TYPE: COMMITTEE HEARING

LENGTH: 22017 words

COMMITTEE: BUSINESS RIGHTS AND COMPETITION SUBCOMMITTEE, SENATE JUDICIARY COMMITTEE

SUBCOMMITTEE: ANTITRUST

HEADLINE: U.S. SENATOR HERBERT KOHL (D-WI) HOLDS HEARING ON COMPETITION AND MERGERS IN TV CABLE INDUSTRY

SPEAKER:
U.S. SENATOR HERBERT KOHL (D-WI), CHAIRMAN

LOCATION: WASHINGTON, D.C.

WITNESSES:

C. MICHAEL ARMSTRONG, CEO, AT&T
BRIAN ROBERTS, PRESIDENT, COMCAST CORPORATION
CHARLES GARRY BETTY, CEO, EARTHLINK
RICHARD GREENE, PRESIDENT AND CEO, CABLELABS
ROBERT PERRY, VICE PRESIDENT OF MARKETING, MITSUBISHI DIGITAL ELECTRONICS AMERICA
MARK HAVERKATE, PRESIDENT AND CEO, WIDEOPENWEST

BODY:

 
U.S. SENATE JUDICIARY COMMITTEE: SUBCOMMITTEE ON ANTITRUST,
BUSINESS RIGHTS AND COMPETITION HOLDS A
HEARING ENTITLED "DOMINANCE ON THE
GROUND: CABLE COMPETITION AND THE ATT-COMCAST MERGER"

APRIL 23, 2002
 
SPEAKERS:
U.S. SENATOR HERBERT KOHL (D-WI)
CHAIRMAN
U.S. SENATOR PATRICK J. LEAHY (D-VT)
U.S. SENATOR RUSSELL D. FEINGOLD (D-WI)
U.S. SENATOR CHARLES E. SCHUMER (D-NY)
U.S. SENATOR MARIA CANTWELL (D-WA)
 
U.S. SENATOR MIKE DEWINE (R-OH)
RANKING MEMBER
U.S. SENATOR ORRIN G. HATCH (R-UT)
U.S. SENATOR ARLEN SPECTER (R-PA)
U.S. SENATOR STROM THURMOND (R-SC)
U.S. SENATOR SAM BROWNBACK (R-KS)
 


*


KOHL: This committee will be in order. Today we examine the merger between Comcast and AT&T Broadband. This is the end of the AT&T as we know it, but a new AT&T, a wide-ranging, powerful cable monopoly is emerging. Just as the pre-1984, AT&T controlled the phone lines, the equipment and the content, this new cable giant has the potential to wield similar control over the cable line, the equipment, and the content sent to more than 22 million American homes. The creation of this new and even broader communications conglomerate may pose the same dangers to consumers and to innovation that led to the breakup of the old AT&T monopoly. As this merger indicates, big changes are coming to the cable industry. But, one thing, unfortunately, remains the same. Cable rates continue to rise, about triple the rate of inflations since the passage of the 1996 Telecom Act and more than 7 percent last year.

Make no mistake if this merger is approved, AT&T Comcast will become the nation's largest cable company, providing television signals to about 30 percent of the nation's homes. Since this merger was announced we have been asking ourselves over and over again how is this good for consumers?

Well, we know it's good for the companies, but what does it do for the average consumer? 10 years from now if trends like this merger continue, consumers may find almost all of their personal communications and information dominated by very few large media companies. Their phones, their movies, their internet, their cable their link to the outside world will be priced, processed and packaged by one company that faces virtually no competition.

While the Echo Star Direct TV deal has faced a borage of anti- trust questions, this deal has not. In fact, it appears that there are few, if any traditional anti-trust concerns raised by it. Nevertheless, there are some serious issues that need to be looked at.

Big is not necessarily bad, but we cannot ignore the potential for a cable company as big as AT&T Comcast to throw its weight around. We should be frightened about this future and we need to be thinking about imposing meaningful conditions on this merger to make it tolerable for consumers.

Therefore, we can fully understand the impact of this merger on consumers, we need answers to five key questions. First, the parties have promised that they will aggressively continue efforts to offer cable, telephone service in more markets. This competition to the local telephone monopoly is sorely needed. So, how can we be sure that they will keep their promise?

Two, we cannot ignore that such a large ignore that such a large company will effect, and perhaps control programming. Small independent media voices will have even a harder time gaining access to the video airwaves.

For the last 10 years we've had rules to guard against cable companies leveraging their monopolies and blocking access to programming to competitors. These programs access rules are expiring this year. Now, more than ever, in the face of all of this consolidation, these rules need to be extended. Why do the parties oppose extending these rules?

Three, the parties have promised that they will let consumers choose who will provide them their Internet. But, they have been unwilling to make the promise binding. AOL/Time Warner made the promise binding as a condition of their merger, why should not these parties?

Four, after recent court decisions, a long established cable ownership caps are currently under review by the FCC. With a seemingly unrelenting wave of media mergers underway, reasonable ownership limits are the last line of defense against excessive concentration in this industry. Will the FCC live up to the responsibilities as guardians of diversity of expression in our video marketplace?

Finally, six years ago we passed a law mandated a competitive market for the so-called settop box, that device that delivers the cable signal to the consumer, in the digital age, controlling technology and software is the ultimate power.

All of us remember the time when there was only one type of telephone, a clunky and rudimentary device. But, when we broke up that monopoly innovation then flourished. Only a truly competitive settop box market can unlock the type of innovation that brought us cell phones, faxes and the Internet itself.

We required competitive settop box market six years ago. So, what's going on here? The answers to these questions and are essential. We thank our distinguished panel of witnesses for testifying today and we look forward to your testimony.

Senator DeWine?

DEWINE: Mr. Chairman, thank you very much for holding this hearing on this very important issue. This afternoon we will examine the proposed merger between two of the leading cable providers in the country, AT&T Broadband and Comcast Corporation. This merger would create an industry giant, as you have pointed out, serving over 27 million subscribers, more than double, more than double, the size of the next largest cable company.

Mr. Chairman, despite its resulting size, this deal appears to avoid many of the traditional anti-trust concerns raised by horizontal mergers, because the companies in this case do not currently compete with each other in the delivery of video services.

Accordingly, in regard to the delivery of video services, a merger between the two is probably not a violation of the Clayton Act test of the "substantial lessening of competition". But, the effects of this deal are not limited only to the video delivery market. And, it cannot be examine in isolation. It occurs at the same time that the courts and, to some extent, the federal communications commission are acting to significantly rollback restrictions on media consolidations.

This trend towards further media consolidation is troubling. And, frankly, the regulators must pay close attention to the impact of consolidation beyond just the standard anti-trust analysis.

Obviously, preserving vigorous competition is always important and will ensure that consumers receive affordable high-quality products.

