Thank you, Mr. Chairman. 

My name is Jim Gleason, and I am the president and chief executive officer of CableDirect, an independent cable business currently serving 40,000 customers in more than 250 rural communities in nine states – Alabama, Colorado, Illinois, Indiana, Iowa, Mississippi, Missouri, Oklahoma and Texas.   

  I also serve as the chairman of the American Cable Association, which represents nearly 1,000 independent cable businesses serving almost 8 million customers primarily in smaller markets and rural areas across the United States.  In fact, our American Cable Association members serve customers in every state and U.S. territory and also in nearly every congressional district represented by the members of this committee.

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 choose not to serve.  Because we live and work in these rural communities, we know how important it is to have advanced telecommunications services available to these communities.

Like other ACA members, my company, CableDirect, specializes in serving customers in smaller markets and more rural areas.  Our company today is on the forefront of providing advanced telecommunications services to customers in these markets.  In fact, ACA members are now providing digital cable service and high-speed cable modem Internet services to many of our communities, and this continues to grow.

We also look forward to providing newer, advanced services to our customers in rural America too.  Advanced services like digital broadcast television, which we’re here to talk about today, and other services such as video-on-demand and cable telephony.

As you know, most of today’s headlines in the communications world are about the large companies — the EchoStar-DirecTV merger and the media giants created by the mergers of the 1990s.  Being on this panel makes me feel like a David among many Goliaths, because the American Cable Association represents no Goliaths.  We’re here to speak for the millions of small-town customers and thousands of small-town businesses that are represented by nearly every member of this committee.

II.    The Transition to Digital Television

We’re here today to share our collective views on the transition to digital broadcast television.  But what we’re really talking about is how, together, we can improve the viewers’ – our customers’ and your constituents’ – experience.

As independent cable businesses in smaller markets, we want to be on the leading edge of this technology just like any other business.  To that end:

• Many of our members are currently negotiating marketplace solutions with smaller market broadcasters for carriage of HDTV signals;

• ACA and its members continue to work with the National Association of Broadcasters, the DTV Standards Committee of the Society of Cable Television Engineers and other industry, technical and vendor representatives to find efficient and workable solutions for the DTV transition in smaller markets and rural areas; and,

• ACA supports legislation that speeds the transition, so long as that legislation accommodates the different circumstances and cost structures in smaller markets.

As smaller market cable systems, we know firsthand that the transition to digital broadcast television will not take place in the same way in markets all across the country.  It will occur in a much different way in places like Shenandoah, Pa., Machias, Maine, or Belhaven, N.C., where smaller market customers and ACA members’ small businesses are from, compared to how it will occur here in Washington, D.C., New York, or other major markets.

This distinction is critical, and it is relevant to the issues this committee must consider as it develops national policy to implement digital broadcast television.  A forced transition without regard to the impact on smaller markets and rural areas threatens to disenfranchise thousands, if not millions, of television viewers today.

It’s important to note here at the outset that my company and the members of the American Cable Association are rapidly deploying digital cable.  It is a service our customers want, and it is a service we like.  As of last December more than half of our nearly 1,000 members have launched digital service, and the remaining half had plans to do so within the next 12-to-18 months.  By now, the launch to digital is almost universal.     

We like the technology, because it is an efficient use of bandwidth.  It allows us to provide a better service to our customers, and it helps us to offer a more competitive service in our marketplace.

Our hope is that the transition to digital broadcast television can be just as smooth and positive. My testimony here today is designed to highlight for you the challenges that remain and to show you how we believe these challenges can be overcome.  We are committed to working with you and the other affected industries to ensure that the viewer experience is enhanced and improved in all areas – even smaller markets and rural areas – without the loss of a single viewer.  In addition, we are committed to doing so in a way that is as seamless as possible and as economically efficient as well.

Let’s review then the challenges that must be overcome in smaller markets and rural areas to ensure a smooth transition to digital broadcast television.

There are four challenges: 

1.  Important technical and market issues must be resolved to accomplish the transition to digital broadcast television. 

2. The substantial costs of paying for a forced transition to digital in smaller markets will impede deployment of other equally important communications services, like high-speed Internet. 

3. In order to minimize the economic impact on consumers, digital broadcast television must be built on the current backbone of cable systems that exist today.  As a result, the DTV transition in smaller markets must address equipment costs and channel capacity for smaller cable systems. 

