<DOC>
[108 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:91211.wais]
S. Hrg. 108-254
THE NEWS CORPORATION/DIRECTV DEAL: THE MARRIAGE OF CONTENT AND GLOBAL
DISTRIBUTION
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HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JUNE 18, 2003
__________
Serial No. J-108-18
__________
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
91-211 WASHINGTON : 2003
_______________________________________________________________________
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COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
CHARLES E. GRASSLEY, Iowa PATRICK J. LEAHY, Vermont
ARLEN SPECTER, Pennsylvania 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
LARRY E. CRAIG, Idaho CHARLES E. SCHUMER, New York
SAXBY CHAMBLISS, Georgia RICHARD J. DURBIN, Illinois
JOHN CORNYN, Texas JOHN EDWARDS, North Carolina
Bruce Artim, Chief Counsel and Staff Director
Bruce A. Cohen, Democratic Chief Counsel and Staff Director
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Subcommittee on Antitrust, Competition Policy and Consumer Rights
MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania PATRICK J. LEAHY, Vermont
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
SAXBY CHAMBLISS, Georgia JOHN EDWARDS, North Carolina
Peter Levitas, Majority Chief Counsel and Staff Director
Jeffrey Miller, Democratic Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 1
prepared statement........................................... 64
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah,
prepared statement............................................. 76
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin... 3
prepared statement........................................... 92
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 4
prepared statement........................................... 93
WITNESSES
Cleland, Scott, Chief Executive Officer, Precursor Group,
Washington, D.C................................................ 13
Hartenstein, Eddy W., Chairman and Chief Executive Officer,
DirecTV, Inc., Phoenix, Arizona................................ 8
Kimmelman, Gene, Senior Director for Advocacy and Public Policy,
Consumers Union, Washington, D.C............................... 11
Miron, Robert, Chairman and Chief Executive Officer, Advance/
Newhouse Communications, Tampa, Florida........................ 10
Murdoch, Rupert, Chairman and Chief Executive, The News
Corporation, Ltd., New York, New York.......................... 6
QUESTIONS AND ANSWERS
Responses of Scott C. Cleland to questions submitted by Senator
DeWine......................................................... 36
Responses of Scott C. Cleland to questions submitted by Senator
Kohl........................................................... 38
Responses of Eddy Hartenstein to questions submitted by Senator
DeWine and Senator Kohl........................................ 40
Responses of Robert Miron to questions submitted by Senator
DeWine......................................................... 45
Responses of Robert Miron to questions submitted by Senator Kohl. 47
Responses of Rupert Murdoch to questions submitted by Senator
DeWine and Senator Kohl........................................ 48
SUBMISSIONS FOR THE RECORD
Cleland, Scott, Chief Executive Officer, Precursor Group,
Washington, D.C., prepared statement........................... 60
Hartenstein, Eddy W., Chairman and Chief Executive Officer,
DirecTV, Inc., Phoenix, Arizona, prepared statement............ 67
Kimmelman, Gene, Senior Director for Advocacy and Public Policy,
Consumers Union, Washington, D.C., prepared statement.......... 78
Miron, Robert, Chairman and Chief Executive Officer, Advance/
Newhouse Communications, Tampa, Florida, prepared statement and
attachments.................................................... 95
Murdoch, Rupert, Chairman and Chief Executive, The News
Corporation, Ltd., New York, New York, prepared statement...... 153
THE NEWS CORPORATION/DIRECTV DEAL: THE MARRIAGE OF CONTENT AND GLOBAL
DISTRIBUTION
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WEDNESDAY, JUNE 18, 2003
United States Senate,
Subcommittee on Antitrust, Competition Policy, and Consumer
Rights, of the Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:37 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine,
Chairman of the Subcommittee, presiding.
Present: Senators DeWine, Specter, Kohl, and Leahy.
OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE
STATE OF OHIO
Chairman DeWine. Well, good afternoon and welcome to the
Antitrust Subcommittee hearing on the proposed transaction
between News Corporation and DIRECTV.
Just 15 months ago, this Subcommittee held a hearing to
examine another deal involving DIRECTV, the proposed merger
between EchoStar and DIRECTV. Many had expressed alarm about
that proposed merger, and ultimately the Justice Department and
the FCC moved to block the deal.
The News Corporation/DIRECTV deal we are examining today is
fundamentally different, of course, from the merger that we
examined 15 months ago. Unlike the prior deal, this one does
not involve two companies that are direct competitors. Instead,
News Corporation and DIRECTV compete in different markets.
The United States, News Corporation competes primarily as a
programmer, owning such properties as the Fox Network and cable
networks, such as Fox News Channel and numerous regional sports
networks. As a result of this ownership, News Corporation
provides some of the most popular programming in the United
States.
DIRECTV competes as a distributor of multichannel video
programming, providing direct satellite service to over 11
million subscribers. DIRECTV carries News Corporation
programming, and other programming, to subscribers. Thus, this
deal is a vertical deal, involving a combination between a
supplier of programming, News Corporation, and a distributor of
programming, DIRECTV.
Vertical combinations, like this one, can potentially
create efficiencies for the combining parties and benefits for
consumers.
Vertical deals also, however, can raise competitive
concerns, though typically fewer and different kinds of
concerns than those raised by deals between direct
``horizontal'' competitors. Deals such as this one may also
raise policy concerns that do go beyond antitrust issues.
In our hearing today, we will explore both the potential
efficiencies and benefits of News Corporation's combination
with DIRECTV and the concerns that the deal raises.
News Corporation and DIRECTV argue that numerous benefits
will flow from their merger. News Corporation will bring its
years of experience as a satellite operator in other countries
and its record as an aggressive, innovative competitor to the
American video marketplace.
For example, in other countries, News Corporation--or News
Corp--has introduced several interactive features, such as
interactive shopping and interactive games with its satellite
services.
If, in fact, News Corp is successful in strengthening the
competitive offerings of DIRECTV, that would like force
EchoStar and the cable systems to improve their product as
well, to the benefit of pay-TV consumers. More specifically,
the parties plan to explore aggressively expanding DIRECTV's
local-into-local service into more of the 210 local television
markets. This is an important potential benefit, and we will
examine carefully how the parties plan to expand that service,
and we will examine other potential benefits as well.
Additionally, we must examine the concerns that have been
raised about this deal.
First and foremost, we must examine concerns that this deal
will lead to higher prices for both cable and DBS subscribers.
In short, the scenario that critics fear most is one in which
News Corp raises prices to DIRECTV, then wields DIRECTV as a
club to batter cable companies into accepting higher prices as
well, all at the expense of consumers.
More generally, critics of this deal have raised concerns
about whether News Corp will use its additional leverage as an
anticompetitive weapon to unfairly disadvantage other
programmers and distributors. These are complicated issues that
need to be examined very carefully.
To their credit, the parties have proposed ways to address
some of these concerns. Specifically, News Corp has promised
that it will abide by the program access rules, even under
circumstances when those rules technically would not apply to a
News Corp or DIRECTV combination. News Corp also plans to
establish an Audit Committee of the DIRECTV board of directors,
which would ensure News Corp deals fairly with DIRECTV.
We plan on exploring whether these protections are
sufficient to ease the concerns that have been raised about
this deal.
Finally, we also look beyond the confines of this specific
deal to its broader implications for competition in the
industry. This Subcommittee has to ask whether the News Corp or
DIRECTV transaction will set in motion a series of mergers
between larger content companies and distributors.
Such consolidation might leave the media in the hands of
fewer and fewer vertically integrated companies, companies with
enough market power to effectively exclude independent
programmers and raise prices, both to the detriment of American
consumers and the marketplace of ideas.
Clearly, this is an important transaction which, if
approved, would have a significant impact on how American
consumers receive their news, their information, their sports
and their entertainment. We have a lot to discuss today, and I
look forward to hearing from our witnesses.
Now, let me turn to Senator Kohl, the Ranking Member of
this committee.
Senator Kohl?
STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE
OF WISCONSIN
Senator Kohl. Thank you, Mr. Chairman.
As you said, a little more than a year ago, we sat in this
room to examine EchoStar's attempt to acquire DIRECTV. That
deal would have created a monopoly in satellite television and
limited most consumers to only two choices for pay TV--the
cable company and one satellite company. We opposed that merger
and, wisely, both the Justice Department and the FCC decided to
block it.
This year, it is News Corporation's turn to try to acquire
DIRECTV, a deal presenting an entirely different set of issues.
One of the world's largest media conglomerates, with holdings
ranging from the Fox TV network, the Fox News Channel, Fox
Sports Net, FX cable networks, the Twentieth Century Fox movie
studio, 35 broadcast television stations, to newspapers like
the New York Post and magazines like TV Guide, is seeking to
acquire the DIRECTV satellite system, the Nation's second-
largest television distribution system.
This combination of content holdings with worldwide
distribution will create a media powerhouse of virtually
unmatched size and scope. The overriding fear is that News
Corp/DIRECTV will take advantage of their global distribution
system and must-have programming to raise prices and squeeze
out competition.
Mr. Murdoch and Mr. Hartenstein will claim several benefits
offered by this deal--a stronger DIRECTV, fortified by its
corporate connection to News Corp, deploying new technologies
better able to compete with cable TV. But, for us, the crux of
the matter is what matters most to consumers--the deal's likely
effect on the ever-rising prices paid by consumers for pay TV
and on the choice and variety of programming available.
So, to convince us that this deal is truly in the public
interest, Mr. Murdoch and Mr. Hartenstein must answer some
difficult questions. Namely, will this deal create a vertically
integrated media giant capable of raising the price of its
programming and excluding other programmers from its powerful
distribution network? And will this deal set in motion a chain
of mergers as content companies and distributors find it
necessary to merge to compete with News Corp/DIRECTV? And will
this deal harm competition in the marketplace of ideas and
further degrade the diversity of news, information and
entertainment available to the American public.
News Corp has preemptively pledged to adhere to a number of
commitments should this deal be approved. This demonstrates, we
believe, their understanding that antitrust authorities are
going to have concerns. So we will ask you, Mr. Murdoch, to
agree to several other legally binding and enforceable
conditions, consistent with your already announced pledges.
Your answers, we believe, will demonstrate whether you are
truly serious about avoiding any injury to competition.
Mr. Murdoch, we will ask you:
Number one, to make all News Corporation programming, cable
channels and broadcast TV stations available to DIRECTV's
competitors on the same terms as they are made available to
DIRECTV;
Two, to avoid any unreasonable price increases in the cost
of NewsCorp programming;
Three, to allow News Corp programming rivals equal access
to DIRECTV, including with respect to channel placement and
tiering; and,
Number four, to work to substantially increase the number
of markets covered by local-into-local service and broadband
access with specific targets on specific dates.
To date, consumers of pay TV have continued to suffer ever-
increasing prices and ever-greater consolidation. We need to
examine this merger carefully to ensure that, for a change, the
promised benefits are truly realized.
And so we thank our distinguished panel for being here
today, and we look forward to having a full and complete
discussion.
