Introduction

Mr. Chairman, members of the Subcommittee, my name is Robert Sachs and I am President and CEO of the National Cable & Telecommunications Association. Thank you for providing us with the opportunity to testify before your subcommittee regarding competition in the multichannel video market. 

Mr. Chairman, competition in the multichannel video marketplace is vigorous and well established.  Today, consumers can choose from a variety of multichannel video providers, including direct broadcast satellites (DBS), alternative broadband providers like RCN, phone companies, like Qwest and utilities, like Sigecom.  Indeed, most consumers have a choice of at least three multichannel video providers.  As a result of this competition, nearly 21 million consumers – almost 23 percent of subscription television customers – today obtain multichannel video programming from a source other than a cable operator.

 To determine whether competition exists, one only need look at what’s been happening in the marketplace since the passage of the 1996 Telecommunications Act.   With respect to the marketplace for the delivery of video services, the answer to that question is clear.  Video competition is fierce, leading to service enhancements and product innovation that inure to the benefit of consumers.

The cable industry responded to this competition and the regulatory stability created by the passage of the 1996 Act by embarking on a massive effort to upgrade facilities and launch new services.  Since the passage of the ’96 Act, the cable industry has invested roughly $55 billion to deploy broadband plant in order to offer a wide array of new advanced digital services, including digital video, high speed Internet access, cable telephony and interactive applications.  The DBS industry, seeking to maintain its lead position in subscriber growth has responded to cable’s investment by launching its own satellite delivered broadband services and obtaining exclusive sports programming. 

            COMPETITION IN THE VIDEO MARKET IS WELL ESTABLISHED

AND GROWING STEADILY 

 

Market Share of Multichannel Video Program Distributors (MVPDs)

September 2001

 

MVPD	Subscribers (in Millions)	Percent of MVPD Market
DBS	16.73	18.05
C-Band	0.94	1.01
MMDS	0.62	0.67
SMATV	1.50	1.62
Local Telephone Companies	0.43	0.46
Broadband Competitors	0.66	0.71
Total Non-Cable	20.87	22.53
Cable	71.79	77.47
Total Multichannel Subscribers	92.66	100.00

 

Source:       NCTA Research Department estimate based on data from A. C. Nielsen, Paul Kagan Associates, Cable World, SkyREPORT, and public reports of individual companies. 

Today, cable competes with a wide range of satellite and terrestrial providers.  Last year in its Seventh Annual Report on Competition in the Video Marketplace, the FCC found that “competitive alternatives and consumer choice continue to develop.”  Customers have increasingly flocked to these alternatives, with non-cable subscribership growing nearly ten-fold from an aggregate of 2,330,000 non-cable MVPD customers at the time of the 1992 Cable Act to more than 20,876,000 in September 2001.

While cable operators are clearly facing competition from a variety of sources, DBS in particular has proven itself as a competitive substitute for cable.  With the passage of the Satellite Home Viewer Improvement Act (SHVIA) in November 1999, DBS companies can now retransmit local broadcast signals into their market of origin (“local-into-local”).  As of November 2001, DirecTV and EchoStar made available local TV signals in 42 markets with over 65 million television households.  When combined with their ability to offer hundreds of channels of digital video and CD quality sound, DBS companies compete vigorously with cable. The total number of DBS subscribers jumped from 14 million to 16.73 million between September 2000 and September 2001 – a 19 percent annual growth rate.  DirecTV now has more subscribers (10.4 million) than all but two cable operators – AT&T and AOL Time Warner – making it the third largest multichannel video provider in the U.S.  The number two DBS provider, EchoStar, is the sixth largest MVPD and has more customers than all but four cable companies.  Furthermore, DirecTV predicts that it will add 1 - 1.2 million new subscribers in 2002.^[1]  EchoStar forecasts net subscriber additions to total between 1.5 and 1.75 million in 2001, with similar gains predicted in 2002.^[2]