4. The abusive conduct of a handful of media conglomerates is threatening the ability of cable systems, particularly in smaller markets, to support the DTV transition.  Congress must act to address the worsening structural programming problems that now affect digital and analog programming at large. 

III. Key Issues 

1.     Important technical and market issues must be resolved to accomplish the transition to digital broadcast television. 

As we see the situation in the smaller markets we serve, the marketplace is unprepared to know what it wants.  Why?  Because it is the lack of resolution on the technical underpinnings of the digital television market that has denied consumers even a glimpse of what benefits lay ahead.  Without any concept of how their experience might be better in a digital world, consumers lack any reason to engage in this matter.  That indifference then deflates industries’ interest in the subject, and the entire thing grinds to a halt..

The key facts about the transition to digital broadcast carriage are these:

Uniform standards among broadcasters, cable providers and consumer electronics manufacturers must be developed for the carriage of digital broadcast signals.  Without such uniformity, there will be no easy transition, and consumers will be unaware of the opportunities that have passed them by.

Assuming such standards can be developed, television sets with digital receivers capable of receiving cable and broadcast digital signals must be made available at an affordable cost to the everyday consumer.  Right now, that is not the case.

Today, the current DTV adoption rate is about at 2.5%.  In order to reach the status of a mature and universal service, we will need to see that increase to about 85% penetration.  To put this in perspective, consider that it took the market 22 years to achieve 85% penetration of color television sets and 15 years for 85% penetration of video cassette recorders.  I doubt many of you are willing to wait that long.

Finally, significant digital broadcast programming does not exist on the many digital channels that broadcasters want us to carry.

In our smaller markets, the transition to digital broadcast carriage cannot be accomplished until there is a widespread demand for a product that customers want at an affordable price and with technology that is readily available.  None of these conditions are present today.

Furthermore, neither my company nor my fellow members in the American Cable Association can achieve the transition to digital broadcast television until digital head-end equipment, digital boxes and digital television sets are widely available at an affordable price and until the bandwidth concerns of cable systems are met. 

2.     The substantial costs of paying for a forced transition to digital in smaller markets will impede deployment of other equally important communications services, like high-speed Internet. 

Right now smaller, independent cable businesses all across the country are locked in a competitive race to improve our systems through the use and deployment of digital cable services and high-speed Internet.  These services are a reality today.  They are available now.  They are helping us improve our systems and provide advanced higher quality telecommunications services to our customers today, and these services are the cornerstone to our economic survival.

My company is using these services to close the so-called “Digital Divide” in smaller markets now.  But these services and the required system upgrades are costly.  For example, it costs hundreds of thousands of dollars to install a digital cable head-end that will enable our customers to receive digital services.  I can tell you that this is a lot of money if you only have 500 or fewer customers on a cable system, as many of our ACA members do.

In addition to the digital head-end, expensive digital set-tops must be purchased for each home, and significant technical work must be completed to take a 35-channel analog cable system to 70 or more digital channels.

  But not all customers take these digital cable services right off, and the return on investment for a digital head-end like this one is lengthy.  As a result, you can see how difficult it is to economically spread that cost across a system that may only serve 500 customers as is typical of ACA’s members.

Similarly, there is a substantial per home cost to our ACA members to make available an advanced high-speed cable modem Internet service.  It’s expensive, and the return is a long one.

However, these services are available now because we believe they are essential to our future and satisfy the demands of our customers.  To be sure, they are not on the drawing board or potentially available sometime in the future.  My company is doing right now what policymakers want and the marketplace demands  – improving our service, enhancing competition in the marketplace, and closing the “Digital Divide” by providing advanced telecommunications services.  Moreover, if we do not do this, our competitors in the satellite business and elsewhere will gladly take each of my customers.

The fact remains that even at the best run systems the significant funds that it takes to launch digital cable or high-speed Internet could not be spread to also cover the costs of digital broadcast carriage.  But we are being asked to support the transition to DTV, and we want to.  However, unless equipment costs come down or there are other accommodations made in smaller markets, something will have to give.  Internet?  Digital cable?  DTV?  Who makes the choice?  Broadcasters?  Cable operators?  Congress?  The FCC?  Consumers?

The transition to digital broadcast television must be balanced to ensure that all consumers – particularly in those areas where our members are, across the so-called ‘Digital Divide’ – have available to them other advanced services, especially broadband Internet access.

In smaller markets, Congress and the FCC must recognize that the DTV transition could result in the unintended consequence of impeding deployment of other advanced services.  In our marketplaces, this truly would be an unacceptable consequence. 