Thank you, Mr. Chairman.
Chairman DeWine. Senator Leahy?
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Senator Leahy. Thank you, Mr. Chairman, and I am
appreciative of the fact that you and Senator Kohl are holding
this hearing.
The merger, actually, the larger issue of media
consolidation is very important to Senators on both sides of
the aisle, and I commend the two of you for following what has
been the normal bipartisan way you have approached these
subjects. We are aware of the dangers of corporate
consolidation, especially in the information and entertainment
industries, where the First Amendment, as well as the antitrust
laws, have significant roles to play. A hearing like this is
very timely because we try to protect both the marketplace, but
also our freedom of speech, which I feel the First Amendment,
the most underpinning of our whole democracy.
Now, no one in this room could have missed the firestorm of
debate and outcry that accompanied the Federal Communications
Commission's recent changes in the media ownership rules. I
know those changes do not directly touch on the merger here
today, but they are a tangible piece of the puzzle we are all
trying so hard to solve.
The Commerce Committee, I believe, is meeting tomorrow. We
are going to have a hearing on media concentration next week,
and meanwhile the FCC continues to roll back the regulations
that were designed to preserve a diversity of programming
options, a host of editorial choices and voices. And as soon as
you could this homogenization of programming, that is not going
to help viewers or listeners.
I know it is true in a rural State like Vermont, where we
have demonstrated with our town meetings that we like
independence, and we like a diversity of views, but I suspect
that is the same everywhere. Then, when you add the likelihood
that increasingly powerful media conglomerates can raise the
prices consumers pay, at the same time they can reduce the
quality of their programming, both in quality, and in quantity,
and in content and even technologically, the implications of
unfettered media conglomeration to the American people and to
our communities and to our society is very troubling.
I think that is where we are today. I wrote to the FCC,
when the rule changes were under consideration, there are those
who argue that the increase in the number of media outlets has
obviated the need for the rules limiting media ownership. That
is not so. The number of media outlets has increased and
ownership has become more concentrated.
There are certainly fewer opinions among the American
people than 1975, when these standards were established, but
there are indisputably fewer true avenues for their expression
to reach sizable segments of the population. To me, it is
illogical that the FCC would exacerbate a disturbing trend
which is transforming the marketplaces of ideas into little
more than a corporate superstore.
The proposed deal between DIRECTV and News Corp is not
implicated by these rule changes, but it is an unavoidable
truth the atmosphere of concern created by the FCC's actions
will color the evaluation of all media deals. Each time that
the FCC eases some restriction, we are assured that the
``public interest'' inquiry that the Agency undertakes in such
deals will ensure that consumers' legitimate interests are
protected. Well, this merger is one deal where we should test
that repeated assertion.
When the Nation's largest home satellite TV service is
purchased by one of the world's largest media companies, it
should come as no surprise that people are concerned about the
choices consumers will have--something I have raised with Mr.
Murdoch and others. Will the new entity discriminate against
other distributors like cable companies, and especially small
cable companies that serve a lot of rural areas.
What about content providers or are they going to pay for
News Corp's own popular programming, such as shows on the Fox
TV network, or the News Channel and sports channels?
Then, I have a couple others, and I will do them briefly,
Mr. Chairman, other concerns, especially important to Vermont:
The provision of local-into-local television to smaller
Designated Market Areas, DMAs, and the roll-out of broadband
service to underserved communities. Local-into-local is
extremely important to my State. We have the largest percentage
or per-capita percentage, I believe, sadly, dish owners of any
State in the country. If it is not the first, it is certainly
the second. That is because most of our areas cannot get cable.
We need local-into-local to find local news and weather, if
there is a flood, there is a dangerous condition or anything
else.
Now, since July 2002, EchoStar has provided local-into-
local television to its customers in Vermont. News Corporation
has assured me that they want to provide local-into-local TV to
Vermont, but they have been unable to answer the question when
they will do this.
The same holds true for broadband to these underserved
areas. Again, News Corporation is hopeful they will be able to
provide broadband to potential customers, but unable to provide
any time frame. So these are among my concerns, Mr. Chairman.
Again, I commend you for holding this hearing.
Chairman DeWine. Senator Leahy, thank you very much. We
will move to our panel. Mr. Rupert Murdoch, of course, is the
Chairman and CEO of the News Corporation. News Corp's holdings
include newspapers and magazine publishing on 3 continents,
major motion picture and television production and distribution
operation, as well as television, satellite and cable broadcast
operations worldwide, and of course the Fox broadcasting
channel.
Mr. Eddy Hartenstein is the Chairman and CEO of DIRECTV. He
has headed DIRECTV since its inception in 1990 and is currently
Chairman of the Satellite Broadcast and Communications
Association. He has testified before this Subcommittee
previously, and we welcome him back.
Mr. Robert Miron is the Chairman and CEO of Advance/
Newhouse Communications, which manages cable television systems
serving over 2 million customers. He was elected to the board
of directors of the National Cable Television Association in
1983, serving as an officer and member of the Executive
Committee for a number of years. He is testifying here today on
behalf of Cable One, Cox Communications and Insight
Communications.
Gene Kimmelman is the senior director of Consumers Union.
He is widely respected as an advocate on a broad range of
issues in both the areas of cable television and antitrust law.
Prior to his tenure at Consumers Union, he served as chief
counsel for this Subcommittee and has been a frequent witness
for us in recent years. Gene, thank you very much for joining
us once again.
Scott Cleland is the CEO of the Precursor Group, an
independent research/broker dealer. He has testified before
numerous Congressional panels on a variety of antitrust and
telecommunications issues, including this Subcommittee, and we
welcome him back as well.
We will follow a 5-minute rule. We are going to be strict
about that today because we want to have a lot of time for
questions. So we are going to start with Mr. Murdoch. We have
your written testimony from everyone, and it is part of the
record. We appreciate that. And if you could just give us your
summary, anything else that you would like for us to hear.
Mr. Murdoch, thank you.
STATEMENT OF RUPERT MURDOCH, CHAIRMAN AND CHIEF EXECUTIVE, THE
NEWS CORPORATION, LTD.
Mr. Murdoch. Thank you very much. Good afternoon, Chairman
DeWine.
Chairman DeWine. And all of these mikes have to be
activated. They are no longer the old mikes where you just
spoke into them that we used to have in this Committee. Now,
you have to push the button.
So, Mr. Murdoch, you are first.
Mr. Murdoch. Good afternoon, Chairman DeWine, Senator Kohl,
Senator Leahy. Thank you for this invitation to testify today
on News Corporation's proposed acquisition of a 34-percent
interest in Hughes Electronics Corporation. This transaction
will infuse DIRECTV with the strategic vision, expertise and
resources necessary to bring increased innovation and robust
competition to a multichannel market. The resulting public
interest benefits are manyfold and substantial. Today, I would
like to tell you specifically why this deal will be good for
consumers and good for competition.
By combining the expertise and technologies of our two
companies, consumers will benefit from the better programming,
more advanced technologies and services and greater diversity
that we will provide. One of the first enhancements DIRECTV
subscribers will enjoy is more local television stations, with
the first component of local-into-local service as part of our
BSkyB satellite venture 6 years ago, and it remains one of our
top priorities.
News is committed to dramatically increase DIRECTV's
present local-into-local commitment of 100 DMAs by providing
local-into-local service in as many of the 210 DMAs as possible
and to do so as soon as economically and technology feasible.
In addition, News is exploring new technologies that
promise to expand the amount of high-definition television
content on DIRECTV, and News will work aggressively to build on
the broadband services already provided by Hughes.
News will also bring a wealth of new services direct to
DIRECTV subscribes from BSkyB in the United Kingdom, including
interactive news and sports and access to on-line shopping,
banking, games, e-mail and information services, and we will
infuse Hughes with our deep and proven commitment to equal
opportunity and diversity, including more diverse programming
and a variety of mentoring, executive development and
internship programs.
You can count on these enhancements because innovation and
consumer focus is in our company's DNA. We have a long and
successful history of defying conventional wisdom and
challenging market leaders, whether they be the ``big three''
broadcast networks, the previously dominant cable news channel
or the entrenched sports establishment.
We started as a small newspaper company and grew by
providing competition and innovation in stale, near
monopolistic markets. It is our firm intention to continue that
tradition with DIRECTV. With these consumer benefits, DIRECTV
will become a more formidable competitor to cable and thus
enhance the competitive landscape of the entire multichannel
industry.
To that end, I should note that there are no horizontal or
vertical merger concerns arising from this transaction. The
transaction does result in a vertical integration of assets
because of the association of DIRECTV's distribution platform
and News Corp's programming interests, but this is not
anticompetitive for two reasons:
First, neither company has sufficient power in its relevant
market to be able to act in an anticompetitive manner.
Second, neither News, nor DIRECTV, has any incentive to
engage in anticompetitive behavior. As a programmer, News
Corp's business model is predicated on achieving the widest
possible distribution to maximizing advertising revenue and
subscriber fees. Similarly, DIRECTV has every incentive to draw
from the widest spectrum of attractive programming, regardless
of its source.
Nevertheless, we have agreed to a series of program access
undertakings to eliminate any concerns over the competitive
effects of this transaction. We have asked the FCC to adopt
these program access commitments as a condition of the approval
of our application.
Viewed from another perspective, neither News, nor Hughes,
is among the top five media companies, by expenditure, in the
United States. As you can see in the chart attached to my
testimony, News is sixth, with 2.8 percent of total industry
expenditures, and Hughes is eighth, with 2.2 percent. Even
combined, the companies would rank no higher than fifth, half
the size of the market leader.
In closing, I believe this transaction represents an
exciting association between two companies, with the assets,
the experience, and the history of innovation to ensure DIRECTV
can provide better service to consumers and become an even more
effective competitor.
Thank you for your attention. I look forward to your
questions.
[The prepared statement of Mr. Murdoch appears as a
submission for the record.]
Chairman DeWine. Mr. Hartenstein?
STATEMENT OF EDDY W. HARTENSTEIN, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER OF DIRECTV, INC.
Mr. Hartenstein. Chairman DeWine, Senator Kohl, Senator
Leahy and members of the Subcommittee, who I presume will come,
I appreciate the opportunity to tell you why the split-off of
Hughes from General Motors and the purchase of a 34-percent
interest in Hughes by News Corp. will benefit consumers
throughout the United States, whether they are current or
prospective DIRECTV subscribers, or even current cable
subscribers.
As a direct result of this transaction, DIRECTV will be
able to improve its service offerings and provide a stronger,
more competitive alternative to cable. Until 1994, there were
no serious competitive alternatives to the dominant cable
operators. With the launch of DIRECTV, exactly 9 years ago
yesterday, consumers gained access to an alternate provider
that offered more channels, and superior picture and sound
quality. But it was not until November of 1999, when Congress
changed the law to allow satellite carriers to retransmit local
broadcast channels, that DBS was able to truly offer a
competitive alternative to cable, at least in those markets in
which DBS operators, such as ourselves, provide local channels.
