BEFORE THE HOUSE COMMITTEE ON JUDICIARY
PROPOSED MERGER OF DIRECTV
and FOX
TESTIMONY OF NEAL SCHNOG
VICE
CHAIRMAN – AMERICAN CABLE ASSOCIATION
PRESIDENT—UVISION,
LLC
I. INTRODUCTION
Thank you, Mr. Chairman.
My name is
Neal Schnog, and I am the president and chief operating officer of UVISION,
LLC, an independent cable business currently serving 8,000 customers in small
towns and rural areas in
I also serve as the vice chairman of
the American Cable Association, which represents more than 1,000 independent
cable businesses serving almost 8 million customers primarily in smaller
markets and rural areas across the
ACA vehemently opposes this proposed
merger.
Unlike big
companies you hear about, ACA members are not affiliated with programming
suppliers, television networks, big cable, broadcast, satellite and telephone
companies, major ISPs or other media conglomerates. We focus on smaller market cable and
communications services, often in markets that the bigger companies chose not
to serve. Because we live and work in
these rural communities, we know how important it is to have advanced
telecommunications services available and to be a provider of choice in these
communities.
ACA members
are leading the industry in delivering advanced services in smaller
markets. Far from living on the wrong
side of the digital divide, millions of customers served by independent cable
companies enjoy access to digital cable and broadband Internet services that
are not available in some urban areas.
Some ACA member systems have begun to deliver DTV broadcast signals as
well, doing our part to move the transition forward.
We also look
forward to providing newer, advanced services to our customers in rural America
too. Advanced services like digital
broadcast television, high definition television, video-on-demand and cable and
Internet telephony, to name a few.
As you know,
most of today’s headlines in the communications world are about the large
companies, such as the Fox/News Corp./DirecTV merger and the media giants
created by the mergers of the 1990s and beyond.
Just for the
record, my small company is not the
“giant entrenched cable monopoly” that others talk about so frequently. Rather, being on this panel makes me feel
like a David among many Goliaths. The
American Cable Association represents no Goliaths. We’re simply small businesses in cable that
happen to serve customers in rural America.
We’re here to
speak for the millions of small-town customers and thousands of small-town
businesses that are represented by every member of this committee.
Quite frankly
and ironically, we’re the smaller-market and rural competitor to what may soon
become the “giant entrenched, vertically integrated satellite conglomerate” – Fox, News Corp., and DirecTV.
I hope my
testimony here today will help you serve your constituents by understanding the
critical issues facing the multichannel video programming and distribution
industry and the negative effects that continue to occur as a result of
increasing media consolidation.
These issues
will have a significant impact on all Americans and could have a devastating
effect on smaller markets and rural communities where our ACA members employ
thousands and serve millions. I
therefore ask for your consideration and hope you will agree that the industry
is in need of congressional and regulatory review.
II.
Competition
and Choice are the Victims of Increasing Concentration of Media Ownership.
To me, the
real benefit of this hearing is the opportunity to highlight the current status
of customer choice in the multi-video services market, because competition really means customer choice. No choice, no competition. However, the irony here is that the status of
competition and customer choice today, especially in rural areas and small
towns, is already significantly limited because it is governed by an unlikely
cast of players that do not live in rural America, do not focus on rural
Americans’ needs, and who have found anti-competitive means to extract enormous
wealth from the pockets of rural consumers and businesses.
Unless there
is significant congressional and regulatory review of these issues, the
situation is sure to get worse. Consumer
choice and competition may be wiped out in the wake of the mergers creating
these mighty communications giants. The
proposed acquisition of DirecTV by FOX is a perfect example of the many things
that are broken. Let me tell you why.
There are
three very important issues that threaten consumer choice in smaller markets
and rural America and that will derail the progress to provide advanced
services in smaller markets:
·
1. The abusive
conduct of a handful of media conglomerates toward smaller market distributors
and their customers. The media
giants are using their vastly increasing control of content, pricing, terms,
conditions and placement requirements to control what the consumer sees and how
much he or she pays. The News/Corp. Fox
team is near the top of this short list.