TOP 12 MULITCHANNEL VIDEO PROVIDERS

                         Company                                  Number of Subscribers

AT&T Broadband	13,750,000
Time Warner Cable	12,654,000
DirecTV	10,341,000
Comcast	8,437,000
Charter	6,970,000
Echostar	6,430,000
Cox Communications	6,206,737
Adelphia	5,693,035
Cablevision Systems	2,988,590
Mediacom	1,585,000
Insight	1,275,500
CableOne	760,000

 

Source: NCTA Research based on Company 3Q reports

 

Clearly, EchoStar and DirecTV are formidable competitors to cable and enjoy a number of competitive advantages.  For example, DBS has been all digital from the start, giving it greater channel capacity than many cable systems, and has been able to achieve greater efficiencies in advertising and promotion with uniform national pricing.  In addition, DBS companies are not subject to local franchise fees and taxes which can add so much as 15% to a cable customer’s monthly bill, as they do in the District of Columbia.  Also, DBS companies are not saddled with the costs of public access studios, institutional networks and free municipal cable hook-ups which are required by most cable franchise agreements. 

On cable’s side of the competitive ledger, upgraded cable systems can match the programming variety and choice that DBS companies offer, and provide consumers with 7 by 24 local customer service, interactive digital video, cable modem and cable telephony products. 

The marketplace will determine which MVPD offers the better package of services with the best price and customer care.  And individual consumers will determine which service offering best suits their particular needs.  But what is undeniably clear is that consumers have multiple choices and are deciding among them with their pocket books.  

NCTA does not take a position with regard to the proposed EchoStar/DirecTV merger.  As indicated earlier, cable operators see the Dish Network and DirecTV as very formidable competitors, and compete vigorously with these satellite companies everyday.  Moreover, with the additional channel capacity and operating efficiencies that would result from combining these two companies, we have no reason to believe that a 17 million subscriber satellite company will be any less formidable.  Charlie Ergen is a fierce and respected competitor, as his track record amply demonstrates. 

We believe that antitrust and public policy issues that have been raised about the proposed EchoStar/DirecTV merger are best left to resolution by expert agencies like the U.S. Department of Justice and Federal Communications Commission.  NCTA represents cable operators serving over 90% of the nation’s cable television customers and more than 200 cable program networks, as well as equipment suppliers and providers of other services to the cable industry.  Many of these companies are also suppliers to the satellite industry.  Individual member companies may choose to submit comments to the expert agencies, however, the cable industry, as an industry, does not plan to take a position on the merger. 

            Total dish subscribership (C-Band and DBS) now exceeds 15 percent in 41 states. According to SkyREPORT, Direct-to-Home (DTH) subscribers (all dish customers, including DBS and C-Band) grew from 15.3 million to 17.9 million between September 2000 and September 2001, an increase of 15.6 percent (versus 1 percent for cable).  In 41 states, DTH satellite subscribership now exceeds 15 percent of all television homes.  As of July 2001, DTH penetration exceeded 20 percent in 31 states, 25 percent in 16 states, 30 percent in 5 states, and 40 percent in 1 state.  As mentioned, today most consumers have the choice of two DBS providers in addition to cable, and some have other multichannel video choices as well.

 

 

 

 

 

 

 

 

States with Direct-To-Home (DTH) Dish Penetration

of Fifteen Percent or More  (July 2001)

 

Source:  SkyTRENDS SkyMAP July 1, 2001; www.skyreport.com

 

 

 

 

While DBS has clearly become the chief competitor to cable, a growing number of new competitors have entered the marketplace.  Companies like RCN, Knology, WideOpenWest, and others are providing consumers with competitive video and broadband services. Some utilities and incumbent local exchange carriers are also adding video programming to their product line-ups. 

Mr. Chairman, the goal of multichannel video competition set by Congress in the 1992 Cable Act has been accomplished.

