

Therefore we should consider the following actions: 

First a careful review of the Adelphia deal by the Federal Trade 

Commission and FCC to ensure that it does not lead to excessive 

market concentration in local geographic markets. Central to this 

review should be a serious consideration of conditions to ensure 

that competitors have access to programming that consumers demand, as was done in News/Corp-DirecTV. 

Second, closing loopholes in the program access law to ensure 

that competitors have access to essential programming owned by 

the cable incumbents. 

And third, revising the existing rules so that independent programmers have a fair shot at getting carried. 

These and other similar ideas should be on the agenda as Congress looks to rewrite the landmark Telecom Act of 1996. These 

measures will help assure that consumers see the benefits of increased choice by giving new entrants the breathing room to compete. 

We have an outstanding group of me here to offer testimony, answer questions, and I think we are all looking forward to this hearing. 

Thank you, Mr. Chairman. 

[The prepared statement of Senator Kohl appears as a submission for the record.] 

Chairman DEWINE. Senator Kohl, thank you very much. 

Senator Hatch. 

Senator HATCH. I have no statement I am going to make. I am 

just very interested in this hearing, interested in hearing from all 

of the witnesses. I may not be able to stay because of an Intelligence Committee meeting I have to go to, but I am certainly going 

to pay attention to what you have to say. These are very interesting areas to me, and we will just have to see how we can sift 

it all out. 

But I appreciate our leadership on this Committee. 

Chairman DEWINE. I am going to introduce our witnesses. Before 

I do, let me just say that we really want to have the opportunity 

to get to questions. We appreciate your being here. We are going 

to stick very rigidly to the 5-minute rule. So when you see the 

lights, that is going to be it. So we are going to do 5 minutes because we do want to have time for questions, and we appreciate it. 

Glenn Britt is the Chairman and CEO of Time Warner Cable. He 

has served in that position since August of 2001. He has been with 

Time Inc. since 1972, and most previously headed Time Warner 

Cable Ventures. 

Kyle McSlarrow is the President and CEO of the National Cable 

& Telecommunications Association. He is certainly familiar to us 

here in the U.S. Senate. He has held many positions here in the 

Senate, including Chief of Staff to the late Paul Coverdell. 

Walter McCormick is the President and CEO of U.S. Telecom, a 

trade association representing the telecommunications industry. 

5

Doron Gorshein is the President and CEO of the America Channel, an independent cable network broadcasting, programming celebrating America. He has also worked at CNN, a channel owned by 

Time Warner. We welcome him back as well. 

Mr. Peter Aquino is the President and CEO of RCN, a cable overbuilder active in several markets. Before joining RCN he served as 

the Senior Managing Director at Capital Technology Advisers, a 

telecom restructuring firm. 

Mr. Scott Cleland is the CEO of Precursor, a market research 

firm. He has testified before this Committee several times in the 

past, and we welcome him back as well. 

Mr. Mark Cooper is the Director of Research for the Consumer 

Federation of America. He has also testified before us on numerous 

occasions, and we welcome him back as well. 

Mr. Britt, we will start with you. Thank you very much. 

STATEMENT OF GLENN A. BRITT, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, TIME WARNER CABLE, STAMFORD, CONNECTICUT 

Mr. BRITT. Good afternoon, Mr. Chairman and members of the 

Subcommittee. My name is Glenn Britt, and I am Chairman and 

CEO of Time Warner Cable. I want to thank you for inviting me 

to appear here today to discuss Time Warner’s role in the remarkable pro-consumer developments occurring in the cable industry. 

I respectfully request that my full written statement be included 

in the record. 

Chairman DEWINE. It will be made a part of the record. 

Mr. BRITT. Time Warner Cable is the Nation’s fourth largest 

multi-channel video distributor, serving nearly 11 million customers in 27 States. It is an indication of how the competitive landscape has changed in recent years that the two companies immediately ahead of us are not cable operators. They are DirecTV and 

EchoStar, DBS operators who have used a combination of innovative service and cost effective national marketing to attract over 25 

million subscribers. 

At Time Warner Cable we have long recognized and responded 

to the competitive challenges posed by the DBS operators and by 

others. Our history of innovation dates back to early experiments 

with interactive television in Columbus, Ohio in the 1970’s. Our response to the changing competitive landscape was to invest billions 

of dollars rebuilding our systems, using an advanced two-way architecture. In fact, since 1996 we have invested more than $17 billion in our infrastructure. 

These upgrades allowed us to offer our customers a variety of 

new video services such as high definition television, digital video 

recorders and video on demand. 

In addition, our investment in upgrading our facilities has allowed us to take on the incumbent telephone companies, first by 

providing high-speed Internet connections in competition with dialup service and DSL, and more recently, by offering voice over 

Internet protocol telephone service. 

The response to these new services has been fantastic. We are 

signing up thousands of new subscribers every week. Most importantly, our success and the success of other cable operators is trigVerDate 0ct 09 2002 10:44 Apr 04, 2006 Jkt 026644 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\26644.TXT SJUD4 PsN: CMORC
6

gering even more competition. The big telephone companies are 

rushing to invest billions so they can offer their own bundles of 

voice, video and data. And that is not all. Power companies and 

wireless providers are also innovating and investing, promising 

more competition in the days ahead. 

At Time Warner Cable we view this competition as creating new 

opportunities for consumers and for independent creators of innovative and attractive services and content. Our goal is to bring as 

many of these services to as many consumers as possible. 

As you know, Time Warner Cable recently entered into an agreement, together with Comcast, to purchase cable systems from 

Adelphia, which has been in bankruptcy for more than 2 years. The 

Adelphia systems, not surprisingly, lag behind in the deployment 

and marketing of advanced services. The proposed transaction will 

allow us to bring advanced services such as VoIP to millions of new 

customers, including more than half a million customers in Ohio. 

We are also continuing our existing strategy of regional clustering by swapping certain systems with Comcast. AS the FCC has 

recognized, regional clustering creates cost savings efficiencies and 

economies of scale that enhance competition and promote innovation. 

It is not surprising that some of our competitors would like to 

impose new restrictions on our clusters, but even with the proposed 

transactions, Time Warner Cable’s regional footprints will be 

dwarfed by the national reach of DBS and by the contiguous multistate territories of the incumbent telephone companies. 

We believe that the new super-competitive landscape requires a 

new way of thinking about regulation. And the foundations for that 

debate should be that like services are treated alike and that Government should not play favorites among competitors. If those principles are followed, we are confident, and you can be confident, that 

the clear winner will be the American public. 

[The prepared statement of Mr. Britt appears as a submission for 

the record.] 

Chairman DEWINE. Thank you very much. 

Mr. McSlarrow. 

STATEMENT OF KYLE MCSLARROW, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, NATIONAL CABLE & TELECOMMUNICATIONS ASSOCIATION, WASHINGTON, D.C. 

Mr. MCSLARROW. Mr. Chairman, thank you very much for inviting me here. With your permission, I will submit my full testimony 

for the record, and just make a couple of observations. 

My testimony is really a continuation of the conversation that 

you and Senator Kohl and I have already had. We are focused on 

video competition, quite properly, but the truth is, if you go by the 

statements that each of you made and that all of us will be talking 

about, this is part of a bigger picture which is really about 

broadband and competition in America. Video is a hugely important piece of that, but it is just one piece. 

Mr. Britt just now mentioned the idea that as Congress takes a 

fresh look at the Telecommunications Act, it is important that we 

keep a couple of principles in mind. One is, as he mentioned, treating like services alike. We would also add that when we think 

7

about video competition, we should think more broadly about not 

just a level playing field for all competitors, but what is it we want 

in the future, 5 years, 10 years down the road? I would submit the 

kinds of questions that we have been asking over the past 5 years, 

maybe even last year, are already becoming stale this year. 

Things are happening so fast. There is so much dynamism in the 

telecommunications industry. We have already mentioned the telephone companies getting into video. We have the spectacular success of two satellite providers with national footprints. We have all 

kinds of content owners figuring a million different ways to get 

video and other forms of content into the hands of consumers, 

whether it is through pipes into the home, or mobile devices, or the 

Internet. 

So this is a great time to step back and think about, No. 1, what 

are the problems we are trying to solve, and number two, how do 

we keep the kind of investment and innovation that has been flourishing over the last couple of years—as well as competition—going? 

One additional point, even though it may not squarely fit within 

this topic: if you are thinking more broadly about video competition, we have to think about the kinds of investments that I would 

suspect you want to encourage and that the cable industry, for one, 

has been focused on making. We have spent close to $100 billion 

over the last 10 years, partly because we made an agreement with 

Congress that if we were deregulated, we would build out our plant 

with fiberoptic technology. We would deliver all these two-way 

services in video and voice and data. 

I think because of that success, there is an opportunity and probably a risk that others will want to take advantage of the kinds of 

investments that other people have made. I will give you one example. Right now before Congress is the issue of the digital transition. 