The benefits to consumers from DBS competition to cable
have been tremendous. In a direct response to DBS competition,
cable operators have aggressively upgraded their services, and
it is forecast that in the very near future, for the first
time, the number of digital cable subscribers will exceed the
total number of DBS subscribers in this country.
Such developments underscore the need for DBS operators to
keep pushing the competitive envelope to preclude satellite TV
customers from being left behind. DIRECTV is already on this
course.
Today, we offer local channels in 61 markets and are on
track to meet our goal of more than 100 markets, upon the
successful launch of our eighth satellite by year end. In just
12 days, we will expand our high-definition television
programming services to 6 channels nationwide.
But we simply cannot stop there. In order to continue
improving our services, it is critical that we keep expanding
DIRECTV's programming offers and keep providing new and
innovative services to consumers.
At a time when DIRECTV requires capital to continue to
innovate and compete, however, GM is focused on improving its
core automotive operations and addressing the need to provide
funding for its U.S. pension plans. DIRECTV must pursue new
initiatives to remain competitive with cable, which will
require additional funding.
GM cannot provide such funding because of the resulting
downward pressure on GM's credit rating. GM has recognized that
an independent Hughes and DIRECTV will have more flexibility to
obtain the kind of financing that it--DIRECTV--needs to
continue to grow and stay competitive into the future.
GM identified with us News Corp. as an ideal partner for
Hughes and DIRECTV because of its proven track record as a
global direct-to-home service provider. And with News Corp's
support, we intend to increase the number of television markets
in which DIRECTV provides local broadcast channels as quickly
as technologically and economically feasible. Consumers
residing in those local markets will be able to obtain
satellite-delivered local news, weather and sports, and cable
operators in those same smaller markets will be forced to
improve their services in response. For those consumers, it is
a win-win.
Through our combined efforts, we intend to expand even
further the number of high-definition channels that we offer
which, in turn, should accelerate consumers' adoption of high-
definition reception equipment nationwide.
Historically, News Corp. has produced and supported a
wealth of culturally, ethnically, and linguistically diverse
programming through its Fox film divisions, television network
and broadcast stations. We plan to tap into News Corp's
resources to expand DIRECTV's already diverse program
offerings.
In sum, the future looks bright for DIRECTV. Independence
from GM and the investment by News Corp. will allow DIRECTV to
improve and expand its services for consumers, a result that
will be manifestly in the public interest.
Now, I realize, Chairman, Senator, that I appeared before
this very Subcommittee just over a year ago touting the
benefits of a different transaction. As you know, the Justice
Department and the FCC prevented us, as you suggested, from
consummating that transaction. I believe that the current
transaction raises none of the concerns that the DOJ and the
FCC cited in connection with the prior transaction, and for
that reason, I am hopeful that those agencies will allow us to
move forward quickly with the News Corp. transaction so that we
may continue aggressively to pursue the strategy we have
pursued since our launch in 1994, which is to offer the best
competitive alternative to cable possible.
I appreciate the opportunity to share my views and look
forward to your questions.
Thank you.
[The prepared statement of Mr. Hartenstein appears as a
submission for the record.]
Chairman DeWine. Good.
Mr. Miron?
STATEMENT OF ROBERT MIRON, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, ADVANCE/NEWHOUSE COMMUNICATIONS
Mr. Miron. Thank you, Mr. Chairman.
In addition to our company, I am testifying today on behalf
of Cable One, Cox Communications and Insight Communications.
Together, these companies serve nearly 10 million cable
television homes in 31 States. We thank you, Mr. Chairman, and
we thank Senator Kohl and Senator Leahy for this opportunity.
No doubt, News Corp's acquisition of DIRECTV can benefit
competition. However, what we find troubling is that the
acquisition will give News Corp unique and unprecedented power
and incentive to raise the cost of programming to providers,
and thus consumers in all three multichannel platforms: cable,
Direct and EchoStar.
Our concerns are magnified by the possibility, and perhaps
even the likelihood, that this transaction will be followed by
a similar consolidation involving EchoStar. Today, there are
vertically integrated companies that combine powerful
programming assets with cable system ownership, but no cable
company currently has the potential to serve more than about
one-third of American homes. None comes to close to the
geographic reach of Direct, which is present in every
television market. None currently owns broadcast stations
inside cable markets, while News Corp owns and operates 35
stations within Direct's national service area, including 9 in
the top ten markets and 16 in the top 20.
It is already hard enough to negotiate with the 4 companies
that combine ownership of broadcast networks, broadcast
stations and cable networks. Retransmission consent
negotiations involve not just the carriage of broadcast
stations, but how much cable operators will pay to the
broadcast stations' affiliated cable networks and how many new
affiliated networks they will need to carry.
Inevitably, cable operators face demands for carriage of
these affiliated channels on their most watched tier of
programming, so that all of our customers have no choice but to
pay for them.
Like network-affiliated broadcast stations, regional sports
networks networks are must-have programming. They present much
the same set of negotiating problems for cable operators, and
News Corp controls, by far, the largest collection of regional
sports networks. News Corp's 18 regional sports networks cover
10 of the top 20 television markets, and each is combined with
an ownership of a Fox-affiliated broadcast station.
Today's marketplace is workable only because both EchoStar
and Direct approached their negotiations with programmers from
much the same point of view as cable does. Once Direct becomes
a partner of the News Corp stations and networks, our
negotiating position will be severely compromised. If a cable
operator fails to reach carriage agreements, it will be
granting its competitor de facto exclusive carriage of very
desirable programming. That is not acceptable, and operators
will be forced to concede. So will EchoStar. Prices will go up
for Direct customers, EchoStar customers and cable customers.
We believe the impact will be substantial nationally. It
will be even more severe for small- and mid-size cable
operators, many of whom operate in smaller markets and rural
areas and who typically pay higher prices for programming than
does Direct.
News Corp has recognized there are problems and has
proposed two conditions:
First, they have proposed to comply with the FCC's program
access rules, but News Corp has exempted its broadcast stations
from the program access commitment. The Fox stations are the
big dogs of News Corp's programming complex. Failure to include
them in the program access commitment greatly reduces its
value.
Of equal importance, the program access rules allow News
Corp to use the additional power it will gain from control of
Direct to raise rates for cable television and EchoStar, so
long as they avoid discriminating by also raising rates to
Direct. We believe they have the incentive to do just that.
Second, News Corp has proposed subjecting related-party
transactions to review by an independent Audit Committee of
Direct's board. But Audit Committees are best-equipped to find
harm to shareholders' interests. Here, the harm is to the
marketplace and consumers, not to Direct or its shareholders.
Finding this harm is beyond the mandate and the ability of the
Audit Committees and independent directors.
In our view, News Corp acquisition can operate without harm
to the public interest, but only if appropriate conditions can
be constructed, in addition to those already proposed, to limit
the adverse effects on consumer prices for DBS and cable
television.
Thank you.
[The prepared statement of Mr. Miron appears as a
submission for the record.]
Chairman DeWine. Mr. Kimmelman?
STATEMENT OF GENE KIMMELMAN, SENIOR DIRECTOR FOR ADVOCACY AND
PUBLIC POLICY, CONSUMERS UNION
Mr. Kimmelman. Thank you, Mr. Chairman. On behalf of
Consumers Union, the Print and on-line publisher of Consumer
Reports magazine, I appreciate the opportunity to testify this
afternoon about consumer concerns with the News Corp/DIRECTV
merger.
Senators DeWine, Kohl and Leahy, you will recall, in 1996,
Congress passed the Telecommunications Act which launched
deregulation of cable television on the theory that satellite
television was there to compete against cable, to hold prices
down.
Well, today, prices are more than 50-percent higher than
they were then, rising almost 3 times faster than inflation.
Unfortunately this deal will not stop that. As a matter of
fact, it may make matters worse. Prices will continue to rise.
I hardly ever agree with the cable industry, but I believe Mr.
Miron has it exactly right--prices will just keep going up.
In the context of the FCC's recent decision to relax media
ownership rules, just think of what companies, like News Corp
with DIRECTV, will also be able to do: buy a second or a third
local broadcast television station in communities across the
country, buy the dominant--no, not the dominant--the monopoly
newspaper, add more cable properties, radio stations, become
the dominant source of local news and information in
communities across the country.
Tomorrow, the Senate Commerce Committee will begin taking
action to undo the FCC's relaxation of media ownership rules,
bringing back a promotion of diversity and competition in local
news markets. I hope you will join in that effort. But until
the FCC's decision is overturned, this transaction, and others
likely to spring out of this, pose enormous dangers to
consumers.
How is that the case? Well, think of it on the national
level. News Corp owns a national television network with rights
of carriage on all cable systems across the country, 30
broadcast television stations, a major stake in more than 20
cable properties with rights to the most popular professional
sports leagues and teams, 67 professional sports teams that are
the basketball, baseball and hockey favorites in communities
across the country, in-house production studios, and newspapers
here and abroad.
Then, this company can add more properties at the local
level, a second, a third local broadcast station, and
newspapers, and on and on. Is this good for competition? Does
this bring more diversity of views from different owners? On
the contrary. It consolidates, at a dangerous level, the power
of few entrepreneurs, with First Amendment rights to control
their media properties, to define what news and information is
in the local market, to present it as they see fit, and to,
unfortunately, undermine the potential for competition across
all technologies, the kind of competition we hope for with
deregulation.
I believe consumers' interests cannot be served by this
transaction unless significant conditions are imposed by the
FCC, by the Congress, and very strict antitrust enforcement is
pursued to ensure that prices do not rise for cable and
satellite customers. Why would they rise? Just think about it.
With all of those stations, all of those cable properties, and
the very expensive television rights to professional sports
teams, Mr. Murdoch is in the position of bundling that
programming and raising the input costs for all of his
satellite and cable competitors. His promise will do nothing to
prevent prices from going up. As a matter of fact, it enables
him to signal the market that everyone's prices go up. Cable
may not like it, but why not pay those higher prices, when
every satellite company also pays those prices. Everyone pays
more, the consumer pays more. That is not the kind of
competition that benefits the marketplace.
So we believe antitrust officials, through tough
enforcement, that conditions placed on this deal by the FCC are
absolutely critical, and most importantly, we believe Congress
must act. It is time to overturn the FCC's relaxation of media
ownership. It is time to prevent consolidation of multiple
broadcast, cable and newspaper properties with content
distribution. And it's time to prohibit companies like News
Corp, combined with DIRECTV, and others with market power over
distribution systems from preventing consumers, choice to pick
the programming they want, get it at a fair price while
ensuring that there is competition in the marketplace.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Kimmelman appears as a
submission for the record.]
Chairman DeWine. Mr. Cleland?
STATEMENT OF SCOTT CLELAND, CHIEF EXECUTIVE OFFICER OF THE
PRECURSOR GROUP
Mr. Cleland. Mr. Chairman and Senators Kohl and Leahy,
thank you for the honor to testify as an independent analyst
who represents institutional investors in our business.