 

The Cable Industry’s Response to Burgeoning Competition

 

Cable companies have responded to competition in the video market by aggressively upgrading their facilities and launching new services.  Since passage of the Telecommunications Act of 1996, the cable industry has invested nearly $55 billion to deploy broadband plant in order to offer a wide array of advanced services, including digital video, digital music, high speed access to the Internet, and telephony.  These upgrades involve rebuilding more than a million miles of cable plant and by year-end 2001, they will be approximately 80 percent complete.  As of September 30, 2001, cable had 13.7 million digital video customers, 6.4 million high-speed data customers, and 1.5 million residential cable telephone customers.

 

Among the new options that cable customers have are digital video services.  Cable program networks have already launched some 60 new digital channels, offering consumers additional choice and further program diversity.  Examples include the Biography Channel and History Channel International (from A&E); Science, Civilization, and Kids (from Discovery); Noggin, Nick Too, and Nickelodeon Games & Sports (from Nickelodeon); and style. (from E!).  There are six new Hispanic channels from Liberty Cańales, new music channels from MTV and BET, and separate channels targeting Indian, Italian, Arabic, Filipino, French, South Asian and Chinese viewers from The International Channel.  There are also many new premium offerings from HBO (HBO Family, ActionMAX, and ThrillerMAX), Showtime (Showtime Extreme, Showtime Beyond) and Starz Encore (Family, Cinema, Movies for the Soul, and Adventure Zone).

Prices for Cable Programming Services

Despite escalating programming costs (especially higher sports rights fees) and billions spent on system upgrades, cable prices have remained relatively stable on a per-channel basis.  For example, in its most recent report the Federal Communications Commission found that cable rates stayed unchanged in the year 2000 on a cost-per-channel basis (Report on Cable Industry Prices, FCC 01-49, MM Docket No. 92-266, released February 14, 2001).  According to the same report, during the 12-month period ending July 1, 2000, average monthly prices for basic service tiers (BST), cable programming service tiers (CPST), and equipment increased by 5.8 percent.  This represents a very slight increase (from 5.2 percent) for the year ending July 1, 1999 – during which CPST prices were subject to FCC regulation from July 1, 1998, to March 31, 1999.

 

Industry critics will cite the fact that average monthly cable prices increased 5.8 percent compared to the inflation rate of 3.7 percent during the 12-month period ending July 1, 2000.  But their criticism fails to take into account the fact that cable subscribers also received an average of three additional channels of BST and/or CPST programming.  In fact, it is the competition from direct broadcast satellite services and other competitive broadband providers that has driven cable operators to upgrade their plant and add the new channels of programming consumers want.

 

Year-to-year comparisons which fail to consider the increased number of channels that operators provide to customers therefore create a misleading picture.  In fact, data from the FCC and General Accounting Office show that the price per channel of cable’s video services has declined since 1986 when adjusted for inflation:

Price Per Cable Channel,  1986 – 2000

 

Source:     GAO Survey of Cable Television Rates and Services, July 1991; FCC Reports on Cable Industry Prices, released 12-15-97 and 2-14-01; Bureau of Labor Statistics, CPI-U.

 

 

This drop in real per-channel cable prices has occurred even though programming costs have skyrocketed since 1986.  For example, between 1996 and 2001, the cable industry spent over $46 billion on basic and premium programming – nearly twice the $23.8 billion it spent during the previous six years. 

 

Source:         NCTA Research Department estimate, based on data from Paul Kagan Associates, Inc. and the U.S. Copyright Office.

 

Cable customers today are receiving more channels and better value for their dollar than ever before.  And consumers are using their cable service more than ever.  During primetime, ad-supported cable viewership increased from a 7.5 share during the 1985-1986 television season to a 41.7 share during the 2000/2001 television season, according to a Cabletelevision Advertising Bureau analysis of Nielsen data.

 

Expiration of Restrictions on Exclusive Contracts

            Finally, I know this subcommittee has a particular interest in a provision of the 1992 Cable Act that imposed a 10-year restriction on the ability of vertically-integrated satellite cable programming networks to enter into exclusive contracts with cable operators.  That restriction is scheduled to sunset in October 2002, unless the FCC finds that “such prohibition continues to be necessary to preserve and protect competition and diversity in the distribution of video programming.”

