<DOC>
[109 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:32152.wais]
S. Hrg. 109-762
COMPETITION IN SPORTS PROGRAMMING AND DISTRIBUTION: ARE CONSUMERS
WINNING?
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
NOVEMBER 14, 2006
__________
Serial No. J-109-119
__________
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
32-152 WASHINGTON : 2007
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512ÿ091800
Fax: (202) 512ÿ092250 Mail: Stop SSOP, Washington, DC 20402ÿ090001
COMMITTEE ON THE JUDICIARY
ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
Michael O'Neill, Chief Counsel and Staff Director
Bruce A. Cohen, Democratic Chief Counsel and Staff Director
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
Feinstein, Hon. Dianne, a U.S. Senator from the State of
California..................................................... 2
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont,
prepared statement............................................. 57
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 1
WITNESSES
Fawcett, Daniel M., Executive Vice President, Business and Legal
Affairs and Programming Acquisition, DIRECTV, Inc., Washington,
D.C............................................................ 9
Hobbs, Landel C., Chief Operating Officer, Time Warner Cable, New
York, New York................................................. 13
Noll, Roger, Senior Fellow, Stanford Institute for Economic
Policy Research, Stanford, California.......................... 16
Pash, Jeffrey, Executive Vice President and General Counsel,
National Football League, New York, New York................... 5
QUESTIONS AND ANSWERS
Responses of Landel C. Hobbs to questions submitted by Senator
Specter........................................................ 25
Responses of Daniel M. Fawcett to questions submitted by Senator
Specter........................................................ 27
Responses of Jeffrey Pash to questions submitted by Senators
Leahy and Specter.............................................. 30
SUBMISSIONS FOR THE RECORD
Fawcett, Daniel M., Executive Vice President, Business and Legal
Affairs and Programming Acquisition, DIRECTV, Inc., Washington,
D.C............................................................ 40
Hobbs, Landel C., Chief Operating Officer, Time Warner Cable, New
York, New York................................................. 50
Pash, Jeffrey, Executive Vice President and General Counsel,
National Football League, New York, New York................... 59
COMPETITION IN SPORTS PROGRAMMING AND DISTRIBUTION: ARE CONSUMERS
WINNING?
----------
TUESDAY, NOVEMBER 14, 2006
United States Senate,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 9:01 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Arlen
Specter, Chairman of the Committee, presiding.
Present: Senators Specter and Feinstein.
OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM
THE STATE OF PENNSYLVANIA
Chairman Specter. Good morning, ladies and gentlemen. The
Judiciary Committee will now proceed with our hearing on the
National Football League and its practices on pay television.
Nine days from today, on Thanksgiving Day, the NFL on its own
network, the NFL Network, will begin showing what is called the
Thursday-Saturday package, and this will doubtless have the
effect of raising subscription rates for consumers who watch
football very materially. This hearing will examine whether the
so-called Sunday Ticket is a violation of the antitrust laws,
whether the new Thursday- Saturday package is a violation of
the antitrust laws, or whether the two in combination violate
the antitrust laws, and whether or not additional legislation
is necessary.
Professional sports in America has a unique position. Other
businesses--and it is acknowledged that professional sports
does constitute a business, but other businesses are subject to
the antitrust laws. But by virtue of a special exemption under
legislation enacted in 1961, professional sports may combine
and deal with the networks in a way which other businesses
cannot. We will be examining today the question as to whether
there is any exemption from that statute, but it appears to me
on the face that there is not.
There is no doubt that America has a love affair with
professional sports. Perhaps it could be more accurately called
an addiction, maybe even a drug addiction. But there is no
doubt that people are attracted to the televising of sports,
especially the National Football League, where the Super Bowl
has consistently been the highest-drawing television program
that is on the air.
In 1999, the Court of Appeals for the Third Circuit handed
down a decision saying that DIRECTV's Sunday Ticket was not
exempt under the 1961 statute, that the 1961 statute covered
broadcast television where there were sponsors and did not
cover pay television. And, in fact, Pete Rozelle testified at
the hearings when that legislation was enacted that it did not
cover pay television, and those were the findings of the House
Judiciary Committee as well.
A key issue of the entire arrangement turns on which of the
subscribers are required to pay for the additional coverage.
Comcast, illustratively, has three tiers of coverage: one is
what is called analog, where you have about 24 million
subscribers; another is digital, with about 11 million
subscribers; and a sports tier, which has less than 1 million.
Efforts are being made by cable companies to carry the new
Thursday-Saturday package on their sports tier, but that is
being resisted by the NFL.
The result is that if it is covered on the basic package,
many more people have to pay the fare, whether they want the
NFL or not, if they already get the cable coverage. One
question which will be pursued here is: Why has the Sunday
Ticket not been available for competitive bidding? The
Committee is advised--and we will be pursuing this more
specifically--that the NFL told Comcast they wouldn't entertain
a bid from Comcast. And the question obviously arises: Why
isn't the bidding open? And why isn't the bidding competitive?
We will be pursuing another hearing on this overall subject
on December 7th on the question of vertical integration, which
poses some different issues with the Yankees and their
television station, where it is reported that their TV station
is now worth more than the baseball team, and the vertical
integration which involves the Braves and the vertical
integration which involves Comcast with the Philadelphia sports
teams.
Let me yield at this time to the Senator from California.
STATEMENT OF HON. DIANNE FEINSTEIN, A U.S. SENATOR FROM THE
STATE OF CALIFORNIA
Senator Feinstein. Thank you very much, Mr. Chairman, and
let me thank you for holding these hearings. And I gather from
what you say there will be a series of them, and I think that
is good. I would like to urge that they be widened somewhat,
and I am very concerned. I happen to be a big NFL fan. You know
I was mayor for 9 years. I had the privilege of going to the
Super Bowl several times. The San Francisco 49ers have become a
treasured value in San Francisco. And I have been very
disturbed to learn that the 49ers are countenancing a move
outside of the city. And I began to take a look at what has
happened, and what I find is that with Major League Baseball
you had one move during this period of time, and with the major
league football there have been seven moves during a period of
time: the Oakland Raiders to Los Angeles in 1982, the Baltimore
Colts to Indianapolis in 1984, St. Louis Cardinals to Tempe in
1988, Los Angeles Rams to St. Louis in 1994, the Raiders to
Oakland again in 1994, the Cleveland Browns to Baltimore in
1996--and in that case they did not take the name essentially
with them--and the Houston Oilers to Nashville in 1997.
Major league football is a very important factor to big
cities of America. It is the great leveler in a diverse city.
People come together. They mourn the losses. They share the
pride of the wins. Once in a while they go to the Super Bowl,
and there is a tremendous investment of the cities of America
in their teams. And when a team just announces that it may pull
out and go to another community and take the name of the city
and the name in this case of the heritage of the city with
them, it causes great consternation.
I have my staff, Mr. Chairman, looking at the law. It is my
view that the league should approve all moves. It is my view
that these constant moves are not healthy for the communities.
And I have deep concern over the taking of the name of a team--
in this case, the San Francisco 49ers. 49er is the tradition of
the city. San Francisco is the city of the Gold Rush. This has
been with us for more than a hundred years. You cannot move to
Santa Clara and call yourself a 49er. You are not. And you
certainly can't call yourself the San Francisco 49ers. You are
not.
So it seems to me that we ought to look at legislation
which would prohibit the taking of a city's name outside of its
jurisdiction without the approval of that city. I have always
contended that major league sports isn't like Post Toasties. It
isn't a commodity. It is a very ethereal, general concept that
so deeply enriches a city. I was passionate about this when I
was mayor, and I am passionate about it as a U.S. Senator.
I pulled together the owner of the 49ers, whom I respect
very much, John York--I have known the family for a very long
time--and the mayor, Gavin Newsom, this past Friday to try to
see if negotiations couldn't resume, and I believe they will
resume. I understand the mayor may be meeting with Mr. York
again Wednesday. And I am very hopeful that something can be
worked out.
But this U.S. Senator intends to fight every way I possibly
can to keep the San Francisco 49ers in San Francisco and to see
that this kind of move of just picking up and leaving a city
can really be modified to the point where, if the name is going
to go, the city provide some approval.