However, it is also important that we ensure that information outlets and communities or regions of the country are not controlled by just a few players. If one company were to own the cable franchise, several broadcast stations and newspaper outlets in any one given community. The people of that community would suffer, not only from a lack of competition, but in all likelihood they also would be exposed to a smaller range of opinions.

This would be unacceptable. Unacceptable in and era that has been dubbed as the information age. Mr. Chairman, in light of recent court decisions, the Federal Communications Commission, I believe needs to developed reasonable rules to protect this marketplace of ideas. And, it must do so in a coherent fashion that will pass the scrutiny of the courts.

One such rule they may need to reexamine that is particularly relevant to our hearing today is the cable ownership limit. The FCC must thoroughly examine cable ownership limits and establish an appropriate limit that would ensure healthy competition and a diverse marketplace. If they can't do it, then Congress will need to take a look at it.

Now, focusing again on the specifics of the deal we have before us today, there are competitive implications of this merger that I believe deserve examination. Perhaps the most important is the effect of the merger on the programming market. As I have said, a combined AT&T Comcast would control access to over 27 million customers. This customer base would become an extremely important outlet for programmers, increasing the pressure to obtain a spot on the AT&T Comcast cable system. This would impose the challenge for those who offer, new independent programming. These independent producers may not have the leverage of linking their product with more established programs. An independent programmer also may not have the financial backing to offer very low initial prices.

This creates an obvious problem. The programmer, more than ever needs the customer base of AT&T Comcast but does not necessarily have the leverage to strike a worthwhile deal. Thus, the increased size of the combined AT&T Comcast may make it more difficult for independent programmers. And, this, I believe, we should be concerned about. This increase in the market power of AT&T Comcast also raises concerns in situations where the cable companies own programming.

For example, Comcast owns the Outdoor Life Network, the combined company, with an expanding presence across more media markets would likely be less willing to carry a similar network from an independent producer. This incentive to exclude independent programming, coupled with fewer programming outlets, might harm the ability of new programs to develop and then to survive.

However, we should acknowledge that these two companies have limited programming ownership. Along those lines, it is important that AT&T has confirmed publicly that it will divest its ownership interest in Time Warner Entertainment Programming. I applaud them for that decision and look forward to the completion of that transaction.

The increased market power of AT&T Comcast also could have an effect on the ability of competitors to gain access to programming. Depending on the competitive circumstances in a local market, the combined AT&T Comcast might have enough negotiating power to demand exclusive rights to programming, therefore harming the ability of a satellite system or cable over builder to compete. This, obviously, would be a very serious concern for consumers since this is significant -- there is significant evidence that the existence of viable cable over builders helps to lower prices. Of course, increased purchasing power also might have the positive effect on prices. If AT&T Comcast were able to drive down programming costs, it might be able to limit the seemingly endless rise of cable rates.

This, obviously, would be of great benefit to customers, consumers, if, in fact, it happened. One additional area of concern involves broadband, specifically, the ability to consumers to choose an Internet service provider when they obtain broadband service from their cable company.

When AOL and Time Warner merged the Federal Trade Commission required the combined companies to allow a range of competitive ISP's to provide service on their broadband network. While the competitive dynamics of this deal differ from those in the AOL merger, this remains and important issues. And I look forward to hearing what plans the company has to ensure that their 27 million consumers will have a choice of ISP providers.

In addition, I look forward to hearing the parties' plans for rolling out broadband and voice services to consumers and how this merger will help them speed this process. I am particularly interested in their plans for cable telephone service.

Mr. Chairman, I think it's fair to say that we have all been disappointed, very disappointed, in the amount of competition in the local phone service market since the passage of the 1996 Telecommunications Act. If this merger can speed competition in that area, it would be a big plus for consumers.

The AT&T Comcast merger is an important one and it has the potential to reshape the competitive landscape of cable service in a number of significant ways. We have certainly, a very excellent panel. Today, Mr. Chairman, I look forward to our discussion. I thank the chair.

KOHL: Thank you, Senator DeWine.

Now we call on Senator Orrin Hatch from Utah.

HATCH: Well, thank you, Mr. Chairman, I commend you and Senator DeWine for your work on this committee and for holding this hearing to discuss the AT&T Comcast merger.

HATCH: This merger before us today follows a series of consolidation activities in the communications sector since the passage of the 1996 Telecommunications Act. Careful anti-trust scrutiny is necessary where two of the five largest cable companies in the nation plan to merge and our inquiries should include the possible effects of this merger on related businesses and markets. These include areas such as the deployment of broadband Internet service and the manufacture and design of cable settop boxes, which could be the access point for all communications in the future. And, the continued vitality of the video programming and Internet content markets.

Overall, this merger by itself does not appear to present the types of competitive concerns that have led me to be skeptical or critical of some other recent major media mergers. For example, unlike the AOL/Time Warner merger, this transaction does not involve the aggregation of the ownership of content with an online service provider and the cable pipes to deliver that content, creating powerful incentives to favor one's own content over competing content. Nor, does the proposed AT&T Comcast transaction involve the elimination of a direct competitor, as does the pending Echo Star/Direct TV merger.

It appears that this merger is largely free from these types of traditional anti-trust concerns and I would hope that this merger will not raise issues regarding content discrimination that leads to fewer choices of diverse content, which I have found to be of great concern in past media mergers.

I should note that this merger does raise several broader policy questions for us to consider as policymakers. These largely center around potential limitations on consumer's access to rich and diverse content resulting from changes in the competitive landscape as divergence of technologies continues.

By means of the 1996 Telecommunications Act Congress succeeded in creating a shift in policy in key high tech industries towards increased deregulation and a competently increased reliance on anti- trust principles and enforcement to protect competition. Now, six years later, consumers are really beginning to see some of the benefits of these actions in the forum of increased competition and increased choice.

Much of this choice is the result of convergence in the types of services provided by the varied companies that form the new information economy. I believe that this convergence will continue to the point where services provided by telecommunications and cable companies will be indistinguishable to consumers. This technology- driven convergence should increase competition and therefore hopefully consumer choice. Along with convergence, however, consumers have, at the same time, witnesses increasing consolidation in the cable, media and telecommunications market.

In contrast to convergence this consolidation tends to reduce the number of competitors and consequently threatens to reduce competition and choice. As these two forces, consolidation and convergence, work to reshape the competitive landscape of a new economy, I strongly believe that we must not merely protect, but where possible, seek choices that allow the marketplace to expand to consumer choice to ensure that as many Americans as possible have full and free access to rich and diverse entertainment and information content.

Accordingly, if the competitive landscape changes, we must ensure that legislation and regulation do not inadvertently hinder consumer choice. In light of these ongoing changes, it is perhaps appropriate to continue to examine existing regulations and their effects on competition in new and evolving marketplaces to protect and strengthen consumer choice.