3.     In order to minimize the economic impact on consumers, digital broadcast television must be built on the current backbone of cable systems that exist today.  As a result, the DTV transition in smaller markets must address equipment costs and channel capacity for smaller cable systems. 

As I have discussed, without measures tailored for smaller markets, a forced transition to DTV would have significant negative consequences on our smaller cable businesses.

Carriage of DTV signals will require each small system to completely replace its antennas and signal processors.  At current equipment costs for a typical small cable system, this will cost tens of thousands of dollars.  Systems serving less than 1,000 customers will have a far more difficult time supporting this investment than would a large cable company where the same equipment at the same cost might serve 100,000 customers or more.

Similarly, cable set-top boxes will need to be replaced or retrofitted to allow customers to view DTV signals without a DTV-compatible set.  This will add substantial additional cost to the transition.

We believe these costs will ultimately come down, but not before the DTV transition is required.  Companies like Motorola, Scientific-Atlanta and others have a strong incentive to develop lower cost solutions for cable-carriage of DTV signals.  But small cable systems in smaller markets will be forced to make the transition before those equipment costs come down, threatening our ability to deploy other advanced services.

There is no glut of channel capacity on cable systems, particularly our members’ smaller market cable systems.  On average, our ACA members’ smaller market systems have substantially less channel capacity than their major-market counterparts.  As a result, a forced DTV transition would cause the loss of important existing analog and digital programming and high-speed Internet services.  It would create a significant chilling effect on the development and deployment of new advanced telecommunications services to these markets.

These new services have been essential to attracting the capital necessary to upgrade our smaller market systems in response to marketplace demand.

Forcing digital broadcast on smaller market cable systems would also force other existing important services off our systems in order to accommodate digital broadcast signals, which few of our customers could watch now anyway.

We as smaller market cable systems have to pay for our additional bandwidth through costly system upgrades.  We can only pay for these upgrades by carrying services our customers want and choose to pay for.

In our smaller market cable systems, we are either spending capital now to update to digital cable and high-speed Internet or seeking the capital to do it, because of the demand for the product and the revenue that can be derived from it.

But if the DTV transition is forced in smaller markets before our customers want it and choose to pay for it, it will cause smaller cable systems in smaller markets and rural areas to shut down.  When this happens, our customers will be left a long distance away from broadcasters.  These broadcasters may not be able to get good television signals at all to smaller market viewers leaving them, quite literally, in the dark.

Great challenges exist to accomplish the transition to digital broadcast television in smaller markets and rural areas.  But we pledge to work together to help remove the barriers to DTV, one of which has already been lifted.

ACA and its members strongly support the prohibition of dual must-carry obligations as contained in Section 6 of the Chairman’s draft DTV legislative proposal.

In addition, ACA supports the Chairman’s efforts to ensure compatibility between cable television systems and digital television receivers as contained in Section 8 of the DTV proposal.  Given the unique and challenging circumstances of smaller market cable systems, we look forward to working with the Committee to ensure that such compatibility and interoperability takes place in a reasonable manner that is sensitive to the needs and concerns of smaller markets and rural areas.

Within the constraints of small company resources and system capacity, our ACA members are eager to support the DTV transition.  Equipment cost remains a critical constraint.  Because of limited channel capacity of many small systems, forced transition to digital broadcast television would impose substantial burdens and could result in the loss of other important services.  For those reasons:

• Many of our members are currently negotiating marketplace solutions with smaller market broadcasters for carriage of HDTV signals;

• ACA and its members continue to work with the National Association of Broadcasters, the DTV Standards Committee of the Society of Cable Television Engineers and other industry, technical and vendor representatives to find efficient and workable solutions for the DTV transition in smaller markets and rural areas; and,

• ACA supports legislation that speeds the transition, so long as that legislation accommodates the different circumstances and cost structures in smaller markets.

4.     The abusive conduct of a handful of media conglomerates is threatening the ability of cable systems, particularly in smaller markets, to support the DTV transition.  Congress must act to address the worsening structural programming problems that now affect digital and analog programming at large. 

From our standpoint, this hearing also 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 that does not live in rural America, nor does it focus on rural Americans’ 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.  For smaller markets cable systems, this is a fundamental problem that directly impacts our ability to support the DTV transition.  These major media conglomerates, which we call programming cartels, have found through media consolidation the means to use market power to extract ever-increasing earnings from all Americans.