So I wanted you, because we have worked closely together on
a number of other issues, to know that and to know my deep
concern, to thank you for holding these hearings, and I hope
they can be expanded.
Chairman Specter. Well, thank you, Senator Feinstein. You
have raised some important issues. And this Committee held
hearings in the early 1980s on the subject you referred to, and
at the same table, we had Pete Rozelle and Al Davis when they
came in to testify about the move of the Oakland Raiders--I
think the table is the same; the witnesses are just different--
and when there was a threat to move the Philadelphia Eagles.
And I share your passion and I share your concern for the
hometown team. When there was a move to take the Eagles to
Phoenix in the early 1980s, I introduced legislation to take
away the antitrust exemption unless major league football, the
NFL, respected the hometown teams.
I believe that sports franchises are--I put it in the
terms, perhaps unduly legalistic, as opposed to Post Toasties,
``affected with the public interest.'' And I still recall, as
do many people, the move of the Brooklyn Dodgers to Los
Angeles. Walter O'Malley got a lot of real estate, and Brooklyn
lost their baseball team. And the Giants followed suit. And I
am sure you opposed the move of the New York Giants to San
Francisco at that time. And then the Colts left in the middle
of the night with Irsay to go to Indianapolis. And then we had
the rash of stadium building where we spent $1 billion in
Pennsylvania and a lot of it has come out of the taxpayers. I
introduced legislation when that wave started to condition the
antitrust exemption on Major League Baseball and the NFL paying
three-quarters of the stadium costs. The NFL has a multiyear,
$24 billion television contract, and they can afford to build
their own stadiums, and they can afford to leave teams in
place. I agree with you totally.
The more imminent problem is the problem as to what is
going to happen to cable subscribers all around the country.
People are going to want to see this Thursday-Saturday package,
and the NFL has sued Comcast involving this matter. We are soon
going to explore that. And I cannot find out what that lawsuit
is about. It is under seal. They have docket entries so you can
see that there is a lawsuit, but it is under seal. So the
public has a really major interest, and there has been a
concern that the attitude of professional sports is that the
public be damned. And that is highly questionable in a context
where you have this unique status of an antitrust exemption.
Well, we are going to talk--
Senator Feinstein. If I may?
Chairman Specter. Sure, you may.
Senator Feinstein. Thank you very much. I would just say
that I agree with everything you have said. I would really like
to work with you in this regard. You clearly have the
background, the history, and have done much more in the arena
than I.
As you know, our side of the aisle has the organizing
meeting at 9:30 this morning, so I look forward to speaking
with you in the coming days and seeing what we might be able to
put together for the new Congress. And I thank you very much.
Chairman Specter. Well, thank you, Senator Feinstein. We
had set this hearing thinking that the organizing meetings were
going to be on Wednesday and not on Tuesday. And as it works
out, as usual, there is a disagreement between the parties as
to when to organize. We can disagree on almost everything. The
Democrats are organizing on Tuesday and Republicans on
Wednesday. But your organization meeting may not take too long,
and if you have the time and inclination, come back. These men
will be here for a while.
Senator Feinstein. Thank you. Thank you very much.
Chairman Specter. We now turn to our first witness, Mr.
Jeffrey Pash, Executive Vice President and General Counsel of
the National Football League. Prior to coming to the NFL, he
was Senior Vice President and General Counsel to the National
Hockey League, had been a partner at Covington & Burling,
graduated from Harvard College and Harvard Law School.
Thank you for joining us, Mr. Pash, and we look forward to
your testimony.
STATEMENT OF JEFFREY PASH, EXECUTIVE VICE PRESIDENT AND GENERAL
COUNSEL, NATIONAL FOOTBALL LEAGUE, NEW YORK, NEW YORK
Mr. Pash. Thank you, Mr. Chairman, and good morning. I
appreciate the opportunity to talk about our television
policies today. They have been, as you indicated, reviewed over
many years in many different forms, and the conclusion I think
has been that these policies are consistent with the public
interest, they are responsive to consumer demand, and they
provide NFL fans with exceptional access to television at
little or no cost.
We are, like any sports league, a unique business entity.
Our teams jointly produce a product that no team could produce
on its own. And, in turn, we compete in a broad entertainment
marketplace that includes other sports products and all kinds
of entertainment products.
Let me touch on three points before we get to the
questioning: first, just an overview of NFL TV policy; second,
the Sunday Ticket package; and, third, our new NFL Network.
The centerpiece of NFL television policy is the free, over-
the-air broadcasting of NFL games. Every NFL regular season
game and every post-season game is televised on free, over-the-
air television. As a general matter, a fan in a particular city
will have available 90 or more games on free television during
the course of the year. That will include all of that local
team's away games, all of the home games if they are sold out,
a wide range of other NFL games, and all playoff games. Thus
far this year, every game has been sold out and has been
televised locally in the home city.
This is true even of games that are shown on ESPN or on the
NFL Network. Those games are simultaneously broadcast over the
air in the home cities of the participating teams. So the game
last night between Tampa Bay and Carolina was shown nationally
on ESPN and also on over-the-air television in those two
communities. That is a unique requirement. It is not imposed by
any other league. It is not imposed, to my knowledge, in the
context of any other sports television product.
Second, with respect to NFL Sunday Ticket, that is, as the
Chairman knows, a satellite package that allows fans to view
out-of-market games that would not otherwise be available in
their home community. So a fan in Washington, for example,
would ordinarily on Sunday see the Redskins and one or two
other games. If that fan purchases Sunday Ticket, he can see
any NFL game being played on that day.
NFL Sunday Ticket is structured to supplement but not
displace the broadcast packages. No fan has to purchase Sunday
Ticket in order to see the local teams' games, the prime-time
contests, any of the post-season games, or a wide range of
other games. Those 90 games I referred to are available without
regard to whether a fan purchases Sunday Ticket or not. It does
not displace the primary role of broadcast networks or local
affiliates. It expands output and enhances consumer choice,
which is precisely what the antitrust laws encourage firms to
do. And as DIRECTV's testimony makes clear, it has also
promoted broader competition in a broader television
marketplace.
Finally, with respect to the NFL Network, the NFL Network
was started 3 years ago. It is a year-round channel devoted to
football. It is currently available in approximately 40 million
homes, both on cable as well as DIRECTV and EchoStar.
Interestingly, DIRECTV and EchoStar, for example, as is also
true of the telephone companies that carry the NFL Network,
have included it on their basic tier at no additional cost to
consumers, no up-charge whatsoever for any of those homes.
While we have allowed cable companies to launch the network
on widely distributed digital tiers, we have not been willing
to do so on the sports tiers. We do not believe the pricing of
those sports tiers or the very narrow distribution of those
sports tiers is consistent with the interests of our fans or,
frankly, with our own interests. We have always tried to have
broad-based distribution of our product, and those sports tiers
are not broadly based.
Later this month, we will begin live telecasts of a package
of eight regular-season games. Those games will also be shown
on over-the-air broadcast in the home cities of the competing
teams.
We are in the midst, as you know, of some difficult
negotiations with cable systems over carriage of the network.
Those are tough commercial negotiations. They are not unusual
or unprecedented in the context of sports or television. There
have been similar disputes in the past between cable systems
and other rights holders. As a general matter, they get
resolved when one party or another reassesses and modifies its
positions. But they do not raise antitrust issues and do not
get resolved by reference to the antitrust laws. They are
commercial disputes that get resolved in the ordinary course.
We believe that our use of the NFL Network, Sunday Ticket,
and our broadcast package, which is where the overwhelming
amount of our television product is placed, is consistent with
the public interest and with the antitrust laws as they have
developed over the past 45 years.
Thank you.
[The prepared statement of Mr. Pash appears as a submission
for the record.]
Chairman Specter. Mr. Pash, why do you say or fundamentally
how can you say that not offering the Thursday-Saturday package
to a sports tier is consistent with the fans' interest? By way
of definition, if you have it in the basic package, everybody
has to pay for it whether they want to watch the games or not,
whether they are a football fan or not. If they could select
their menu a la carte, it would be the channels they wanted. So
how can you say it is consistent with the fans' interest when,
if you put it on a sports tier, only the fans who wanted to
watch the games would be paying for them and not everybody have
to pay for them to get the basic coverage?
