Mr. Gene Kimmelman

June 18, 2003

Washington Office
1666 Connecticut Avenue, N.W. Suite 310 ? Washington, D.C. 20009-1039
(202) 462-6262 ? fax (202) 265-9548 ? http://www.consumersunion.org
Testimony of Gene Kimmelman,
Senior Director for Advocacy and Public Policy,
Consumers Union
Before the
Antitrust, Competition Policy and Consumer Rights Subcommittee
of the
Senate Judiciary Committee
On
News Corp./DirecTV Merger
June 18, 2003
1
SUMMARY
Consumers Union1 welcomes this opportunity to testify before the Senate Antitrust,
Competition Policy and Consumer Rights Subcommittee regarding the proposed merger between
the News Corporation ("News Corp.") and Hughes Electronics Corporation's satellite television
unit DIRECTV ("DirecTV"). Given the current concentration in the media marketplace, as well
as the further concentration that will result from the Federal Communications Commission's
(FCC's) recent relaxation of media ownership rules, we believe that the proposed merger
between network and cable giant News Corp. and DirecTV, the largest direct broadcast satellite
(DBS) service provider, will further increase prices for consumers and decrease the diversity of
voices in the media marketplace.
Today, consumers are not receiving the fruits that a competitive cable and satellite
marketplace should deliver, and consumers are likely to suffer further harm if antitrust officials
do not impose substantial conditions on the proposed deal between News Corp. and DirecTV.
Since passage of the 1996 Telecommunications Act, cable rates have risen over 50%,2 and FCC
data show that satellite competition is not creating downward pressure on cable rates. Despite
the promise for more diversity from new technologies such as the Internet and satellite, a mere
five media companies control nearly the same prime time audience shares as the Big Three
networks did 40 years ago.3 Unfortunately, the market for news production and distribution is
becoming more concentrated.
And a troubling situation is about to get much worse.
The recently announced proposed merger between News Corp. and DirecTV, combined
with the FCC's decision two weeks ago to significantly weaken its media ownership regulations,
threaten to seriously harm meaningful competition between media companies in this nation.
This lack of competition will mean that control of the media that Americans rely upon most for
news, information and entertainment will likely be placed in the hands of a few powerful media
giants.
The FCC's June 2nd order dramatically reworked the rules that protected the diversity,
localism, and competition of the media in this country. Under the new rules, mergers between
television stations and newspapers in a single community will now be allowed in approximately
200 markets comprising 98 percent of the population. Ownership of two or even three television
stations by one company are allowed in over 160 U.S. markets under the new FCC rules. In
these markets, the new rules do not provide for any public interest review of such mergers. The
1 Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the state of New York to provide
consumers with information, education and counsel about good, services, health and personal finance, and to initiate and
cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union's
income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants
and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports with more than 4 million paid
circulation, regularly, carries articles on health, product safety, marketplace economics and legislative, judicial and regulatory
actions which affect consumer welfare. Consumers Union's publications carry no advertising and receive no commercial support.
2 Bureau of Labor Statistics, Consumer Price Index (March 2003). From 1996 until March 2003, CPI increased 19.3% while
cable prices rose 50.3%, 2.6 times faster than inflation.
3 Tom Wolzien, "Returning Oligopoly of Media Content Threatens Cable's Power." The Long View, Bernstein Research (Feb.
7, 2003).
2
FCC made these radical rule changes despite the presence of considerable media concentration in
eighty to ninety percent of the markets affected by this decision.
The result, according to industry analysts, is that broadcast television station owners will
either purchase television stations in new markets, or will swap properties with other large media
owners, concentrating ownership of both television station and newspapers within one market in
an attempt to achieve cost "synergies." But experience with the television duopolies permitted
by waiver prior to the FCC's decision to weaken its rules shows that these "synergies" have
come from the elimination of news programming and news reporters and the substitution of a
single, centralized news operation in place of multiple, independent news divisions.
The proposed merger of News Corp. and DirecTV comes in the wake of this FCC
decision. While the antitrust laws can and should be used to limit potential competitive abuses
resulting from the News Corp./DirecTV merger, these laws are not enough to prevent the
excessive consolidation in the marketplace of ideas that will result from any combination of
transactions under these relaxed ownership rules. Antitrust has never been used effectively to
promote competition in and across media where there is no clear way - like advertising prices -
of measuring competition/diversity in news sources, information and points of view presented
through the media.