My overall view, when you look at this merger, from an
antitrust perspective, is I do not think this merger is
anticompetitively going to hurt consumers and competitors. So
while I think it does not necessarily raise antitrust concerns,
I do think there are legitimate and significant First Amendment
and public policy issues that are raised by this that are most
appropriately dealt with in the FCC arena or in the legislative
arena, but not necessarily as conditions to a merger.
Now, we also, my Precursor Group, when we talk to investors
about this, you should also know we have advised them we
thought that this deal would get approved by the Government and
that we thought it would create value.
Now, what I think I can do for you today that is helpful
and give you some insight is I think this deal is a lot less
about pricing than it is about technology and about correcting
some business-model weaknesses, and so I would like to run
through 7 dynamics that are going on with News Corp that are
motivating News Corp and DIRECTV to get together. This is not
just about negotiations or pricing.
The first is, is they need to make the transition from
analogue to digital. As you all know, the over-the-air
broadcast has been, the transition to digital has been snake-
bit, and very slow, and very expensive. It is essentially all
pain and no gain.
With this transaction, they can make the leap from an
analogue business model to a digital model.
In one leap, they also can go from a regional platform to a
national platform, the second thing.
The third thing is they are going to be able to change
their business model from an advertising-based model, which is
very economically sensitive with economic cycles to a
subscription-based model which is less-economically sensitive.
It will also allow them to go from single channel to
multichannel. The clear trend in pay TV is towards niche
programming and having the technology that enables you to
narrow cast and have many channels is the wave of the future.
So this enables them to do that.
The other thing it does is it allows them to move from a
very unsecured platform to a more secure platform. You have
over-there broadcasters up here asking for help because the
technology today enables people to easily pirate digital
content. And when you make a digital copy of one copy, you can
make a billion of them. And so the technology here, and there
is a need and a desire for News Corp to move its content off of
an analogue, more vulnerable, easily pirated technology, to one
where they have more control to protect their value.
The other thing is that they are making a shift from a
depreciating business model to an appreciating one. I mean,
they are shifting horses kind of mid race. The over-there
broadcast model is way past its prime. It should be put out to
pasture, and essentially the DBS technology is more like a
thoroughbred, and they are switching horses I think quite
wisely.
And the last thing is, and that is the subject of this
discussion and why you all are having this very important
discussion, is that it does shift from an unleveraged business
model to a leveraged one, and the reality is, is when you are
negotiating, and Mr. Miron is right, is that you do have more
negotiating leverage, you are taken more seriously at the
negotiating table when you are a content provider and when you
are a distributor. So that does create legitimate issues that
should be discussed here.
Now, what I also would like to give you some insight is
about what may be coming down the pike. I think Mr. Murdoch, at
least from an investment standpoint and a business standpoint,
is making the right decision. He recognizes these very serious
business-model weaknesses, and for 6 years has tried to merge
with a DBS provider.
I am surprised that Disney and Viacom do not share the
strategic vision, and I believe, in the future, you will
probably see a transaction that will involve EchoStar coming at
you down the pike.
So, to wrap up, I do not think that this is an
anticompetitive deal. This does not raise any more issues than,
say, the Comcast/AT&T issue did, and I would also like to point
out that one of the interesting things, as a kind of
independent observer, is that News Corp has consistently been
what is called a ``maverick'' competitor. They are an
insurgent. They tend to be very disruptive and very good for
the marketplace.
My time is up. I will conclude.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Cleland appears as a
submission for the record.]
Chairman DeWine. Well, we thank you very much. You all gave
very interesting testimony, and you all were right on time,
too. I appreciate that.
We have a vote that started. We are going to stop now, and
we will be back in 12/13 minutes, probably.
[Recess from 3:22 p.m. to 3:41 p.m.]
Chairman DeWine. Mr. Miron, Mr. Kimmelman, you paint kind
of a scary picture for us, and I would like to explore that
with you and then try to get Mr. Murdoch's response.
Mr. Miron, let me put it on a personal basis. I am a
Cincinnati Reds fan, I also have DIRECTV, and so I get the
Cincinnati Reds on Fox Sports Net. I watched them last weekend
when I was home in my home in Cedarville, Ohio. My dad is a
Cincinnati Reds fan. He watches them in Yellow Springs, Ohio,
on cable TV. He also, of course, watches them on Fox Sports
Net.
So you are telling me that we both should be nervous about
this deal? We are going to be paying more, are we, Mr.
Kimmelman, Mr. Miron?
Mr. Kimmelman. I would like to answer--
Chairman DeWine. It is bad for us as consumers, is it?
Mr. Kimmelman. I think it is, Mr. Chairman. Being a born
Cincinnatian, a Cincinnati Reds fan ever since I think I was 5
years old--
Chairman DeWine. You are ingratiating yourself to the
Chairman, I can tell, Mr. Kimmelman, but that is okay. That is
all right.
[Laughter.]
Mr. Kimmelman. It happens to be true. If I still lived in
that territory, I would be extremely worried because I know
that one of the main reasons I would want cable or I would want
satellite would be to watch the Reds.
Chairman DeWine. Frankly, it is the only reason I got
DIRECTV, and that is the truth. It certainly was not to watch--
well, we will not go into that.
[Laughter.]
Mr. Kimmelman. I would be concerned that if Mr. Miron was
my cable operator, and I was sitting there and was being told
that because the price went up he was considering not putting
it on the air, I would have to look at DIRECTV because I want
it.
Now, like many consumers, there is a lot of frustration
about the cost of cable going up and the inability to choose
the channels that you want. Most consumers only watch about a
dozen channels, and yet they get 50 or 60, and they have to
keep being told that you should be happy to pay more because
you are getting more, and they do not want them.
What I am afraid, we wanted satellite to be the kind of
competitor that would come in aggressively and would challenge
cable with discounts, and they have tried, to some extent.
Their equipment costs are very high. Mr. Hartenstein is
absolutely right. They have done an admirable job, but their
costs are high, and getting a second set hook-up and getting a
high-speed service is expensive, and it just has not so far
really cut into cable price increases, unfortunately.
And what I am afraid of is this transaction, with a company
that makes a lot of its money from programming, and the ability
to bundle that with its over-the-air network and say, This is
what we are charging. If you do not want it, you are not going
to have it on your cable system. We will just put it on
DIRECTV, is likely to raise prices for everybody.
Chairman DeWine. Mr. Miron, do you want to weigh in here?
Mr. Miron. Thank you, Mr. Chairman. I, too, was a--I
remember Johnny Bench, and Joe Morgan, and was a fan.
I think our goal is really to protect the uninterrupted
flow of Fox product to consumers at reasonable prices. And this
transaction could undo that, since all 3 platforms now, today,
negotiate and everybody tries to get the best price, and things
could change if Mr. Murdoch owned DIRECTV. DIRECTV could make a
deal to carry Fox Sports at a higher rate and then negotiate
with the cable company to pay the same rate. If the cable
company refused to pay that rate, Direct would, in effect, have
de facto exclusivity of that product.
And if the cable company could not stand the pressure,
Cincinnati fans would want to go subscribe to DIRECTV, they
would give in and pay the price, and that would have a tendency
the force the prices up. I think that is one of our serious
concerns.
Chairman DeWine. Mr. Murdoch? Should I be afraid, Mr.
Murdoch? Should my father be afraid of this? What is your
answer to that?
Mr. Murdoch. I do not think so, Mr. Chairman. I cannot
claim to be a fan of the Cincinnati Reds, and I am sorry.
Chairman DeWine. No, I hope not. I would surely hope not. I
was waiting for that one.
[Laughter.]
Mr. Murdoch. But the fact of the matter is the marketplace
handles this. We do not--we were quoted as owning 18 or 19
regional sports networks--we, in fact, control only 10 of
those. Our name is carried on about 19, and then we now have a
small minority or they are associates of ours.
If I could quote a, it was a private conversation with Mr.
Ergen of EchoStar a couple of months ago, saying, Thank God for
Fox because it brings all of these teams together and charges
like $1 or $1.50 a month, depending on what tier they are on or
whatever, if each team, otherwise each team will have its own
network like the Yankees, and everybody paying about $8 a
month.
And I think Fox provides a very good service here. It also
provides a limited sort of competition to ESPN, which is much
needed, and I am sure Mr. Miron would agree with that.
I do not know what they are going on about. I mean, our
record here on pricing--first of all, let me just say this.
Direct's record, it launched in 1994 with 50 channels at a
price of $29.95. Today, it sells its biggest package of 100
channels for $33.99, an increase, over 9 years, of $4.04,
totally unlike our friends down the table here.
Fox has been dealing productively with the cable industry
for years, giving them programming they want, on mutually
acceptable terms, and at the same time getting the value from
retransmission consent that Congress envisioned in the 1992
Cable Act in growing our business.
Retransmission consent is something quite different to
program access. One applies to cable and satellite or we are
making it apply to satellite, and the other has to do with
broadcasting. And all we ask for is a level playing field. If
they want to change that statute on retransmission, let them go
ahead. It has got to apply to everybody. The effort of Mr.
Miron and his associates here is simply to try and stop us from
being competitive in any way they can.
On this question of our relationship with cable, the
smallest cable systems that have Fox programming on them, 300
of them, they just were granted retransmission consent without
any conversation, without even any discussion. The major ones,
perhaps the biggest 10 companies, have more like 90 percent of
the market. I think 6 companies have over 80 percent of the
market.
We do, indeed, negotiate with and see what we can get. And
we have had over the last couple of years I think 150--I have
got them here--separate deals for carriage on those cable
companies for cable channels, which we have started . Our
record, wherever you look, has been as a price-cutter, as a
competitor and as a provider of new choice in what we do, and
we intend to continue that here.
What really shocks me, frankly, is that Mr. Miron has
allowed himself to be used by Cox to front for this effort
here. They are privately owned entity, they are the fourth
biggest cable operator in the country, they have programming
services, they have leading, big TV stations--a bit more about
that in a minute--large monopoly newspapers and many multi-
radio station groupings in different cities.
In fact, when Mr. Kimmelman was sort of fantasizing about
the future of News Corp, I thought he was describing Cox
Communications today.
To get Fox News started, for instance, we have had to pay
special payments to cable companies of over $640 million.
Fifty-one million of that went to Cox, in addition to which
they made us sign a 10-year unbreakable, exclusive affiliation
agreement for their large television station in San Francisco,
which stops News Corp or Fox from really ever having an
investment in television in San Francisco, a major market.
So they are well able to, they are big boys, they are quite
capable of looking after themselves. I am not complaining.
These have been vigorous negotiations, but to cry poor and to
try and tie us down is something which I think is just
outrageous.
Chairman DeWine. Mr. Miron, do you want to respond to that?
Mr. Miron. I certainly cannot respond to the particulars of
the Cox situation, but we certainly do not believe any of the
issues we are raising will have a limiting effect on Direct's
ability to compete. We are simply concerned, and we have had
negotiations with Fox over the years, and they are strained,
but we have always managed to eventually come to an agreement.