Mr. Pash. Well, the interest of fans, I think, Senator, is
best served by broad distribution. That is why so many cable
channels are carried on a basic tier. We do not have an a la
carte model. This is not about a la carte. This is not
selecting the NFL Network.
Chairman Specter. Well, why not? Why is it in the fans'
interest to have to pay for the Thursday-Saturday package when
they do not have any interest in professional football? Why not
let the people who want it--we are not talking about going a la
carte all the way. We are talking about two different tiers:
the basic package everybody has to pay for, and a sports tier,
where you have those who are identifiable as wanting the sports
would pay for what they see.
Mr. Pash. Well, they do not have to pay for it. If you look
at DIRECTV and you look at EchoStar, the NFL Network and these
eight games are available on the basic tier. When EchoStar
added the NFL Network earlier this year, there was no increase
in charge to the consumers. There was no increase in charge to
the subscribers for DIRECTV. The telephone companies that are
carrying this on their basic tier, they do not charge the
consumers anything extra for it. That is a false dichotomy.
That is not how it has to work out. It can be part of the basic
cable charge, or it can be part of the basic digital tier
charge. There is no reason why there has to be a separate
package, and four of the five largest distributors in the
country carry the NFL Network without imposing a separate
charge. It is a false dichotomy.
Chairman Specter. Which cable companies carry it without
any additional charge?
Mr. Pash. There is no additional per subscriber fee passed
through on Cox, on Comcast; there was not on Adelphia before
Time Warner took over the Adelphia systems and dropped the NFL
Network; and there is not on DIRECTV; and there is not on
EchoStar.
Chairman Specter. Well, you mentioned Comcast. Is it true
that the NFL has sued Comcast?
Mr. Pash. Yes, we are in litigation with Comcast.
Chairman Specter. And what is the thrust of that
litigation?
Mr. Pash. It is a contract dispute involving whether
Comcast has the right to tier the NFL Network starting next
year.
Chairman Specter. Well, that is precisely the point I am
making. Comcast does not want to have it in a tier where people
pay for it where the people are not interested in the sporting
event.
Mr. Pash. Well, we think that the contract that we signed
with Comcast does not permit that, and we have asked a judge to
make a ruling on that issue. We think we have already
negotiated that issue with Comcast, and there is a dispute
about what the contract permits.
Chairman Specter. Mr. Pash, do you know if the NFL, through
its former Commissioner, Mr. Tagliabue, declined to entertain
any bid by Comcast for the Sunday Ticket?
Mr. Pash. I do not believe that we declined to enter a bid.
I know there were conversations with Comcast and other cable
systems about Sunday Ticket. I do know that we have been quite
reluctant, as have our broadcast partners, to have Sunday
Ticket go on to cable because we are very concerned that it
would really undermine the broadcast television model,
including the role the local affiliates play--
Chairman Specter. Well, before you give your explanation,
let's come back. You used the word ``reluctant.'' Was the
reluctance carried to the extent of Commissioner Tagliabue
telling Comcast he would not entertain a bid?
Mr. Pash. I cannot say. I was not party to a discussion,
whatever discussion Mr. Tagliabue may have had with people at
Comcast.
Chairman Specter. Well, would you find out about that and
let the Committee know, please?
Mr. Pash. Yes, I will.
Chairman Specter. And you were starting to describe why you
don't want to have it over cable.
Mr. Pash. Right. As I said, Senator, the primary means of
our telecast is over free, over-the-air television. That has
been the case going back to the 1960s. And we do not want to
have Sunday Ticket undermine or substitute for that. We want to
preserve the health of the broadcast television model. We want
to maintain the local affiliates as the principal means for
viewing NFL television. And there is concern on our part, and I
think on the part of the broadcast networks, that if Sunday
Ticket were to be available on 80 or 90 million cable
households, it would seriously cannibalize and undermine the
viability of broadcast television. We think our primary
responsibility, Mr. Chairman, is to deliver NFL Football to a
broad audience through broadcast television.
Chairman Specter. Well, how about on 24 million, which is
what Comcast has on its basic, or even less than that, 11
million on its digital line, or even less than that, a million
on its sports tier?
Mr. Pash. To put Sunday Ticket on the sports tier?
Chairman Specter. Well, it is not going to undermine your
broadcast television. We are not talking about 80 million. We
are talking about a much smaller number. How many subscribers
does DIRECTV have?
Mr. Pash. Well, we currently have on DIRECTV about 1.8
million subscribers to Sunday Ticket, and I do not know the
total universe that DIRECTV has off the top of my head. I am
sure Mr. Fawcett knows. But our Sunday Ticket has about 1.8
million subscribers on DIRECTV.
Chairman Specter. 1.8 million?
Mr. Pash. Yes, sir.
Chairman Specter. Is that on the basic coverage of DIRECTV?
Mr. Pash. Yes. Well, you have to purchase it. It is a
separate package that you purchase.
Chairman Specter. So you have DIRECTV on a tiered basis.
Mr. Pash. We have a package of games that can be purchased
on DIRECTV, yes.
Chairman Specter. Because I have DIRECTV, and I do not have
the Thursday-Saturday package.
Mr. Pash. Well, the Thursday-Saturday package, Mr.
Chairman, you do not have to buy separately on DIRECTV. Those
are on the NFL Network. The NFL Network is on the basic tier of
DIRECTV and EchoStar. You do not have to pay anything extra to
get the Thursday-Saturday games on DIRECTV.
Chairman Specter. Well, what is the basis of the litigation
with Comcast? Comcast has the NFL Network, and there is a
contention that Comcast wants to put it on the sports tier, and
the NFL wants to put it on the broader base, either analog or
basic coverage. Isn't that right?
Mr. Pash. Comcast has informed us that they want to put it
on the sports tier beginning next year. We want to keep it
where it is now. We believe that the contract that we
negotiated with Comcast does not give Comcast the right to move
the NFL Network to the sports tier, and that is the question
that we have asked the judge to resolve.
Chairman Specter. But with DIRECTV, you do permit it to go
on just the sports tier.
Mr. Pash. No, Mr. Chairman, that is not correct.
Chairman Specter. Everybody on DIRECTV gets the Thursday-
Saturday package.
Mr. Pash. That is correct. Yes, sir. The Thursday- Saturday
games are available on the basic tier on both DIRECTV and
EchoStar.
Chairman Specter. Is it true that Cox has it on just the
sports tier?
Mr. Pash. No, that is not correct.
Chairman Specter. Well, we will take up the Time Warner
situation with the Time Warner witness.
We turn now to Mr. Daniel Fawcett, Executive Vice President
for Business and Legal Affairs for DIRECTV, Incorporated.
Previously, he had been Executive Vice President for Legal and
Business Affairs for FOX, served in several positions at FOX,
including Senior Vice President for Business and Legal Affairs;
a bachelor's degree from Tufts, an MBA from Carnegie Mellon,
and a law degree from the University of Pittsburgh.
Thank you for joining us, Mr. Fawcett, and the floor is
yours.
STATEMENT OF DANIEL M. FAWCETT, EXECUTIVE VICE PRESIDENT,
BUSINESS AND LEGAL AFFAIRS AND PROGRAMMING ACQUISITION,
DIRECTV, INC., WASHINGTON, D.C.
Mr. Fawcett. Thank you, Chairman Specter. My name is Dan
Fawcett, as you said, and I am also the head of Programming
Acquisition at DIRECTV, and I am happy to be here today to
testify on the role of NFL Sunday Ticket in fulfilling the
goals of the program access statute and in fostering
competition to the incumbent cable providers.
Over the last decade, Congress has helped develop the
competitive video marketplace that exists today. In a little
over 10 years, DBS--that is DIRECTV and dish, EchoStar--has
grown to more than 28 million subscribers. Increased
Competition means consumers have more choice; customer service
and pricing are more responsive; and technological innovation
is flourishing. Because of this competitive marketplace, all
Americans, not just DIRECTV customers--are enjoying a better
television experience, no matter who their provider.