Media moguls themselves admit their desire to avoid real competition within their
industry. At the National Cable and Telecommunications Conference last week, Mel Karmazin,
president and chief operating officer of Viacom, declared in reference to colleagues from
Microsoft, AOL Time Warner, and Comcast, "I can't imagine being a competitor with any of
these guys."4
Consumers Union believes the Department of Justice should impose significant
conditions on the News Corp./DirecTV deal, and Congress should alter the laws that enable
industry consolidation spurred by excessive deregulation to weaken or undermine competitive
conditions in media markets. The News Corp./DirecTV merger is likely to lead to higher prices
for both satellite and cable television, since the combined company can maximize its earnings by
inflating the prices it charges for its broad array of popular programming that all cable and
satellite customers purchase.
We are pleased to see that the combined News Corp./DirecTV entity has agreed to offer
access to their programming as part of the acquisition.5 However, this promise must be
expanded to prevent other forms of anticompetitive discrimination, and must be enforceable
through appropriate Department of Justice oversight mechanisms.
4 Richard Linnett, "Media Rivals Backslap at Cable Conference." AdAge.com, June 10, 2003.
5 "As part of the acquisition, News Corp. and DIRECTV has agreed to abide by FCC program access regulations, for as long as
those regulations are in place and for as long as News Corp. and Fox hold an interest in DIRECTV. . . Specifically, News Corp.
will continue to make all of its national and regional programming available to all multi-channel distributors on a non-exclusive
basis and on non-discriminatory prices, terms and conditions. Neither News Corp. nor DIRECTV will discriminate against
unaffiliated programming services with respect to the price, terms or conditions of carriage on the DIRECTV platform." News
Corporation Press Release, "News Corp. Agrees to Acquire 34% of Hughes Electronics for $6.6 Billion in Cash and Stock." Apr.
9, 2003.
3
Even given the terms of what News Corp. is willing to concede by way of program
access, substantial danger remains. First, there is a danger that News Corp. will discriminate
against non-affiliated programmers in determining what programming to offer on its DirecTV
satellite system. News Corp. could also pressure cable operators to do the same in return for
more favorable carriage terms for News Corp. owned programming.
Second, the agreement preserves the right to a variety of exclusive carriage arrangements,
including distribution of Liberty Media programming, as well as sports programming where
News Corp. enjoys substantial market power. Liberty Media owns approximately 18% of News
Corp., and News Corp. has interests in several Liberty properties, indicating a close relationship
between the two. It is hard to understand how such exclusive arrangements involving a company
with such massive market power would not have a detrimental impact on competition in video
programming. Antitrust officials must prevent these types of behavior.
We believe it is time for Congress to intervene and finally deliver more choices and
lower prices for the media services consumers want, and to reverse the excessive relaxation of
media ownership which threatens the critical watchdog function media companies play in our
nation's democracy. It is time for Congress to look beyond the rhetoric and focus on the reality
of deregulated video markets. Congress should:
? Reconsider its grant of retransmission rights to broadcasters, where a broadcaster
also owns a second means of video distribution.
? Let consumers pick the TV channels they want for a fair price.
? Prevent all forms of discrimination by those who control digital TV distribution
systems and those who control the most popular programming in a manner that
prevents competition in the video marketplace.
? Most importantly, reverse the FCC's decision to weaken media ownership rules
that prevented companies from owning the most popular sources of news and
information in both the local and the national markets.
4
THE NEWS CORPORATION/DIRECTV MERGER
If competition in the multichannel video market had performed up to its hope and hype, the
NewsCorp./DirecTV merger might not be so threatening. But in light of the failure of
deregulation, it presents a problem for public policy that cannot be ignored. There are two
points of power in the marketplace - distribution and program production. The problem with a
merger between News Corp. and DirecTV is that it combines the two.