Congress must act to address the worsening structural programming
problems that are forcing consumers to pay more while taking away any choice.
·
2. The
disproportionate burden of regulation on smaller, independent cable companies,
like mine in rural America, compared to the free regulatory ride enjoyed by
giant multinational satellite powerhouse.
Congress and the FCC must reduce or balance these regulatory burdens
with DBS to foster and protect full and fair competition in smaller markets and
rural areas.
·
3. In most other
industries the consolidated market power and anti-competitive behavior of
the programming media conglomerates, including Fox, would likely violate
federal anti-trust laws or at least invite close scrutiny by Congress and the
federal government. This
anti-competitive behavior will have a greater impact in smaller, rural markets
where Fox/News Corp.’s worldwide market dominance and pricing power can quickly
drive small competitors out of town. Therefore,
Congress should apply federal anti-trust laws to the anti-competitive practices
of Fox and others.
·
4. The adverse
effect of the proposed Fox-News Corp.-DirecTV merger, which will limit current
competition in U.S. markets – particularly in smaller and rural markets – by
consolidating enormous, vertically-integrated content and control in the hands
of one company – the merged Fox/News Corp./DirecTV empire. If this merger is ultimately approved,
then at the very least the Federal Communications Commission and Department
of Justice must place significant conditions on this merger to ensure fair
access to News Corp. affiliated satellite and broadcast programming. The conditions News Corp. have proposed in
their first FCC filing fall far short of what is required. But even beyond strict conditions,
Congress should also extend and apply current program access laws covering
vertically integrated cable operators to vertically integrated satellite
operators.
Before
addressing the merger and its negative effects on our members and consumers in
small towns and rural areas, it is important to review current practices
employed by the large conglomerates, including Fox/News Corp.
III.
Key Issues
1.
The abusive
and anti-competitive conduct of a handful of media conglomerates, including
Fox/News Corp., is threatening the ability of cable systems, particularly in
smaller markets, to compete. More
importantly, these abuses are driving consumer costs up while taking away
choice. Congress must act to address the
worsening structural programming problems caused by increasing media
concentration.
From our
standpoint, this hearing provides an important and appropriate opportunity to
highlight how little customer choice exists today in the multichannel video
services market, especially in rural America.
The fact is that the status of competition and customer choice today,
especially in rural areas and small towns, is already significantly diminished
because it is governed by an unlikely cast of players who neither live in rural
America, nor focus on its needs.
This unlikely
cast includes several major media conglomerates that are mandating the cost and
content of most of the services we provide in smaller markets. These include Fox/News Corp.(DirecTV),
Disney/ABC/ESPN, General Electric/NBC, CBS Viacom/UPN, and AOL/Time
Warner/WB. For smaller markets cable
systems, this is a fundamental problem that directly impacts our ability to
provide a viable, competitive service to our customers. These major media conglomerates, which we
call OPEC, the Organization of
Programming Extortion Companies, have found through media consolidation the
means to use market power to extract ever-increasing profits from consumers and
businesses in smaller markets.
Unless there
is significant congressional and regulatory action to address these issues, the
situation will only worsen. Without your
intervention, consumer choice and competition, not to mention the deployment of
advanced telecommunications services in rural areas, will disappear in the wake
of this merger frenzy.
A vitally
important question here: Who controls
what your constituents see on their TV sets?
Not a small cable business like mine or any one of our ACA members.
Customers and local franchise authorities are unaware of this, but their
television choices are controlled by the five OPEC companies.
Over the past
five years we have seen an explosive consolidation in the programming industry
that has led to sharply increased prices, less freedom to offer popular
content, and little customer awareness as to why they are forced to buy the
channels they do.
For example, ESPN’s fifth 20% increase in five years was announced just this past week, and Fox Sports isn’t far behind and closing fast.
Imagine how
your Committee would react if it were my cable company or any other cable
operator that raised its rates 20% a year for five years in a row – an increase
of almost 250% over five years. Frankly,
the same indignation you would feel if my company raised rates like this must
be focused on ESPN and other programmers, like Fox Sports, that raise rates
like this every year.
