Copyright 2001 Federal News Service, Inc.  
Federal News Service
May 24, 2001, Thursday
SECTION: PREPARED TESTIMONY

LENGTH: 4506 words

HEADLINE: PREPARED TESTIMONY OF KIRBY J. CAMPBELL CEO - THE ARMSTRONG GROUP OF COMPANIES MEMBER - AMERICAN CABLE ASSOCIATION
 
BEFORE THE HOUSE SMALL BUSINESS COMMITTEE REGULATORY REFORM AND OVERSIGHT SUBCOMMITTEE RURAL ENTERPRISES, AGRICULTURE AND TECHNOLOGY SUBCOMMITTEE

BODY:
INTRODUCTION

Thank you, Mr. Chairman.

My name is Kirby .1. Campbell, and I am the CEO of The Armstrong Group of Companies, an independent cable business serving 208,000 subscribers in several states, including Ohio, Pennsylvania and West Virginia.

Our company is also a member of the American Cable Association. ACA represents more than 930 independent cable businesses serving more than 7.5 million subscribers primarily in smaller markets and rural areas across the United States. ACA members serve customers in every state and every U.S. territory and also in nearly every congressional district represented by the members of this Committee. Unlike some larger companies you hear about, ACA members are not affiliated with program suppliers, big telephone companies, major ISPs or other media conglomerates. We focus on smaller market cable and communications services, often in markets that the bigger companies choose not to serve.

Like other ACA members, our company, The Armstrong Group, specializes in serving residential and business customers in smaller markets and more rural areas. Our company today is on the forefront of providing advanced telecommunications services to customers in these markets, including high-speed cable modem Internet service and digital cable television. Our customers want broadband, and we're delivering it to them.

THE ISSUES FACED BY SMALLER MARKET CABLE SYSTEMS IN THE DEPLOYMENT OF BROADBAND SERVICES

I am pleased to have the opportunity to speak to you for several reasons.

First, our company and the members of the American Cable Association are rapidly deploying broadband services. At The Armstrong Group, we connected our first high-speed Internet customers in 1997 and today serve 18,000 Internet customers, including 1,100 small businesses.

On the deployment of broadband in smaller markets, we have a success story to tell. Our company and other ACA members are making substantial investments in system upgrades and are taking calculated business risks to launch broadband services in our markets. By the end of this year, we will offer Internet and digital cable to more than 90% of our 208,000 customers. In our case, we will have invested more than $130 million and more than $600 per subscriber to deliver these new services. Our technical platform is superior to almost all major metropolitan cable systems. When it comes to deployment of cable modem service in smaller markets and rural areas, our company at Armstrong and other ACA members are part of the solution, not part of the problem.

We find it ironic that so many attempts are being made to incent huge conglomerates like the RBOCs to service smaller markets and rural areas in order to close the so-called "Digital Divide." Our company and the hundreds of others in the ACA are already there.In December 2000, the American Cable Association commissioned a study of its members to determine the extent of broadband, high-speed cable modem deployment in its members' cable systems. The r esults were impressive. Despite the many challenges faced by my company and other ACA members to launch broadband, the facts show that we're doing it. The ACA survey showed the following:

- Current regulatory and legislative policies have encouraged investment in infrastructure. The marketplace is working. - The imposition of mandatory open access laws or regulations would impose significant additional costs and deter investment.

- Current ACA members' expansion plans will double the number of homes passed by broadband services within the next 12 to 24 months.

- ACA members have invested hundreds of millions of dollars to install fiber, upgrade plant, and acquire equipment necessary to offer cable modem services and other advanced services.

- Most ACA members obtained the capital required to upgrade networks and purchase equipment from sources typical for smaller business - banks or retained earnings.

- ACA members indicated that they would not risk the investment necessary for this expansion if burdensome regulations were imposed on cable modem service in their markets.

- Many ACA members provide cable modem service through negotiated agreements with unaffiliated ISPs.