Congress helped make this possible by enacting the program
access provisions in the 1992 Cable Act. The point of the Act
was to ensure that new entrants had access to programming that
cable operators would otherwise withhold. Congress, therefore,
required that programming owned by cable be made available to
all competitors on nondiscriminatory terms.
Yet when adopting the program access provisions, Congress
treaded carefully, and rightfully so. It did not prohibit all
exclusive arrangements. It instead sought to encourage the
development of unique product offerings, such as local news.
And because it was principally concerned about the abuse of
market power, it only prohibited exclusive contracts by
dominant cable operators for programming owned by cable.
On the other hand, Congress recognized that exclusive
contracts could enhance the competitive viability of new
entrants, like DIRECTV.
Perhaps the best example of an exclusive arrangement
helping, and not harming, competition is the NFL Sunday Ticket.
DIRECTV was able to get a foot in the door of this highly
concentrated industry by offering unique content like Sunday
Ticket. The introduction of competition from DBS in turn has
forced cable to innovate and become more responsive to
customers' concerns. This is exactly what Congress had in mind
when it enacted the program access provisions.
DIRECTV believes that Sunday Ticket raises no meaningful
antitrust concerns. To the contrary, it has served the purpose
of the antitrust laws by contributing to a competitive
marketplace for video services.
The same cannot be said for cable. Cable has found ways to
evade the law and harm competition. They have used the
terrestrial loophole to deny programming they own to DBS
providers in places like Philadelphia and San Diego. They have
also imposed substantial and arbitrary price increases for home
team sports events in places like Chicago.
A comparison of the differences between Sunday Ticket and
these kinds of anti-competitive arrangements by cable
exemplifies this point. One key difference is that DIRECTV has
less than 15 percent market share. By contrast, in
Philadelphia, where Comcast has given itself exclusive rights
to the Phillies, the Flyers, and the 76ers, Comcast has a 70-
percent market share. It owns the programming. It even owns a
controlling interest in two of the three teams. This was
clearly not an arm's-length negotiation.
Another key difference is that Sunday Ticket is a premium
package of out-of-market games that historically did not exist
and, as Mr. Pash said, complements and supplements the NFL's
basic broadcast packages. It allows football fans to see games
that are not broadcast in the regions where they live. As a
native of Pittsburgh and a diehard Steelers fan, Sunday Ticket
allows me to watch the Steelers from my house in Los Angeles.
But in all markets, every football fan can still enjoy watching
his home team play on free, over-the-air television. My father
in Pittsburgh watched the Steelers on free, over-the-air
television through Comcast Cable until last year when I forced
him to switch to DIRECTV.
By contrast, in Philadelphia and elsewhere, incumbent cable
operators deny local fans the right to see their home team
unless they subscribe to cable. So in Philadelphia, the only
way you can watch the 76ers and the Phillies and the Flyers is
by subscribing to Comcast.
You have called this hearing today to look at whether
consumers are the winners when it comes to competition in
sports programming and broadcasting. The answer is simple. When
programming is available in a fair and open bidding process,
consumers clearly benefit. As Congress envisioned, competition
thrives and consumers have more choice as each competitor
strives to provide innovative content programming and service.
When the incumbent provider, however, uses its entrenched
market power to deny certain must-have programming to
competitors, consumers only lose.
Congress should act steadfastly to ensure that providers
don't use their market power to artificially limit choice and
raise prices, and DIRECTV is eager to work with Congress to
ensure that the vision of the program access rules is fulfilled
by closing the terrestrial loophole. And DIRECTV urges this
Committee to consider examining any antitrust concerns raised
by the cable industry's abuses of its market power.
Thank you, Senator. I am happy to answer questions.
[The prepared statement of Mr. Fawcett appears as a
submission for the record.]
Chairman Specter. Well, thank you, Mr. Fawcett. You say
that Congress should act to see to it that prices are not
raised. Isn't what is happening now with the Thursday- Saturday
package on the NFL Network going to result in prices being
raised as the NFL insists, as Mr. Pash has just testified, on
putting that program on a broad base on basic coverage and not
permitting you to go on a limited sports tier so the fans, the
people that want it pay for it, but the others don't have to?
Mr. Fawcett. Well, I think, first of all, our packages at
DIRECTV will not increase as a result of the Thursday- Saturday
package, which is eight games that are included on the NFL
Network, which you as a DIRECTV customer--
Chairman Specter. Well, okay, yours may not be, but right
now Time Warner is refusing to carry the Thursday- Saturday
package because it is going to raise prices. And Comcast is in
litigation, started by the NFL, because they want to carry it
on a sports tier so the only people who pay for it are the ones
who want it. So if the NFL has its way, won't prices be raised?
Mr. Fawcett. Well, first of all, Senator, I believe that it
is somewhat ironic that Comcast and Time Warner are wanting to
put the NFL Network in a sports tier when they with their own
sports networks require that distributors carry it on basic
cable. Comcast, for example, in all of its regional sports
network--its Outdoor Life Network, which is now called Versus,
its Golf Channel--they require carriage on basic cable, not on
a sports tier.
Chairman Specter. Okay. Aside from the irony--and we will
come back to that.
[Laughter.]
Chairman Specter. Aside from the irony, aren't prices going
to be raised? I mean, I liked your line where you said Congress
ought to act if prices are going to be raised. It looks to me
like prices are going to be raised. It looks to me like
Congress ought to act. It is your idea, Mr. Fawcett, not mine.
Mr. Fawcett. Yes, Senator. I think that certainly our costs
increase, but we do not pass along costs of programming in our
basic tier to consumers. If it is in a sports tier, the price
that we would charge would be very-- first of all, the networks
wouldn't allow it or wouldn't want us to do it. And the prices
that they would charge for that service on an a la carte basis
would be very high and they wouldn't have their advertising
revenues to make it a viable business model.
So virtually every sports network with live professional
games of a major league are carried on basic cable. The Sunday
Ticket package is an ancillary product of out-of-market games,
not games of the local professional teams. In Chicago, for
example, where I am talking about prices increasing is where
Comcast takes over the regional sports network in Chicago and
doubles the price to people like DIRECTV, which it can afford
to do because it has 60 or 70 percent of the Chicago market,
and requires--you know, arbitrarily increases the price for
that must-have local programming, that is, the games of the
Black Hawks, the Cubs, the White Sox, and the Bulls.
That is certainly must-have programming, and in those types
of situations, yes, prices are increasing, and that is because
of the terrestrial loophole and the dominance of cable and
local markets which, after the Adelphia transaction, are
staggering.
Chairman Specter. Okay. Let's come back to the irony now--
the irony of Comcast raising prices. Do you think Comcast is
violating the antitrust laws?
Mr. Fawcett. No. I am not suggesting that. The irony is
that when it doesn't--MASN, for example, the Mid-Atlantic
Sports Network, which is carrying the Washington Nationals and
the Baltimore Orioles, Comcast refused to launch that on its
cable systems in this area and then ultimately, as part of the
Adelphia transaction, agreed to launch it, but then it passed
on a $2 price increase to its customers.
Chairman Specter. Well, you are talking about Comcast
having a regional sports network, and you referred to Chicago,
you referred to Philadelphia. And you say that they are raising
the prices. It is vertical integration, and as I said earlier,
we are going to take that up on December 7th. But since you
brought it up, I would like to pursue it a little further now.
And that is, since, as you say, Comcast is raising the prices,
but you say the antitrust laws are not being violated, do you
think Congress should modify the antitrust laws to deal with
that kind of vertical integration which results in increased
prices?
Mr. Fawcett. I am not an expert in the antitrust area,
Senator, so I am not suggesting that.
Chairman Specter. You are not an expert in the antitrust
area? You have a law degree from the University of Pittsburgh.
Mr. Fawcett. I do.
Chairman Specter. You are the Executive Vice President for
Legal Affairs at DIRECTV. Aren't they dodging the antitrust
issue all the time at DIRECTV?