The fact is that programming rates for 14 of the major cable programming networks have risen 66.6% over the past five years – an increase of more than 5 times the Consumer Price Index (CPI) over the same period.
In ESPN’s
case, one day after ESPN announced last week its fifth consecutive annual 20%
increase, ESPN’s parent company, Disney, announced a $400 million revenue
increase for the 2nd Quarter of 2003, largely attributed to revenue
growth at ESPN and other Disney programming networks.
Now let’s
turn to Fox. For a typical independent
cable business in rural areas Fox Sports is the second most expensive service
after ESPN – exceeding even HBO (Home Box Office).
If you want
to know why cable rates are increasing, this is a big reason why.
But there’s
more.
Obviously,
some of our customers want ESPN. But
ABC-Disney will not generally let us buy just one service. Fox won’t either in the area of
retransmission consent. Oftentimes, in
order to get the local ABC or Fox affiliate, Disney and Fox will force us
through retransmission consent to take and pay for other channels we know our
customers don’t want.
This abuse of
retransmission consent goes farther – in order to get consent to carry a local
broadcast station in one market, our members are forced to carry Disney or
Fox’s satellite programming in other markets, where Disney and Fox do not even
own the broadcast station.
For example,
is it really in the public interest for all of my customers to pay for recycled
soap operas, a programming service for which most of them have absolutely no
interest, just so some of my customers can be permitted to watch their ABC
affiliate?
Adding to the
absurdity of the situation, these conditions for carriage often outlive the
terms of the retransmission consent period for the local broadcast station by
many years. As a result, these mandated
conditions clog a cable system’s channel capacity with OPEC programming while
denying that capacity to independent, non-OPEC programmers. The end result is that these mandated OPEC
conditions increase costs and decrease choice for consumers.
It gets
worse. One solution might be to offer
the expensive services in tiers or a la carte.
This would allow consumers to choose whether or not they wish to pay for
the expensive services. But all of the
OPEC programming companies, including Fox, force their programming onto the
lowest, basic levels of service, making your constituents pay for all of their
programming whether they want it or not.
We must ask: Is this good for the
consumer? Is this in the public
interest? Is this why these companies
get free spectrum?
Consolidation
has turned retransmission consent into extortion. Even more appalling is that
fact that the OPEC companies embed in their contracts various “non-disclosure”
terms. These provisions prohibit cable
operators from telling any customer, even the local franchise authority or your
Committee, the rates and terms for the distribution of the OPEC
programming. Thus, rate increases and
unfair bundling practices are kept hidden from the public and even from
Congress. That is not the foundation for
an open, functional and fully competitive marketplace, or one that is
transparent and constructed to best serve consumers.
I am sure you
all remember the retransmission consent showdown in New York City between Time
Warner and Disney over this very issue.
After that
enormous struggle between industry titans, imagine the odds a small company
like mine has when negotiating with Fox, especially an even bigger, stronger
post-merger Fox.
The five
major OPEC programmers control all broadcast networks and at least 50 other of
the most popular stations. More than 90%
of cable systems offer 30-to-90 channels, which, as you can see, are dominated
by OPEC programmers.
In fact, on your own House cable system 60% of the widely distributed channels on it are controlled by the OPEC media conglomerates.
The irony
here is that at a time when Congress wants our small cable businesses to
provide our customers with more
choice and greater value, media
conglomerates like Fox/News Corp./DirecTV, Disney/ABC/ESPN and the other OPEC
companies are restricting choice and raising costs.
If our
smaller businesses and our customers are ever to regain any measure of control
over the spiraling rates imposed by these voracious conglomerates, then
Congress must intervene.
The members
of the American Cable Association and independent cable’s buying group, the
National Cable Television Cooperative, have for years sought meaningful
dialogue with Fox/News Corp. and the OPEC programmers, but to no avail.
More than a
decade of debate and discussion on these issues with them has led to no
positive change in their behavior.