The reach of News Corp.'s media empire is truly staggering. The following are highlights of
some News Corp. properties in the U.S.:
? Broadcast Television Stations (35 stations, including two broadcast stations in
New York, Los Angeles, Dallas, Houston, Minneapolis, Phoenix and Orlando)
? Filmed Entertainment (20th Century Fox Film Corp., Fox 2000 Pictures, Fox
Searchlight Pictures, Fox Music, 20th Century Fox Home Entertainment, Fox
Interactive, 20th Century Fox Television, Fox Television Studios, 20th Television,
Regency Television and Blue Sky Studios)
? Cable Network Programming (Fox News Channel--the most watched cable news
channel, Fox Kids Channel, FX, Fox Movie Channel, Fox Sports Networks, Fox
Regional Sports Networks, Fox Sports World, Speed Channel, Golf Channel, Fox
Pan American Sports, National Geographic Channel, and the Heath Network)
? Publishing (New York Post, the Weekly Standard, HarperCollins Publishers,
Regan Books, Amistad Press, William Morrow & Co., Avon Books, and Gemstar
- TV Guide International)
? Sports Teams and Stadiums (Los Angeles Dodgers, and partial ownership in the
New York Knicks, New York Rangers, LA Kings, LA Lakers, Dodger Stadium,
Staples Center, and Madison Square Garden)
News Corp.'s merger with DirecTV adds a new, nationwide television distribution
system to News Corp.'s programming/production arsenal. DirecTV is the nation's largest
satellite television distribution system, with more than 11 million customers and the ability to
serve all communities in the United States.
News Corp.'s vast holdings provide it with leverage in several ways. "The biggest, most
powerful weapon News Corp. has is 'a four-way leverage against cable operators, competing
with satellite and using the requirement that cable get retransmission consent to carry Fox-owned
TV stations, while potentially leveraging price for Fox-owned regional sports networks and its
national cable and broadcast networks. . .'"6
6 Diane Mermigas, "News Corp.'s DirecTV Monolith." Mermigas on Media Newsletter, (Apr. 16, 2003), quoting Tom Wolzien,
a Sanford Bernstein Media Analyst.
5
One of News Corp.'s most important weapons is significant control over regional and
national sports programming. Mr. Murdoch often describes sports programming as his
"battering ram"7 to attack pay television markets around the world. As David D. Kirkpatrick
noted in an April 14, 2003 New York Times article regarding Mr. Murdoch's control over sports
programming:
In the United States, News Corp.'s Entertainment subsidiary now also controls the
national broadcast rights to Major League Baseball, half the Nascar racing season
and every third Super Bowl. On cable, Fox controls the regional rights to 67 of
80 teams in the basketball, hockey and baseball leagues as well as several major
packages of college basketball and football games, which it broadcasts on more
than 20 Fox regional sports cable networks around the country. By acquiring
DirecTV, Mr. Murdoch gains the exclusive right to broadcast the entire slate of
Sunday NFL games as well.
With DirecTV, Mr. Murdoch can start a new channel with immediate access to its
subscribers, currently 11 million. He has other leverage in Fox News, now the
most popular cable news channel, and essential local stations in most major
markets around the country.8
It is important to consider the ramifications of Mr. Murdoch's control of over 40% of Fox
broadcast stations nationwide, control of 11.2 million satellite subscribers, and his stranglehold
over regional sports programming. With those extensive holdings, News Corp. is in a position to
determine what new programming comes to market, and to undercut competitive programming.
The company will be able to decide what programming it does not want to carry and may be able
to indirectly pressure cable operators (by offering a lower price for Fox programming as an
inducement) not to carry programming that competes with Fox offerings. We believe Mr.
Murdoch has a right as an owner to put whatever he wants on his system, but with the FCC
having voted to weaken the media ownership rules, companies like News Corp. will have the
ability to control key sources of news and information in an unprecedented manner.
The merger between News Corp. and DirecTV is extremely unlikely to stop skyrocketing
cable rates and could very well exacerbate the problem. According to David Kirkpatrick's New
York Times article,9
some analysts said the structure of the deal suggested Mr. Murdoch hoped to use
DirecTV mainly to punish other pay television companies and benefit his
programming businesses. The Fox Entertainment Group, an 80 percent-owned
subsidiary of News Corporation, will own a 34 percent stake in DirecTV's parent,
creating the potential for programming deals that favor Fox over DirecTV.