While that bill is going to be marked up in another committee, one 

of the issues that has come up is called multicasting, which is the 

broadcasters’ claim for mandatory carriage—in addition to the 

mandatory carriage they already have—of up to six channels of our 

capacity. 

One reason why I say we cannot just focus on video is that the 

pipe we provide into the home is a broadband pipe. We do not just 

do video. So if somebody comes along and takes our bandwidth—

which we would submit is properly within your jurisdiction as the 

taking of private property—then you are not just hurting other 

independent voices, as you said Senator Kohl, who might be out 

there wanting carriage on our pipe, you are also hurting our ability 

to deploy other broadband services. 

So I think this hearing is timely. I know that you are going to 

be doing others down the road. We welcome and would be delighted 

to participate in that process, and we thank you for having the 

hearing. 

[The prepared statement of Mr. McSlarrow appears as a submission for the record.] 

Chairman DEWINE. Thank you very much. 

Mr. McCormick? 

8

STATEMENT OF WALTER B. MCCORMICK, JR., PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, UNITED STATES TELECOM ASSOCIATION, WASHINGTON, D.C. 

Mr. MCCORMICK. Thank you very much. I too would ask that my 

full statement be included in the record. 

Mr. Chairman, our membership ranges from the smallest rural 

telecom companies to some of the largest corporations in America, 

and we are united in a single belief, that it is time to update the 

Nation’s telecommunications laws to reflect the dramatic technological and marketplace changes that are taking place today. 

As the Subcommittee examines the state of video competition, let 

me highlight three aspects that we believe are worthy of examination. First, broadband deployment. As my colleague Kyle 

McSlarrow said, broadband deployment is critical, and video is 

going to play a significant role in the widespread deployment of advanced broadband technology. It is video services that local telecom 

companies will deploy over the new broadband networks that will 

drive subscriber growth and thus network deployment. 

For example, SBC Communications is planning to offer services 

with interactive features that go far beyond those provided with 

video programming today. Verizon Communications has already 

started deploying fiber optics to the home with the intent of offering subscribers new and innovative video offerings. And across this 

Nation there are scores of small,independent, local telecom companies that are investing in new infrastructure to deliver video choice 

and innovative services to consumers. 

Second, price. Mr. Chairman, I should not have to convince this 

Subcommittee that competition is a good thing and a check on inflation. There are few areas where there is greater price inflation 

than in the delivery of cable television services. According to the 

GAO, even with the presence of two satellite competitors, cable operators have been increasing their prices at a rate that is nearly 

three times the rate of the consumer price index. This hurts every 

consumer, but especially the economically disadvantaged and those 

living on fixed incomes. Indeed, in Keller, Texas the local cable operator has responded to Verizon’s entry by dropping its price by 50 

percent. 

Third. We urge this Subcommittee to consider the effect of unnecessary governmental barriers to competitive entry. The current 

franchising process imposes substantial delay in transaction costs, 

and thereby, the uncertainty raises the cost of capital. Some U.S. 

telecom companies are reporting that it is taking as long as 3 years 

to get franchises. And aggressive cable opposition to the granting 

of competitive franchises in local area suggests that the cable industry itself sees the franchising process as a barrier to entry that 

it will use to insulate itself from competition for as long as possible. 

Build-out requirements are another barrier to entry. Indeed, the 

very notion of imposing build-out requirements on competitors is 

virtually unheard of in our country, and the same cable operators 

who argue for build-out requirements on our industry, vigorously 

oppose any requirement that they build out to match telephone 

service territories when they offer voice telephone service. Buildout requirements do not protect consumers. In small communities 

like Lakedale, Minnesota, companies have invested to build out inVerDate 0ct 09 2002 10:44 Apr 04, 2006 Jkt 026644 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\26644.TXT SJUD4 PsN: CMORC
9

frastructure to offer voice video and Internet access. At the petition 

of the local cable operators, these companies have been told they 

cannot offer video over these facilities unless it is built out beyond 

the voice network to match the cable footprint. 

So we have areas where facilities have been deployed and consumers are being denied the service simply because it is now economically impracticable to do so. 

We are seeing this use of governmental processes by the cable industry to slow competitive entry, everywhere. Cable operators in 

Texas have sought to enjoin the newly enacted State franchise law. 

And this is not just aimed at stopping entry by large companies 

like Verizon and SBC, it is aimed at small entrepreneurs as well. 

In Texas, the first certificate granted under the new law was to 

Guadalupe Valley Telephone Cooperative, which is a small company seeking to compete with one of the Nation’s largest cable operators. 

So in conclusion, Mr. Chairman, we believe it is time to update 

the laws. Rapid advancements have eliminated technological barriers to entry. We believe it is time to eliminate the regulatory barriers into entry into video competition as well. 

Thank you again so much. 

[The prepared statement of Mr. McCormick appears as a submission for the record.] 

Chairman DEWINE. Thank you very much. 

Mr. Gorshein, thank you for coming. 

STATEMENT OF DORON GORSHEIN, CHIEF EXECUTIVE 

OFFICER, THE AMERICA CHANNEL, LLC, HEATHROW, FLORIDA 

Mr. GORSHEIN. Mr. Chairman, members of the Subcommittee, 

thank you for the opportunity to testify today on behalf of the 

America Channel. I am here to share our perspective on the state 

of competition in the video space based on our experiences as an 

independent channel seeking access to the consumer. 

The America Channel is a nonfiction programming network, set 

to explore and celebrate America, profiling its diverse communities, 

local heroes, ordinary people who accomplish the extraordinary. It 

is not a channel about celebrities or the latest fashion, but about 

the every day heroics and stories of real political, their struggles, 

aspirations and achievements. 

The America Channel was founded in the months following 9/11 

when television no longer resonated with my sensibilities as an 

American consumer. Indeed, our stellar market research results 

confirmed that many Americans share this view. We discovered 

that Americans want more relevant programming, more programming about what makes America special, more community, more 

connectivity and more authenticity on television. This is why we 

believe the America Channel could be the most powerful, most resonant new product to come along in quite some time. 

We then spent 18 months and a million dollars from investors on 

planning, development, market research before approaching the 

cable operators. As part of our efforts, I traveled to dozens of cable 

systems across America which are owned by the top cable operators. The reception was overwhelmingly positive. We believe our 

level of diligence was a strong as any new channel’s. 

10

The key to viability is distribution to a sufficient number of 

households and access to certain key markets. Because of the market power of the largest cable operators, access through them is absolutely essential. If they say no, the viability of a new channel is 

in peril. Today the America Channel has distribution relationships 

with the majority, the vast majority of what will become the telco 

video space, including Verizon, SBC and others, and productive discussions with both satellite players. 

But after nearly 21⁄2 years we have had virtually no progress getting carriage from the dominant cable operators. Why is this? One 

reason is the cable operators are vertically integrated. They own 

channels. The telcos do not. This is relevant because an independent channel is a direct competitor to a cable-affiliated channel 

on several fronts, for viewers, ad dollars, technical capacity, and 

the asset value is independently owned. New independent channels, typically free to the cable operator for several years, also create downward pricing pressure on affiliated channels. A review of 

Kagan’s Reports reveals the average fee for a cable-affiliated net is 

more than three times the fee for the few independents. 

One major cable operator derives 40 percent of its operating income from its television networks, only 28.6 percent from cable 

subscriptions. That operator has strong incentive to exclude the 

less expensive and better products to protect increased rates for its 

own channels. 

A fully distributed channel is typically valued in the billions of 

dollars and generates annual revenue in the hundreds of millions. 

Thus, vertically integrated cable operators must choose between 

owning 5 percent of the revenue and asset value when launching 

an independent channel, versus 100 percent when wholly owned. It 

is an easy decision and an inherent conflict of interest that prevents the best value products from reaching the market. 

The GAO confirmed that cable operators are much more likely to 

carry affiliated networks over independents, and we found that 

each of the top two cable operators over a 21⁄2 year period, carried 

on a non-premium wide basis only one of 114 channels with no 

media affiliation. Meanwhile, most affiliated channels are carried. 

John Malone recently said that an independent channel has no 

chance whatsoever if Comcast does not carry it, and Cable World 

Magazine reported that VC funding of entrepreneurial cable networks has died because of the gatekeeping power of the top cable 

operators. 

Of the 92 channels that have reached the critical viability 

threshold of 20 million homes, not a single one did so without at 

least two of Comcast, Time Warner and Adelphia. The Adelphia 

transaction, with its geographic rationalization, if consummated 

without conditions, could mean the end of new independent channels. Though we believe the public would embrace the America 

Channel, this hearing is not about any single product, it is about 

free competition for content and for services. We believe the telcos, 

in contrast to the largest cable operators, are squarely focused on 

free market competition with better channel selection, lower price 

and higher quality customer service. Their success is critically important, and they should be helped to deploy their services and 

have fair access to content. 