 

            The prohibition on the ability of vertically integrated programmers to enter into exclusive contracts was enacted in a very different environment.  As my testimony indicates, the competitive landscape in the multichannel video market place has changed dramatically since then.  In 1992, DBS had no subscribers.  Today, DBS serves more than 17 million customers.  In 1992, cable operators served 95% of all MVPD subscribers.  Today, cable serves less than 78% of multichannel video customers. 

 

            And, in a total turnaround of circumstances, the most valuable exclusive rights in subscription television—to the NFL’s Sunday afternoon football package—are held by DirecTV, the third largest MVPD.  Regulations that were established during a period when there were significantly fewer multichannel video programming alternatives for consumers should be allowed to expire in a competitive environment.  In limiting the restriction on exclusive contracts for 10 years, Congress recognized that a competitive marketplace is preferable to regulation.  Prolonging the ban disserves competition and diversity by disincenting cable operators and their competitors to develop differentiated programming services.

 

The dramatic growth over the last decade in the number of multichannel customers subscribing to alternatives to cable is only part of the picture.  The increase in diverse program services in which cable operators have no ownership interest has totally changed the landscape from 1992.  In 1992, there were only 45 non-vertically integrated satellite-delivered services.  Today, there are more than 200 national satellite delivered services that have no cable ownership.  These networks compete with vertically-integrated networks for viewers, offering a variety of programming genres, such as news, children’s, music and general interest programming, among others.  While nearly half of all program services were vertically integrated in 1992, that percentage has dropped to 26% today.  And no single cable company has ownership interests in more than 9% of satellite delivered programming services.

 

Source: 1999-2000 FCC Annual Competition Reports; NCTA Research

 

 

In contrast, major media conglomerates like Disney, General Electric, Viacom, and News Corp (who respectively own the ABC, NBC, CBS and Fox broadcast networks), are increasing their ownership of cable networks.  Each of the major commercial broadcast TV networks today is owned by a media company that has financial interests in 10 to 20 cable networks.  Some are nationally distributed channels like CNBC, while others are regional channels like Fox Sports Net.  And, as the following chart shows, the stable of broadcast-owned cable networks includes some of the most powerful brands in television, among them ESPN, The Disney Channel, MTV, VH-1, Nickelodeon, Lifetime, the History Channel, and Showtime Networks.

 

          November 2001

 

Broadcast Network Investments in Cable Networks

 

General Electric/NBC

CNBC

 

Partial Ownership:

A&E

AMC

Biography Channel

Bravo

Fox Sports Net (regional sports networks)

History Channel

History Channel International

Independent Film Channel

MSNBC

MuchMusic

Valuevision

WE: Women’s Entertainment

 

 

Viacom/CBS/UPN

BET Holdings: BET, BET Action Pay-Per- View, BET on Jazz, BET Gospel

The Box

CMT (Country Music Television)

Flix

MTV

MTV2

Nickelodeon/Nick at Nite

TV Land

VH1

Showtime

The Movie Channel

TNN: The National Network

The Suite (digital networks): Noggin, Nickelodeon GAS, Nick Too, M2, MTV X, MTV S, VH1 Smooth, VH1 Country, VH1 Soul

 

Partial Ownership:

Comedy Central

Sundance Channel

 

 

 

News Corporation/Fox

Fox Movie Channel

Fox News 

Fox Sport Americas

Fox Sports World

FX

 

Partial Ownership:

Discovery Health

Fox Sports Net  (regional sports networks)

National Geographic

Speedvision

     

 

 

Walt Disney/ABC                                 

ABC Family

Disney Channel

SoapNet

Toon Disney          

 

Partial Ownership:

A&E

Biography Channel

E!

ESPN

ESPN2

ESPNews

ESPN Classic

History Channel

History Channel International

Lifetime

Lifetime Movie Network

style