I have frequently expressed my concerns regarding competition in digital entertainment services and the harms that may befall consumers when information "gatekeepers" limit consumer choices or access to content and information for anti-competitive purposes. These concerns have arisen in context ranging from the Microsoft case to the AOL/Time Warner merger. These concerns apply equally to cable programming and broadband Internet content. Because the proposed merger would create the largest cable provider in the nation, a merged AT&T Comcast would have significant power as a major purchaser of content.

A merged AT&T Comcast would have similar power determining which and how many Internet service providers will have access to consumers over its cables. Any merged entity with such power must exercise carefully its powers to ensure that consumer choice and marketplace competition are not unfairly hindered.

In the digital age a cable merger involved much more than simply which company will deliver video programming to consumers, rather a merger within the cable industry today is likely to affect other services, products, technology, business relationships between very large cable companies and providers of content and communications services.

Finally, I have some basic concerns about implementation of the proposed merger. We need to take into account the practical effects of the proposed merger on consumers. More specifically, I note that AT&T currently provides cable broadband and telephone services in my own home state of Utah. I would like to hear today and hopefully get some type of assurances regarding how the merger has been structured to avoid difficulties such as loss or disruption of these services, degradation of the quality of these services, and unexpected rate hikes.

Again, I want to thank you, Mr. Chairman, I look forward to hearing from all of our witnesses here today.

KOHL: Thank you very much, Senator Hatch.

Now we call on Senator Specter.

SPECTER: Well, thank you, Mr. Chairman, may I note at the outset that there is parity between the parties, we have four Republicans and you, Mr. Chairman, are a Democrat, so the odds are about...

KOHL: You're right on that.

SPECTER: ... at this point. There is a practice of a fair amount of testifying on this side of the podium as on that side, but I think the issues have been delineated sufficiently so that I will await for further comment on the substance for the witnesses. But, I would like to take just a moment or two to introduce Mr. Brian Roberts from Comcast.

The cable company was founded by his father, Ralph Roberts, 35 years ago. Just about the time I became District Attorney in Philadelphia and I'm in a position to say, unequivocally, that there was never an investigation of Ralph Roberts or his company.

And, in my capacity as a United States Senator I am obviously concerned about the serious issues which have been discussed, but as a Pennsylvania Senator and as a Philadelphian there is a great deal of pride in what the Roberts Family has done and what Comcast has done.

And, Mr. Brian Roberts, at the age of 42 brings and extraordinary record to be a leader of this company. He has had the osmosis advantage of being associated with his father for 42 years and having son about the same age, I know what osmosis can do.

His educational background is sterling, Wharton School. His public service activities are extensive. He serves on the Simon Weisenthal (ph) Board, taking up the important issues of the Holocaust. He took on a very big job several years ago on being co- chairman of the committee, which brought the Republican National Convention to Philadelphia, a much-heralded event, agreement by our mayor who is a democrat with Republicans who came and enjoyed the hospitality of the city.

He has received very distinguished awards, the PAL, Police Athletic Award and the William Kemp Award and those go to people who have done a significant amount on public service. And, last October he had the Comcast 35,000 employees nationwide engage in a day of public service. His persuasion brought me for a day of public services as well.

I was commandeered to join the enormous throne for the add-in Fairmont Park that day. It is a matter of great economic concern to my city and state to have a company, which has 35,000 employees and $40 billion, I took another look at the figure to be sure. I have watched Comcast grow and I visited them several years ago when they were downtown and I had just noted that they took on a $7 billion operation. And, I said to the Roberts, Ralph, Brian, you sure, $7 billion in debt? And, now, they moved ahead as giants and I visited a very high tech operation in Northeast Philadelphia and saw what consumer service can be.

This line of activity is very, very complicated and it requires a lot of capital and a lot of know-how and a lot of technology on speed of transmission and availability of services for the consumer. So, while there are important questions we have to answer in our duties on the anti-trust subcommittee, we should also note what this kind of a merger can do for the consumer.

Thank you very much, Mr. Chairman.

KOHL: I thank you, Senator Specter.

Before we hear from Senator Brownback, I'd ask unanimous consent that the statement of Senator Thurman be made a part of the record.

Senator Brownback?

BROWNBACK: Mr. Chairman, thank you very much. I want to associate myself with comments already made and would just would note that the convergence issue that Senator Hatch had talked about, I think is an important one. We're wresting with it both here and in the Commerce Committee and it effects different areas of legislation that's even -- that are coming up now as well, along with this hearing the proposed merger that's here today.

So, I see, as well, some convergence of issues coming together and I look forward to hearing the panel's thoughts of how that impacts us in brining these various technologies together one place in the home as it comes out the other end of the pie.

Thanks for holding the hearing.

SPECTER: Mr. Chairman, I just have one note, I left out, perhaps, Brian Roberts' most important qualification, he won the Silver Medal in Squash at the Macabee (ph) and Squash Tournament. When I found that out I almost revoked my agreement to introduce him today. I'm a squash player, but not that kind.

KOHL: Well, we thank you very much. And, we will start. Our panelists I will introduce them. I'd like to bring this information to you. Briefly, we'll have to recess about 2:30 to maybe at 2:40 there's a vote and then we'll come back immediately after vote and we'll continue this hearing.

Our first witness today will be Mr. Brian Roberts, whose president of his family's Comcast Corporation. Before becoming president in 1990, Mr. Roberts held a number of senior management positions within the company.

And, next we will hear from Mr. Michael Armstrong, whose chairman and CEO of AT&T. Mr. Armstrong joined AT&T in 1997 after six years as the Chairman and CEO of Hughes Electronics. And prior to that he was with IBM for three decades.

Joining us from Earthlink is the CEO, Mr. Garry Betty. Before joining Earthlink in 1996, Mr. Better was President and CEO of Digital Communications Associates and Senior Vice President of Sales, Marketing and International Operations at Hays Micro Computer.

Next, we'll here from Dr. Richard Greene whose CEO of Cable Labs a non-profit research and development consortium of the cable television industry. Mr. Greene has been involved in this industry in a variety of capacities from television broadcasting and engineering to managing key industry technology projects.

From WideOpenWest, also known as WOW, we have Mr. Mark Haverkate, whose founder, President and CEO of that company. Prior to the launch of WOW in 1999, Mr. Haverkate was Executive Vice President of RCN Corporation and President of Cable Michigan.

And, finally, we'll be hearing from Mr. Robert Perry who is Vice President of Marketing at Mitsubishi Digital Electronics America. Mr. Perry joined Mitsubishi after a seven-year tenure with Sharp Electronics where he served most recently as the head of the consumer, LCD products division.