11

Foreclosure of opportunities for independent channels has adverse effect on competition, consumer choice, consumer pricing, and 

the diversity of ideas in the marketplace. We must have an environment which permits free competition on the merits. It is my 

hope that our experience will help you address these systemic problems that play out to the detriment of all Americans. 

Thank you. 

[The prepared statement of Mr. Gorshein appears as a submission for the record.] 

Chairman DEWINE. Thank you. 

Mr. Aquino. 

STATEMENT OF PETER D. AQUINO, PRESIDENT AND CHIEF EXECUTIVE OFFICER, RCN CORPORATION, HERNDON, VIRGINIA 

Mr. AQUINO. Good afternoon, Mr. Chairman, Senators Kohl and 

Hatch. My name is Peter Aquino, and I am the CEO and President 

of RCN Corporation. 

RCN is a leader in facilities based broadband expansion in the 

United States. We bring voice, data and video to consumers 

through the triple play, since 1997, and before any of the other incumbents had embarked on the triple play. Now, we are asking you 

to help us to ensure a marketplace in which there is more consumer choice and one that fosters additional broadband expansion. 

Ensuring access to programming with fair rates is key. 

To allow us to expand our pro-competitive presence, we are asking you today to do the following. 

1. To ensure that the FCC and FTC condition the Adelphia transactions to require that competitors have access to programming 

at rates and on terms equivalent to what Comcast and Time 

Warner charges themselves. 

2. Request that the FTC immediately open an investigation into 

the rates and terms for video programming in general, to illuminate the current discriminatory pricing structure that favors 

large cable operators, and to debunk the myth that these discriminatory rates are justified. 

3. Close the terrestrial loophole in the program access rules. I 

think that is very important. 

And then finally, reject the former Bells’ demand that franchise 

relief is necessary. In a fair, open and competitive marketplace 

with fair price structures, we can provide cable choice to even more 

consumes, and I hope you support this goal. 

I took the helm at RCN last year, and RCN today has more than 

850,000 customer connections on the East Coast from D.C. to Boston, Chicago and some parts of California. Our current network 

passes about 1.4 million homes, and we have 6 million homes licensed. We do this with 130 franchise licenses and that is without 

any special concessions. 

I am especially proud of the fact that RCN’s presence in the marketplace has produced documented benefits for consumers. As both 

the FCC and GAO have reported, this includes more choice, 

telecom infrastructure upgrades, better customer service, and a 

check on ever-rising cable rates. With fair practices and price structures we can do even more. We can expand competition and give 

12

consumers a choice, provided we have access to ‘‘must have’’ programming with rates that are fair. 

Comcast and Time Warner’s proposal to acquire Adelphia and 

swap systems among themselves threatens our ability to access 

programming on a fair basis. A major concern with the Adelphia 

transactions is that these companies, which will control over 47 

percent of the market, are swapping system to consolidate regional 

clusters. The FCC has said that clustering will increase the incentive of cable operators to practice anticompetitive foreclosures of access to vertically integrated programming. At a minimum, conditions similar to those imposed on News/Corp’s acquisition of 

DirecTV should be applied to the Adelphia transaction. These conditions would ensure access to vertically integrated programming 

with fair rates and terms, and would give us an arbitration process 

if disputes arise. 

We do not oppose the Adelphia merger, but this kind of market 

concentration is supportable only if pro-competitive conditions are 

imposed. 

Comcast also has a history of using the terrestrial loophole to 

foreclose competitors’ access to regional sports, a ‘‘must have’’ content. So this loophole needs to be closed. 

Although we currently have access to programming, companies 

like RCN are being placed at a significant price disadvantage. We 

brought a chart today, a chart that shows that we believe our programming costs as a competitor are double those of large cable 

companies. Roughly 32 percent of our programming dollars currently go to Comcast and Time Warner and their affiliates. As their 

control over ‘‘must have’’ sports and other programming grows, so 

does their ability to charge even more excessive rates. 

We believe an FTC investigation into discrimination in video programming rates and terms would both illuminate the problem and 

make clear the need for legislation to provide fair access. 

RCN is very innovative and we are broadband fiber leaders, and 

we want to be part of the continued broadband expansion in the 

United States. 

I thank you for this opportunity to speak today. 

[The prepared statement of Mr. Aquino appears as a submission 

for the record.] 

Chairman DEWINE. Mr. Aquino, Thank you very much. 

Mr. Cleland. 

STATEMENT OF SCOTT CLELAND, FOUNDER AND CHIEF 

EXECUTIVE OFFICER, PRECURSOR, WASHINGTON, D.C. 

Mr. CLELAND. Thank you for the opportunity to testify, and I also 

request to have my full testimony in the record. 

Chairman DEWINE. It will be made part of the record. 

Mr. CLELAND. I want to commend Congress. In both the 1992 Act 

and in the 1996 Act, there was vision and there was great success. 

I think that both video and telecom competition is increasingly vibrant and I think it is here to stay. I do not see it being reversed. 

I think the facts are clear that cable is no longer a monopoly. 

There are now 28 million Americans, or 30 percent of the market 

where they have taken their freedom that Congress gave them and 

13

they can tell their cable company to take a hike if they do not like 

the service or the offering at the price they are getting. And the cable industry has spent $90 billion to basically compete 

more aggressively, and so the marketplace is working. It now has 

the best plan and offering some of the better services in the marketplace. 

The other thing that is good is telecom and cable competition is 

finally happening. The cable industry is a good two to 3 years 

ahead of the telephone industry in entering the other’s business, 

and I think that what you are going to see is you have seen a couple million cable customers take telephony from cable companies 

this year. It is going to be several million next year. 

And at that same time we expect, if there are a million or two 

that take video from the telephone companies, that will be a surprise. So for the next two to 3 years you are going to see the numbers, because cable got its act together two to three to 4 years earlier, that they are going to be taking millions of customers from the 

Bells before the Bells are taking millions of customers from them. 

To just give you a little bit of insight, I think that Verizon is 

probably the most serious and quick about getting into video. I 

think SBC is the least serious. I would think that Bell South is 

very well prepared and is kind of under the radar, and I think 

Qwest really can only afford DBS resale. 

So briefly on the Adelphia transaction, I also do not see that as 

a competitive problem. In a sense there are two big things that 

transaction accomplishes. In 2002 the Department of Justice ordered that these two companies, Time Warner and Comcast, has to 

divest the cross-ownership between the two. This transaction accomplishes that and that was not easy to accomplish. The second 

thing it does it that it brings 5 million American consumers under 

reputable and competent management. Those 5 million customers 

were operated by a criminal family enterprise, and this is a good 

development, getting these 5 million subscribers under competent 

management so that they can have better service. 

Now, Mr. Chairman, in the last couple minutes you asked in an 

opening statement for ideas of how to better promote more competition. Well, last April when I testified before the Committee I said 

the Bell mergers were not a problem, but I said there was a looming problem out there that I warned the Subcommittee about, and 

that was bitter interference. 

Well, 2 weeks ago something big happened. And that was a denial of access, which is what I was arguing, is the big fear to competition in the Internet. What happened is Level 3 went to Cogent, 

one of the providers, and basically denied access. And so about 5 

percent of the Internet went dark for a couple of days about 2 

weeks ago. Precursor was one of the companies that got turned off. 

We were not able to fully publish. We were not able to do our research, and many of our colleagues that had had voice over IP were 

not able to complete their phone calls. 

How this happened was a big company went to a small company 

and said, ‘‘You are not paying us enough in this peering arrangement.’’ The Internet is built on cooperation. The fabric of cooperation has been very strong to date, but what I want to point out 

here is if the big feel that they can take the small hostage by basiVerDate 0ct 09 2002 10:44 Apr 04, 2006 Jkt 026644 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\26644.TXT SJUD4 PsN: CMORC
14

cally saying, ‘‘If you do not pay us more money to transit, we will 

cut you off—heck with the consumers and the businesses that are 

relying on the Internet to do interstate commerce.’’ That is what 

happened. 

So what I want to advise the Committee here is this is a case 

where an ounce of prevention can prevent a pound of cure, is the 

Internet functions exceptionally well right now in a cooperative 

way. I am by no means calling for a regulation. That would be a 

disaster. What I am advising is do something now so you will not 

have to regulate later. My advice is that the Committee and the 

FCC and everybody in Government should say, ‘‘Look, if you have 

disputes on peering arrangements, these should be handled by private sector commercial arbitration disputes, but they should never 

devolve down to the level of cutting off people from the Internet.’’ 

And so it is in everybody’s interest for the Internet to be free and 

competitive. 

And so I just flag that issue. It will get worse if the Government 

does not flag it. Thank you. 

[The prepared statement of Mr. Cleland appears as a submission 

for the record.] 

Chairman DEWINE. Very good. 

Dr. Cooper. 

STATEMENT OF MARK COOPER, DIRECTOR OF RESEARCH, 

CONSUMER FEDERATION OF AMERICA, WASHINGTON, D.C. 