'My sense is that the major purpose for News Corporation controlling DirecTV is
to use it as a tactical weapon against the cable companies to get them to pay up
7 David D. Kirkpatrick, "Murdoch's First Step: Make Sports Fans Pay." The New York Times, Apr. 14, 2003.
8 Id., Emphasis added.
9 David Kirkpatrick, "By Acquiring DirecTV, Murdoch Gets Upper Hand." The New York Times, Apr. 10, 2003.
6
for its proprietary programming,' said Robert Kaimowitz, chief executive of the
investment fund Bull Path Capital Management.
While News Corp. has agreed to abide by the FCC's program access requirements, this
pledge could end up being nothing more than a tool for pumping up cable prices. That is, while
News Corp. agrees to make its programming available on non-discriminatory terms and
conditions, there is absolutely nothing that would prevent News Corp. from raising the price that
it charges itself on its satellite system, in return for increased revenues from the other 70 million
cable households. If a cable system refuses to pay the increased price, then News Corp. will be
able to threaten cable operators with use of its newly acquired satellite system to capture market
share away from cable in those communities.
An article in the Washington Post10 recently detailed the way this might work:
For instance, News Corp. raised the cost of his Fox Sports content to some cable
systems by more than 30 percent this year, according to one cable operator. Like
most officials interviewed yesterday, he refused to be identified, saying he had to
continue dealing with News Corp.
Most recently, in Florida, News Corp. pulled its Fox Sports regional sports
programming off of competitor Time Warner Cable's system over a rate dispute.
News Corp. wanted to charge more than Time Warner was willing to pay, but the
conflict was resolved and service restored. "If this happens when Rupert owns
DirecTV, you can assume DirecTV will go into the market and just pound away
at the cable system," said one cable channel executive.
And price is only the beginning of the problems in this industry. Even in the 500-channel
cable universe, control of prime time programming rests in the hands of a very few media
companies. Given the enormous power that will be concentrated in News Corp. as a result of the
DirecTV transaction, not only will the combined entity be able to insist on top dollar for its
programming, it will be able to determine who makes it and who fails in the programming
marketplace.
10 Frank Ahrens, Murdoch's DirecTV Deal Scares Rivals." Washington Post, Apr. 11, 2003.
7
CABLE RATES HAVE ESCALATED AND SATELLITE COMPETITION HAS NOT
KEPT THEM UNDER CONTROL
Despite the growth of satellite TV, the promise of meaningful competition to cable TV
monopolies remains unfulfilled. Cable rates are up 50% since Congress passed the 1996
Telecommunications Act, nearly three times as fast as inflation.11 We welcome the possibility
that satellite would aggressively cut its price and compete with cable, thereby keeping cable rates
in check, but for several reasons that is unlikely to happen.
Satellite competition has failed to prevent price increases on cable because cable and
satellite occupy somewhat different product spaces. First and foremost, the lack of local
channels on satellite systems in many communities prevents satellite from being a substitute for
cable; in fact, many satellite subscribers also purchase cable service for the express purpose of
receiving local channels. And while many larger communities now receive local broadcast
channels from satellite, service is not as attractive as cable in several respects and many
consumers simply cannot subscribe. Many urban consumers cannot receive satellite services
because of line of sight problems, or because they live in a multi-tenant dwelling unit where only
one side of the building faces south.
Restrictions on multiple TV set hookups also make satellite more costly. The most recent
data on the average price for monthly satellite service indicates that consumers pay between $44
and $80 a month to receive programming comparable to basic cable programming. This monthly
fee often includes two separate charges above the monthly fee for basic satellite programming -
one fee to hook a receiver up to more than one television in the household, and another fee so
consumers are able to receive their local broadcast channels.
Satellite customers often subscribe to receive high-end services not provided (until the
recent advent of digital cable) on cable systems, such as high-end sports packages, out of region
programming, and foreign language channels. In essence, it is an expensive - but valuable -
product for consumers who want to receive hundreds of channels.