We have had an occasional service interruption, but we
think that, with DIRECTV, the incentive for possible, for this
to change, would be much greater, and so we have genuine
concern that if this happens, it will create some, as I said
before, de facto exclusive product programming.
Chairman DeWine. Mr. Kimmelman, and then my time is up, and
we will turn to Senator Kohl.
Mr. Kimmelman, last comment.
Mr. Kimmelman. Mr. Chairman, I would just like to respond
on this level. We certainly have problems with Cox, where it
dominates the market, and we have raised concerns in the media
ownership proceeding about some of that, but we did not have
time, in the 5 minutes, to go through all of what News Corp
owned here that is relevant to the Cincinnati Reds situation.
Mr. Murdoch owns substantial stakes in the Dodgers--
Mr. Murdoch. They are for sale.
Mr. Kimmelman. The Lakers--
[Laughter.]
Mr. Kimmelman. The New York Knicks, the New York Rangers,
Dodger Stadium. I mean, he owns it all the way up the chain for
many of the sports franchises which are must-see local
programming in the community. I have now testified with him 3
times before Congress in the last month. I have not once heard
him that he can make cable rates go down through his
transaction, that he is going to compete down prices.
He has got a different vision of competition. It is
admirable, it provides some benefits. I do not disagree with
that, but let us be clear here. There is nothing about this
transaction that appears likely to drive prices down for
watching the Reds or any other team.
Mr. Cleland. Could I add to that comment, just to give an
insight into the cable market?
Chairman DeWine. Sure.
Mr. Cleland. I agree, you know, cable rates have not gone
down, but generally the DBS pay TV is not a competitive market.
It is a Government-manufactured market. There were 4 DBS
licenses that were granted. The market would only fund two.
EchoStar and DIRECTV are the only ones that survived. And so
the reality is we have a 3-person market. Generally, in a 3-
provider market, you have competition on service, on packaging,
those types of things. Generally, they know, it is oligopoly,
they look around, and they say, We do not want to compete on
price. It is in none of our interests, and generally it takes a
fourth or a fifth or a maverick pricer. And as I said before, I
think News Corp is an unusual one in that they have a history
of being a maverick pricer and a maverick competitor.
Chairman DeWine. Senator Kohl?
Senator Kohl. Thank you, Mr. Chairman.
Mr. Murdoch, Mr. Hartenstein, for weeks we have heard you
making the promises in order to convince us that your deal
will, in fact, be beneficial to consumers. It has been our
experience that these promises are soon forgotten, and
consumers fail to see sufficiently of the benefits.
I would like to discuss your commitments in detail, but
before doing so, I would like to ask one question. Are you both
willing to commit here today to be subject to an enforceable
and legally binding decree either at the FCC or Justice
Department that you will implement your promises if this merger
is approved?
Mr. Murdoch. Yes, sir. That is a condition of the deal. We
have written that in and offered that.
Senator Kohl. Good.
Mr. Hartenstein. Absolutely, sir.
Senator Kohl. Good. Mr. Murdoch, your commitments do not
limit your ability to raise prices for your programming, as
long as you do so on the same terms that you do to DIRECTV; is
that a fact?
Mr. Murdoch. I am sorry, Senator. You mean that there has
been a suggestion that we might raise the price of our
programming that we sell to Direct and then try to let it run
through. The fact is we do not have that power. It would not be
a thing we do because of Direct, it would be because the
programs are good, and we would be doing it already. We charge
what the market will bear, frankly.
Then, there is the other matter, if you think of anything
sort of out-of-line that could be done, there is,in spite of
all that has been said, a very strong majority of independent
directors that are there to look after all of the shareholders.
I know we have that in a parallel situation in BSkyB in
Britain. It has taken us nearly 3 years to get a Fox channel on
for 7 miserable cents per month.
These Audit Committees do operate for all of the
shareholders, so we are not going to put anything that is
uneconomic on Direct. We could not get away with it.
Senator Kohl. I do appreciate that. I was simply referring
to your ability to do it. Not that you might or might not do
it, but that you can do it.
Mr. Murdoch. I cannot.
Senator Kohl. You cannot do it?
Mr. Murdoch. No, I cannot do it because it would go to
the--every transaction has to be, between any affiliated
company or our company, has to be approved by the Audit
Committee of the company, who are independent directors and
distinguished businessmen in their own rights, and they are not
going to be party to Direct paying anything that is unfair.
I mean, you can say they are only worried about the
shareholders, not about the public--
Senator Kohl. I do not have a sense of sufficient comfort,
with respect to the Audit Committee and its independence.
Mr. Murdoch. Well, sir, if I might just, you know, it does
fully comply with all of the rules of the FCC, and with the New
York Stock Exchange, NASDAQ and the new Sarbanes-Oxley Act. I
cannot say more than that.
Senator Kohl. Do you want to comment on that, Mr.
Kimmelman?
Mr. Kimmelman. Senator Kohl, I would just like to say that
no one is suggesting News Corp is going to break the law, and
no one is suggesting it is particularly unfair to raise your
prices if you can get away with it. If cable has to pay a
higher price for the Fox network, for FX, for Fox News, for the
regional sports channel, and EchoStar has to pay that same
higher price or a higher price, then it is not harming DIRECTV
to pay approximately that price.
And given that they are allowing for volume discounts in
their own commitments, they are, with 11 million subscribers,
one of to largest-volume providers of multichannel video
service, they can probably justify a somewhat lower price than
most cable operators or EchoStar would pay.
So the terms ``fairness'' or ``legality'' are not the issue
here. If the point is will prices go up or go down, I have not
heard a word that indicates to me that there is any likelihood
they will go down.
Senator Kohl. Mr. Murdoch, the Audit Committee will not
stop any deal as long as the cable pays the same price. I mean,
that is almost self-evident.
Mr. Murdoch. If we went to the cable companies first and
said, Hey, we want to double all of our charges, and if you do,
we will make Direct pay it, you are probably quite correct, but
I do not see that happening.
Cable, sir, has 80 percent of the market. It is almost a de
facto monopoly. Direct has 12 percent of the market.
Senator Kohl. Another question, Mr. Murdoch.
In the past, you have imposed substantial program rate
increases. For example, the Washington Post reported that this
year you raise the cost of your Fox Sports programming by more
than 30 percent to some cable operators. Would you agree to
limit raises and the prices charged for your programming? For
example, would you commit not to raise prices for your
programming to no more than the national average rate of cable
price increases over the past 5 years?
Mr. Murdoch. I would have to study that, what the figures
are. I do not know of any 30-percent increase. The fact is that
all of those charge different prices, and it is sort of a
jumble, and there has been a leveling, although some people may
have gone up, but it is nothing like ESPN which goes up 20
percent every single year.
Who knows. We are not trying to put those prices up. We are
just trying to keep what we pay the teams down.
Senator Kohl. I think it is essential that the regulators
craft some reasonable restrictions on your ability to raise
programming prices as a condition of approving this deal. That
is an opinion that I hold.
Mr. Murdoch. Well, let me take an instance where I think we
were entitled to an increase which we will not get for 2 or 3
years because we have a binding legal contract. But Fox News,
for instance, gets about half what CNN gets, and yet we deliver
double the audience, and you know when those contracts come up,
we will certainly look to correct that. I think that is a
reasonable economic objective. It is a reasonable business
approach.
Senator Kohl. Gentlemen, while you have agreed to make your
cable television programming available on a discriminatory
basis to cable and satellite companies, you have not committed,
Mr. Murdoch, you have not committed to do so with respect to
your 35 broadcast television stations. And your Fox broadcast
stations are among the most powerful programming forces, as you
know, in television.
Fox is one of the top 4 national networks, one that has
popular programming, like professional football, that to many
viewers is essential. And yet without such a nondiscriminatory
commitment, you could threaten to withhold the rights for
EchoStar to any cable or any cable system to carry any Fox
network affiliate in exchange for favorable terms, such as the
carriage of other News Corp cable systems or programming.
Mr. Miron, are you concerned about this scenario, and why
do you believe it is dangerous?
Mr. Miron. Senator, I would love to comment on a couple of
things that Mr. Murdoch said.
First, he made the statement that Fox News had a greater
rating than CNN and his price was half. We could look at it the
same way and say that Fox News has a rating that is greater
than the sports channels that he delivers to us, but the sports
channels have a far greater rate, and if he wanted to equal the
rating, that would be interesting.
He said that he will charge what the market will bear. I
think that really was the key statement, and I think what we
believe is that this transaction will give him added market
power, and that added market power, coupled with his statement
that he will charge what the market will bear, will bring
higher prices to the consumers.
Senator Kohl. Mr. Murdoch, will you agree that you will
make your broadcast television stations available to competing
satellite and cable TV systems on the same terms as they are
made available to DIRECTV?
Say yes.
[Laughter.]
Mr. Murdoch. Each transaction is different, but broadly
speaking here, but I better look at that before I bind myself
on that, sir. Let me just say this. It is absolutely essential,
whether it is a cable channel or whether it is our local
television station to get every conceivable pair of eyeballs
watching you.
You do not just go and take yourself away from 80 percent
of the market and say we are not going to have this cable
system in this city because we do not like Comcast or something
or cannot get an agreement with them. That would be totally
self-destructive. It is just not possible. The same with, I
mean, why do you think I paid, you know, hundreds and hundreds,
and probably well over a billion dollars to get cable channels
established and get distribution for them?
You know, we have bled a lot of money waiting for cable
companies, big cable monopolies, to move in their own good
time. And we even had Time Warner bar us from the essential
market of New York because they own a rival news channel. We
had to go to court, we had to fight, we had a huge political
fight before we could final settle that. We are not dealing
with a bunch of virgins here.
Senator Kohl. So was your answer yes or no?
Mr. Murdoch. I am not prepared to make commitments about
our broadcast license that I would not want to see a majority
governed by statute, and I would want to see, if there is a
change in that, would that--of course, we would have to agree
to any statute--but how would it apply to our competitors? It
is a different world, and if we had to do something which NBC,
and CBS and ABC are not committed to do, I would have to just
approach that with some caution.
But if you said would we not charge more than what we would
charge Direct or we would do the same, I think that is a
reasonable request, but I just, before committing myself, I
would really need to talk to my advisers and study it.
Senator Kohl. Sure.
Mr. Kimmelman?
Mr. Kimmelman. Senator Kohl, in 1992, Congress, at the
request of the broadcast industry, granted automatic carriage
to broadcast networks and the right to bargain for
retransmission consent based on one very simple set of facts.
Cable was the dominant means by which the American consumer was
receiving broadcast network television, and broadcast networks
had to go through the cable system. They did not own another
transmission system.
I will tell you what the difference between News Corp with
this transaction is from NBC, CBS and ABC. It owns a new
transmission distribution system through DIRECTV. Those
companies do not. It has a national network and a satellite
distribution system nationwide. The logic of the granted rights
by Congress does not, and should not, apply to News Corp if
this transaction goes through. The facts will no longer fit the
circumstances.