Mr. COOPER. Thank you, Mr. Chairman, Senator Kohl. My testimony outlines our concerns about the Adelphia merger transaction, 

and I want to focus on the second issue that you raised. A number 

of the other people have expressed similar concerns that we had. 

I want to focus on it, and I am going to do it in terms I think the 

Antitrust Committee it is relevant to. 

I certainly applaud the potential for the arrival of a new cable 

competitor that will end this persistent monopoly, but I must remind you that policymakers have been promising consumers cable 

competition for 20 years, and it never seems to quite get here. It 

is always someplace around the corner, and when it arrives, it is 

expensive bundles, it is very, very inconsistent, infrequent and does 

not serve the interest of the average lunch-bucket cable consumer. 

We never got the second wire. Satellite has not disciplined. Video 

dial tone disappeared. And so now they tell us, you tell us the telephone companies are coming to help us. I remind you that they 

have a miserable track record in both opening their own networks 

and entering other service areas as a competitor. 

As a result, cable consumers have been forced to buy huge bundles of packages in which they do not watch three-quarters of the 

programs they are forced to pay for. Cable ties the tiers together, 

so if you want to buy the second tier, you have to buy the first tier. 

The only exception is a Congressionally mandated one. They then 

bundle at each tier. They tie high-speed Internet to basic video 

service with a negative $15 price on basic service. That is a predatory price. They then force consumers to buy their Internet service 

provider. It is a tie. And if you want to get your own service provider, you have to pay for two, pay twice. 

15

Telcos do essentially the same thing. Most refuse to sell standalone DSL service separate from their franchise product, voice. 

They are offering even bigger bundles for consumers, not more 

choice, just take it or leave it, all or nothing. Now, that is a choice, 

but it is not the choice consumers want. It is not real consumers’ 

choice of picking the programs they want to pay for. 

The average monthly bill for cable service has doubled since the 

passage of the ‘96 Act, doubled the average monthly bill. It has 

been pointed out that there is only one other commodity dominated 

by a foreign cartel and a domestic oligopoly that matches that, and 

that is gasoline. 

Entry by the telephone companies into cable will not serve the 

consumer if they insist on bundles, if they do not open their networks, and of course, the price they want to impose is the complete 

abandonment of public policy and public interest obligations on 

their service territories. The build-out requirement there again 

means that they are not going to serve the poor people they promised to help and who their big bundles will not in fact do any good 

for. 

Of course, cable entry into voice will not do nearly as much good 

as it could if they can tie it together with their other products, if 

they can foreclose their network from competing service providers, 

which they can, in fact, are likely to do. 

So what are the big issues that this Committee needs to address 

and can address pro-competitively on an antitrust set of issues. 

One, Mr. Cleland has suggested the first one. You cannot interfere 

with the bids. Nondiscriminatory access to the means of communication have been a fundamental part of our society since its 

founding. Roads were open to all, canals were open to all, steamship lines, et cetera, have all been open. We have to preserve that 

principle of network neutrality. 

It has to be enforceable. The FCC had a charade of saying, it is 

a principle, we adopt it, but it is not enforceable. You cannot as 

policymakers accept that. 

Second of all, if you really want competition, then we have to 

have more last miles, and the way to get that, someone else mentioned, the DTV transition. We need unlicensed spectrum available 

for platforms to reach consumers in the lower bands so that we are 

not dependent upon centralized investments by a little duopoly or 

even a triopoly. 

Third, we need municipal broadband to be open. Congress said 

in the ‘96 Act any entity should be allowed to compete. Unfortunately, even a simple word like ‘‘entity’’ confused the court. 

So they have been eliminating municipalities from providing 

competition. That is a barrier to competition. That is something I 

think is within the purview of this Committee to look at. And so 

we need to make sure that any entity has access to the public, cannot be cutoff from access to the Internet, and that will create a 

playing field where multiple platforms can compete for the consumer’s dollar. 

Thank you. 

[The prepared statement of Mr. Cooper appears as a submission 

for the record.] 

16

Chairman DEWINE. Good. Thank you very much. We appreciate 

all your testimony. 

Mr. Britt, we will start with you. You are first. I live in Ada, 

Ohio, and I currently have Adelphia service. What is going to 

change for me? Will I still be able to walk across the street and 

sign up for service, or am I going to have to call some number and 

wait and punch in some numbers and do some things? Am I going 

to have to do that? Or am I going to get more cable choices, more 

channels? What is going to happen to my price? That is what people want to know, and it is not, of course, obviously, just Ada, Ohio. 

It is Chillicothe, it is Newark, it is Bryan, it is Cleveland. It is, you 

know, 800,000 customers, I guess, in Ohio. 

Mr. BRITT. Thank you, Mr. Chairman. 

Chairman DEWINE. I used to live in Ada, Ohio. 

Mr. BRITT. A few things will happen, I think all of them good. 

First of all, because Adelphia has been bankrupt, it has not been 

able to invest in upgrading its cable systems in much of its footprint. We are going to invest a great deal of capital so that the infrastructure can handle new services. We will then offer all the 

same services we have been offering on Time Warner Cable, services like broadband, voice over IP, high-definition TV, et cetera. 

We believe, to answer one of your questions, that this is a local 

business, so although we are very large company, we operate it as 

a local business. We provide customer service locally. Our employees live locally. We are part of the communities that we do business in. We do not believe in centralizing these things from very 

far away. 

So I think what the consumers will see is more services, better 

customer service, and local service. 

Chairman DEWINE. When would people start to expect, though, 

to see kind of a change in the menu or a change in the options? 

Mr. BRITT. Well, first, of course, we have to close our transaction— 

Chairman DEWINE. Well, I understand. I mean assuming—you 

know, once the curtain comes down. 

Mr. BRITT. Once it is closed, the answer will vary location by location. Some places that are more easily upgraded will get the new 

services very quickly. Others need to have the construction process 

of upgrading them, so that will take a longer time period. And I 

do not have a complete answer, but I would say in a couple of 

years, everybody will have all the services. 

Chairman DEWINE. A couple years? 

Mr. BRITT. Yes. 

Chairman DEWINE. So it would be fairly uniform then at that 

point? 

Mr. BRITT. Yes, as the Time Warner footprint is today. 

Chairman DEWINE. Let me follow that up with another question. 

The Bell entrants—and Mr. McCormick argued that it is unfair to 

place the same regulations on phone companies in the video market as are placed on the cable incumbents, because in the video 

market the Bell Companies are new entrants with no market 

power, no market share. 

They also point out that when the cable companies offer telephone service as a new entrant, they are not forced to abide by all 

17

of the requirements and restrictions placed on the phone incumbents. 

Do you disagree with that, and why? 

Mr. BRITT. First of all, when we enter the phone business, we 

have been going to PUCs and getting licenses. We have been submitting to all of the regulation that is applicable to CLECs, including things like paying into universal service, CALEA, 911, those 

sorts of things. So I am not quite sure what he is talking about. 

I think everybody has anecdotes of the other side trying to 

thwart them through regulation. We in our own case, in my written testimony, talked about experiences we have in South Carolina 

where some of the rural phone companies are trying to keep us out 

and have gotten the PUC to vote against us. So that is applicable 

to both of us. 

I think the larger question is what sort of regulation should we 

have for this industry, this converged industry. It is not just video. 

It is video, broadband, and telephone. What sort of regulation do 

we want for the long run? What is the role of the local municipality? What is the role of the State? What is the role of the Federal Government? And, really, that is the question. 

I do not believe that the franchise process is creating a meaningful impediment to the phone companies. Verizon is getting lots of 

franchises. Most cities are eager for competition. They are not interested in delaying competition. 

Chairman DEWINE. Let me go back to the first question that I 

asked Mr. Britt and see, Mr. Aquino or Dr. Cooper, if you have any 

comments on that. 

Mr. AQUINO. I do agree with— 

Chairman DEWINE. My friends in Ada or Cleveland or any place 

else in the system, what are they going to see different? Do you 

agree with his answer? 

Mr. AQUINO. I agree with Mr. Britt, first of all, on the franchise 

side. We have gotten a lot of franchises— 

Chairman DEWINE. OK. You want to take that one then. OK. 

Mr. AQUINO. I will take that one first. 

Chairman DEWINE. All right. Go ahead. 

Mr. AQUINO. The answer to your other question about, you know, 

upgrading Adelphia’s network, I also agree with Mr. Britt. A system that is not taken care of for a long time requires fiber upgrade 

in order to offer voice services and high-speed data services. And 

certainly Time Warner and Comcast are well equipped to make 

that upgrade and ultimately bring consumers the choice of the triple play or products, you know, whether it is voice, data, or video. 

And when it comes to franchising, I would just reiterate that it 

is just not an impediment. As an entrepreneurial company, we 

haven’t really had a big problem to get franchises. 

Chairman DEWINE. Dr. Cooper? 