If satellite were a close substitute for cable, one would expect that it would have a large
effect on cable. In fact, the FCC's own findings and data have contradicted the cable industry
claims for years. The FCC found that satellite only "exerts a small (shown by the small
magnitude of DBS coefficient) but statistically significant influence on the demand for cable
service."12 In the same econometric estimation, the FCC concluded that the "the demand for
cable service is somewhat price elastic (i.e. has a price elasticity of minus 1.45) and suggests that
there are substitutes for cable."13 This elasticity is not very large and the FCC recognizes that in
using the modifier "somewhat." The FCC also attempted to estimate a price effect between
satellite and cable. If cable and satellite were close substitutes providing stiff competition, one
would also expect to see a price effect. Most discussions of substitutes and price elasticity in
11 Bureau of Labor Statistics, Consumer Price Index (March 2003). From 1996 until March 2003, CPI increased 19.3% while
cable prices rose 50.3%, 2.6 times faster than inflation.
12 Report on Cable Industry Prices, February 14, 2002, p. 36.
13 Report on Cable Industry Prices, February 14, 2001, p. 36.
8
economics texts state that substitutes exhibit a positive cross elasticity.14 The FCC can find
none. In fact, it found quite the opposite. The higher the penetration of satellite, the higher the
price of cable.15
The most recent annual report on cable prices shows that the presence of DBS has no
statistically significant or substantial effect on cable prices, penetration or quality.16 This is true
when measured as the level of penetration of satellite across all cable systems, or when isolating
only areas where satellite has achieved a relatively high penetration.17 At the same time,
ownership of multiple systems by a single entity, large size and clustering of cable systems
results in higher prices.18 Vertical integration with programming results in fewer channels being
offered (which restricts competition for affiliated programs).19
In other words, one could not imagine a more negative finding for intermodal
competition or industry competition from the FCC's own data. All of the concerns expressed
about concentrated, vertically integrated distribution networks are observed and the presence of
intermodal competition has little or no power to correct these problems. The claims that the
cable industry makes about the benefits of clustering and large size - measured as price effects -
are contradicted by the data. In fact, only intramodal, head-to-head competition appears to have
the expected effects. The presence of wireline cable competitors lowers price and increases the
quality of service.
While we hope that satellite will ultimately have a price disciplining effect in those
communities where satellite offers local broadcast stations it is clear that the single most
important variable in cable prices is whether there is a cable overbuilder in a particular
14 Pearce, George, The Dictionary of Modern Economics (MIT Press, Cambridge, 1984), p. 94. Cross Elasticity of Demand. The
responsiveness of quantity demanded of one good to a change in the price of another good. Where goods i and j are substitutes
the cross elasticity will be positive-i.e. a fall in the price of good j will result in a fall in the demand for good i as j is substituted
for i. If the goods are complements the cross elasticity will be negative. Where i and j are not related, the cross elasticity will be
zero. Taylor, John, B., Economics (Houghton Mifflin, Boston, 1998), p. 59.
A sharp decrease in the price of motor scooters or rollerblades will decrease the demand for bicycles. Why?
Because buying these related goods becomes relatively more attractive than buying bicycles. Motor scooters or rollerblades
are examples of substitutes for bicycles. A substitute is a good that provides some of the same uses or enjoyment as another
good. Butter and margarine are substitutes. In general, the demand for a good will increase if the price of a substitute for
the good rises, and the demand for a good will decrease if the price of a substitute falls.
Bannock, Graham, R.E. Banock and Evan Davis, Dictionary of Economics (Penguin, London, 1987).
Substitutes. Products that at least partly satisfy the same needs of consumers. Products are defined as substitutes in
terms of cross-price effects between them. If, when the price of records goes up, sales of compact discs rise, compact discs
are said to be a substitute for records, because consumers can to some extent satisfy the need served by records with
compact discs. This account is complicated by the fact that, when the price of an item changes, it affects both the REAL
INCOME 01 consumers and the relative prices of different commodities. Strictly, one product is a substitute for another if
it enjoys increased demand when the other's price rises and the consumer's income is raised just enough to compensate for
the drop in living standards caused (pp. 390-391).