To break the stranglehold of control by Fox/News Corp. and the OPEC programmers and to give consumers and independent cable businesses any choice and control, Congress should act in five specific areas:
· ensure the freedom to unbundle OPEC programming;
· revamp the laws dealing with retransmission consent and program access;
· require the transparency and disclosure of programming costs;
Unbundling: Today the OPEC
programmers tie and bundle their services in such a way that to obtain one
service our customers are forced to pay for other services they don’t
want.
Congress should act to ensure that Fox and the other programming conglomerates cannot force consumers and cable businesses to take bundled services or require that these services be carried on the lowest levels of service.
If the
programming conglomerates had exercised any self-control to stop this conduct,
we wouldn’t be here today asking Congress to act. But the abuse goes on.
Congress
should amend telecommunications laws to provide that no programming provider
can require that its services be carried only on the basic or expanded basic
level of service. Rather, to give
consumers choice and to allow the market to determine what gets on TV, programmers
should be required to make their services available as part of a separate
programming tier, or even a la carte.
The template
for this congressional action has already been created. For example, both Cablevision Systems and the
Yankees Entertainment Sports Network (YES), are now allowing consumers to buy
higher-priced programming services on either a tier or as a single, a la carte
channel.
However, this
fundamental change to give consumers more choice through tiering and a la carte
will not occur without congressional action.
In the case
of Cablevision and YES, it took the actions and efforts of the New Jersey
Senate, U.S. Senator Frank Lautenberg, New York City Mayor Michael Bloomberg
and New York State Attorney General Elliott Spitzer to compel this result.
If it takes
this kind of combined political pressure to force parties of equal bargaining power together, what
chance do consumers in smaller markets and rural areas have to see similar
improvements if this Fox is allowed to buy the hen house. Frankly, none.
Therefore, Congress must help us give consumers greater choice by amending the Communications Act to allow us the right to offer all programming on a tiered or a la carte basis.
Retransmission Consent: Today, as a result of unprecedented media consolidation, the OPEC programmers abuse retransmission consent laws simply to line their pockets. They do this by forcing your constituents to pay for unwanted programming in exchange for receiving their local, free over-the-air broadcast stations.
ACA has provided
detailed evidence of these abuses to the Federal Communications Commission and
has asked the FCC to undertake an inquiry into these abusive retransmission
consent practices. The FCC has so far
not acted on this petition. We ask the
Congress to urge the FCC to take immediate action on this inquiry.
The retransmission consent laws when enacted in 1992 were designed to put local broadcasters on a more equal competitive footing with cable operators. Since then, unforeseen media consolidation has turned this process on its head. Now, Fox and other media conglomerates are using the retransmission consent laws to evade market forces in order to artificially inflate the revenues from their satellite programmers. The practical impact of this evasion by the media conglomerates is that rural and smaller market consumers have less choice and higher costs, effectively subsidizing urban markets.
Congress
should amend the retransmission consent laws to protect our consumers from
being forced to pay for unwanted satellite programming just to see their local
broadcast stations.
Transparency and Disclosure: What
consumer, local franchising authority or congressional office knows what it
costs to watch TV? The answer is not one.
That’s because the OPEC conglomerates resist transparency by hiding
their abusive practices under the cloak of confidentiality requirements.
Who gets the
blame when programmers force unpopular or costly programming on our basic tiers? Not them, but us.
As ESPN’s
increase of nearly 250% over the last five years demonstrates, programming
prices continue to escalate far in excess of the rate of inflation, raking in
enormous sums from consumers. It’s greed
run amok. One way to rein in the greed
of programmers is to require transparency.
Congress should amend the Communications Act to require programmers to make annual disclosures to local franchise authorities and the Federal Communications Commission. These disclosures should include what programmers charge cable businesses and how they mandate bundling or placement of their services.
Moreover, Congress
should direct the FCC to compile every year a comprehensive Programming Price
Index to show Congress and consumers how much they are truly being charged to
watch television. Every three years the
FCC should also compile and publish a Retransmission Consent Index to show
consumers what it truly costs them to receive their local network television
stations.
Until there is transparency in the programming marketplace, consumers and their local providers of service will have little control over what is seen on TV, when it is seen on TV, or how much it will cost.