Despite the success story that's taking place in our company and so many other ACA members' companies, the deployment of broadband services is threatened by certain facts, proceedings and cost trends. These problems and challenges fall into four specific areas:

(1) Access to capital. Access to capital is vitally important to the deployment of broadband in smaller markets and rural America, but adequate sources for this capital are limited. Initiatives considered by Congress can address this concern by providing for technology neutral credits, loan guarantees or low-interest loan programs that will make capital more affordable and readily available to launch broadband services in smaller markets.

(2) Forced carriage of both analog and digital broadcast signals. The effect of mandatory dual digital broadcast television carriage (dual must-carry of local television stations' analog and digital broadcast signals) on cable systems with limited bandwidth will result in lost capacity and lost important broadband services that our customer want. The substantial costs and adverse effects of paying for a forced transition to digital will stop or hinder the advancement of high- speed Internet- particularly in rural areas.

(3) Mandatory open access in smaller markets. The effect of open access regulations, if imposed on these markets, will create a chilling effect to hinder or even stop the development of broadband services in smaller markets and rural America, where the marketplace is already working.

(4) The high cost of programming supply and other annual cost increases that far outstrip the rate of inflation or cost of living. These costs are being borne disproportionately by smaller businesses in the cable industry. Independent cable companies pay 2530% more for programming than the larger cable companies and must absorb significant annual programming increases that far outstrip the trend in retail cable rates for independent cable businesses. Another potentially chilling factor is pole rent - the amounts charged by utilities or cooperatives to independent cable businesses for the right to attach cable to utility poles.

If utilities or cooperatives, which are using federal funds to build their infrastructure, are allowed to triple or quintuple their rates for pole rent, as some have begun to do, the impact on rural areas would be devastating. In very rural areas with only 10-15 customers per mile, these new rates could be $10.00 per subscriber per month. The end result of these increases is that important capital and resources are taken away from resources that would otherwise fund the development and deployment of broadband service in smaller markets and rural America.

Before discussing each of these areas individually, it is important to understand what makes serving smaller markets and rural areas unique and why certain factors impact us disproportionately. The most basic factor is that it is much more expensive on a per customer basis to provide expanded bandwidth and advanced services in rural America. The main factor is the number of homes in a given mile. While an urban area will have 100 or more homes per mile, we provide service in areas down to 15 homes per mile. Our company-wide average is only 45 homes per mile. Fewer customers per mile in smaller markets and rural areas mean a substantially larger investment per customer for all services, including broadband. This fact alone puts pressure on all other operating factors.In the telephone and electric business, this fact of operation has been understood for years, and that's why telephone companies and electric cooperatives providing service in rural America have been subsidized for years by the federal government. Smaller, independent cable businesses have not been subsidized. We have achieved our success through independent risk financing and sweat equity. However, we are not here to ask for subsidies, but rather only a level playing field that could easily be tilted against us by any one of the following factors. And if this field is tilted, it will certainly impact and adversely affect the deployment of broadband in smaller markets and rural America.

(1) Access to Capital and Technology Neutral Solutions to Encourage Broadband Deployment are a Must to Serve Smaller Markets with High Speed Internet, Digital Cable and Other Broadband Services=

Our company and all ACA members face the challenges of building, operating and upgrading broadband networks in smaller markets and rural areas. For most of these companies, the capital required to upgrade networks and purchase equipment came from sources typical for smaller businesses - banks or retained earnings. In other words, our capital comes from Main Street, not Wall Street. But this investment is not easy to make or to obtain. When independent companies like mine and need to raise money to serve smaller markets and rural America, we sign personal guarantees. My company has taken the financial risk to make investments in a robust broadband infrastructure in smaller markets. Far from languishing on the wrong side of a Digital Divide, our customers have access to high quality cable modem service today. Current expansion plans of ACA members will double the availability of the cable modem service within 24 months. In some cases, these markets are ahead of broadband deployment in urban centers.

Compared to RBOCs and the largest cable and media companies, most independent cable businesses face serious difficulties in finding sources of capital. Many communications lenders are not interested in lending to smaller companies serving smaller markets.

This is true because the loans sought by smaller, independent companies are generally smaller than loans sought by larger companies, and thus do not produce the same for the bank in lending fees, interest, etc. In addition, there can be a longer payback and return on a loan to service a sparsely populated smaller market compared to an urban market with hundreds of subscribers per mile.