Senator Kohl. Mr. Miron, how important is access to sports
for cable programmers? What would happen if your customers
could not see the local sports teams in their areas because
another distributor had exclusive rights to these broadcasts?
Mr. Miron. It is very important to us. We would definitely
lose subscribers if those subscribers were able to see the
services on a DIRECTV platform. We would be at a tremendous
disadvantage.
Senator Kohl. Mr. Murdoch, let us say your sports
programming is carried on the Fox TV network, which, as we have
discussed, is not subject to your equal access promises, will
you agree that for any sports programming, not now exclusive to
DIRECTV, that you will still make it available to DIRECTV's
competitors on nondiscriminatory terms; for example, that the
World Series will not be moved from Fox TV to DIRECTV
exclusively?
Mr. Murdoch. Absolutely, sir. I do not guarantee we will
always have the World Series.
[Laughter.]
Mr. Murdoch. The big problem, frankly, in all of this is
the future of free broadcast. It is doubtful how long broadcast
networks can keep paying for major sports.
Senator Kohl. Good.
Mr. Murdoch. But that is another issue.
Senator Kohl. Thank you.
Mr. Murdoch. It all leads to higher prices in cable. If
they are going to insist on these prices, they are going to end
up on cable networks, whether it is ESPN or a new competitor or
someone, and it is going to force pricing to go up. There is a
problem, and it has been the work of the marketplace--I am not
complaining--but there is a problem because sports is just
continually getting more expensive.
Chairman DeWine. Senator Specter?
Senator Specter. Thank you very much, Mr. Chairman.
I would be surprised if my questions were not repetitious
since I was unable to be here earlier, and this very
distinguished panel has been testifying for the better part of
an hour-and-a-half, interrupted by a vote.
Mr. Murdoch, permit me to begin with you. How many
communications entities do you presently own?
Mr. Murdoch. In this country, sir?
Senator Specter. No, take all of the countries.
Mr. Murdoch. Let us start with this country, which is about
80 percent of our business. We own the Fox Network, and the Fox
Movie Studios, and 30-odd television stations, local television
stations. We also own the New York Post and Harper Collins book
publishers.
In Britain, we own 2 daily newspapers and 2 Sunday
newspapers. We have between 20 and 30 percent of the national
market of newspapers there. We have a minority investment, such
as we are talking about here, in BSkyB, a company I founded in
order to challenge the established monopoly in Britain.
And then in Australia, we have some local newspapers, in
Sydney, in Melbourne, Brisbane, Adelaide, and we have, if you
look at our balance sheets, there are a lot of little things,
but these are the main properties.
And then we have Star Television in Asia, which is a sort
of long-term, start-up big--but we now are broadcasting 37
channels in 6 different languages across China, and India, and
the Middle East, and Southeast Asia. They sound a lot, but they
are relatively small business to the other things I have
described.
Senator Specter. An obvious concern, Mr. Murdoch, with that
much, by way of ownership, is the issue of concentration of
power, which is always a concern, especially with the impact of
the media on public opinion and political affairs. Do you
consider that to be a legitimate concern?
Mr. Murdoch. Not these days. I think there is such a
multiplicity of voices everywhere that concentration is hardly
possible. I mean, the most powerful, if you are talking about
political influence, by far the most powerful company in this
country is the New York Times, which services with its news
just about every newspaper across the America, and is followed
pretty slavishly by the 3 networks and its choice of news, but
I am not saying that is bad or that it cannot be competed with.
You also have the Wall Street Journal, with a very large
circulation, although it is a more specialized one. No, I
think, if you look at the country as a whole, that is true. You
can look at certain specific markets and say, hey, there is a
large monopoly newspaper here and a large city with the number
one television station and 5 radio stations, and huge cable
interests in the rest of the country, and you can ask questions
about that. But even in that case, I am sure there are, you
know, there are suburban newspapers, and there are weeklies,
and there are other voices.
Senator Specter. Mr. Murdoch, when you have--
Mr. Murdoch. I would also say, if I may, Senator, that the
power of the press is greatly overstated. We are much flattered
by the interest of politicians, but--
Senator Specter. I do not think you will find anyone in the
Senate who will agree with you about that.
[Laughter.]
Mr. Murdoch. I am sure--or any politician anywhere in the
world. But I have not noticed them change any election result
yet.
Senator Specter. Well, that is because you have not been a
candidate.
[Laughter.]
Senator Specter. Mr. Murdoch, when you have such a premier
product such as the National Football League and the National
Football Conference, and you have the Fox Network, and you have
30 TV stations, and you now seek to acquire a satellite, does
that not put you in a position to charge pretty much what you
want for rights to watch the National Football League?
Speaking as a long-time fan, I think that there are many
people who would pay whatever it took to see the Philadelphia
Eagles or the Washington Red Skins or the San Francisco 49ers
play. And when you have the control of the transmission of
those games, and then you have so many of your own stations you
can play them on, and then you go to satellite as well, do you
not think it is a fair concern that that concentration of
power, with that kind of a product, gives you inordinate
leverage to establish high prices?
Mr. Murdoch. With respect, Senator Specter, no. It is the
NFC, for which we pay $550 million a year, is on free, over-
the-air television, and there is a real question how long we
can continue to pay such prices.
If you are talking about the NFL Sunday Ticket, which is on
Direct and is exclusive, and which is also enormously
expensive, that has been there for some time, and I understand
there is a new contract for the next 4 or 5 years, but that has
nothing to do with me, and it does not give us any power.
I better leave Mr. Hartenstein out of that because he is
going to have to make it pay out.
Senator Specter. Mr. Kimmelman, what, in the last series of
answers by Mr. Murdoch, do you agree with, if anything--
Mr. Kimmelman. Well, I agree when he said--
Senator Specter. --opposed to what you disagree with, but I
thought we would start with a presumptively narrower arrange
what you agree with.
Mr. Kimmelman. Yes, it is a short list. I definitely agree
with Mr. Murdoch that there is a danger of concentration in
local markets where you have monopoly newspapers buying the
number one broadcast station, and I believe he is a bit
understating dangers of concentration throughout markets.
And it is quite clear to me that, for example, in the
Philadelphia market, being able to watch the Eagles is very
important to consumers. And if my recollection is correct, when
a cable company refused to sell its rights to sports
programming, one of the satellite providers in the market found
that only about half as many consumers were buying satellite
service as in comparable communities in the country, reflecting
the fact that they could not sell because consumers would not
go where they did not get their local teams.
So it is an enormously powerful tool. It is market power at
the programming level. I do not disagree with Mr. Murdoch that
there is market power in the cable distribution system as well,
but we are not serving consumers' interests when the 2 of them
are fighting over monopoly rents, over overpricing, as opposed
to competitive pricing, and that is the problem with this
transaction.
It is shifting more power into the hands of one programmer
who, with a new distribution system, has too much power in the
marketplace to raise prices, not just to satellite customers,
but to the other satellite provider and every cable operator
because they are dependent on his product as a critical input
to serve their customers.
Senator Specter. What is the additional factor,
illustratively, of saying the New York Yankees, having their
own cable, when you have the Atlanta Braves with their own
cable outlet, and you have that in other forms, so that people
want to watch the New York Yankees, and if you can only get it
on cable, it drives up the prices?
This Antitrust Subcommittee I have been on for many years,
and I commend the Chairman for these hearings, and we try to
keep up with these issues, but they are vast, and they are
complicated, and they overlap in so many, many directions. And
one of the directions involves franchise shifts, and that
involves enormous expense on stadiums.
In my State, Pennsylvania, we have seen 4 new stadiums
built at a total cost in excess of right at a billion dollars,
and those stadium costs occur as a direct result of blackmail
because those teams are going to go somewhere else or
extortion.
I have a hard time being a Senator, but I have a pretty
good command of blackmail and extortion from my prior practice.
But how does the factor of--and that is a little different--but
Mr. Murdoch would have a somewhat similar power with the NFL
and people who want to see it--how does the factor of, say, the
Yankees and their cable stations tie into this overall issue?
Mr. Kimmelman. Senator Specter, I think you are hitting a
very important point because it would be appropriate for this
Subcommittee to look at the leagues and their antitrust
immunity under the Sports Broadcasting Act or under common law.
That has been a problem that fuels this.
I would just point out that Mr. Murdoch is a team owner--
the Dodgers, the Knicks, the Rangers, the Kings, the Lakers,
Dodger Stadium--so he is part of that problem on that side as
well. This is very, and I am not quibbling with his statement
that he pays a lot, whether it is for his players or for his
broadcast network, the right to televise games, but that is
just institutionalizing overpayments, where the market itself
knows there is not competitive pricing.
So there is lot of surgery that needs to be done, I would
suggest, by the Congress to look at all levels of monopolistic
practices, from the Leagues all through the sports broadcasting
rights to the cable and satellite distribution systems.
Mr. Cleland. Can I add a comment, Senator? Sports are an
extraordinary example in the sense that they are like a
personal monopoly. If you are a Yankees fan, you do not care to
watch anybody else. You want to watch the Yankees. There is one
choice. If you are Cincinnati Reds fan, you want to watch the
Reds. And so it is our own personal loyalty to sports teams
that creates a monopoly in that price.
Sports prices have gone up probably more than almost any
other product in the economy over a long period of time. We
remember when boxing used to be free on ABC Sports on Saturday
afternoons. The reason it moved was because the business--they
could earn a tremendous amount more money by doing it pay-per-
view. And that is the trend, with Fox NFL, the NFL Ticket, that
is the trend. They are realizing if they can constrain supply,
they can leverage the personal monopoly of sports.
Mr. Hartenstein. Senator, if I may, we have been on both
sides of this. As you well know, in your State Comcast, to be
very specific, has an ownership interest in both the Sixers and
the Flyers and, through a loophole in the program access
provisions, does not provide the Flyers or Sixers games to
satellite. As Mr. Kimmelman indicated, we do not do as well in
those territories where they are because we do not have the
ability to deliver to our customers there those games.
On the flip side, in New York, with the Yankees being
carried onthe Yes Network, we made a promise to our customers
long ago when we started, almost 9 years ago, that we would
provide the regional sports network for their popular teams as
part of our basic package to every customer. We bit the bullet.
We did it. Cable, or at least some cable in the New York area
for the Yankees, did not and it has been very well publicized.
In neither case has this been the end of the world, and in
all cases, as with NFL Sunday Ticket for us, at the end of the
day it comes to consumers and what they are willing to pay.
Yes, we have Sunday Ticket, but the percentage of our total
subscriber base that takes NFL Sunday Ticket is in the low
teens. And it is just the market is a very efficient device in
terms of prohibiting us or, for that matter, cable from over
charging and gouging.
We have gone from zero to almost 12 million subscribers in
8 years. To some that is a damn good start. It is a textbook
case in, I think, business school and I think Mr. Ergen at
EchoStar would have a similar experience.