We
continually hear representatives of the direct broadcast satellite industry say
how Congress should help DBS compete against the “giant, cable monopoly” by
reducing or eliminating the DBS regulatory burden.
However,
contrary to these DBS cries, two facts are clear:
First,
as we have already outlined, the new Fox/News Corp./DirecTV juggernaut will
assemble an unparalleled array of content and distribution assets. Absent clear enforceable restrictions, the
conglomerate will expand the use of this massive power to the detriment of
choice, competition and consumers in rural America.
Second,
my company and the nearly 1,000 other small, independent cable businesses in
the American Cable Association are obviously not the “cable giants” that DBS
says it must compete against. Rather, we
are and will be the competitor in smaller markets and rural areas. That’s why preserving competition in rural
markets is vital.
But
it’s more than that. Right now direct
broadcast satellite enjoys favored regulatory treatment that gives it a great
advantage in the rural marketplace.
Consider the following list and ask if this regulatory balance is
fair. The average ACA member company
serves 8,000 subscribers, more than 9,992,000 fewer subscribers than the post-merger DirecTV. Fox and DirecTV cannot seriously maintain
that they need governmental help to compete against smaller market cable companies.
(Avg. 8,000
Subscribers) (10,000,000
Subscribers)
·
Must-Carry in all Markets *Must-Carry
only in selected markets
·
Retransmission Consent *Retransmission
Consent
·
Emergency Alert Requirements *Limited
Public Interest Obligations
·
Tier Buy-Through
·
Franchise Fees
·
Local Taxes
·
Signal Leakage/CLI
·
Rate Regulation
·
Mandatory Carriage of Broadcast on Basic
·
Privacy Obligations
·
Customer Service Obligations
·
Public Interest Obligations
·
Service Notice Provisions
·
Closed Captioning
·
Billing Requirements
·
Pole Attachment Fees
·
Public File Requirements
In smaller markets and
rural areas, the regulatory disparity that exists between independent cable and
DBS must be addressed if Congress and federal policymakers want to ensure that
multiple providers of video service are there to provide choice to
consumers. This means that Congress
should reduce, or at least equalize, the regulatory burdens on smaller cable.
3.
Congress
should apply federal anti-trust laws to the anti-competitive behavior of the
OPEC programmers, including Fox/News Corp.
The actions
of the programming conglomerates, including Fox/News Corp., to tie their
services and gouge consumers implicate core anti-trust principals. Current federal anti-trust laws are designed
to prohibit contracts and combinations in restraint of trade, and to prohibit
price discrimination where it has an anti-competitive effect.
If
programming were any other business, the tying, bundling and price fixing that
goes on year after year would have been prohibited on anti-trust grounds by
either Congress or the Department of Justice.
Why then are
the programming conglomerates allowed unfettered ability to perpetrate the same
harmful actions on consumers without consequence? There is no good reason.
As a result, Congress
should carefully scrutinize potentially harmful consequences from the vast
increase in market power by Fox/News Corp, which has consistently exhibited
anti-competitive behavior. Even if this
merger is blocked, Congress should apply federal anti-trust laws to this
anti-competitive behavior.
Just because consumers can’t touch a programming service on TV doesn’t mean that it’s not bought or sold like any other good or commodity consumers purchase. It is a “good” for anti-trust purposes that is tied and bundled just like any other commodity.
4.
The adverse
effect of the proposed Fox-News Corp.-DirecTV merger will limit current
competition and choice in U.S. markets – particularly in smaller and rural
markets. The Federal Communications
Commission and Department of Justice must place significant conditions on this
merger, and Congress should also extend and apply current program access laws
to vertically integrated satellite operators.
Customers
will also face less choice as a result of the vertically integrated satellite
conglomerate that would be created from a Fox-News Corp.-DirecTV merger.
The merger of
Fox, News Corp. and DirecTV will create perhaps the world’s largest vertically
integrated programming distributor. This
multi-national behemoth will possess global reach and control a television
broadcast network, scores of broadcast affiliates, a significant number of
cable and satellite programming channels, and a complete satellite distribution
system with DirecTV’s more than 10 million customers. These facts alone will give Fox the ability
to control access to programming, limit customer choice, raise programming
prices, and eliminate competition in rural markets.