Mr. COOPER. This is an interesting case, and it frequently happens that the real bad guy is not in the room here in the sense that 

the creation of regional clusters, which is a really serious problem, 

is the other party to the merger; that is, Comcast has now created 

a tremendous set of clusters in a lot of larger markets. That is a 

great concern to us, as we outlined in our testimony. And so it is 

18

all those swaps that were around the rest of the transaction, that 

is a grave concern. 

Time Warner is also the smaller of the acquiring parties, so their 

footprint as a national actor is smaller. 

The simple answer is that a simple transfer of ownership of systems in Ohio from one party to another, divorced from the question 

of the regional clusters, divorced from the question of a national 

footprint, is not a bad thing for consumers, especially when, as was 

pointed out, it was run as a criminal enterprise. 

So I don’t disagree with his statement as far as it went. It is all 

the other stuff that he is not the primary moving party to that is 

the source of our concern about this merger in terms of regional 

clusters and national footprint. 

Chairman DEWINE. OK. Mr. Cleland? 

Mr. CLELAND. Thank you, Mr. Chairman. Just real briefly on 

clusters, I have to disagree with Dr. Cooper on the fact that clusters—the cable industry was very fragmented, and clusters give 

you enormous efficiencies. Those efficiencies have been handed 

back to consumers by getting better plant, getting high-speed access faster, getting more services faster. And so clustering, they are 

not anywhere near as clustered as regional Bell Operating Companies are. And so clustering is not by itself an evil. It is a benefit 

that has redounded to great benefit of consumers. 

Chairman DEWINE. OK. Who else wants to jump in? Mr. McCormick? 

Mr. MCCORMICK. Mr. Chairman, I would like to respond to a couple of the comments that have been made. 

First, with regard to the franchise requirement, Verizon has been 

at this for a year. It has obtained 14 franchises out of the more 

than 10,000 franchise areas that its region covers. If it gets one a 

day, it will take about 40 years for Verizon to achieve franchise 

agreements in all those franchise areas. 

Second, with regard to the cable industry’s entry into video, I 

would like to submit for the record a list of a dozen key telephone 

industry regulatory requirements that are unapplicable to the cable 

industry when it provides voice services, but, most important is the 

build-out requirement. In no area has the cable industry been required to build out to match the telephone service area prior to its 

offering voice service to its customers. And one of the biggest impediments to our deployment is that the telephone service footprint 

does not often match the cable franchise, and yet we are being prevented from being able to offer video to our customers. 

In Ohio, we have 32 companies that are offering telephone service, and some of the most innovative companies in the country are 

moving into video: Horizon, Champaign Telephone Company, and 

SBC. 

Finally, SBC’s commitment. SBC is very serious about deploying 

video. Its commitment is to have 18 million customers, 50-percent 

penetration, within 3 years. For purposes of comparison, it took the 

cable industry 35 years to reach a 50-percent penetration. It took 

Internet service 9 years. SBC is investing billions of dollars today 

to reach a 50-percent penetration in its region within 3 years. 

Chairman DEWINE. Senator Kohl? 

19

Senator KOHL. Thank you very much, Mr. Chairman. I would 

like to ask permission to insert the statements of Senators Leahy 

and Feingold into the record. 

Chairman DEWINE. Without objection. 

Senator KOHL. Mr. Britt, I would like to ask you a couple questions about the Adelphia deal. As part of this transaction, Time 

Warner and Comcast, as you know, intend to divide up Adelphia 

and then swap local systems to increase their regional clusters. As 

a result, local market shares will go up significantly in many communities to as high as 70 percent in some. 

Mr. Britt, do competitors have to worry about what you or 

Comcast will do once you gain such high local market shares and 

also that you will be able to lock up ‘‘must have’’ programming, like 

regional sports programming? And will you then—or should they 

worry that you will then deny that programming to your competitors? 

Mr. BRITT. Senator, on the question—the first question was really about clustering, and I think as somebody pointed out earlier, 

our big competitors are better clustered than we will be even after 

this transaction. So we have two satellite companies, who are both 

larger than we are, who have national footprints. So that is about 

as well clustered as you can be. And then we are competing against 

these very large multi-State phone companies that have much larger contiguous clusters than we have. So we are not quite sure we 

see what the issue is. 

We do understand—the question of program access has been 

brought up, and I think there is vigorous competition in this marketplace. We are in general, Time Warner, not an owner of regional 

sports networks, which seems to be the big focus. We are going to 

be a minority owner in a new Mets sports network in New York. 

That will be available to anybody. 

Actually, the irony of this to me is that the single economically 

largest example of exclusivity in sports is the NFL DirecTV package, the Sunday Ticket package, which is exclusive and has been 

unavailable to any other multi-channel video operator other than 

DirecTV. So I am not quite sure what the issue is in relation to 

clustering. 

Senator KOHL. Well, Mr. Aquino, what is your opinion? Does the 

Adelphia deal heighten your concerns about gaining access to programming? 

Mr. AQUINO. I think the Mets is probably a good example. It is 

access to programming at affordable rates. I used to pay a certain 

rate when the Mets were part of the MSG Network. To go to a 

Comcast/Time Warner venture, my rate increase will be about 20 

to 25 percent as they strip it out of one package and create another 

company. That type of programming access is really the problem 

that we are going to face as entrepreneurs, that the price is getting 

out of control. We certainly don’t want to pass those types of rate 

increases on to consumers. There is a certain market rate in the 

marketplace that is acceptable, but when programming, regional 

sports in particular, begins to fall into only a few hands, those are 

‘‘must have’’ programs. And with those rate increases, that is just 

unattainable. 

So that is my main concern with the clustering. 

20

Mr. BRITT. Senator Kohl, if I could just respond? 

Senator KOHL. Go ahead, Mr. Britt. 

Mr. BRITT. In the case of the Mets network, the owners of the 

Mets were going to form that network whether we invested in it 

or not. We were very small investors. So we, unfortunately, are 

sharing the cost increase that RCN has, and I would say that the 

cost of sports programming is a big issue for all of us. It is unrelated to the structure of the cable operator business. 

Senator KOHL. What about you, Dr. Cooper? Do you believe that 

we do, in fact, have reason to worry about this deal, that it will 

enhance Time Warner’s and Comcast’s ability to lock up programming and deny it to their competitors? 

Mr. COOPER. Again, the important guy is not in the room, the 

one that controls the sports, that has withheld it from competitors, 

that invented the terrestrial loophole, so to speak, and saw it as 

a point of leverage. And that is the fundamental difference between 

the so-called clusters of the Bells and the clusters of the cable systems. The Bells could not leverage their cluster. They were subject 

to regulation and non-discrimination, and so it did not do them any 

good to have that cluster because they could not discriminate in access to their systems. 

Now, of course, as we go forward into the new broadband era 

where the Commissioners decided that they are not longer obligated to provide access to the networks, they may change that. But 

that is not the direction we should be going. 

So there are clear examples of sports programming that has been 

withheld through the terrestrial loophole. Those clusters are the leverage for it. If you live in Philadelphia and you cannot see the 

Phillies or the Sixers, what do you need somebody else for? You 

want that stuff, and that drives penetration, and that can be withheld. Closing the terrestrial loophole is one of the clearly competitive issues that this Committee can address. 

Senator KOHL. Mr. Cleland? 

Mr. CLELAND. Yes, I would just like to add, you know, we have 

two different choices, and I think we chose a market-based solution 

in going forward with cable. And markets don’t always provide for 

all consumer wants. There are some consumer wants that don’t 

necessarily make economic sense, and so my point here is there are 

all sorts of instances where a marketplace delivers things consumers don’t like. 

When I am on an airplane, I cannot get Coke. I can only get 

Pepsi products. That is because the marketplace has set up a regime where it makes sense to have a sole-source supplier and they 

pay for it. 

Now, is that something regulation is necessary? I don’t think so. 

And so there are going to be lots of times in programming where 

consumers may not get all they want or may not get the best deal 

they want; however, the alternative of Government intervening and 

being the chooser rather than the marketplace I think is much, 

much worse. So it is the lesser of two evils. 

Senator KOHL. Mr. McSlarrow or Mr. Gorshein? 

Mr. MCSLARROW. I am here representing the cable industry, but 

because a couple of assertions have been made about Comcast—

21

even though I am not representing them specifically—I feel compelled to jump in here. 

First, it is false that Comcast Sports Net has done something 

with the so-called terrestrial loophole. What Comcast did in Philadelphia was acquire from Prism an existing microwave terrestrial 

distribution system, which had some sports programming on it, and 

they brought new sports programming to it. Sports Net is local in 

Philadelphia, and Comcast did not change what they had acquired. 

In every other instance, including here in D.C., Comcast Sports Net 

is satellite-distributed and is available to all other distributors. 