Cross-price elasticity of demand. The proportionate change in the quantity demanded of one good divided by the
proportionate change in the price of another good. If the two goods are SUBSTITUTES (e.g. butter and margarine), this
ELASTICITY is positive. For instance, if the price of margarine increases, the demand for butter will increase (p. 99).
15 Report on Cable Prices, p. 11.
16 Federal Communications Commission, 2002b.
17 Federal Communications Commission, 2001b, describes the DBS variable as the level of subscription. Federal
Communications Commission, 2002b, uses the DBS dummy variable.
18 The cluster variable was included in the Federal Communications Commission 2000a and 2001b Price reports. Its behavior
contradicted the FCC theory. It has been dropped from the 2002 report. The MSO size was included in the 2002 report. System
size has been included in all three reports.
19 Vertical integration was included in Federal Communications Commission, 2002b.
9
community. Wire-to-wire competition does hold down cable rates, whereas satellite seems not
to. The U.S. General Accounting office describes this phenomenon:
Our model results do not indicate that the provision of local broadcast channels by
DBS companies is associated with lower cable prices. In contrast, the presence of
a second cable franchise (known as an overbuilder) does appear to constrain cable
prices. In franchise areas with a second cable provider, cable prices are
approximately 17 percent lower than in comparable areas without a second cable
provider.20
In other words, where there are two satellite and one cable company in a market, prices
are 17 percent higher than where there are two cable companies and two satellite providers in a
market. If we had this type of competition nationwide, consumers could save more than $5
billion a year on their cable bills.
PROGRAM PRODUCTION
The failure of competition in the cable and satellite distribution market is matched by the
failure of competition in the TV production market. In the 1980s, as channel capacity grew,
there was enormous expansion and development of new content from numerous studios.
Policymakers attributed the lack of concentration in the production industry to market forces and
pushed for the elimination of the Financial Interest in Syndication rules (Fin-Syn) that limited
network ownership and syndication rights over programming. The policymakers were wrong.
Following the elimination of the Fin-Syn rules in the early 1990s, the major networks
have consolidated their hold over popular programming. The market no longer looks as
promisingly competitive or diverse as it once did. Tom Wolzien, Senior Media Analyst for
Bernstein Research, paints the picture vividly--he details the return of the "old programming
oligopoly":
Last season ABC, CBS and NBC split about 23% [of television ratings]. . . But if
the viewing of all properties owned by the parent companies - Disney, NBC, and
Viacom - is totaled, those companies now directly control television sets in over a
third of the TV households. Add AOL, Fox and networks likely to see
consolidation over the next few years (Discovery, A&E, EW Scripps, etc.), and
five companies or fewer would control roughly the same percentage of TV
20 U.S. General Accounting Office, Report to the Subcommittee on Antitrust, Competition, and Business and Consumer Rights,
Committee on the Judiciary, U.S. Senate: Issues in Providing Cable and Satellite Television Services." October 2002. In an
important clarifying footnote, the report finds that:
"This was a larger effect than that found by FCC in its 2002 Report on Cable Industry Prices (FCC 02-107).
Using an econometric model, FCC found that cable prices were about 7 percent lower in franchise areas
when there was an overbuilder. One possible explanation for the difference in results is that we conducted
further analysis of the competitive status of franchises that were reported by FCC to have an overbuilder. We
found several instances where overbuilding may not have existed although FCC reported the presence of an
overbuilder, and we found a few cases where overbuilders appeared to exist although FCC had not reported
them. We adjusted our measurement of overbuilder status accordingly."
10
households in prime time as the three net[work]s did 40 years ago. The
programming oligopoly appears to be in a process of rebirth.21
In addition, the number of independent studios in existence has dwindled dramatically
since the mid-1980s. In 1985, there were 25 independent television production studios; there
was little drop-off in that number between 1985 and 1992. In 2002, however, only 5
independent television studios remained. In addition, in the ten-year period between 1992 and
2002, the number of prime time television hours per week produced by network studios
increased over 200%, whereas the number of prime time television hours per week produced by
independent studios decreased 63%.22
Diversity of production sources has "eroded to the point of near extinction. In 1992, only
15 percent of new series were produced for a network by a company it controlled. Last year, the
percentage of shows produced by controlled companies more than quintupled to 77 percent. In
1992, 16 new series were produced independently of conglomerate control, last year there was
one."23
The ease with which broadcasters blew away the independent programmers should sound
a strong cautionary alarm for Congress. The alarm can only become louder when we look at the
development of programming in the cable market. One simple message comes through: those
with rights to distribution systems win.