Mr. Fawcett. Again, I have some knowledge of the antitrust
laws, but I am not an antitrust expert, and obviously we have a
number of issues--
Chairman Specter. Well, let me ask you to study that issue,
do a crash course--we have had crash courses around here
before--on antitrust law and follow up the testimony which you
have offered with respect to--you are defending your conduct by
bringing up the conduct of Comcast, so I would like to get your
view on that.
We turn now to Mr. Landel Hobbs, Chief Operating Officer of
Time Warner Cable, had been Vice President in the Financial
Analysis Operation with AOL Time Warner, had been Chief
Accounting Officer for Turner Broadcasting Systems; bachelor's
degree in business administration from Angelo State University
in Texas.
Thank you for coming in today, Mr. Hobbs, and we look
forward to your testimony.
STATEMENT OF LANDEL C. HOBBS, CHIEF OPERATING OFFICER, TIME
WARNER CABLE, NEW YORK, NEW YORK
Mr. Hobbs. Thank you, Mr. Chairman. My name is Landel
Hobbs, as you said, and I am Chief Operating Officer at Time
Warner Cable, the Nation's second largest cable operator. I
want to thank you for inviting me to appear here today to
discuss the question of how consumers are faring in the current
marketplace for sports programming.
From Time Warner Cable's perspective, the answer to the
question of whether consumers are winning is yes and no.
On the one hand, consumers who enjoy sports programming
clearly are winning in that there is a staggering amount and
variety of sports programming available to them on broadcast
television, cable, satellite networks, and increasingly through
the Internet. On the other hand, over the past few years, Time
Warner Cable has been monitoring and trying to deal with two
troubling trends relating to sports programming that are less
than ideal for consumers.
The first is the spiraling rise in costs that affects every
level of the sports food chain and which ultimately must be
paid by consumers.
The second trend is the ever increasing fragmentation of
television sports rights that has undoubtedly added to the
increases in costs that consumers are being asked to bear.
An example of both of these trends is the decision by the
NFL to take eight games that were previously available on
broadcast or other programming services and put them on the
league-owned NFL Network while simultaneously demanding that
distributors pay a significantly higher price for the network
and refusing to allow the network to be carried on any tier
other than the one reaching virtually all customers.
There is also another disturbing element to this situation.
The NFL is preventing individual teams that want to do deals
for non-game content from entering into any agreements with
cable operators unless they also carry the league's NFL
Network.
In the setting of a Congressional hearing, the question, of
course, is: What, if anything, should Government regulators do
about these problems? We believe that the best thing that
Government can do is to leave the solutions to the marketplace.
Government favoritism can serve only to deprive consumers of
the full benefits of today's vigorously and highly competitive
video distribution marketplace. Thus, Government should not
only refrain from additional regulation, but also should re-
examine existing rules to make sure they are not contributing
to any problems or tilting the playing field in favor of some
participants against others?
In particular, while I am not an expert in antitrust law,
it seems important to make sure that certain exemptions granted
to sports leagues are not reducing competition and contributing
to the escalation in prices to consumers or reducing their
viewing options. In addition, Government should examine whether
the imposition of access obligations and anti-exclusivity rules
on some video distributors but not others is warranted and how
it contributes to problems in the sports and video
marketplaces.
We recognize that the marketplace is not always perfect. We
are not always able to obtain the carriage terms that would
allow us to give our customers everything we would like to
while keeping down our costs. But whatever the shortcomings of
the marketplace, they pale in comparison to the shortcomings
that result from attempts by Government to impose outcomes by
regulatory intervention.
In closing, let me add one final thought. Government should
be especially wary of the claims of some companies that rush
into advocate Government intervention when it would restrict
their competitors, but vehemently oppose such regulation when
it would apply to them. In particular, it is simply
disingenuous for DIRECTV, which is larger than Time Warner
Cable, and every other video distributor but one, to claim here
and elsewhere that it is in need of special Government
protection against exclusivity while continuing to enter into
exclusive agreements itself and demanding that it be left free
from any similar restrictions.
Indeed, DIRECTV's exclusivity with the NFL applies not only
against cable operators that are generally a fraction of its
size, but also against the Nation's other smaller DBS provider.
And it is competitively far more significant than any
exclusivity about which it complains.
It is now well past the time for DIRECTV to recognize that
it can no longer credibly play the new entrant card. Time
Warner Cable has never acted in such a disingenuous manner but,
rather, has consistently been of the view that the marketplace
is generally the best regulator, and the marketplace functions
the best when any truly necessary Government intervention,
absent any special circumstances, applies equally to all
players.
Thank you.
[The prepared statement of Mr. Hobbs appears as a
submission for the record.]
Chairman Specter. Mr. Hobbs, what are the core
considerations that Time Warner has in declining to take on the
Thursday-Saturday package?
Mr. Hobbs. The programming is too expensive.
Chairman Specter. Too what?
Mr. Hobbs. Expensive.
Chairman Specter. Too expensive.
Mr. Hobbs. The value equation is out of whack. So for our
customers for the eight games, eight out-of-market games that
they will see in their own local hometowns, it is just too
expensive. And I have heard a lot today about other people not
raising prices. Anytime your costs continue to escalate at
increasingly rising rates, like sports programming, especially
targeted sports programming, it causes you eventually to raise
rates. Some people may not do it through a sports package, but
I would suggest that people do raise their prices, and that is
because their costs are growing.
So that is what happens when you have programming that is
too expensive.
Chairman Specter. Well, isn't it true that Time Warner has
sought to have the Thursday-Saturday package but on a sports
tier?
Mr. Hobbs. We think that by placing this type of sports
programming, that is very targeted, in a sports package
benefits all of our customers because it allows those who
actually want to see the programming to pay for it if they
would like it, and those that don't have to bear the burden of
the cost.
Chairman Specter. Well, where you have the NFL in effect
raising prices and limiting distribution without any
countervailing reasons for it, don't you have a violation of
the Sherman Act rule of reason? That may be beyond your own
training, but you have been in this field a long time. The
Sherman Act does not--we do not deal here with what we call a
per se violation, that is, an automatic violation. But isn't
that really subjected to the rule of reason? And don't you have
at least a prima facie showing of a violation there when prices
are raised and distribution is limited without any
countervailing business purpose?
Mr. Hobbs. You are right, you are outside of my expertise--
I am not an attorney, but what I would say is that from our
perspective, let's let the marketplace handle that question.
Let's let our consumers handle that question. We balance those
things every day, so when we have this type of programming that
is so expensive and NFL would like it on a broadly distributed
basis, so many people who don't watch the programming have to
pay for it, our view is no, let's give the consumers what they
want. The people who want the programming should be able to get
this in a sports programming package, and that would take care
of it. The marketplace would deal with the issue.
Chairman Specter. Did Time Warner have an opportunity to
bid on the Sunday Ticket, which went to DIRECTV?
Mr. Hobbs. I am sure we did. We did not bid on that
package. Again, we look at economics, and we look at the impact
on our customers.
Chairman Specter. The Wall Street Journal today reports
that the NFL left on the table as much as $400 million during
its last round of television right negotiations to reserve for
its fledgling cable network the eight season games. Do you
think that that is accurate?
Mr. Hobbs. That is what has been reported. What I do know
is that based on our negotiations, what they want out of us,
this would make this particular programming in the top five in
terms of how expensive it would be. Compared to everything else
we carry, this would be in the top five in terms of expense.
And yet the ratings at this point are not even in the top 30.
Chairman Specter. Well, you have taken a resolute position
here, and the NFL may have a little different view as to how it
is going to work out. The Times quotes two of the owners of the
NFL teams saying that there may be some short-run holdouts but
in the long run they have a real plan. And they cite Marc
Ganis, a sports marketing consultant, saying that, ``The cable
companies won't be shooting themselves in the foot. The cable
companies will be shooting themselves in the chest.'' And this
is in the context of the NFL speculating--they use the words
``can hope''--that the fans will cry, ``I want my football,''
pressure their cable companies to make a deal, or threaten to
switch to another provider.
How do you evaluate the aspect of your customers switching
to another provider to get from another provider what they
cannot get from you?
Mr. Hobbs. We have to evaluate those trade-offs every day,
and, again, it comes back to analyzing the type of programming,
the cost, and the impact on all of our customers, not just the
ones who like football.