Unless there is significant congressional and regulatory action to address these issues, the situation is not likely to improve.  Consumer choice and competition, not to mention the transition to digital broadcast television, may be wiped out in the wake of the mighty merged communications giants.

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.  While customers and local franchise authorities don’t see it, their choices on what they watch are controlled by five programming cartels – Disney/ABC, CBS/Viacom, Fox/News Corp., General Electric/NBC, and Time Warner/AOL.

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 has raised its rates to our members by up to 20% each year for the past five years.  Obviously, some of our customers want ESPN.  But ABC-Disney will not let us just buy ESPN.  Oftentimes, in order to get the local ABC affiliate, Disney will force us through retransmission consent to take other channels we know our customers don’t want relative to other programming options.

This abuse of retransmission consent goes so far as to subject operators with multiple systems in multiple states to be forced into carriage of many such undesired programs on systems not even within the market involved.  Adding to the absurdity of the situation, these conditions for carriage often outlive the terms of the retransmission consent agreements by many years, thus leaving cable systems with bad, artery-clogging programming long after the desired programming has disappeared.  To be clear, this situation is being repeated by Fox/News Corp., GE-NBC and CBS-Viacom.

And the reality is that once such a programming cartel forces a new cable program onto the television dial, it’s virtually impossible to take it off, leaving the public with a service they never wanted or asked to receive.

This might not be so bad if we could offer the cartels’ programming on a tiered or a la carte basis to allow the consumer to choose to pay for these services or not.  But all of the cartel programming companies force their tied and bundled programming onto the lowest, basic levels of service, making independent cable pay for every customer and pay punitive prices if we do not carry many of their services in a bundle, just like they dictate.  The consumer also is forced to pay for services in this bundle they neither asked for nor wanted.

Consolidation has turned retransmission consent into extortion.  These same programming cartels go so far as to dictate channel locations and other terms.  Even more appalling is that fact that these programming cartels also embed into their contracts various “non-disclosure” terms.  These provisions prohibit cable operators from telling any customer, even the local franchise authority or your Committee, what the terms or rates are for their programming.   Thus, rate increases and unfair bundling practices are kept hidden from the public and even from Congress.  That is not the definition of an open, functional and fully competitive marketplace, or one that is constructed to best serve customers.

I am sure you all watched the retransmission consent showdown between Time Warner and Disney over this very issue.  Imagine the odds that a small system like mine has when negotiating with the programming cartels.

The four or five major programming cartels control the 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 the programming cartels.

In order to assist your review of this situation, I have attached several charts that depict the realities a small ACA member faces with regard to programming and channel capacity, and I hope you will take a moment to look them over at your convenience.

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 Disney/ABC, Fox/News Corp. and others are taking away choice and raising costs.

As a result of the hammerlock of control the programming cartels have on what consumers see on TV, it naturally affects what gets on TV, how much consumers pay for it, and when it gets on TV.

This is especially true for rural communities and smaller markets served by the members of the American Cable Association.

If the transition to digital broadcast television is to occur more smoothly, then more control must be put back into the hands of consumers who watch television and the businesses that serve them.

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 the programming cartels on the issues faced by independent cable and how the programming cartels are harming these businesses and smaller market consumers.  To no avail.

More than a decade of debate and discussion on these issues has led to no meaningful change in any of the behavior of the programming cartels or how they treat smaller market consumers and cable businesses.

The hammerlock of control gained by ever-increasing and consolidating programming cartels threatens to undermine the very businesses our members have fought so hard to maintain in smaller markets and rural areas.  As a result, with this situation as bad as it is and getting worse, we have no alternative but to seek action from Congress to break the hammerlock of the programming cartels.

To break the hammerlock of control by the programming cartels and to give consumers and independent cable businesses more choice and control, and to increase resources available for the DTV transition, Congress should act in three specific areas:  ensure the unbundling of services, require the disclosure of programming terms and conditions, and apply federal anti-trust laws to programming practices.

Unbundling:  Today the programming cartels tie and bundle their services in such a way that to get one service, you must take, and pay for, many.  Or, to get your local broadcast network stations, you must take, and pay for, other programming services sold by the programming cartel.

If the transition to digital broadcast television is going to occur, then consumers and the providers who serve them must have greater control to the larger pipe.

This means Congress should act to ensure that the programming cartels cannot force consumers and cable businesses to take bundled services or to require that these services be carried on the lowest levels of service.