The threat by
a merged Fox/News Corp./DirecTV to use its programming leverage against other
competitors is not theoretical. Upon
completion of the merger, the conglomerate will have exclusive control over
certain sporting events, including the NFL’s Sunday Ticket and numerous
regional sports networks.
This Committee
has a long history of exploring antitrust activities and anticompetitive
behavior. In today’s marketplace, our
business is akin to the wild west, in which the large robber barons are free to
impose their will, especially on consumers.
Last Friday,
News Corp. proposed some “voluntary conditions” in its first FCC filing on the
merger. These do not go nearly far
enough. Even with the proposed
conditions, News Corp. and its many broadcast and programming affiliates will
still have an arsenal to increase costs and reduce choice for rural consumers.
Because of these concerns,
we believe the government must place strict and easily enforceable conditions
on any such merger. In addition,
Congress should amend the program access laws to extend them to vertically
integrated satellite entities, like Fox, just as these laws are applied to
vertically integrated cable entities.
IV. CONCLUSION
Each one of
the foregoing issues directly affects the market’s ability to: (1) provide
competition and choice in smaller markets; (2) give consumers control over what
they see on television and how much they pay for it; and, (3) deploy advanced
new services in rural communities.
My company and the members of the
American Cable Association are here today alongside the giants of the
television, cable, satellite and telecommunications world. Why should anyone here listen to what we have
to say?
Because the nature of our businesses
makes us uniquely sensitive to the needs of small and rural markets. We serve nearly 8 million consumers in nearly
all congressional districts and, in fact, every state represented on this
Committee.
The irony here is that the impact of these media ownership issues, if not addressed by Congress, will have the opposite outcome to what Congress desires. This potential outcome will not provide advanced new services, competition and choice for consumers in the smaller and rural marketplaces.
This merger is emblematic of these issues and the unintended consequences that will result and, most importantly, ultimately cause great harm to television viewers, particularly in small towns and rural areas.
The American Cable Association and its members are committed to working with the Committee to solve these important issues.
I would like
to sincerely thank the Committee again for allowing me to speak before you
today.
Neal Schnog
Neal Schnog is a 19-year veteran of the cable television industry. Starting out in Kansas City, Missouri, in 1982 as a marketing manager, Mr. Schnog soon started his own cable company by acquiring a 500-customer cable system in Syracuse, Utah, in December 1984. Since that time, Mr. Schnog has built, owned and operated more than a dozen cable television systems ranging in size from 100 to 100,000+ customers. Today, Mr. Schnog is president, general manager and part owner of UVISION, LLC, serving 8,300 customers in 16 Oregon communities, based in Stayton, Oregon. Mr. Schnog is also the majority owner of Teton Media, Inc., the publishers of the Cable Yellow Pages®.
As an active member of the cable industry, Mr. Schnog is a board member of the American Cable Association, a member of the Oregon Cable Television Association, a member of the Society of Cable Telecommunications Engineers (SCTE), and a member of the National Cable Television Cooperative. Mr. Schnog is a past vice president of the Utah Cable Television Association.
Mr. Schnog has written articles addressing cable television and the Internet for Boardwatch Magazine, a trade journal for Internet service providers, and has been an invited speaker at trade shows. Other activities have included consulting projects for Disney, Antec, TCI (now AT&T), and a variety of other cable related companies.
Mr. Schnog is a 1981 graduate from Syracuse University with a degree in economics.
BEFORE THE HOUSE COMMITTEE ON JUDICIARY
THURSDAY, MAY
8, 2003
PROPOSED MERGER OF DIRECTV
and FOX
TESTIMONY OF NEAL SCHNOG
VICE
CHAIRMAN – AMERICAN CABLE ASSOCIATION
PRESIDENT—UVISION,
LLC
EXHIBITS
1. “Who Controls Your TV Set?”
2. U.S. House Channel Card
3. ACA Member Programming Pie Chart
4. ACA Member Programming Bar Chart