For example, there are a lot of our subscribers who love
football, which everyone here acknowledges. But from our
research, there may be 75 to 80 percent who aren't as enamored
with football. So we have to keep those customers in mind as
well. So that is the reason we made the decision we have.
Chairman Specter. Do you think the quotation by Marc Ganis
as it appears in the Wall Street Journal that the cable
companies won't be shooting themselves in the foot but shooting
themselves in the chest is inaccurate?
Mr. Hobbs. It is inaccurate, in my view.
Chairman Specter. Shooting yourselves anywhere?
Mr. Hobbs. It would be painful. But, no, we are comfortable
with our decision.
Chairman Specter. We now turn to our final witness,
Professor Roger Noll, professor emeritus at Stanford
University, where he taught for 22 years, Senior Fellow at the
Stanford Institute for Economic Policy Research, and one of the
Nation's foremost experts in sports economics and regulatory
policy, has authored 11 books in these areas; a bachelor's
degree in mathematics from the California Institute of
Technology, and a Ph.D. in economics from Harvard.
Thank you for being with us today, Professor Noll, and we
look forward to some real expert guidance here. It is up to
you.
STATEMENT OF ROGER NOLL, SENIOR FELLOW, STANFORD INSTITUTE FOR
ECONOMIC POLICY RESEARCH, STANFORD, CALIFORNIA
Mr. Noll. Thank you very much. I appreciate the opportunity
to speak on this issue. I have been here many times talking
about antitrust issues in professional sports, and, indeed, my
interest in professional sports was created by Sam Ervin when
he was considering the proposed merger of the two basketball
leagues 35 years ago. That is what got me into this interesting
area.
I have been teaching the Sports Broadcasting Act for 40
years to my undergraduates because it illustrates everything
that can possibly go wrong with legislative antitrust
exemptions. And what I want to do today is put the current
disputes that are going on in professional football in a much
larger context. I think these disputes are useful in causing a
re-examination of policy, but the reality is this is all within
the context of some much bigger issues, and that is what I want
to focus on.
When the Sports Broadcasting Act was passed, there were
many fewer teams. There were two competing football leagues.
There were no significant multichannel video distribution
systems. The only ones that existed at the time were systems
that did nothing other than retransmit over-the-air television.
There were no cable-only channels, and there was no satellite
broadcasting.
All of these are important because they get to the point
about what did Congress do in 1961 and what is the implication
of that today. Congress did pass a law that reduced
competition, but there were still two competing football
leagues. And, indeed, there were two competing basketball
leagues. And as we know, in the 1960s and 1970s, there were
entries of other competing leagues.
When leagues compete to sell their broadcasting rights, the
implication of an antitrust exemption is much less significant.
That is to say, two isn't as good as four or five, but it is
better than one.
Likewise, at the time the Act was passed, there was no
conception of what the world would look like when cable and
satellite companies were competing for viewers, which, if you
remember, has only been going on for less than a decade. It has
only been in the current millennium that the satellite
companies began to retransmit local broadcasts and to offer a
realistic competitive alternative to cable television. And now
I think it would be an overstatement to say this is a
competitive industry, but it is three, and that is a lot better
than one.
So the world has changed in dramatic ways. The bargaining
strength of existing sports leagues relative to broadcasters
has increased dramatically because each sports league is a
monopoly, but the broadcasting environment is much more
competitive than it was at the time the Act was passed.
One could make something of an argument to say a world of
three networks and two leagues was similar to bilateral
bargaining. But that isn't the right way to think of it today
when we have four networks instead of three, many more strong,
independent over-the-air channels, and in every major
metropolitan area in the United States three competing
multichannel video distribution systems. Hence, the validity of
the Sports Broadcasting Act has changed. Whatever it was to
begin with, it requires re-examination.
The right template that we economists use for deciding
whether an action such as the creation of the NFL Network is
pro- or anti-competitive is whether there is a profit-enhancing
reduction in output. It seems to me, without having done the
analysis--I would ask you to collect the data--that the NFL
Network is a profit-enhancing reduction in output in the sense
that the eight games that are on NFL Network, will be available
to fewer people than had those games been offered on broadcast
television. Now, that, I think, is the right template to think
about this issue.
One last point. It seems to me, because of the equities
involved in the Sports Broadcasting Act and the reliance for
over 40 years of both broadcasters and the leagues on this Act
is great, I would suggest that the appropriate mechanism is
sunset--that is to say, Congress should enact a law saying the
Act will expire in 5 years, which will force Congress to re-
evaluate the Act from ground up over the next few years and see
if all the changes I described say that, no, this thing really
should be put to bed.
[The prepared statement of Mr. Noll appears as a submission
for the record.]
Chairman Specter. Mr. Noll, thank you very much for those
insights. Do you have any suggestions as to which way Congress
ought to go on revising the 1961 Act?
Mr. Noll. Yes. My personal belief is that it was a mistake
to begin with because it did have the profit-enhancing quantity
reduction. The passage of the Sports Broadcasting Act led to an
elimination of the then common way to sell broadcasting rights,
which was consortiums of teams.
The but-for would is either professional sports prior to
1962 or current collegiate sports because of the NCAA case. In
these cases consortiums of teams, in order to get a reasonable
broadcast schedule available, sell collectively their broadcast
rights, but they still compete because the number of consortia
is large enough to create a competitive market.
In the NCAA, for example, each major conference sells
television rights. And in professional sports, prior to the
passage of the Sports Broadcasting Act, there were four
consortia of professional sports teams that sold national
broadcasting rights.
That would be the world we would have, and it seems to me
that in a world of many channels and many competing MVDS
operators, the whole issue of exclusivity, for example, would
go away. If DIRECTV had exclusivity to 20 percent of the NFL
and Dish-TV has another 20 percent and then three television
networks had 20 percent more each, the whole issue of
exclusivity would be much less important if there were
competition in the selling of the national broadcasting rights.
Chairman Specter. Well, if we just repeal the 1961 Act, the
antitrust laws would then be violated by the joint action of
the NFL teams, NFL members, which is what the United States
District Court for the Eastern District of Pennsylvania found
back in 1961, which led to the adoption of the statute.
Mr. Noll. In order for it to be an antitrust violation for
the NFL to negotiate as a league for broadcasting rights, one
has to prove that televised professional football games are a
separate relevant market. Every time that issue has been
litigated, it has been determined to be a separate relevant
market. And in that case, without the antitrust exemption, not
only the NFL but Major League Baseball and the NBA all would be
in violation of the antitrust laws if they sold their
broadcasting rights nationally as a league-wide consortium.
Chairman Specter. Professor Noll, would you think that it
would make sense or be appropriate to condition the antitrust
exemption on, say, the franchise move limitation, which Senator
Feinstein suggested earlier?
Mr. Noll. No, I do not believe that is appropriate, and
that is because it is making mistake number two to deal with
mistake number one. The antitrust exemption in broadcasting is
more harmful, as I said before, because of the antitrust
exemption that was granted to the AFL and NFL to permit them to
merge.
One reason people care a great deal about losing a team, as
Senator Feinstein said, is the issue of naming. The Cleveland
Browns name is a good example. But the main issue is the
inability of a city to find a replacement. Many cities that are
viable locations for major league professional sports teams do
not have one because monopoly leagues create scarcity in teams
to give each individual team more bargaining power over a
locality to get a stadium subsidy.
The presence of Los Angeles as an area without an NFL team
is the universal golden threat point for every NFL team in the
country: Give me my stadium or I go to LA, which is obviously
an attractive option. So I don't think to use one antitrust
exemption to deal with a problem created by the other is the
right way to go. I think the right way to go is more
competition.
Chairman Specter. How about conditioning the antitrust
exemption on the teams or the NFL paying for their own stadiums
as opposed to imposing a tax burden, as four sporting teams
did--two in Pittsburgh and two in Philadelphia--on the
taxpayers of the Commonwealth of Pennsylvania?
Mr. Noll. That would have been a great idea in 1990.