Of the 26 top cable channels in subscribers' and prime time ratings, all but one of them
(the Weather Channel) has ownership interest of either a cable MSO or a broadcast network. In
other words, it appears that you must either own a wire or have transmission rights to be in the
top tier of cable networks. Four entities - News Corp. (including cross ownership interests in
and from Liberty) AOL Time Warner, ABC/Disney and CBS/Viacom - account for 20 of these
26 channels.
Of the 39 new cable networks created since 1992, only 6 do not involve ownership by a
cable operator or a national TV broadcaster. Sixteen of these networks have ownership by the
top four programmers. Eight involve other MSOs and 10 involve other TV broadcasters.
Similarly, a recent cable analysis identified eleven networks that have achieved substantial
success since the passage of the 1992 Act. Every one of these is affiliated with an entity that has
guaranteed carriage on cable systems.24
Moreover, each of the dominant programmers has guaranteed access to carriage on cable
systems - either by ownership of the wires (cable operators) or by carriage rights conferred by
Congress (broadcasters).
21 Tom Wolzien, "Returning Oligopoly of Media Content Threatens Cable's Power." The Long View, Bernstein Research (Feb.
7, 2003). Emphasis added.
22 Coalition for Program Diversity, Jan. 28, 2003.
23 Victoria Riskin, President of Writers Guild of America, West. Remarks at FCC EnBanc Hearing, Richmond, VA (Feb. 27,
2003).
24 Federal Communications Commission, Ninth Annual Report, In the Matter of Annual Assessment of the Status of Competition
in the Market for the Delivery of Video Programming, MB docket No. 02-145 (Dec. 31, 2002).
11
? AOL Time Warner has ownership in cable systems reaching over 12 million
subscribers and cable networks with over 550 million subscribers.
? Liberty Media owns some cable systems and has rights on Comcast systems
and owns cable networks with approximately 880 million subscribers. Liberty
owns almost 20% of News Corp.
? Disney/ABC has must carry-retransmission rights and ownership in cable
networks reaching almost 700 million subscribers.
? Viacom/CBS has must carry-retransmission rights and ownership in cable
networks reaching approximately 625 million subscribers.
? Fox has must carry-retransmission and ownership in cable networks reaching
approximately 370 million subscribers and a substantial cross ownership
interest with Liberty.
These five entities account for over 60 percent of subscribers to cable networks,
rendering this market a tight oligopoly. Other entities with ownership or carriage rights account
for four of the five remaining most popular cable networks. The only network in the top 25
without such a connection is the Weather Channel. It certainly provides a great public service,
but is hardly a hotbed for development of original programming or civic discourse. Entities
with guaranteed access to distribution over cable account for 80 percent of the top networks and
about 80 percent of all subscribers' viewing choices on cable systems.
In the world of broadcast and cable networks, almost three-quarters of them are owned by
six corporate entities.25 The four major TV networks, NBC, CBS, ABC, Fox, and the two
dominant cable providers, AOL Time Warner (which also owns a broadcast network) and
Liberty (with an ownership and carriage relationship with Comcast and Fox), completely
dominate the tuner. Moreover, these entities are thoroughly interconnected through joint
ventures.
If distribution rights win, then an entity like News Corp./DirecTV would create a
powerhouse with guaranteed transmission rights on all three of the technologies used to
distribute TV to the home. It will own broadcast stations, have must carry/retransmission rights
on cable and satellite because of the broadcast licenses it holds, and own the largest satellite
network. This is an immense power of distribution for a company that is vertically integrated
into both broadcast and cable programming.