In addition, consumers union, RCN and the Writer's Guild have submitted testimony for the record today. Following the conclusion of this hearing the record will remain open for one week for any additional statements to be included.

And, so now we'd like to call upon Mr. Brian Roberts for your statement.

ROBERTS: Chairman Kohl, Senator DeWine, members of the subcommittee, on behalf of my father Ralph, who is seated just behind me and myself, we're honored to be here today to talk about our vision and our excitement about what the merger of Comcast and AT&T Broadband will mean for American consumers. And I hope we'll get to all the issues you laid out.

But, obviously, in questions, we can go into specifics. Let me also thank Senator Specter for that gracious introduction, and particularly my squash attributes. Because this is my first time before this subcommittee, I'd like to just take a brief moment to tell you about Comcast and our roots and the kind of company we are.

As Senator Specter mentioned, my dad founded the company in 1963 and I think we represent what is truly great about family business in America, the opportunity to chase your dream.

ROBERTS: My dad's a true entrepreneur and he is always forward- looking. Evidence, the name he coined for his new company back in 1963, Comcast, which means communications and broadcasting. And, today, I can't think of a more concise summary of our vision than communications and broadcasting.

I went to work for my father right out of college and have been with Comcast in many different jobs ever since. We both love the cable business. It's in our blood. Having the chance to work together side-by-side during this great era that we've seen in cable and to be part of the terrific things that cable's brought this nation, the creation of CNN, HBO, CSPAN 1, 2 and 3, FOX News and hundreds of new channels that today we all take for granted.

And, we've always been enthusiastic about the ability to cable technology to do even more and that's why we keep rebuilding a reinvesting. Our company was one of the first to experiment with the high-speed cable modem, delivering lightening fast Internet over cable and one of the first to deploy them. We set the pace in rolling out digital cable, which gives you over 250 channels of TV and audio programming.

And, now we're introducing high definition television right here in Washington and video on demand, another product, that let's viewers watch when they want when they want it. And, we think there are going to be more and more other great services that broadband cable can deliver.

This is why I'm so excited about the proposed merger with AT&T Broadband. In all the decades that we've been in this industry we have never seen another business opportunity that is as exciting for our customers, our employees and our shareholders.

There's a lot of interest in making sure that the benefits of broadband reach all Americans. And, much discussion what the government can do. This merger presents a private sector response to that question. It will bring more digital services and features to more Americans more quickly. Let me explain why.

Comcast has substantially completed the upgrade to our cable systems necessary to offer broadband. Nearly, 95 percent of our systems are now built to current industry standards. Comcast also has a strong balance sheet among the very best in our industry. And our business, first and foremost, has and will remain cable television.

By contrast, a greater number of AT&T Broadband systems still require additional investment to get them up to current standards. Of course, AT&T's been in a number of different businesses up until now, all of them competing for scarce capital dollars and in the face external financial pressures, they haven't completed system upgrades as quickly as Comcast did.

This merger will give the combined company a clear focus, a solid balance sheet and strong borrowing capacity. It will find cost savings in several key areas, which will help to finance system upgrades and speed up the introduction of new services, including video, internet and cable telephone.

Now, I haven't mentioned phone yet. Frankly, we at Comcast have been a little slow to introduced cable-based phone service. We've been excited and always have said we've been excited about the prospect of cable telephony. But, we haven't been focused on circuit- based, but rather the so-called next generation Internet protocol or IP phone, which we believe offers more features at lower costs.

However, the more I spoke with Mike about AT&T Broadband's business, and phone business, the better the opportunity looks. Comcast can now take advantage of AT&T's considerable expertise and experience in providing circuit switch phone over cable and that will let us give millions more customers a true choice between facilities- based telephone providers and Mike will speak more about these opportunities and their experience in a moment.

I've used the term facilities-based a couple of times. Promoting facilities-based competition telephone against cable, cable against satellite, satellite against wireless was a cornerstone of our nation's pro-competitive communications policies of the 90s. As a result, satellite alone has captured nearly 20 percent of the video marketplace. Our industry certainly got the competitive message. In the past six years we've invested over $55 billion as an industry to prepare our systems and our companies for the digital era.

Comcast alone has invested over $5 billion. This merger is completely consistent with these pro-competitive policies. It will accelerate broadband, promote more investment and facilities and let us keep with a rapidly changing, hotly competitive communications world.

So, let me summarize the fundamental case for this merger. What specifically will it mean for consumers? It will mean that more Americans will have broadband sooner. It will speed up the introduction of digital cable, high-speed cable and other Internet and other innovative services still on the drawing board. It will bring facilities-based phone competition to millions more homes. It will allow us to expand investment in improved local and regional programming and it will permit us to expand our strong commitment to our local communities using the latest technology.

This merger will make all these things possible, as you've said while not reducing competition in any relevant market.

Chairman Kohl, and others, Senators, I could not be more proud of what the cable industry and Comcast have brought to America in the past. With our new company, joining Comcast and AT&T Broadband, we have the chance to do so much more. We want to make our new company a true 21st Century leader in every sense. We are committed to serve our customers and our local communities, both as quality communications service providers and as good corporate citizens.

I thank you for the opportunity to appear today. And, I look forward to your questions.

KOHL: We thank you, Mr. Roberts.

Mr. Armstrong?

ARMSTRONG: Thank you chairman Kohl and Senators, for inviting me to testify about his proposed merger of AT&T and Comcast. This merger is a unique opportunity, I think, to achieve two of Congress's longstanding goals. First, the widespread deployment of facilities- based local telephone competition and second the more rapid provision of advanced broadband services.

By uniting two companies with complimentary assets, this merger will bring more voice data and digital video services to more Americans, more quickly than would be possible without this merger.

When I testified before the Judiciary Committee almost three years ago, I offered that AT&T's cable investments would give more American consumers a choice of local telephone providers. Just two years after closing that merger we are over achieving on that commitment. We now serve more than 1 million residential telephone subscribers. This is a five-fold increase over the number of cable telephony customers we served at the time of the Media One merger.

As a result of this progress, in just these two years, AT&T Broadband has become one of the 10 largest local telephone companies in the nation. Today in 55 communities our telephone penetration is already 25 percent or higher. And, this includes several cities such as Salt Lake, Pittsburgh and Seattle. We enable customers to pay one charge for local, intralotta (ph) toll and long distance and savings are some 39 percent when compared to incumbent telephone companies.

In our original five-year plan we thought we would breakeven financially on telephony in the last quarter of this year and we're eon track because we're overachieving to beat that goal. But, despite this rapid success there is still much more to be done. Incumbent local exchange carriers still serve nearly 95 percent of the market for residential telephone service.