But at the end of the day, we are still only 12 percent of
the homes in America, and we have a long way to go. I think
this is all about competition, and what we are trying to do,
and I think with News Corp. coming on board as a 34-percent
owner, emphasis on 34 percent, is to be the innovator and
extend the innovation and competitive alternative that we
started. That is all that we are looking for, and I think that
is what a lot of the folks are objecting about. They do not
like competition.
Mr. Miron. Senator, if I might, I think in respect to your
original question about Philadelphia, at one point I think Mr.
Murdoch was quoted as saying that sports were his, quote,
``battering ram.'' And I think what we would be concerned about
in Philadelphia is the retransmission consent that he might use
in granting that, the ability to raise the price so that the
Philadelphia Eagles would not be carried on a cable system and
only on DIRECTV. And that would be part of what would--and if
they were carried on cable, it would be because cable had to
pay a higher price for that particular channel.
Senator Specter. Thank you.
Chairman DeWine. Senator Leahy?
Mr. Murdoch. Can I just add something to that? I am sorry,
Senator. May I?
Chairman DeWine. Mr. Murdoch, then Senator Leahy.
Mr. Murdoch. I beg your pardon. I just want to--
Senator Leahy. Senator Specter has asked a good question. I
just did not hear your answer.
Chairman DeWine. Go ahead.
Mr. Murdoch. I wanted to say, reaffirm that the sports,
which is always free bidding and free market, is carried on
free television. We are totally 100 percent dependent on what
advertising we get, and we are not about to give away 80
percent of the audience because we would lose 80 percent of our
advertising, if not all of it. So it is just not a realistic
thought to take it off cable.
Chairman DeWine. Senator Leahy?
Senator Leahy. I suppose I should be--have all my concerns
and doubts put aside in this hearing, I don't. I saw the
specter of nothing but nationally produced or geographically
homogenized programming on satellite, indeed on cable, and I
always worry about claims made. I voted against the--I was one
of the few that voted against the Telecommunications Act. I
really did not believe the claims that we would all see our
cable bills come down. I think mine has doubled or tripled
since then. I really did not believe the claim that we would
see much better, clearer TV. Most stations, if they are local,
I can get a far better picture off rabbit ears than I can off
my cable.
I was concerned about what many have talked about, that
they will just use this--you go to like the so-called HDTV,
just use all this extra spectrum to run ads and other
businesses, not to give a better picture to the person buying
it. But that is a different issue than here.
Now, though we hear reassuring pronouncements--and, again,
I am concerned, and let me speak to a bit of a bias here. About
a third of America lives in what could be called rural America.
That is still a whole lot of people. That is about 90 million
people. And in most of those areas of rural America, you do not
get cable. You only get satellite, if you are going to get it,
or over the air--you have to get it over the air somehow. A
very important part of America. You cannot write off many
million Americans, and you certainly, just as back in the days
of Franklin Roosevelt, when a decision was made to bring
electricity to rural America and telephones to rural America,
to bring them into part of the country.
Now, I do not say that just coming from Vermont. We are
basically very much a high-tech State. But every single Senator
represents some large rural areas. In fact, I know from my
childhood and visiting my uncle in Ohio, Senator DeWine has
parts of rural Ohio which go way beyond what we think of as
rural just because of the distances involved.
So that brings me to this. DIRECTV and News Corporation
made public pronouncements about the hope of providing service
outside large urban areas. I have not heard concrete plans to
do so. To pick a State at random, say Vermont, what is the
impediment to providing local-into-local TV today in Vermont,
for example?
I mention this because EchoStar has done so. As I
understand, when EchoStar did this, they courted a significant
number of customers away from DIRECTV because you could get
local programming. I would hope that that would provide an
economic incentive for DIRECTV to do the same, but does anybody
want to tell me, are they going to compete?
Mr. Hartenstein. Sure, Senator. We have our eighth
satellite, as I indicated, going up at the end of this year. It
happens to be, while being our eighth satellite, our second
spot beam satellite. We have not yet done the final testing to
determine exactly how many additional markets and which ones in
particular that we can cover. We know that we can take our
total number of markets up to at least 100, and that will give
us coverage of about 85 percent of the country.
We will, at the end of this year, which is not that much
further away, have the ability to add some more markets, and we
hope to be able to oblige at least the Burlington DMA, which is
near about, if I understand or remember correctly, the 100th
DMA. And so we--
Senator Leahy. I think it is in the high 90's.
Mr. Hartenstein. Yes, it is. So, we will look to that and
see if it is technically feasible where exactly our spot beams
fall. We come from different orbit locations.
Senator Leahy. So, in other words, you have no--you are not
saying there is--you are not making any commitment.
Mr. Hartenstein. I cannot commit--
Senator Leahy. Except to look at it.
Mr. Hartenstein. I cannot commit specifically to Burlington
today, but we are certainly looking at that and all the other
markets that we might be able to cover. Our goal is to get to
as many of the homes in America as we possibly can.
To answer your earlier question from your opening statement
with respect to broadband, we today have a broadband service.
It is called DIRECWAY, which works everywhere, including in all
parts of Vermont, where by satellite--and it is a Hughes
product--we can deliver high-speed broadband Internet via
satellite, and we have a--
Senator Leahy. Is that two-way?
Mr. Hartenstein. Yes, it is two-way. Yes, sir.
Senator Leahy. And is that comparable in price to cable
broadband?
Mr. Hartenstein. It is a little bit pricey right this
minute. It will typically cost you about $60 a month to get
comparable service. But we have another service that should be
launched by the middle of 2004. It is called SPACEWAY, also
satellite-based but much higher performance, which will give
much higher performance than even DSL or some cable modem
service can today for a very similar price to what we are able
to offer today.
Senator Leahy. Am I right that in the service you have now,
if there is suddenly a large demand, it slows down?
Mr. Hartenstein. No, that is not correct.
Senator Leahy. That is not correct. Okay.
Mr. Hartenstein. I think you are thinking of cable or DSL
there.
Senator Leahy. I am familiar with cable and DSL, but I had
heard that that happens on satellite. But not so?
Mr. Hartenstein. Not the way we allocate the transponder
capacity. No, sir.
Mr. Cleland. Senator, could I add a comment on that with
the rural satellite? It is going to be probably the only
provider in some very rural spaces, but satellite will always
be inferior as an architecture to a telephone or cable
infrastructure because when you have to send signals on the IP
protocol, you have to send up to the satellite and get answers.
And so what it creates is a quarter-of-a-second delay because
of the distance and bouncing back.
Now, for most services on high-speed, you would not notice
the difference. For telephony you would. It would be like a bad
walkie-talkie. If you were trying to do interactive gaming,
like an F-15 fight with somebody across the country, it would
be like flying a Sopwith Camel. So that is what the delay would
be like.
Senator Leahy. I am not very good at either the Sopwith
Camel or the F-15, so I might be okay. However, my youngest son
and daughter-in-law, who can fly such things, might feel
differently.
We have been told that there would not be discrimination
against unaffiliated programming services on DIRECTV. What
about affiliated programming?
Mr. Murdoch. Senator, we have made that quite clear. Any
affiliated program would be treated exactly the same as a Fox
program and a News Corp program. The misunderstanding here is,
I think, that we amended our submission on this some weeks ago.
Senator Leahy. Am I correct that that is if the FCC
maintains its program access rules? Would you do that even if
they did away with those program access rules?
Mr. Murdoch. No, sir. We only ask for a level playing
field. If they want to exempt all the cable companies and Time
Warner with all their things, we would want the same treatment.
All we ask for is the same treatment as cable gets.
Senator Leahy. So if they did that, if they did away with
program access rules, then as far as you are concerned, it is
Nellie bar the door, just go ahead, and then you make the
decision, whatever commitments are in place now would not be
there--I am not trying to put words in your mouth.
Mr. Murdoch. Our commitment is simply to extend the
existing law from cable to satellite. The only person who will
be exempt from it will be Mr. Ergen at EchoStar. We are happy
with that.
Senator Leahy. But if the FCC changes the program access
rules, you would not feel that any commitment you made now
stands? Is that right?
Mr. Murdoch. I expect they would change it for everybody.
Mr. Hartenstein. For the record, Senator, the program
access rules were put in place in the 1992 Telecommunications
Act as Mr. Kimmelman indicated, and the original sunset for
those provisions was in 2002. They were extended for 5 years,
so they are automatically now valid until 2007. And by our
submission at the FCC, the joint News Corp./DIRECTV submission,
we have voluntarily subjected ourselves to those exact terms.
Senator Leahy. You subject yourself to FCC's non-
discrimination principles by contract, correct?
Mr. Hartenstein. Yes.
Senator Leahy. How would you feel if that commitment was
put into a consent decree by the Justice Department? Do you
want to think that one over?
Mr. Hartenstein. Well, if the program access rules were,
again, applied to all MVPDs, vertically integrated ones, we
would abide by those. Clearly, if there is a specific exclusion
so that only DIRECTV would be subjected to those, I think that
would be clearly an unlevel playing field against our MVPD
competitors.
Senator Leahy. But you are trying to get the Justice
Department to go along with you. Still obviously there are
certain give-and-takes when that is being done. You do not
think this would be a fair one.
Mr. Hartenstein. I think it would be--
Senator Leahy. If they just put into a consent decree you
have got to do this, even if the FCC later on changes their
rules, which they seem willy-nilly able to do.
Mr. Hartenstein. I think that would be unfair, yes.
Senator Leahy. Mr. Murdoch, do you agree?
Mr. Murdoch. I agree with Mr. Hartenstein, sir. We are
simply seeking here the right to compete with cable on a level
playing field, and all the submissions we have heard today are
to try and tie my hands behind my back from doing that. And if
you want competition and service and price competition and
everything to the public, I have to have the same privileges
they have.
Senator Leahy. I have never really pictured you as somebody
with their hands tied behind their back with all--
Mr. Murdoch. Well, that is the attempt that is going on
here.
Senator Leahy. It has usually been unsuccessful.
Does anybody want to add anything to this?
Mr. Kimmelman. Senator Leahy, I would just like to point
out that I don't know where this level playing field is. Mr.
Murdoch has a television network with Congressionally granted
rights to get on every cable system in the country
automatically. I know of no cable company that has such rights.
I certainly believe cable companies that own their own
programming can prefer their own programming and guarantee
carriage on their systems. But there is something unique about
a broadcast television network that Congress recognized and
gave special privileges to.
So I am a bit baffled that Mr. Murdoch and Mr. Hartenstein
are not willing to promise more, and particularly not promise
more that covers not just cable programming but the broadcast
programming to be offered on the same non-discrimination terms.
It strikes me that they are unique by having a broadcast
network and have through DIRECTV now a separate nationwide
distribution system. No one else in the country is like that.
Senator Leahy. Does anybody want to add to that?
Mr. Miron. I was just going to say I support what Mr.
Kimmelman said. The difference between--is definitely that News
Corp would have a distribution, national distribution platform
which no cable company has. The most a cable company has is a
regional platform, and the greatest is to one-third of the
country, but most of us much smaller.