Unfortunately, almost all teams in all sports have gotten their
nice new subsidized stadium. Actually, some NFL teams did not
get a subsidy, but most of them did. In all the major
professional sports, nearly one hundred new arenas and stadiums
have been built in the past twenty years. Eighty percent of the
teams are already playing in their subsidized arenas. So,
unfortunately, those horses have left the barn.
Chairman Specter. Well, they may come back. The Vet in
Philadelphia was opened in 1971, and we have already torn it
down and built two new stadiums.
Mr. Noll. That is exactly right. There--
Chairman Specter. So we may be looking at building two new
stadiums 25 years from now.
Mr. Noll. Yes, the useful life of a stadium is about 25 to
30 years, and sometimes it has been even shorter than that. And
you are right, eventually teams will be back at the well. But
that is a very slow process. One of the problems that
Philadelphia and San Francisco find themselves in is that by
being the last cities to replace an old stadium, an obsolete
stadium, their teams are at a competitive disadvantage. And it
is not obvious that preventing the last two or three cities
from having new stadiums is pro-competitive.
It would have been pro-competitive to do something about
the subsidies right at the beginning, but now that almost all
the teams have them, the few that do not are disadvantaged
relative to their subsidized brethren.
Chairman Specter. Mr. Pash, is the Wall Street Journal
accurate today that the NFL left $400 million on the bargaining
table during this last round of television rights negotiations
to reserve for its fledgling cable network the eight Thursday
night/Saturday night package?
Mr. Pash. I have not seen the articles. I do not know the
source of the--
Chairman Specter. I had not seen it until a few moments
ago. It is just in today's paper. It was not even in my
briefing materials. The Wall Street Journal did not let me know
in advance.
Mr. Pash. As I say, I have not--
Chairman Specter. Aside from what the Wall Street Journal
knows, you know more about what the NFL left on the table than
the Wall Street Journal does, presumably.
Mr. Pash. Well, I know we could have sold those eight games
to other carriers. We could have sold them to cable carriers.
There were a number of reasons why we did not want to do so,
including the fact that the cable carriers, some of the ones we
were talking to about them, did not want to simultaneously
broadcast them on over-the-air the way we do with ESPN and the
way we do with the NFL Network.
Chairman Specter. They did not want to broadcast them
simultaneously? What did they want to do?
Mr. Pash. They wanted to have them exclusively on cable so
that the only way you could watch those eight games is if they
were on cable. There would not be a simultaneous over-the-air
broadcast in the competing cities. That was one consideration
for us.
Another consideration was we are trying to develop the NFL
Network. We are trying to build that as a new entrant into the
television world. We think it has got a lot of high-quality
programming. It is growing. It is getting better in terms of
the quality of the programming and the quality of the
offerings. We think by having the games on the NFL Network it
is a good value proposition. We obviously have disagreements
with some cable carriers, with other cable carriers, and with
satellite carriers we don't have those disagreements. But we do
think there is a good value proposition there.
Chairman Specter. Well, your last answer raises the
question as to where the NFL Network is heading. We already see
the NFL Network on this Thursday-Saturday package raising
prices. What is next? What does the NFL Network have in store
which will pose problems for Time Warner and other cable
companies to have to raise their prices and pass them on to the
consumer? Is the NFL Network heading for more programming,
which will cost the consumers more money?
Mr. Pash. Well, as I say, Mr. Chairman, I don't think that
the NFL Network and price increases automatically go hand in
hand, and the experience of many other cable companies
demonstrates that, and the experience of the satellite
companies demonstrates that. And that is the current state of
the record.
Chairman Specter. Well, how can you say that in the face of
what Mr. Hobbs testified to, which is perfectly obvious, that
when you have increased costs, you have to pass them on? How
can you say it is not going to cost the consumer more money?
Mr. Pash. Well, because I--
Chairman Specter. May the record show that Professor Noll
thought that was very funny, and I am going to come back to
you, Professor Noll, to explain your smile.
Go ahead, Mr. Pash.
Mr. Pash. Because I look at the experience of four other
large distributors that have put the NFL Network on a broad
distribution tier and have not raised their prices to
consumers.
Chairman Specter. Can you give me a few examples of that?
Mr. Pash. Yes, sir: DIRECTV, EchoStar, Cox, Comcast-- four
of the five largest distributors.
Chairman Specter. Isn't Comcast demonstrably different in
the current contest you have with them as to whether it is
going to go on the sports tier or some broader coverage tier?
Mr. Pash. Well, I don't know how that litigation will end
up. I accept that. But as we--
Chairman Specter. Well, wait a minute. How the litigation
is going to end up is what the judge says, but Comcast thinks
they are going to have to raise their prices, or they would not
be defending that lawsuit.
Mr. Pash. Well, I don't know. They may feel as though they
can raise their prices more by putting it on a sports tier.
They may feel that an underutilized sports tier that has
relatively unattractive programming on it today will become
much more attractive and bought at a much higher rate for much
more money if all of a sudden it includes NFL programming,
which is the most attractive programming out there in the
sports world.
Last week, the highest rated broadcast television program
was an NFL game, and the highest rated cable television program
was an NFL game. And if those are forced onto a sports tier, it
may well be that you will see consumers paying more money for
it. But to date, the carriers that have put the NFL Network on
a basic tier have not done that, and so I do not think it is
inevitable that one leads to the other.
Chairman Specter. Professor Noll, you have heard the
conflicting testimony of Mr. Hobbs and Mr. Pash. What is your
view?
Mr. Noll. Senator, you get an A in my course. You are the
good economist.
Here is what is happening in multichannel video
distribution: We have gone from one to three in urban areas.
That has reduced the profit margins of incumbent cable
companies. Companies like Time Warner and Comcast are subject
to much more competition than they were 10 years ago. Because
their profit margins have gone down, not all of the increase in
programming costs have been passed on to subscribers due to
increased competition between cable and satellite services.
Nevertheless, holding the extent of competition constant,
when a pay-TV service adds another channel, its costs go up on
a per viewer basis. All else equal, that causes the pay-TV
service to raise price. Indeed, economics research has shown
that higher programming costs, all else equal, cause higher
subscription prices.
A final complication arises when a pay-TV service obtains a
highly popular type of program on an exclusive basis. For
example, if DIRECTV succeeded in having the NFL Network
exclusively in Philadelphia, DIRECTV's market share in
Philadelphia would go up while Comcast's and Dish-Tv's shares
would go down. In this case DIRECTV could earn its current
markup on a larger number of customers, and so it could be the
case that its profits would not be undermined by taking on an
expensive channel and not raising its price.
But in the long run, Time Warner or Comcast have to respond
with something in kind to attract those viewers back. The
nature of the competitive process is to drive prices to costs.
if programming generally becomes more expensive, prices will go
up.
Chairman Specter. Mr. Pash, do you disagree with the
conclusion of the Court of Appeals for the Third Circuit,
Federal Court of Appeals, that the DIRECTV arrangement is not
cleared by the 1961 antitrust exemption?
Mr. Pash. Well, we certainly accept that conclusion as the
law in the Third Circuit. We did not seek further review of
that opinion, and as I am sure you know, Mr. Chairman, we
ultimately settled that litigation so there were no further
appeals or further review. So we accept that decision.
Chairman Specter. Well, it is obvious that you accepted it
when you did not apply for certiorari, correct?
Mr. Pash. Correct.
Chairman Specter. You did not ask the Supreme Court of the
United States to review it.
Mr. Pash. That is correct.
Chairman Specter. Well, when you say in that jurisdiction,
that is the prevailing law in the country generally, isn't it?
Mr. Pash. This is the only court of appeals opinion that
addresses that issue; that is correct, Mr. Chairman.
Chairman Specter. Well, if you do not ask the Supreme Court
to review it and if you accept it, that is that nationwide,
isn't it?
Mr. Pash. Well, that is where we are right now. As you
know, of course, Mr. Chairman, sometimes appellate courts in
different parts of the country see issues differently.
Chairman Specter. But if there is a disagreement with the
court of appeals, you ask the Supreme Court to review it. They
may not, but at least you asked them, which you did not do in
this case.
Mr. Pash. Which we did not do in this case. As I say, we
settled the litigation so there was no need to ask for any
further review.