We're confident that AT&T Comcast will take our success to the next level. Comcast Cable systems today provide telephone service on a very small scale. AT&T's Broadband telephony expertise will strengthen Comcast's ability to offer telephony. First, Comcast can take advantage of AT&T Broadband's technical and operation capability in launching and providing cable telephony. We've already deployed the systems for the design, for the installation, for the operation of the complex fiber, coaxial systems that it takes to support digital voice.

Second, Comcast will gain access to AT&T Broadband's back office and customer care systems.

And, third, our marketing success will help Comcast face the difficult challenge of competing with local monopolies. Importantly, because AT&T Broadband's cable telephone approach is so highly scalable it will allow us to expand the availability of telephony over Comcast systems much more quickly, at less capital expense and a more customer friendly manner. In fact, Brian and I have already announced that shortly after closing the merger, we will begin deploying telephone service Comcast Philadelphia and Detroit systems. This will bring facilities-based, local telephone choice to about 1 million more consumers. The local telephony competition is not the only important benefit of our merger.

The merger will also enhance our ability to offer new broadband services such as AC-TV, Video on demand and expanded Internet services to virtually millions of additional Americans.

In particular, the combined company will have greater financial strength than either one of us would have to do this alone. As a result, we will have far greater access to the capital required to upgrade our cable systems to deploy broadband services. In addition, the scale economy's created by the merger will allow to more efficiently use the combined resources. For example, we can combine the call centers, centralize repair and maintenance facilities, and more efficiently manage broadband research and development costs.

All of this means that we'll be in a much better position to bring new broadband services to many, many more customers. This was our experience in our merger with Media One. When I testified before you about that merger, I noted that we would give many more American consumers access to high-speed Internet and other broadband services. In the two years since the merger closed, our high-speed data customers have nearly doubled to 1.5 million and our digital video customers have jumped from 2.2 million to 3.5 million. We're just as confident that the combination of our two companies will continue these benefits.

I also want to address the issue of ISP choice, which I know is of interest. Given the competition we have in the marketplace we're DSL we're interested in being as competitive in our offerings to consumers as possible. We concluded the 20 million trials in Boulder, Colorado with four ISP's. We learned about a great deal about what we had to do to implement a multiple ISP network. And, in fact, we have negotiated and now have, in the process of planning, an Earthlink implementation in Boston and Seattle. And, we announced just this morning another ISP in the Boston area, a local region ISP, Net One Plus. So, that there will be three ISP's on the network and we're currently in negotiations with others.

Finally, I want to stress that we will achieve all the benefits of our merger without violating any FCC rule or anti-trust policy. As I described in the written testimony our merger will not reduce competition in any market and I look forward to answering any specific questions you may have, Mr. Chairman.

KOHL: We thank you, Mr. Armstrong. As I noted, there is a vote, so we'll have now a 10-minute recess and then we'll be back.

(RECESS)

KOHL: This hearing will resume and we will commence with testimony by Mr. Betty.

BETTY: Thank you, Chairman Kohl, Senators and thank you for inviting me to testify today about the proposed merger between AT&T and Comcast and its potential impact on competition and consumer choice in the broadband internet access arena.

My name's Garry Better, I'm the CEO of Earthlink. Earthlink is the nation's third largest Internet service provider and we're the largest independent ISP. We currently serve 4.9 million customers with dial-up, broadband and web hosting services. And, broadband Earthlink is platform agnostic providing high-speed Internet access to over 530,000 customers through digital subscriber line, cable and satellite connections. The majority of Earthlink's broadband customers today have DSL connections, as most major cable companies do not offer cable modem customers a choice of ISP's.

All of us here today want to encourage broadband deployment. Broadband deployment is a term that is frequently used almost about anything these days. Unfortunately, it's also misused as an excuse for activities that benefit network owners at the expense of consumers.

It's been said that you can do just about anything you want in Washington these days as long as you say it's to promote broadband deployment. One example of this has been the refusal of most major cable companies to allow consumers who want to connect to broadband Internet through high-speed cable modems to choose their ISP. Rather, these cable companies have forced customers to use just their cable company's in-house Internet service. This take it or leave it choice has resulted in higher prices and lower adoption rates than would be the case if consumers had competitive choice in their internet provider over cable.

We are therefore here today to ask that AT&T and Comcast commit to providing customers in all of their markets a choice in broadband ISP's over cable by signing commercially reasonable contracts with independent ISP's prior to the merger being approved.

AT&T Comcast have argued since 1998 to Congress, the FCC, federal courts and local authorities that they should not be required to offer their subscribers a choice in internet providers over broadband cable. Rather, they proposed that open access should be voluntary and have promised that they would open their networks by this year. They've couched these arguments in very appealing cause for market based solutions for broadband Internet access over cable.

Unfortunately, while ISP's have always existed in the competitive marketplace, cable companies have not. Just as most consumers have no competitive choice in their cable television provider, so, too, most consumers have no choice in their Internet provider over broadband cable.

This is a significant problem since cable is and will remain the primary platform to which consumers get broadband Internet access. In 2001 cable provided about two-thirds or 6.5 million out of 9.7 million of all broadband connections. By the end of 2002, cable will still e 60 percent and by 2005 it's estimated that cable will provide more than half of the connections for broadband customers.

Notwithstanding cause for ubiquitous competition and platforms, the fact remains that cable will remain the only broadband connection for million Americans for years to come. This many consumers should not be denied meaningful choice in their Internet provider over these cable connections.

Furthermore, broadband is the future of the Internet. While the market for dial-up Internet has matures, it reached a platform of about 55 million households, broadband continues to grown from about 1 million households at the end of 1999 to an estimated 30 million by the end of 2005.

There's been a lot of promises made over the years during 1999 and AT&T's merger with TCI. AT&T told the commission that it was committed to an open broadband platform and that it would favor the unbundling of the modem in order to provide consumers with choice at the lowest prices. Later that year, at the urging of then FCC Chairman Kennard, AT&T signed a statement of principles with Mindspring Enterprise, now part of Earthlink, which AT&T committed to offer broadband consumers a choice of ISP's when it's exclusive contract, with it's own affiliated ISP, Excite At Home, inspired of June 2002.

In June 2000 AT&T signed an agreement with the Massachusetts Coalition for Consumer Choice in competition, which seeking an open access referendum from the November 200 ballot. In exchange for removing the ballot initiative AT&T committed to conduct a multiple ISP trial no later than October 2001 and to implement ISP choice statewide by July 1, 2002.

As part of their acquisition of TCI, AT&T also made a commitment in the year 2000 to the local franchising authority in King County, Washington to provide multiple ISP choices to consumers once their contract expired. On March the 12 we announced an agreement with AT&T to offer broadband Internet service to AT&T Broadband cable customers in Boston and Seattle later this year. They've also suggested that they will open additional markets during 2003, although they're under no obligation to do so.