Therefore, many independent companies find themselves seeking loans from local, general service banks on Main Street rather than the experienced commercial communications lenders on Wall Street. Moreover, many of these smaller loans with the local banks are "hit or miss" and may depend on a number of factors unrelated to the project itself.

The federal government has already begun to consider a number of proposals that would help to encourage broadband deployment by providing tax credits, federal loan guarantees or other federal grant or low-interest loan programs. These ideas would help independent companies in smaller markets and rural areas obtain the capital they need to launch broadband services. We support these ideas.The key to success for these programs would be to ensure that they are technology neutral and easily obtainable through a streamlined, simplified application process.

It is important for the programs to be technology neutral because this would ensure that all technologies (cable, wireless, satellite, etc.) are encouraged to make use of the funds or credits. At the same time the competition for the funds would help speed deployment where it is so vitally needed.

As mentioned earlier, ACA members are already deploying advanced services in many rural areas, and we are uniquely positioned to expand into other rural markets. Our company and ACA would enjoy the opportunity to work with the Small Business Committee in considering technology neutral solutions that would put capital in the hands of smaller, independent businesses to encourage broadband deployment in smaller markets and rural America. (21 The Unintended Consequences of Mandatory Digital Broadcast Carriage on Cable Systems with Limited Bandwidth Will Derail Broadband Deployment in Rural America.

A second issue facing threatening independent cable's progress is the broadcast industry's campaign to force dual carriage of analog and digital signals during the transition to digital television. The forced carriage of both the analog and digital broadcast television signals of local broadcast stations on smaller market cable systems would absorb most of the bandwidth we are developing for broadband services. This would undercut our ability to roll out new services our subscribers want, just so broadcasters could get a free ride for both analog and digital signals. Mandating digital carriage would cause the loss of important existing analog and digital programming and high- speed Internet services. It would also create a significant chilling effect on the development and deployment of new advanced telecommunications services to these markets.

The ability to provide these new services is essential to attracting the capital necessary to upgrade our smaller market systems in response to marketplace demand. It is already difficult enough to attract the capital necessary for broadband, which provides a new revenue stream, let alone finding the money for a forced transition to digital, which would provide no new revenues.

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

An important point is often missed in this debate: the government has given broadcasters both the analog and new digital spectrum to transmit both of these signals during the transition period before digital broadcast signals are mandated in 2006. But the law has not granted smaller market cable systems additional bandwidth to carry any of the additional broadcast signals.

We have to pay for our additional bandwidth through costly system upgrades. We can only pay for these upgrades by carrying services our customers will pay us for. Currently, our customers are not requesting digital broadcast signals in our markets.

From a technical, operational, economic and practical standpoint, we cannot carry all of the digital and analog signals of the local broadcasters. The reason? Because we are still required to devote up to fifty percent (50%) of our channel line-ups for other mandated carriage set-asides, such as analog must-carry, retransmission consent, non-commercial educational programming, public, educational and governmental programming, and leased access programming, not to mention the current analog, digital and high-speed data services our customers now demand and expect. Who will make the choice to tell my customers what they can and can no longer receive as a result of dual must-carry or mandated digital broadcast television carriage? And is this the right thing to do? I think not. But one thing is certain. Our company and other ACA members like ours will get blamed for it, while dissatisfied switch to direct broadcast satellite service. This result could threaten the viability of smaller market cable systems, which would certainly be an unintended consequence of this policy.

As far as smaller market cable systems are concerned, the FCC has gotten this one right - no dual carriage during the transition period.

When you hear broadcasters demand a legislative fix for their dual carriage demands, we encourage members of this committee to carefully consider the consequences for smaller market cable systems and consumers.

The High "Cost" of Converting to Digital and the Threat to Broadband Deployment

Right now our company is engaged in a competitive race to improve our systems through the use and deployment of digital cable services and high-speed Internet. These services are a reality today. They are available now. They are helping us improve to our systems and provide advanced higher quality telecommunications services to our customers today.