There is no such thing as the terrestrial loophole. That is a misnomer. The policy in the United States is that programming decisions should be left to the marketplace between programmers and 

distributors. There is an exception carved out for, I think, sound 

policy reasons. It says that where you have vertically integrated 

programming with distributors, you need to ensure that they are 

not discriminating against other distributors. And the Congress 

has defined that as satellite-distributed networks. The FCC many 

times has looked at this issue and agreed that for very good policy 

reasons, you want to encourage terrestrial networks that can give 

you the kind of local and regional news and other local programming that you wouldn’t otherwise have an incentive to invest in. 

Senator KOHL. Mr. Gorshein? 

Mr. GORSHEIN. Thank you. Just a couple of quick things from a 

clustering perspective. I heard the term ‘‘national clustering’’ earlier, but I think it is also important to look at the top DMAs in the 

country. And post-transaction, 38 out of the top 40 markets will be 

locked up or substantially controlled. 

Now, from my limited perspective as an independent programmer, what that means is that although other regions of the 

country may be available theoretically, I will be foreclosed from 

competing because the investment community, the advertising community will say, well, you don’t have the top markets or most of 

the top markets or some of the top markets, and, therefore, you are 

not viable because the top markets are where disposable incomes 

are higher, product trends get set, and there is the presence of 

major press. 

One other point. Empirically, we looked at, on the ground, what 

the top 92 channels have done. These are the channels that are in 

20 million homes or more. Twenty million is a key number, as everyone in the industry knows, because that is where Nielsen ratings are accurate and reliable and where, for most networks, profitability starts. Ninety out of the 92 secured carriage from both 

Comcast and Time Warner, two from one of Comcast or Time Warner, but those two also secured Adelphia. So post-transaction, it 

will be, empirically at least, impossible for an independent channel 

to succeed without Comcast and Time Warner. 

Senator KOHL. Well, before I turn it back to the Chairman, is the 

man right, Mr. Britt? 

Mr. BRITT. I think I am familiar with the study that Mr. 

Gorshein talked about earlier. He uses the word ‘‘affiliated’’ in a 

very interesting way. The proper concern and the concern of the existing rules is vertically integrated companies, so there is a set of 

regulations that requires Time Warner as a vertically integrated 

22

company to make its programming available to other people. And 

those rules apply to News Corp. also and any other cable operator 

that owns programming. 

Programming owned by other big media companies in my case is 

not affiliated with me. So the Disney Corporation as a third party 

is just as independent as Mr. Gorshein’s company when I deal with 

them and our negotiations are very fierce. 

The only thing I would add to that is that it is true that there 

is a whole set of rules and regulations and laws around the broadcast industry that are called ‘‘must carry’’ and ‘‘retransmission consent.’’ And it is true that the big broadcasters have used retransmission consent to foster carriage of their networks. And they do 

own a large number of cable networks, so that is a true thing and 

it does affect independence. And I would say—and Mr. McSlarrow 

referred to it—elsewhere there is discussion of the digital TV transition and multi-cast. If the Congress decides to go along with 

multi-cast, that will further hurt the ability of independent programmers, that is, people not attached to a broadcast company, to 

get carriage. 

Senator KOHL. Last comment, Mr. Gorshein? 

Mr. GORSHEIN. Yes, I agree with everything Mr. Britt just said, 

but I will say that in addition to the extra leverage that the broadcasters have, what we define as ‘‘independent,’’ not affiliated with 

a top cable operator or a broadcaster, there is a significant competitive threat brought by newer and cheaper mousetraps to vertically 

integrated companies that have channels, compete for eyeballs, for 

capacity, for ad dollars, and there is foregone value. 

Senator KOHL. Absolute last comment, Dr. Cooper. 

Mr. COOPER. Senator, yes, it is very important and, again, it gets 

back to my central theme. This Congress creates rights of carriage, 

the ‘‘must carry’’ rights, and that determines success or failure. If 

you have got guaranteed rights through ownership or ‘‘must carry,’’ 

you will succeed. And if you don’t, you will almost certainly fail. 

Make no mistake about it. And that is why I suggested the notion 

of unlicensed spectrum where no one has those rights, where we 

all find ways to use spectrum without declaring ‘‘I am the only one 

who has a right to transmit in this space,’’ whether it is inside a 

wire or through the air. 

You determine success and failure in this business by allocating 

those transmission rights. 

Senator KOHL. Thank you, Mr. Chairman. 

Chairman DEWINE. Mr. McSlarrow, let me ask you a question. 

How will the digital TV transition impact television viewers? For 

example, will cable subscribers in Ohio need to do anything specific 

to make sure that their TVs keep working the same way after the 

transition? 

Mr. MCSLARROW. It depends on what Congress decides to do. If 

nothing is done, potentially cable subscribers would be affected in 

the same way that over-the-air customers would be affected—that 

is, out of 66 million cable customers, 40 million of them have analog-only TV service. So unless they get a set top box or some other 

converter, their screens would go dark on some channels. 

Now, there are two ways to solve that. You can either add all the 

cable customers into the big subsidy program that Congress is conVerDate 0ct 09 2002 10:44 Apr 04, 2006 Jkt 026644 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\26644.TXT SJUD4 PsN: CMORC
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sidering for over-the-air customers and buy them digital-to-analog 

converters. Or you can do what we have proposed to help the transition along, which is: we will spend our own money, we will reengineer the cable plant, we will send a digital stream from the 

broadcaster down to the consumer, and we will send an analog signal down and make sure that everybody, no matter what kind of 

service they have, is taken care of. 

For some odd reason, the current law actually makes it a big 

question whether or not we could do that. So we have asked the 

Commerce Committees in both the House and the Senate for that 

clarification. 

Chairman DEWINE. Mr. Aquino, you have told us that vertically 

integrated cable companies like Comcast and Time Warner are giving each other discounts and charging smaller cable companies 

more for the same programming. But you also claim that these discounts are not really based on volume or some other legitimate 

basis. You acknowledge you don’t really have evidence of this because programmers’ contracts are confidential. But you call for an 

FTC investigation, which obviously is a very serious thing. 

Is there anything specific you can point to that indicates they are 

doing anything to improperly discriminate? 

Mr. AQUINO. Mr. Chairman, I don’t know that it is improper or 

not. From a marketplace perspective— 

Chairman DEWINE. You say you don’t? 

Mr. AQUINO. I do not. 

Chairman DEWINE. OK. 

Mr. AQUINO. I am not alleging that there is anything improper. 

I think the market forces basically state that if they can charge 

small entrepreneurs more money and they pay for it, they will continue to do so. But if you look at the chart that we presented today, 

if the MSOs are paying about 30 percent, what we call expense-torevenue relationship, expense of programming to video revenues, 

and the DBS providers pay about 40 percent of their expenses for 

that same service, the over-builders and the rural companies and 

the new entrants in broadband are paying close to 50 percent. 

Now, I would suggest that a premium of that nature is just out 

of bounds, and we provide fiber, you know, to 150 home nodes. We 

bring broadband at 10 megabits to the home. So we are part of the 

broadband movement in the country, but that price difference, that 

premium, I think is just unacceptable. So we are looking for some 

help—because I don’t see the rates of the other players and we are 

only looking at public filings, there is no way to really know what 

kind of premiums we are paying as competitors and whether that 

kind of premium is justified. 

Chairman DEWINE. Mr. Britt, do you have any response to the 

concerns Mr. Aquino is raising? And, you know, generally speaking, 

how should we evaluate if a deal with discriminatory or the differences in treatment are based on justifiable business or efficiency 

reasons? 

Mr. BRITT. I guess my only response, I am on the purchasing side 

of this, too. I buy programming. I don’t sell it. And when we negotiate with people, most of whom are not associated with our company, we negotiate the very best deal we can get. 

24

I believe, as with most things in the American economy, when 

you buy more, you get a cheaper price. If you buy a big box of Corn 

Flakes, you get a cheaper price per Corn Flake than if you buy a 

little box. 

So I suspect that that happens. Obviously, I am not privy to the 

details of what other people pay for programming, but I think all 

of us try to get as good a deal as we can. 

Chairman DEWINE. Mr. Gorshein, Dr. Cooper, let me ask you 

this: You both raise the point that a large percentage of the channels carried by the cable companies are affiliated with either a 

large cable company or a network that has retransmission rights. 

It does seem that most of the channels that are carried are affiliated with other organizations, but with regard to a specific cable 

company like Time Warner, many of the channels they carry are 

not affiliated with Time Warner specifically. 

Is there really any reason for Time Warner to favor content that 

is affiliated with some other distributor, for example, Comcast? 

And let me just ask all of you—let me go to Mr. McSlarrow and 

Mr. Britt. Is there any significance to this fact? I understand that 

many channels are affiliated with large networks because often 

those networks can utilize the retransmission consent provision to 

obtain carriage for them, but really, why are so many of the other 

channels affiliated with other cable systems? 

Mr. Cooper, we will start with you. 