While we're pleased to have reached the agreements we have and look forward to signing others like them, there's still millions of AT&T and Comcast cable customers who have no competitive choice in broadband Internet service over cable.

Similarly, Comcast recently signed an agreement with United Online to provide Indianapolis and Nashville customers with a choice of ISP's. Again, these limited agreements raise the question as to whether this is a slow trend towards long-promised open access or many an effort to force all open access requirement in the context of this merger review.

As I'm running out of time, I'll say that we've been very satisfied with the arrangement that we've been able to negotiate with AOL/Time Warner. I think in its example of how it does provide consumer choice. Their business and adoption rates have increased 20 to 25 percent only six months after the introduction of that and has been a big part of their growth story perceptively.

What I urge today is to support -- have support from the Senate to support concepts of customer choice on open access over AT&T and Comcast systems, look for standards of effective open access consistent with what was set forth in the AOL/Time Warner agreement that we signed and perhaps push for getting more than just a promise and actually implement contractual arrangements between independent third parties prior to the merger being concluded.

Thank you.

KOHL: We thank you, Mr. Betty.

Mr. Greene?

GREENE: Good afternoon, Chairman Kohl and Senators. I am Richard Greene, President and CEO of Cable Labs. I appreciate this opportunity to testify before this committee and look forward to answering any of your questions that you have concerning the role of the cable industry in developing and deploying new technology.

Cable Labs is a research and development consortium of the cable television system operators serving North and South America. Cable Labs conducts and funds research and development projects to help cable companies plan for the future and apply technology to meet customers' needs.

We've been working to promote development of new services over cable systems and to introduce competition among suppliers to increase innovation and reduce prices to consumers. Our tremendous and successful effort with cable modems is an example of this work. Today 7 million American homes enjoy cable, high-speed data service. The cable modems used in those homes were developed at Cable Labs.

The cable industry recognizes that to make cable modems broadly available, it would be necessary for these modems to use a common interface. Interoperability of the modems was achieved through the cooperation of the cable industry, equipment manufacturers, retailers and others working with Cable Labs on the DOXIS (ph) project. As a result, a highly competitive environment has developed, to the benefit of consumers.

Cable Labs has certified over 200 different modem models from dozens of vendors. Cable modem retail prices have dropped from $300 to $50. In a similar and parallel effort, Cable Labs has worked hard to encourage the commercial availability of cable settop boxes and other equipment that work with cable systems.

Cable Labs members have been very clear in their instructions to us. These members supported the DOXIS effort that successfully created a retail market in cable modems. They want the same thing to happen with cable settop boxes and integrated digital television sets.

But, first, and perhaps foremost, it's important for you to understand that cable systems can delivery and today are delivering broadcaster, digital signals, high-definition, digital cable settop boxes which allow cable operators to provide digital and high- definition broadcast to consumers exist, and they are being deployed today.

Therefore, in those areas where cable companies have reached agreements with broadcasters to carry their digital signals, there are no technical compatibility problems. A number of cable companies, including Comcast, AT&T, AOL/Time Warner, COX, Charter, are currently providing such services or have announced plans to do so in the near future. The cable industry has worked with consumer electronics industry to develop and integrated DTV set, which would allow the cable settop box to be incorporated within the DTV. To this end, the National Cable and Telecommunications Association and the Consumer Electronics Association reached voluntary agreements in February of 2000 and that agreement would allow consumer digital television sets to be connected directly to digital cable systems.

In a related area, the FCC has implemented the provision in the '96 Telecommunications Act calling for the commercial availability of navigation devices such as settop boxes. Consistent with the Congressional direction that the security of the cable operator signal not be jeopardized, the FCC rules require that separable security modules must be available from cable operators. These modules support integrated television receivers as well as settop boxes in the retail market.

These removable points of deployment, or POD security cards, foster the portability of settop boxes and other point of deployment- enabled devices. Leading cable operators, including the two companies here today, have publicly affirmed that these systems will support settop boxes and integrated TV equipment built to these specifications.

Moreover, to further promote retail sales of settop boxes, in October of 2001, the cable industry launched an initiative that provides customers with the option of purchasing from participating retailers, the exact same settop box that they lease from the cable operator.

In addition to the open cable hardware specification mentioned about, the open cable project, has recently published an open specification for middleware. A voluntary initiative, called OCAP that will promote the commercial availability of fully portable digital settop boxes and integrated TV's that will function seamlessly on cable system.

Once again, Comcast and AT&T and other cable operators have committed that their systems will support OCAP-enabled devices. The Cable Labs process is open, cooperative and efficient. We model our open cable effort on our successful DOXIS effort. As we did with DOXIS, we worked with equipment designers and manufacturers over 500 companies in all, to cooperatively prepare and approve specifications.

We are convinced that by attracting additional manufacturers, competition will add features to and reduce the price of settop boxes for consumers, as well as cable operators. Our goals are to issue specifications that will unleash market forces to promote innovation and competitive offering.

Thank you, again, for this opportunity to testify this afternoon. And, I'm pleased to answer the committee's questions.

KOHL: Thank you, Mr. Greene.

And, now we turn to Haverkate?

HAVERKATE: Mr. Chairman, Senator DeWine, thank you very much for allowing me to participate in this important hearing today. I'm the President of WideOpenWest, and I represent today, my company, as well as the Broadband Services Providers Association, which is group of 13 entrepreneurial companies across the country that have been out building brand new high-speed residential broadband networks for the last several years.

In effect, when the Congress passed the 1996 Cable Act they passed us the ball. We caught it and we ran with it. Since that time we've been working as hard as we can to build new networks and provide competition to the local incumbent cable and telephone companies to as many markets as possible.

Since that time, we have invested collectively over $5 billion in building these new high-speed networks. We're up to about a million customers together, so we feel like we've made substantial progress from a ground zero start back in 1996. But, even with that tremendous progress, we're still only about 5 percent the size of an AT&T Comcast, just to put things in perspective.

HAVERKATE: A few months ago my company, WideOpenWest, stepped up to the plate to preserve competition when no one else would and we acquired the properties that Ameritech built in the Midwest, the competitive cable TV properties that were built in the states of Ohio, Illinois and Michigan. Since acquiring those properties, we've been aggressively adding digital services, aggressively rolling out high speed internet and now are providing competitive choice for all those products to over 1.3 million households in those three states, much to the delight of municipalities because now they have a competitive choice today and going forward, hopefully.

A police report, not only from WOW, but also from the other broadband service provider association members that in fact the demand for broadband is very strong. We have tremendous support for the services that we offer. The penetrations that we're getting are generally on target with our business plan. And, in fact, our business model is a good business model.