If the programming cartels had exercised any self-discipline 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 on either 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 sell their services as part of a separate programming service tier, or even a la carte.

Moreover, Congress should prohibit any retransmission consent provision from a cartel programmer/broadcaster that requires carriage of any new programming service outside of a local broadcast network’s market.  This action will prevent frequent scenarios where consumers all over the country are required to take an unlikely new programming service in return for retransmission consent in one television market.

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 programming cartels have dominated the marketplace with their massive content streams of programming.  The cartels have put consumers and cable businesses over a barrel by tying services and raising programming prices without any regard to the consumer or the local companies that serve them.

Who gets the blame?  Not the programming cartels.  Conveniently enough for the programming cartels, each time they raise their programming rates they insulate themselves from criticism by requiring the cable business through strict confidentiality provisions to be silent about the rates or terms charged or required by the programmer.

Programming prices continue to rise far in excess of the rate of inflation.  One way to rein in this out-of-control programming cartel behavior is to require programmers to annually tell local franchise authorities and the Federal Communications Commission what they charge cable businesses and consumers to watch television.

Consumers can go on the Internet to learn how much it will cost them to buy a new car, but they can’t find out how much it costs to watch ESPN or how much a programming service has increased from one year to the next.

To restore control to the marketplace, Congress should act to require programmers to annually notify local franchise authorities and the FCC the true programming rates they charge to cable businesses and consumers and to also notify these entities whenever they raise rates.

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, which – ironically – were supposed to be free!

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.

Anti-Trust:  The actions of the programming cartels to tie and bundle and to coerce the price of their services 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 it were any other business, the tying, bundling and price fixing that goes on year after year in the programming business would have been squashed on anti-trust grounds by either Congress or the Department of Justice.

Why then are the programming cartels allowed unfettered ability to perpetrate the same actions on consumers without consequence?  There is no good reason.

As a result, Congress should carefully and comprehensively scrutinize the conduct and behavior of the programming cartels to examine their conduct toward providers and consumers and to apply federal anti-trust to cartel behavior.

Just because we 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 oil was in the past.

IV.CONCLUSION

Each one of the foregoing issues directly affects the ability of independent cable companies and also consumers to have any control over what they see on television, how much it costs and when it gets on TV – including digital broadcast television.

The transition to digital broadcast television is more than just a series of technical issues.  It also involves a series of marketplace reforms that must take place before consumers and their local providers – like my company and the members of the American Cable Association – can accomplish the transition to digital broadcast television.

Without these marketplace reforms, it is not too strong to say that the future of advanced services in smaller markets and rural areas hangs in the balance.

My company and the members of the American Cable Association are here today amidst the giants of the television, cable and telecommunications world.  Why should anyone here listen to what we have to say?

Because we are 1,000 small businesses serving 8 million consumers in smaller markets and rural areas in every state and in nearly all congressional districts – virtually all of the districts covered by this committee.  Our companies and our consumers in these smaller markets and rural areas are where the rubber meets the road in solving these telecommunications issues.  If you want to make sure that the transition to digital broadcast television happens, then make sure it happens in the smaller markets and rural areas we serve, and it will happen everywhere.

We know what our customers want to watch on television and how much they’ll pay for it.  We are the vital link in the chain that will determine whether the digital broadcast television transition occurs in smaller markets and rural areas or whether it won’t.

The irony here is that the impact of these issues, if not addressed by Congress, will do exactly the opposite of what Congress wants us to do – provide advanced new services, competition and choice for consumers in the smaller and rural marketplaces.

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.

James M. Gleason

James M. Gleason is the President and Chief Operating Officer of CableDirect and has held that position since December 1996.  CableDirect is a cable television company managing and serving more than 40,000 subscribers in rural areas and small communities in the Midwest and Southeast United States.

Previously, Mr. Gleason has been the President of Galaxy Cablevision and has been in the cable television industry since 1986.  He is responsible for overall operations, and comes with prior experience in cable television system construction, marketing, customer service, and operations. 

Currently, he also serves as Chairman of the American Cable Association.  In 1992, Mr. Gleason served as Chairman of the Board of the National Cable Television Cooperative, of which CableDirect is a member.    He also serves on the Boards of Directors for the Southeast Missouri State University Foundation and Missouri Delta Medical Center.  Mr. Gleason holds a Bachelor of Science degree in Business Administration from Southeast Missouri State University, and has 17 years experience in the cable industry.