Chairman Specter. The specific language of the 1961 Act
grants the exemption for sponsored telecasting where there are
commercials, and the House Antitrust Subcommittee found flatly,
``The bill does not apply to closed circuit or subscription
television.'' And Commissioner Rozelle conceded on the record
that the bill ``covered only the free telecasting of
professional sports contests and does not cover pay TV.'' So
all of that leads to the conclusion that the Sunday Ticket is
not covered by the exemption.
That then leads you to considerations as to the rule of
reason. The Sherman Act prohibits any contract, combination, or
conspiracy that unreasonably restrains trade, and the Sunday
Ticket would not be, as I referred to earlier, a per se
violation, which means automatic on its face. It would be
subjected to the rule of reason. And that turns on whether
there is reduced output and fixed prices without any
corresponding justification.
Doesn't that pretty much indicate that the Sunday Ticket is
a violation of the Sherman Act?
Mr. Pash. I would say precisely to the contrary, Mr.
Chairman. Sunday Ticket is as clear a pro-competitive act as
could be imagined. It increased output. It enhanced consumer
choice. It delivered a new product that did not previously
exist. It allowed consumers, particularly commercial
establishments, to legally obtain a product that the only way
they had been able to obtain it before was by violating the
copyright laws, and the FCC has repeated looked at this
question and identified Sunday Ticket as a pro-competitive,
output-enhancing step. They have identified it as a key point
in allowing satellite to grow and become an effective
competitor to cable and restrained pricing in the way that
Professor Noll has talked about on several occasions. I think
it frankly would be difficult to think of something that is
more pro-competitive than creating this new package.
Chairman Specter. Would your answer be different if it were
established as a conclusive fact that Commissioner Tagliabue
told Comcast they could not bid on Sunday Ticket?
Mr. Pash. No, Mr. Chairman, it would not. It would not.
Exclusivities are perfectly acceptable. That was reviewed as
recently as 2 years ago by the FCC, and the FCC specifically
commented that it was perfectly lawful for DIRECTV to purchase
Sunday Ticket on an exclusive basis.
Chairman Specter. Did the FCC have before it the fact that
the NFL through its Commissioner said Comcast could not bid?
Mr. Pash. I don't know if they had that particular
statement before them or not, but it is true--irrespective of
whether that was said or not, or when it was said, it is true
that exclusive arrangements in the television industry have
been in existence for decades and are well respected and
considered lawful and pro-competitive.
Chairman Specter. Professor Noll, how would you apply the
Sherman Act's rule of reason to Sunday Ticket, realizing that
the NFL litigated, lost in the court of appeals, then settled
the case?
Mr. Noll. The relevant benchmark for whether an action is
pro- or anti-competitive is the circumstance that would prevail
in a competitive world. The argument that NFL Sunday Ticket
increased output is correct, but it increased output in a
monopolized market. The issue is what is the alternative in the
absence of monopolization, and in the absence of
monopolization, the market for televised NFL games would be
like other pro sports were or like college sports are today.
For example, if all broadcasting of college football games were
put together into a single package priced at $150 a month and
shown exclusively through DIRECTV, the effort would be a
profit-enhancing reduction on output.
From my perspective, if one adopts the right
counterfactual, the right but-for world in the competitive
environment, it is obvious that NFL Sunday Ticket is a
palliative compared to the output and prices that would exist
in a competitive environment.
Chairman Specter. Mr. Hobbs, you are satisfied to leave it
all to the market. Do you think in light of the Third Circuit's
opinion that the 1961 Act does not apply to Sunday Ticket and a
class action brought and settled by the NFL that there is any
basis for concern about an antitrust violation here?
Mr. Hobbs. Our view is that we are fine with exclusivities,
as long as everyone has the same approach and rules. So we are
fine with people having exclusive programming. Again, as long
as every party is treated the same way, then we are fine.
Chairman Specter. Well, would that require that the NFL
entertain bids from other than DIRECTV?
Mr. Hobbs. Yes.
Chairman Specter. And if they do not?
Mr. Hobbs. Then I think it does continue to cause problems.
Chairman Specter. Well, anybody else have any additional
comment you would care to make?
[No response.]
Chairman Specter. Thank you very much for coming in,
gentlemen. The Judiciary Committee is going to be looking at
the vertical integration issue, and we are going to be studying
the ramifications of the Thursday-Saturday package and DIRECTV,
and we are intrigued, to put it mildly, by what the NFL has in
mind. The Wall Street Journal quotes Mr. Jones and Mr. Kraft,
the owners of the Dallas Cowboys and the New England Patriots,
as saying they are willing to take some short-term losses for
some long-term gains. So we will see what happens next. And the
Judiciary Committee will continue to be vigilant on this
important subject.
Thank you all very much. That concludes our hearing.
[Whereupon, at 10:26 a.m., the Committee was adjourned.]
[Questions and answers and submissions for the record
follow.]
[GRAPHIC] [TIFF OMITTED] T2152.001
[GRAPHIC] [TIFF OMITTED] T2152.002
[GRAPHIC] [TIFF OMITTED] T2152.003
[GRAPHIC] [TIFF OMITTED] T2152.004
[GRAPHIC] [TIFF OMITTED] T2152.005
[GRAPHIC] [TIFF OMITTED] T2152.006
[GRAPHIC] [TIFF OMITTED] T2152.007
[GRAPHIC] [TIFF OMITTED] T2152.008
[GRAPHIC] [TIFF OMITTED] T2152.009
[GRAPHIC] [TIFF OMITTED] T2152.010
[GRAPHIC] [TIFF OMITTED] T2152.011
[GRAPHIC] [TIFF OMITTED] T2152.012
[GRAPHIC] [TIFF OMITTED] T2152.013
[GRAPHIC] [TIFF OMITTED] T2152.014
[GRAPHIC] [TIFF OMITTED] T2152.015
[GRAPHIC] [TIFF OMITTED] T2152.016
[GRAPHIC] [TIFF OMITTED] T2152.017
[GRAPHIC] [TIFF OMITTED] T2152.018
[GRAPHIC] [TIFF OMITTED] T2152.019
[GRAPHIC] [TIFF OMITTED] T2152.020
[GRAPHIC] [TIFF OMITTED] T2152.021
[GRAPHIC] [TIFF OMITTED] T2152.022
[GRAPHIC] [TIFF OMITTED] T2152.023
[GRAPHIC] [TIFF OMITTED] T2152.024
[GRAPHIC] [TIFF OMITTED] T2152.025
[GRAPHIC] [TIFF OMITTED] T2152.026
[GRAPHIC] [TIFF OMITTED] T2152.027
[GRAPHIC] [TIFF OMITTED] T2152.028
[GRAPHIC] [TIFF OMITTED] T2152.029
[GRAPHIC] [TIFF OMITTED] T2152.030
[GRAPHIC] [TIFF OMITTED] T2152.031
[GRAPHIC] [TIFF OMITTED] T2152.032
[GRAPHIC] [TIFF OMITTED] T2152.033
[GRAPHIC] [TIFF OMITTED] T2152.034
[GRAPHIC] [TIFF OMITTED] T2152.035
[GRAPHIC] [TIFF OMITTED] T2152.036
[GRAPHIC] [TIFF OMITTED] T2152.037
[GRAPHIC] [TIFF OMITTED] T2152.038
[GRAPHIC] [TIFF OMITTED] T2152.039
[GRAPHIC] [TIFF OMITTED] T2152.040
[GRAPHIC] [TIFF OMITTED] T2152.041
[GRAPHIC] [TIFF OMITTED] T2152.042
[GRAPHIC] [TIFF OMITTED] T2152.043
[GRAPHIC] [TIFF OMITTED] T2152.044
[GRAPHIC] [TIFF OMITTED] T2152.045
[GRAPHIC] [TIFF OMITTED] T2152.046
[GRAPHIC] [TIFF OMITTED] T2152.047
[GRAPHIC] [TIFF OMITTED] T2152.048
[GRAPHIC] [TIFF OMITTED] T2152.049
[GRAPHIC] [TIFF OMITTED] T2152.050
[GRAPHIC] [TIFF OMITTED] T2152.051
<all>