25 One of the more ironic arguments offered by the cable operators feeds off of the observation that broadcast networks have
carriage rights. They argue that even if cable operators foreclosed their channels to independent programmers, these
programmers could sell to the broadcast networks. This ignores the fact that cable operators control the vast majority of video
distribution capacity. There are approximately 60 channels per cable operator on a national average basis (Federal
Communications Commission, 2002b, p. 10). There are approximately 8 broadcast stations per DMA on a national average
basis (BIA Financial, 2002). Each broadcast station has must carry rights for one station. They can bargain for more,
particularly in the digital space, but the cable operators control more stations there as well. In other words, if we foreclose 85
percent of the channels, the programmers will be able to compete to sell to the remaining 15 percent of the channels. Needless to
say, this prospect does not excite independent programmers.
12
In the 1992 Cable Act, Congress recognized that the Federal government "has a
substantial interest in having cable systems carry the signals of local commercial television
stations because the carriage of such signals is necessary to serve the goals . . . of providing a
fair, efficient, and equitable distribution of broadcast services."26 Congress also recognized that
"[t]here is a substantial government interest in promoting the continued availability of such free
television programming, especially for viewers who are unable to afford other means of
receiving programming."27
These governmental interests, as well as a finding that "[c]able television systems often
are the single most efficient distribution system for television programming," formed the original
rationale behind Retransmission Consent. Because a majority of the country was receiving
broadcast television service through cable, it was necessary to require that cable systems carry
local broadcast signals. However, a merger between News Corp. and DirecTV would change the
landscape against which Retransmission Consent was created. Given that this transaction will
provide News Corp. with assets that no local broadcaster had in 1992 when Retransmission
Consent was originally put in place - it will have a satellite distribution system capable of
reaching a majority of the country - it seems that the original logic behind the rule is strained in
the present circumstances. Not only will News Corp. own its own transmission system, but it
also owns other programming that it bundles with its network programming, which may give it
too much market power in negotiating cable and other carriage agreements. Congress should
revisit the necessity of Retransmission Consent as it pertains to stations owned and operated by
News Corp.
CONCLUSION
Consumers Union believes that the Department of Justice should impose substantial
conditions on this deal which will otherwise be harmful to competition in the video programming
market--harm that will be borne on the backs of consumers.
In addition, Congress should impose a new set of nondiscrimination requirements that
would enable all media distributors and consumers to purchase video programming and related
services on an individual - as opposed to bundled - basis under terms that maximize competition
and choice in the marketplace. Congress must reexamine the enormous market power and
leverage that Retransmission Consent provides broadcast programmers - particularly one like
News Corp. which, as a result of the merger with DirecTV, will own a new nationwide video
distribution system (in addition to its over-the-air broadcast distribution system). And Congress
should require cable and satellite operators to offer consumers the right to select the channels
they want to receive at a fair price - in other words, require an a la carte program offering from
all video distributors. Since the average household watches only about a dozen channels of
video programming, this requirement could empower consumers to help discipline excesses in
cable (or satellite) pricing, and could possibly spur more competition.
Congress must also carefully consider all the ramifications associated with the FCC's
June 2nd decision concerning the media ownership rules. Given that this decision was made
26 Public Law 102-385, Section 2(a)(9).
27 Public Law 102-385, Section 2(a)(12).
13
despite existing concentration in most of the nation's media markets, and given that the new
rules do not provide for a public interest review of future mergers, Congress should enact
legislation to reverse the FCC's decision.
If the FCC's decision is not reversed, the consolidation of news outlet ownership
permitted by the new rules would likely result in the concentration of broadcast television station
and newspaper ownership in a few hands within individual markets. The News Corp./DirecTV
deal would look almost harmless in comparison to the avalanche of media mergers that could
ensue. It is completely unfair to force American consumers to accept inflated cable rates and
inadequate TV competition. But excess consolidation in the news media is even worse: the mass
media provides Americans the information and news they need to participate fully in our
democratic society. Without the ownership rules that effectively limit further consolidation in
media markets, one company or individual in a town could control the most popular newspaper,
TV and radio stations, and possibly even a cable system, giving it dominant influence and power
over the content and slant of news. This could reduce the diversity of cultural and political
discussion in that community.
The cost of excessive media consolidation and further media deregulation is very high.
The cost of market failure in media markets is the price we pay when stories are not told, when
sleazy business deals and bad accounting practices do not surface, when the watchdog decides
that it would rather gnaw on the bone of softer news than chase down the more complicated
realities that must be uncovered to make democracy function.