Our company is using these services to close the so-called "Digital Divide" in smaller markets now. These services and the required systems upgrades are costly. For example, on average it costs about $130,000 to install a digital cable headend that will enable our customers to receive significantly more services that they want. But not all customers take these services right off, and the return on investment for a digital headend like this one is lengthy. In addition, you can understand how difficult it is to economically spread that cost across a system that may only serve 500 customers.

We face the same situation with the substantial investment necessary to deliver high-speed cable modem Internet service. It's expensive, and the return is a long one.

Still, these services are available now. They are not on the drawing board or potentially available sometime in the future. Our company is doing right now what policymakers want - improving our service, enhancing competition in the marketplace, and closing the "Digital Divide" by providing advanced telecommunications services.

But what if the significant funds that it takes to launch digital cable or high-speed Internet are forced to cover the costs of dual must-carry or mandatory digital broadcast carriage? Plainly, something would have to give.

The adverse effect on broadband deployment would be more than an unintended consequence of mandating digital broadcast television carriage. It would be a direct result. (3) The Effect of Open Access Regulations if Imposed On Smaller, Rural Markets Will Create a Chilling Effect to Hinder or Even Stop the Development of Broadband Services in Smaller Markets and Rural America, Where the Marketplace is Already Working.

For smaller markets, the relevant policy goals are: (i) continued rapid deployment of broadband services, and (ii) maintaining a regulatory environment that encourages investment in companies serving these markets. The emphasis by Congress and the FCC to date on regulatory restraint and marketplace solutions has succeeded in smaller markets and rural America. Our company has taken a substantial financial risk to bring Internet services to our customers. Why should someone who has not taken this risk be allowed to come in and skim off profit? This could stop Internet deployment dead in its tracks. And why should small rural cable operators be burdened with real open access when large ILEC's have yet to open their networks in a meaningful way.

By recognizing the unique circumstances and economic considerations of smaller market providers in rural America, this Committee can avoid unintended consequences in broadband deployment and ensure that the desire by some industries to regulate does not drown out the concerns of independent cable and the smaller market customers they serve.

As we have shown, despite many challenges, independent cable has accepted the challenge to launch broadband services. But this impressive success begs one question: With the higher costs associated with serving lower density markets, what drives this progress? The evidence points to one consistent answer the absence of burdensome regulation spurs investment in broadband deployment.ACA members surveyed report that they developed their broadband business models on the assumption that marketplace forces would govern their provision of cable modem service. Nearly all ACA members currently providing cable modem service indicated they would not risk additional capital at this point if the service were to face burdensome regulations in their markets.

(4) The Effect of Uncontrollable Cost Increases which are Being Borne Disproportionately by Smaller, Independent Cable Businesses Could Have a Major Impact on the Financial Viability of These Companies and, Therefore, Their Ability to Upgrade Their Systems and Provide Advanced Telecommunications Services, Like Broadband Technologies.

Programming costs are skyrocketing. Why? Because they can. Giant media companies, like Disney, or vertically integrated programmers, like Time Warner/AOL, own most cable and satellite programming networks. Aside from the fact that programming costs are increasing by 20% each year or more, smaller, independent cable businesses pay 25-30% more for programming than larger cable businesses.

Huge media content conglomerates, vertically integrated programmers and the unintended consequences of retransmission consent are major contributors to this problem. The huge media conglomerates - Disney/ABC, CBS/Viacom, NBC/GE, Fox, Time Warner/AOL - all use their enormous market power to hold hostage the carriage of broadcast networks and local broadcast stations they own through the "retransmission consent" process every three years. Retransmission consent under the 1992 Cable Competition and Consumer Protection and Policy Act allows the owners of broadcast networks and stations to withhold the right of a smaller, independent cable business like mine to carry the network or station unless we agree to the broadcast owner's terms of consent. With the enormous power wielded by these conglomerates, we have no ability to negotiate fair terms at all. We are at their mercy.

As a result, more and more overpriced programming is being forced on to our cable systems in order to secure retransmission consent. This takes up precious bandwidth, significantly increases our costs and expenses and takes away valuable resources for launching broadband in our systems.