One example of innovation I'd like to bring up is on the Internet side. A lot of people consider us more on the cable TV or phone side, but not only WOW, but the other companies have put a lot attention on the rollout of high-speed internet service. And, we're doing it in a different way than the cable industry has done so far.

In WOW, for example, we have three different options for the customer on price and speed. So, depending on whether the residential user is a high bandwidth user or a home telecommuter and they need the highest possible speed and performance, we have that option available. We also have an option as low as $19.95 a month for all refund high- speed Internet for the customer who just wants to have an always-on connection to the net.

So, we actually have broadband services available for prices less than a dial-up connection. Before I move into talking about our concerns with the AT&T Comcast merger, I'd just like to point out that, you know, I personally, and I'm sure many other members of the BSPA have tremendous respect for the Roberts Family. Just like, Mr. Roberts, Senior, who is an entrepreneur years ago and build a great communications company that's what we aspire to do today, in so many ways, we look up to that.

But, we do have issues with the conduct of the corporation and I'd like to use the rest of my time to point some of those things. It's not just Comcast, but AT&T as well, as well as some of the other MSO's. We think that there's been a decision made that the best time to try to eliminate the local broadband competitors from the market is right now. You know, everyone knows that the capital markets are a little bit weak, there's big companies combining together. There's talk about competition between the cable industry and the telephone industry. It's a good time to look around and say we have 13 entrepreneur companies out there that really pose a serious competitive threat to us on the internet side and the digital services side, on the video on demand side coming up, maybe now's the time to really put the pressure on and see what we can do.

So, two things are happening. One is on the program exclusivity side. You know, everyone knows that Comcast and AT&T have control and ownership interest in a lot of different channels, not only the basic cable channels but sports teams and the channels that distribute those sports teams, video on demand programming they're moving into control over all sorts of programming, even one possibility is the purchase of broadcast stations. If they end up owning broadcast stations and all this clout combined the risk that we have, all 13 of our companies, if we can't have equal access to all the programming that's available on fair economic terms, that's a trump card that they automatically win.

We cannot possibly compete with a company that has all this programming and control of it, doesn't make it available to us or if they do make it available, they make it on harsh terms and expect to be able to hold on to our customer base.

The second issue that I'd like to point out before I close is a current practice that should cause concern for the committee because its concern for the competition. And that is that there's now two rates that are being used in the market. You know, historically in the cable television business, ever since Mr. Robert, Senior, was in it in 1963, the common practice was to have one rate. You notify the municipality. You notify the customers and everybody in that municipality pays the same rate. It's not a flea market or an ebay where everybody gets a different rate. But, now there's a strategy that's being deployed, we feel, directly targeting us and that's to have two rates in the same municipality for the same service. One rate that their customers pay, their big large base of, you know, customers pay. And, then a second rate that's 35 percent less or sometimes more that is directed at our customers or any of their customers that consider switching over to Comcast. So, now you have two rates in the same market for the same services, next-door neighbors getting the exact same services, paying different rates.

And, you ask, well, why is that? Is that good competition? Well, it's not, you know, it's clearly designed by a big corporation to try to squeeze out the competition. And, we're here to object to that and to bring it to the committee's attention.

So, are we in favor of the merger or not? For us, it's not an issue about size. For us an issue about corporate behavior and whether it's in the best interest of this country, after all the work that was done by Congress, by the municipalities, by all these entrepreneurial companies that build these networks and really have local competition be at its height, is it really in our best interest to allow some of this bad behavior to jeopardize that whole process? We suggest that it isn't. And, we ask for some attention to be put to this so that our entrepreneur dreams could come true.

Thank you very much.

KOHL: We thank you, Mr. Haverkate.

And, now we ask Mr. Perry to make his statement.

PERRY: Thank you, Chairman Kohl, Senator DeWine for being here this afternoon. I appreciate the opportunity to address you. I'd also like to thank you, Chairman Kohl, for your fifth point, which is in the 1996 Telecommunications Act the FCC was to promote the availability of retail settop boxes, to create this vast competitive environment for new product and innovation. So, I appreciate you bringing that up. It was obviously lacking in some of the statements that have been made here today.

But, first and foremost, my name is Robert Perry, I'm the Vice President of Marketing of Mitsubishi Digital Electronics America. My responsibilities include product development, government affairs and dealing with the retailers who sell our products across the country. My goal in life is quite simple. It's to sell large volumes of advanced digital television receivers and other products as quickly, inexpensively, as effectively as possible.

One out of every five HDTV's in consumer's homes today is a Mitsubishi. But, despite the best efforts of the members of this committee to introduce competition, my competitors and I are still unable to offer a single consumer product of any sort that connects directly to any digital cable system.

The dominance of the AT&T Comcast deal can either seal this market from competition or finally open it. This power will all be in the hands of one of my colleagues at this witness table. The prepared statements form Comcast and AT&T for today's hearings do not even address the device market, nor do their oral testimony.

But, 10 years of leaving this issue to Cable Labs has not enabled competitive entry. For such entry to have a chance it must be actively embraced and supported by the CEO's before you today.

For 10 years the Congress has tried to open this market to competition. In 1991 Senator Leahy, pointed out that cable systems do not really support the operation of television receivers. In 1996 Congress explicitly instructed the FCC to assure that competitive commercial availability of any product necessary to receive any service offered by a cable operator. In 1998 the FCC accepted an offer from Cable Labs and its MSO owners to draft and support necessary technical specifications by July 1, 2000. These specifications turned out to be late, inadequate, incomplete and not sufficiently tested.

Mr. Greene barely refers to them in his testimony today. Recently, a competitor of ours asked Cable Labs to certify a prototype DTV receiver built essentially to the July 2000 specifications. But, Cable Labs refused to consider certifying it because it does not also rely on newer specifications that are still under development and revision.

So, Cable Labs first try was deemed good enough for the FCC, but not good enough for an actual product. Cable Labs new specification, known as OCAP, may be an improvement if, and when it is complete and reliable. But, today, it is untested, far from ready and even farther from being relied upon. In fact, in recent public statements they have commented that OCAP may not even be ready in time to support the digital television transition.

In addition, at present we have no assurance that the products built to this specification would actually work when connected to cable systems. The cable MSO's themselves, such as Mr. Roberts and Mr. Armstrong, have been unwilling to say that they will rely on this specification in the devices that they themselves lease to customers.

Moreover, both OCAP 1.0 and OCAP 2.0 provide that competitive product features such as recording, games, program guides, telephony and home networking might not work or could be disabled at will by the MSO. Cable Labs has referred to this issue as tools, not rules.