Senator Leahy. Well, Mr. Chairman, I will add my other
questions for the record, and I appreciate we went over time on
this. Thank you. I really enjoyed your football questions. We
do not have those problems up in my little State.
Senator Specter. [Presiding.] Stick around. There are some
more coming, Senator Leahy. Thank you very much to Senator
Leahy.
Senator DeWine has stepped out for a few moments and has
asked me to proceed at this time.
Focusing on the sports aspect, which may be the key point
where so much or perhaps all of the other programming can be
substituted for, but there is, as pointed out, only one New
York Yankees, only one Philadelphia Eagles, only one Los
Angeles Dodgers, when the Judiciary Committee has looked over
these problems over the years, when we have had franchise
transfers going back to the early 1980's and we had some very
hotly contested hearings in this room when the Raiders moved to
Los Angeles and Commissioner Rozelle was here with Al Davis and
had about as lively a debate at that table as you can fathom.
That was in 1982, and we have had the hearings periodically
since. And there is always a question as to what Congress can
do. And Congress probably does best when Congress does nothing.
We have a lot of experience at that.
We do have tremendous leverage on the antitrust exemption,
which baseball enjoys as a result of judicial decisions and
which football enjoys as a result of legislation.
So if we were to insist on some other approach by Major
League Baseball or by the NFL conditioned on losing their
antitrust exemption, if they want to be like any other
business--and we know baseball is a business at this point
because the Supreme Court said so, long after the Holmes
opinion in 1922, and we know football is a business, so that we
could use that as leverage to structure some different
arrangement. But then the question arises as to what
arrangement would we suggest.
Mr. Cleland, starting with you, right to left, what would
you say Congress ought to do to deal with this issue?
Mr. Cleland. Try and offer a creative solution. I think the
big problem from a Congressional standpoint is when consumers
that might not way to pay for sports have to pay for sports. So
probably one of the things is that as sports has migrated to
pay-per-view, that has been a good development. But to the
extent that sports costs are driving up, you know, cable
programming and other programming, because they are bundled,
you know, the technology nowadays allows you to select what
programs you want. And you may have to buy 50, but you may only
want three or five.
So I think, you know, any exploration of a la carte pricing
from a Congressional standpoint would be something I imagine
your constituents would like.
Senator Specter. Mr. Kimmelman?
Mr. Kimmelman. If I could echo that, we certainly would
support moving towards a la carte pricing for consumers, pick
the channels you want at a fair price, and I would suggest
carrying it back into the wholesale level, each--
Senator Specter. At a fair price? How do you determine
that?
Mr. Kimmelman. Well, if you can pick the channel you want
at the retail level and you carry it back to the wholesale
level and prohibit the bundling of channels so that they are
sold to the distributor on an individual basis, you will get
the closest you can to a market mechanism for people getting to
choose what they want.
We have a problem with market prices here because we have
cable monopolies; we have at best two satellite providers. It
is an oligopoly structure. It is tricky.
I would urge you to review any antitrust immunity, first of
all, for the leagues. I think it is problematic.
Senator Specter. Review it?
Mr. Kimmelman. And eliminate it.
Senator Specter. We have reviewed it again and again and
again. But what do we put in its place? You talk about market.
How do you get market for the New York Yankees television
games, cable television games?
Mr. Kimmelman. If the Yankees are allowed to bargain on
their own, you will see a very different result in the
marketplace than if they are required to bargain through a
league in a national package. You may need to look to special
rules related to ownership of teams and ownership of
distribution media. I think that creates problems.
As Mr. Cleland points out, this is a very tough set of
issues because it has some inherent monopolistic aspects based
on people's taste and also based on the fact that we have very
few distribution mechanisms for televised sports, which is what
people want. Certainly eliminating antitrust immunity would be
a start, and requiring the sale of programming to all
distributors on a per-channel basis and then to all consumers
on a per-channel basis. People can bundle anything in addition
to that.
Senator Specter. When you say eliminating the antitrust
exemptions would be a start, would you recommend that we do
that?
Mr. Kimmelman. Yes, sir, I do.
Senator Specter. What would happen? What would the
consequence be? Would we not have a situation of chaos?
Mr. Kimmelman. We might have--we would have--we might have
more chaos than we have today because leagues would not be able
to organize how they maximize their profits for each of their
teams. But you would certainly have the consumer able to pick
and choose the teams he and she want to watch and see much more
readily than you have today. You would not necessarily have
certainty that teams would not move around. That is definitely
a problem.
Senator Specter. Would we have teams? If you don't have the
revenue-sharing of the NFL, would we have teams?
Mr. Kimmelman. We might have a lot more, Senator Specter.
We might end up with more teams serving more communities, as
you have in soccer in the U.K. Where we do not restrict exactly
how the minor league is structured for baseball and major
league is structured, you might have a much more open
marketplace.
Senator Specter. Just let the market govern, no antitrust
exemptions.
What do you think, Mr. Miron?
Mr. Miron. Senator, I am not knowledgeable enough in this
particular area to really try to--
Senator Specter. Well, don't let that stop you, Mr. Miron.
[Laughter.]
Senator Specter. Nobody else is either.
Mr. Miron. I can only look at how legislation would affect
us, and at this point I would not want to see Congress enact
legislation that would force tiering or a la carte or any of
that sort of stuff on a cable operator and a programmer. I
would rather have us be able to enter into free market
negotiations and continue to enter into negotiations, you know,
with Fox Sports.
What I fear is that with the DIRECTV purchase, it would
upset that free market negotiation. I think we have seen and we
have seen now in New York a negotiation going on and some start
towards the moving of cable programming, cable sports
programming to a tier or something of that nature, and that to
me--if we could have that free market negotiation and it could
continue, maybe that has a way of helping it.
But I would be very cautious to ask the Congress to delve
into that specific area because I think it would be very
difficult.
Senator Specter. Mr. Hartenstein?
Mr. Hartenstein. Senator Specter, I cannot speak for any
given league, the NFL or any others, as to what their druthers
are. But I know in general programmers themselves do not like
the notion of a la carte pricing or even tiering. It is
terribly suppressive to the innovators who want to come up with
new programming services. If everything went a la carte, the
Animal Planets of the world, some of the new services just, I
think, would be impossible to come into existence.
Senator Specter. Would that be bad?
Mr. Hartenstein. Pardon?
Senator Specter. Would that be so bad?
Mr. Hartenstein. Well, if you look at where people's
choices were 10 years ago in terms of how many channels could a
multi-channel programming provider provide, read cable 10 years
ago, the answer was typically 30 or 50 or so channels. And
while, yes, everybody only in their household professes to
watch three channels, I tell you, if you get 50 households in a
row, they will be a different three or nine or however many
they watch in every one of those 50.
It is all about choice, sir, and I think that the cable
industry has enough trouble answering the phone as it is. You
know, trying to deal with customers wanting to change their a
la carte lineup, I do not think they could handle it.
I think, quite frankly--that was a cheap shot, I know, Mr.
Miron.
Senator Specter. How does DIRECTV do on answering the
phone?
Mr. Hartenstein. We do very well, sir. We are number one in
both the ACSI and the J.D. Power independent customer
satisfaction surveys. It is 2 years running now on ACSI.
Senator Specter. How does that compare to EchoStar?
Mr. Hartenstein. EchoStar has come in number two, and the
rest of the MVPD providers, cable, comes sort of a distant
third.
Senator Specter. Judging by my cable company, you would not
have to be very good to be better than they are.
[Laughter.]
Mr. Hartenstein. Thank you.
Senator Specter. I say that very seriously.
Mr. Murdoch?
Mr. Murdoch. Senator, I would just like to start by saying
that I am pleased that Mr. Miron has just agreed to free market
negotiations, which is just what we do.
On the bigger question of antitrust and the leagues, first
of all, there seems to be some fiction that all these teams
make a lot of money. I don't know any teams that make any
money, particularly in baseball.
There is also the little fiction of Mr. Kimmelman's I might
correct. We do not own Madison Square Garden or the Knicks or
the Nets or whoever the hell are there. We do have a minority
position in that, which we will be very happy if you ordered
Cable Vision to give their money back. But we certainly have no
influence at all on that.
The real point, we have just had this, as a matter of
interest, in Europe and in Britain. We supported the start of a
premier league in soccer and made it very popular, and it was a
tremendous help to Sky Television, although it was very
expensive. But it led to huge improvement in football in
Britain, and they share the money around.
Over the last year, the European Commission, Mr. Monti, the
Commissioner for Competition Policy, has been driving at them
to try and break it up and say this is monopolistic, it is a
cartel, and so on. And he has finally backed away and given up
on that and simply said they have to sell different packages of
games.
But if you let each team negotiate for themselves, you are
going to end up with half as many teams, not many more teams,
as Mr. Kimmelman stated. The big teams will get all the money,
and the little teams will get no money. And I think it would be
very bad for the public and for the games. It would be better
if Mr. Tagliabue of the NFL was here to articulate this rather
than me. But I think the NFL has done a tremendous service to
the public by controlling and sharing the money and sharing the
talent equally.
It is a tricky problem. I know that sounds bad public
policy, but it happens to work well in this case.
Senator Specter. Well, it certainly is a tricky problem,
and it is extraordinarily difficult to try to find some answer,
and Congress has shied away from it because of the lack of
predictability of what would happen if we removed the antitrust
exemptions. So we stumble along in what we are doing, and we
really leave it up to the leagues. And I think baseball and
football are getting into deeper trouble because you go to see
the Philadelphia Eagles and you do not know any of the players.
You go to the see the Philadelphia Phillies and you do not know
the players. Free agency has now put all the players on
different teams. We had a lot of Philadelphia Eagles in the
Super Bowl last year, but they were playing for Tampa or the
other team.
Well, thank you very much, gentlemen. It has been very
interesting and informative. Thank you.
Thank you, Mr. Chairman.
Chairman DeWine. [Presiding.] Well, let me thank our
witnesses for their testimony here today. As I stated at the
outset, this transaction has important implications for pay-
television consumers and for the media industry generally. And
today's witnesses I think have really provided a great deal of
information and insight into the issue, and we appreciate it.
Vertical transactions like the one before us today often
raise very complicated competition policy issues, and I think
it is fair to say that this deal certainly does that.
Senator Kohl and I continue to believe that the issues
raised here today need to be thoroughly examined by the Justice
Department and the FCC. And for that reason, we have sent a
letter today to those agencies requesting that they review this
deal carefully.
I would like to stress, however, that the Antitrust
Subcommittee has not reached any conclusions about whether or
not the deal should be approved. Similarly, we have not reached
any conclusions as to the final form of any additional
conditions which may be necessary.
We will issue, therefore, follow-up questions to today's
witnesses, and we look forward to working with them as we
continue to evaluate these important issues.
So, again, let me thank all of you very much for your
patience and for your very good testimony. Thank you.
[Whereupon, at 4:52 p.m., the Subcommittee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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