Mr. COOPER. Well, from our point of view, this is the dance of 

the elephants in which the mice in the grass get trampled. Essentially you have entities that have a lot of bargaining power—the 

networks and the cable operators who have programming—and essentially they have assembled suites of programs in which they 

have an offering in each of the major categories. We present that 

evidence in our testimony. And they fill the basic and expanded 

basic tiers up with that stuff. And if you are not one of those entities who has the leverage to get into that tier, you have almost no 

chance of succeeding. That is the stunning evidence before this 

Committee and the Commission. 

If you don’t get carriage on those networks, past those—in the 

current model. Now, I would—if we were to have a la carte choice, 

then individual programs would have to stand on their own and 

consumers would get a chance to choose—not all or nothing or almost all or nothing, but individual programs—that would change 

the landscape because that would break the bundles. But as it 

stands now, you have six entities who simply match each other’s 

suites, get into the basic and expanded basic tiers, and that is it. 

Chairman DEWINE. Mr. Gorshein? 

Mr. GORSHEIN. Yes, sir. We certainly have no issue with some 

companies owning lots of channels, and there are six of them that 

own lots. Comcast in recent years has launched 20 of them, with 

more in planning and development. 

The issue for us is free and fair competition on a level playing 

field. The antitrust laws are supposed to prohibit discrimination on 

the basis of affiliation. The program carriage rules at the FCC are 

supposed to prohibit specifically discrimination on the basis of affiliation by cable operators. Those laws, to our knowledge, have 

never been enforced. The end result is that of the top 92 channels, 

25

there are only 9 that have no affiliation with a broadcaster or a 

cable operator. We did a study in the last 21⁄2 years where less 

than 1 percent of independent channels secured broad-based, nationwide carriage, and most if not all affiliated channels get carriage. Some of those are watched and some of those are less successful. 

So what we are looking for is an enforcement, a greater scrutiny 

and an enforcement of the existing laws that will allow us to compete. Why is it important for us to compete? Competition is good. 

It is good for consumer pricing. Independent channels, according to 

Kagan, 130 of the top channels surveyed, independent channels 

are—sorry, affiliated channels are 300 percent the cost of unaffiliated channels. It is good for consumer pricing. It is good for consumer choices. It is good for diversity. 

Chairman DEWINE. Mr. McSlarrow? 

Mr. MCSLARROW. It is hard to unpack all of this because it is an 

odd thing. Here is the cable industry, at a time when most Americans just assumed it was a law of nature that we would get TV 

with only three stations, that invented diversity of programming. 

Without cable, there would be no opportunity for the hundreds of 

networks that are out there. Niche networks, big networks, sports 

networks, you name it. They are out there for every group in America with their individual tastes and interests. We have almost 390 

networks that are getting carriage someplace—that are thriving 

better in other places than others, I suppose—but are a successful 

business model. And it is a business model that is working precisely because independents are actually getting carriage. 

Now, over the years—and I know this Subcommittee has delved 

into this—there have been studies about how many and what percentage of cable networks are actually vertically integrated with an 

operator. That number has dramatically declined. It was only a few 

years ago that it was above 50 percent; 2 years ago it was 33 percent; and last year it was down to 23 percent. We don’t know this 

year’s numbers, but the fact is the trend is actually down. 

Now, I think Mr. Britt and others have made the point about retransmission consent, so I don’t need to duplicate what they have 

said. But the point is people do get carriage. They get carriage on 

the basis of their content and whether or not their ideas are compelling enough. Somebody has to make a call on that. I vote for 

somebody who actually is worrying about whether or not their consumers like what they are offered and not what the Government 

or the FCC decide. 

A final point: it is an odd thing to hear somebody make the argument that it requires a certain base threshold of subscribers—call 

it 20 million, which is the number that has been thrown out—in 

order to survive and then turn around and argue that an a la carte 

model—which almost by definition guarantees that you will have 

some smaller universe of viewers—is going to allow you to solve 

this problem, because we know what happens in an a la carte 

world. What happens in an a la carte world is that the niche, perhaps marginal, networks—even if they have great ideas—are going 

to fall off the pipe because they won’t have the viewership to sustain them. 

Chairman DEWINE. Anything, Mr. Britt? 

26

Mr. BRITT. I don’t really have much to add to that except to say 

that our job is to put together the most attractive package of programming we can find that we think will appeal to the consumers. 

And there are literally hundreds of ideas for new channels that 

float around, and we try to do as good a job as we can of deciding 

what we should buy that will maximize consumer purchase of our 

product. And that is the role we play. 

Obviously, entrepreneurs may have what they think is a great 

idea and we might disagree, in which case they are disappointed. 

But I am not sure that the Government should be getting involved 

in that. I think it is the marketplace at work. 

Chairman DEWINE. Senator Kohl? 

Senator KOHL. Mr. Britt, when News Corp. acquired DirecTV a 

couple years ago, the FCC imposed a merger condition forbidding 

DirecTV from getting exclusive rights to carry News Corp. programming. Would it be appropriate to impose a similar requirement on Time Warner Cable and Comcast with respect to this 

deal? 

Mr. BRITT. That is actually an excellent question. The existing 

law actually has those same provisions for vertically integrated 

cable companies, so we live under those provisions today at Time 

Warner, because when that law was written, satellite was just 

starting. It didn’t apply to satellite. 

So what happened in the case of News Corp. and DirecTV was 

a new vertically integrated entity was being formed of a very powerful programmer, News Corp., and a powerful distributor, 

DirecTV. So all that happened there was the existing rules that applied to cable were applied to News Corp. They weren’t a new set 

of rules. 

There was the added twist that, unlike any cable operator I am 

familiar with, News Corp. also has a considerable number of broadcast stations, and there was the risk of them using retransmission 

consent in an adverse way. So there were some additional constraints put on that transaction, that are not really relevant to us. 

We don’t own broadcast stations. 

Senator KOHL. Mr. Cleland, do you want to make a comment? 

Mr. CLELAND. Yes, if I can make a comment just on program access. I think, you know, all these discussions, back in 1992 program 

access was essential to launch a competitive video programming 

market. In 2002, I believe it was, when the FCC decided should 

they extend program access, I think at that time it was still necessary. But I think it will be 2007, maybe, when it is up again. 

That is the time when we may have reached a market threshold 

where program access may no longer be necessary to be mandated 

by the Government. It is going to be a close call because, you know, 

Rupert Murdoch doesn’t need any protection from anybody and 

Comcast doesn’t. I mean, these are large players. There are many 

people fighting. They have power on each side. It is not really—I 

do sympathize. This is not a land—this is the land of the giants. 

The smaller players, you know, may get trampled. But it is big 

business, and I think, you know, generally going forward the program access regulatory approach is going to be less and less justifiable based on market forces and the level of competition in the 

marketplace. 

27

Senator KOHL. Mr. Cooper, how do you feel about that? 

Mr. COOPER. Well, the interesting thing to me is that we have 

got all these good ideas floating around, and it is just dumb luck 

that the good ideas happen to stick, are 62 percent more likely to 

be found in the affiliates of the cable operators because they get on 

the air 62 percent more of the time. And they are 46 percent more 

likely to be found in the affiliates of the networks because they get 

carriage 46 percent more than the other people with good ideas. 

There is no doubt that there is a structural bias in favor of affiliated programming. There is a quid pro quo with the rights of carriage. And so rather than being—and maybe Scott, who is a 

straight talker, has put it exactly as it needs to be put to this Congress. All the little guys will disappear. That was not the purpose 

of the 1992 Act. That was not the purpose of the 1996 Act. 

We do not want a world in which the big dozen, half-dozen—this 

is a fairly small number—decide what succeeds. And if you look at 

the numbers—look at the Government Accountability Office study. 

They found a bias in favor of affiliated programming. That creates 

a hurdle that you ought to care about. If you only care about the 

market, then we know what will happen. The big guys will succeed 

and, frankly, rather than have the executives of the cable companies decide what they think the American people want to see, I 

would like to have the American people decide directly what they 

want to see by having the opportunity to exercise choice. It will 

change the business model because there will not be blank TV 

screens for almost all of the channels. The people who pay for those 

channels will watch them, and those eyeballs will be valuable to 

the advertisers who want to reach that demographic. 

It is absolutely the case, as suggested, that is a different model, 

but it is a model that really can work because people will have 

said, ‘‘I want to watch this show, I will watch this show,’’ and the 

advertisers who want to reach those individuals will be able to find 

them. It is a different model, but it is one that gives consumers the 

real choice, and we think that is important. And it keeps a lot more 

little guys in the business than the current system in which only 

the big players will survive. 

Senator KOHL. Mr. Aquino, when our Committee looked at cable 

competition, we found that the presence of competitive cable companies like RCN helped keep cable rates down. Last year, Senator 

DeWine and I commissioned a GAO study on the issue, and the 

study found that in five of six markets it studied, the consumers’ 

cable bills were lowered by between 15 and 41 percent when an 

independent competitor was present. An earlier study found markets with wire-based cable competitors benefited by prices that 

were about 15 to 20 percent below average. But relatively few markets across the country have the benefits of an independent cable 

competitor. 