Skyrocketing costs for sports programming are another major factor. Our costs for sports programming increased 40% in 2000 alone. Our customers must eventually pay for these out-of-control increases. Smaller, independent cable businesses should be able to buy programming on the same basis as larger cable companies. There is no cost basis or economic justification for this discrepancy.

Another area of growing concern is pole rent - the cost we pay a utility or a cooperative for the right to attach our cable lines to their poles. While typical rates to rent a pole are $6-$9 annually, our company recently received notice of an increase that would increase our pole rent to $47.25 per pole per year in areas providing telecommunication services. This is a totally unwarranted increase because no physical aspect of our attachment has changed at all. As previously mentioned, this could amount to an increase in costs of more than $10.00 per subscriber per month in rural areas. Who could introduce new broadband services in smaller markets and rural areas under these circumstances?

Independent cable businesses are under enormous pressure to keep rates to consumers within either the rate of inflation or cost of living. However, suppliers of programming services, pole rents, etc., are under no such restriction - either mandated by regulation or the marketplace. If these costs continue to skyrocket out of control to the point where smaller, independent cable businesses can no longer afford them, how can there ever be hope of long-term broadband deployment in smaller markets and rural America?

What Can Be done? Some Potential Solutions.

Full deployment of broadband services, like high-speed cable modem Internet and digital cable service, cannot be accomplished or even be expected to succeed unless the barriers to further deployment are removed. While there may be a number of solutions to eliminate these barriers, we offer several suggestions to address the barriers discussed in our testimony. Access to Capital

- Provide incentives to lenders and financial institutions to lend money for broadband projects in smaller markets and rural areas.

- Consider "technology neutral" plans that would provide tax credits, loan guarantees or low-interest loans to lower the cost of capital, increase access to it, and help spur broadband deployment.

Mandated Digital Broadcast Carriage

- Refrain from imposing "dual must-carry" on smaller, independent cable businesses that would be required to carry both the analog and digital broadcast television signals of television signals.- Let the marketplace develop solutions to digital carriage and technology concerns. Imposing dual must-carry won't help if the technology and digital programming are not available to the consumer on a cost- effective basis.

- Consider eliminating smaller, independent cable businesses from the myriad requirements of mandated carriage of certain types of programming to increase bandwidth that would then be available for broadband deployment.

Open Access Regulations

- Promote plans that would encourage marketplace negotiation between independent cable businesses and unaffiliated Internet Service Providers. The marketplace is already working to solve these concerns.

- Refrain from imposing mandated open access regulations, which would hinder or even stop the development of broadband deployment in smaller markets and rural areas.

Increasing Programming, Pole Rent and Other Operational Costs

- Hold hearings and seek detailed information from programming owners on the actual costs of programming and the various rates charged to providers of varying sizes. Find out how the increasing cost of programming is affecting independent cable businesses and discouraging broadband deployment.

- Prohibit huge media conglomerates from tying new programming services or digital broadcast carriage to analog retransmission consent and also from forced bundling of programming services.

- Extend and strengthen current programming access regulations from the 1992 Cable Act, as amended. - Consider applying other principles, such as unfair trade practices, to programming business practices.

- Tighten the provisions of the Pole Attachment Act to eliminate huge, unjustified rate increases of utilities, and extend the provisions of the Act to municipalities and cooperatives.

CONCLUSION

In conclusion, our company's future and our ACA members' future lie in the deployment of broadband services. We have already embraced it.

Independent cable companies are responding to marketplace incentives, making substantial investments in infrastructure. The marketplace is working.

The results are exactly what the Congress intended - delivery of advanced services to an increasing number of consumers in smaller markets through market-based solutions.

However, severe barriers face us if we are to continue to deploy broadband throughout all smaller markets and rural areas. These barriers could derail the enormous gains that have already been made. My company and all of the members of the ACA are concerned that these barriers could stop broadband deployment cold.

We're committed to working with the Committee on solutions that will enable us to eliminate these barriers and further encourage broadband deployment throughout smaller markets and rural America.

I would like to sincerely thank the Committee again for allowing me to speak before you today.

END

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