In your judgment, why is this? And what are the biggest obstacles to the entry of independent companies to challenge the cable 

incumbents? 

Mr. AQUINO. Senator, it comes down to financing from Wall 

Street and the confidence that they have that entrepreneurs like 

RCN can succeed. And they evaluate our cost structure, and they 

look at things that they think are fair and unfair. 

28

I get the question all the time about my programming rates relative to the other players, and I compete ferociously in these markets, and competition is good. Competition will keep both of us honest, will get to innovation. I have fiber almost to the curb in my 

markets. We have metropolitan fiber rings in major cities. We are 

offering services to commercial customers as well as residential 

customers. So competition is good. It really raises the level all 

around, and ultimately prices will be better for consumers. 

But it comes down to investment. If there is a sense that the 

small guys will disappear by the big guys taking over, that is a 

problem. 

So, you know, I plead before the Committee today to just basically hear some of the comments today. Consumers need to have 

a choice. We think we can compete. We have been very successful 

in our marketplace, and many franchises where we compete head 

to head, we actually win in some cases. So we would like the opportunity to continue to do so. 

Senator KOHL. Yes, Mr. McCormick? 

Mr. MCCORMICK. Senator, I might add that the franchising process is a significant barrier to entry. We are an industry that began 

in the voice business. Once we began offering high-speed Internet 

access, the technology makes it possible for us to provide video. The 

cable industry is an industry that began in the video business. 

Once it added high-speed Internet access, the technology made it 

simple for the cable industry to offer voice. But the franchising 

process is a significant barrier to entry. 

I had mentioned the situation in Otswego, Minnesota, where we 

have a small telephone company with 13,000 subscribers that goes 

out and invests to deploy a network capable of offering voice and 

Internet access and video to a set of customers. Those customers 

today are getting voice and Internet access, but they are not getting video, despite the fact that the facilities are capable of offering 

it, because the local franchising authority has said you must build 

beyond your telephone service area into a different service area to 

match the cable service area. It is wholly arbitrary. It is economically impractical. And all it results in is consumers being denied 

that choice. 

So we think it is important that Congress undertake an examination of how the franchising process is imposing a barrier to entry. 

Senator KOHL. Mr. McSlarrow? 

Mr. MCSLARROW. If I could actually respond to the last two comments. 

First on the GAO report, let me just say very quickly for the 

record: That was, as you said, a study of a paired set of 12 communities nationwide, half with overbuilds, half without. There are a 

total of 433 communities nationwide with overbuilders, and if you 

go and look at all the competition we have from two satellite providers, there is actually a total of 10,000–30,000 communities, excuse me—that have competition in them. And in each case, if an 

overbuilder comes in, either because they bought the system for 

pennies on the dollar and got a cost break; or because they didn’t 

actually have build-out requirements, as we have been talking 

about, so they had a cost advantage over the incumbent; or because 

they just didn’t get the market right and decided they will dive 

29

down on price and force competition with the cable guys; it turns 

out in most cases they just got it wrong. This was not actually a 

sustainable, competitive price model. 

If you look at the ins and outs, RCN has done a great job in the 

last couple of years, and I applaud that. But the history of this 

business has been one of financial instability because it is very 

hard. The assumption that there is not effective competition taking 

place today is belied by the fact that it is very hard—with cable 

and the two satellite providers—to get into the video market and 

dive down below on price. But we are going to see it again now 

with the Bells. This is their tried and true model on price. They 

have already done it on DSL. They are going to try to do it with 

video, and that is fine. We will see how this shakes out. 

But I would say that in terms of franchising—and Walter and I 

are friends outside this room—this is a complete fantasy. The only 

thing holding back the Bells from getting franchises has been the 

Bells themselves. The rules that are on the books today are the 

rules the Bells asked Congress for in 1996. They actually acquired 

over 100, I think, franchises along the way and decided they did 

not want to pursue that business until recently. Now they have decided to get into video again. That is fine. We are going to have 

that kind of competition. But they want to change the rules and 

get a subsidy, in essence, by saying we should play by a different 

set of rules. 

When we were talking about phones before, everything that we 

have done, when we have rolled out our services, complied with the 

rules on the books. We have never come to Congress and said, 

‘‘Change the rules for us.’’ And all we are asking is that the Bells 

be treated the same way. 

If you want to change the rules going forward, that is fine. Let’s 

have that conversation. But do it for all of us. 

Senator KOHL. All right. Mr. Cleland, do you believe that the 

challenges that cable companies face, such as difficulties in gaining 

access to programming, and for the phone companies, gaining franchises, seriously harms the ability of these competitors to compete 

in the marketplace? And if you do, what legislative or regulatory 

changes do you believe will help solve some of these difficulties? 

Mr. CLELAND. I think that you are going to see increasing competition and innovation. I actually am very much an optimist in 

this market, I think what is happening in this expanding pie. Essentially what you have is technology is enabling new services, and 

new services are being piled upon the basic ones. And so I look 

ahead and I think, especially in the video programming space, it 

is going to be a very rich competitive market. And I look at it and 

I kind of say, why are we so focused on prices? People are getting 

so much more value for their dollar out of entertainment than they 

did in the past. That is why it goes up. And, you know, value is 

going up, so price is going up. And when you compare entertainment pricing over TV relative to what you get when you go to a 

ball game or when you go out to eat, it is just, you know, still an 

incredible bargain. People will spend a lot more going forward on 

entertainment. 

The questions on legislation, I think that the laws on the books, 

whether they are telecom, they are cable, they are broadcast, they 

30

are ancient and they are an impediment to innovation, productivity, and economic growth. And Congress—and in my testimony 

I lay out an approach which says we really should think about 

going back and doing a clean slate because the problem is all these 

rules and regulations and laws were based on technologies where 

we assumed there was market power and we assumed that people 

needed to be protected from technology. And now we are in a situation where technology can actually help people, and we have all 

sorts of impediments of essentially silo regulation. 

So I guess I am one of the view where I think Congress should 

take a really deep, hard look and say going forward in the 21st century, why do we have some of these 1930’s laws. I am not saying 

have no law, but I think you can get rid of 90 percent of it and 

protect 10 percent. And one of the things I think is mandated—you 

know, BIT cooperation so that people don’t go dark, so you can 

make sure that the network stays to be powerful. That is the minimal level of regulation, and it can be outsourced to be arbitrated 

by private entities. But the law—telecom, broadcast, and cable, and 

all of these laws need to be completely pulled out at the roots and 

start over for the 21st century. 

Thank you for asking. 

Senator KOHL. Thank you very much, gentlemen. 

Senator DeWine? 

Chairman DEWINE. Well, we appreciate everyone’s testimony 

very much. 

Mr. Britt, just one last question. I don’t know if I asked you this 

before or whether you covered it. In regard to Adelphia, what 

would people expect in regard to their price per month? Are they 

going to expect a change? I mean, is that something that people 

can look for or— 

Mr. BRITT. Mr. Chairman, I think that will vary by location. We 

price locally according to market conditions. We don’t have a national price, so there really isn’t a blanket answer. 

I would not anticipate major changes in price, though. They have 

been competing with some success, although, as we point out, they 

are bankrupt. We will be adding many new services that will have 

the prices they have, but I don’t expect big, giant changes. 

Chairman DEWINE. Well, we appreciate everyone’s testimony. As 

we have heard today from, really, I think all of our witnesses, the 

video marketplace is in flux. We have seen major changes in the 

last few years in terms of new products, new services. Increasingly 

now we are seeing different players become involved in telephone 

service, video service, data service, all to the benefit of consumers 

as well as business customers. As we move forward, it will be increasingly important that the laws and regulations that guide 

these markets are clear, are consistent, and are drafted to promote 

the maximum amount of competition. The more competition we 

have, the more innovation and better products and prices we will 

all see. 

Accordingly, that will be the goal of our Antitrust Subcommittee 

as we look forward to rewriting the Telecom Act and reworking the 

various laws that impact on the telecommunications and video industries more broadly. 

31

Our witnesses today have provided us with valuable insights as 

we consider how to increase competition in these various industries, and this hearing has, I think, been an excellent first step in 

that direction. So we thank all of you very much. Senator Kohl and 

I thank you for being with us today. We look forward to talking 

with you in the future. 

Thank you very much. 

Senator KOHL. Mr. Chairman, I just need to make another comment. I had been inclined to be much more difficult with Mr. 

McSlarrow than I have been, and it is because, as you know, your 

wife, who is a good friend of mine, you brought along to stand in 

the back of the room to probably modify my approach. And it has 

had its effect. 

[Laughter.] 

Chairman DEWINE. We thank you all. 

[Whereupon, at 3:42 p.m., the Subcommittee was adjourned.] 

[Submissions for the record follow.] 

[Additional material is being retained in the Committee files.]

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65


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26644.087
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Æ


26644.088