As we all know, no one orders tools without intending to use them. We face another showstopper in the so-called POD host interface or FILA license, which any entrant must sign in order to compete with MSO's in the device market. Elements of this license are anti- competitive and profoundly anti-consumer. Such provisions include turning off home network interfaces by remote control, reducing the resolution of high-definition content, turning off consumer home recording via technical means and in requiring Cable Labs certification prior to sale at an unlimited per product certification fee.

While we try to fight through this obstacle course, cable MSO's say they distribute about 135,000 digital settop boxes per week, about 25 million to date, all proprietary and none which conform to the standards set for competitors or are bound by this license.

Not a single competitive product has been sold or even certified for manufacture by Cable Labs. The competitive score to date is cable MSO's $10 billion in commerce, competitive entrants, zero. AT&T Comcast will be Cable Labs largest owner and Motorola's biggest customer. I believe this committee can and should insist on a commitment here and now that the enormous power resulting from this merger be used to district monopoly, not consolidate and perpetuate it.

Here are the minimum commitments that I urge this subcommittee to demand for my colleagues at this witness table. As to standards and specifications, a simple and authoritative pledge from AT&T Comcast that by a date certain their devices will live by the same rules and specifications they set for competitors. And, that specifications will not discriminate against competitive entrants.

This would go an enormous way to build confidence in manufacturers, retailers and consumers to enter this marketplace. As to product certification, while my colleagues and I like and respect Mr. Greene, MSO policies and resource constraints on Cable Labs have led to certification practices that, in many cases, are discriminatory, underfunded, overpriced, non-transparent, inefficient and unpredictable. It is up to AT&T Comcast as the dominant cable MSO to build confidence that Cable Labs will drop any requirement that they approved competitive products for sale.

As to the final license, the POD host interface license. This license is a public trust originating in the Congress. A reasonable license would not threaten the 2.5 million HD displays now owned by consumers with degraded resolutions or with interfaces being shut off and screens going dark or with the unconstrained ability to stop home recording by technical means.

AT&T Comcast will have the power to insist on reasonable license terms that a manufacturer could sign without having to apologize to its past, present and future customers.

Accomplishing this would fulfill Mr. Armstrong's commitment here today not to violate any FCC regulation, as well as complying with the will of Congress. On behalf of my company, I thank you very much for having invited me today.

KOHL: We thank you, Mr. Perry. And, we'll begin asking a few questions.

Mr. Roberts, your statement was very well written and very well delivered. I appreciate it very much. But, I was disappointed, you didn't seem to answer many or any of the points and questions that I felt were most pertinent and that I noticed as I spoke you were, at least to some extent, marking down.

So, first of all, will this merger offer consumers any relief from continually rising cable rates, the first question, if you'd mark that down?

The second question, won't, Mr. Roberts, this merger make it more difficult for small competitive cable operators like our witness here today, WideOpenWest, to compete with you and other giant cable companies, as Mr. Haverkate has attested?

KOHL: Third, Mr. Roberts, how can independent programmers ever hope to distribute their programs over cable lines where large companies like yours prefer to get their content from their own affiliated companies? And, specifically, shouldn't the program access rule be extended past this October?

Fourth, why won't you agree to a legally -- in a legally binding manner to allow access to your high-speed internet connections by competing companies as AOL/Time Warner did as a condition of their merger?

And, fifth, how do you respond to Mr. Perry and what assurances can you give us that the law with regard to the settop boxes will actually be implemented soon with your full approval?

ROBERTS: Thank you, Mr. Chairman. As I mentioned in the opening statement, I look forward to chance to address specifically all five of those issues. So, taking it from the beginning, cable rates, as you know cable industry, two-thirds of our cost comes from the programming cost that we pay to the programming channels, to the hundred channels that we carry or more.

Last year in Comcast and the year before our programming costs went up about 15 percent per year. And, you see today, in New York City with the New York Yankee's dispute with Cable Vision, a real live example of the terrible dilemma facing a cable operator. There's a product that clearly many people want and at the same time a new cost, above and beyond all your existing costs, have been reported around $2 a month for one channel.

So, in our case, and in AT&T's case we launched that channel and we have recently announced a rate increase. And that rate increase is substantially more than inflation. Another cable company that chose not to carry to the new product and they have significant competitive problems with full page ads being run by dish competitors saying switch your cable over and you can get the Yankees.

So, this is a competitive business today. And, your principle competitor is the satellite industry who also has many of the same channels and in many cases their programming costs as well and they have raised rates. So, the complexity of what happens to the consumer from their cable company has to be looked at a couple levels.

One, what are your programming costs? Two, are you -- we've been able to rebuild all of our systems and offer new products like digital and modems, as you've heard here today. All of those products are optional. So, all consumers get a better cable system but many have chosen to take incrementally more services.

And, finally, the issue of how do you put a package together to compete with your satellite reverend or companies like WideOpenWest. So, in our case our rate increases have been about 5 percent each of the last several years. And, our programming costs have gone up double-digits. If we do that for too long, if it wasn't for the new services, our business would be going backwards. So, that's number one.

KOHL: But, just to get -- how will this merger affect your rates? How will this bring down rates to your consumers who are listening to you today?

ROBERTS: Well, I think that the ability to accelerate the new products so we can get more of the incremental revenues takes pressure off the basic rate. If it had not been for digital and modems, I don't believe you could pay 15 percent more for programming, which is two-thirds of your cost and only have a 5 percent rate increase, which, as you acknowledge is higher than the inflation rate as it is already.

So, the first problem is can you get more new products to consumers to not have to raise basic rates? Number two, will there be an ability between the two companies to reduce cost and be able to then pass some of that or all of that through in some form of consumer benefit, whether that's an acceleration of new products or directly in rates or in of giving better service and competing as a better competitor.

So, that's, hopefully, responsive to question number one. And, Mr. Armstrong may want to add to that.

Number two, will it be more difficult for small companies or small entrants to compete with us? I don't believe the merger effects that question because the markets are different markets. So, AT&T's in Boston, Comcast is in Michigan where we compete with WideOpenWest. The reality is that this is a very different cable business than your father's cable business, if I can steal the line from the commercial. Since 1992 with the cable law of 1992, there is a creation of the satellite industry. Today, we have two competitors in satellite and many local competitors such as WideOpenWest and in other cities we have wireless competitors.

But, nationwide, everywhere there is two competitors from satellite. There is price competition. They run specials and marketing promotions. It's a customary practice in the competitive business, very different than pre-1992 where the only way to get ESPN or HBO was through cable. That's not the case today.

You can get a free satellite dish and in many cases six months of, you know, very discounted service at $9 a month. So, we have to match that new marketing offer on the ground. In those cases, three out of four new sign-ups appear to be going to satellite and their growth rate has been faster the last several years than cable.

So, I don't believe the merger in any way changes the competitiveness today in each of the local cities where we compete. We have a national competitor in every one of our markets. And, it's many of the markets where WideOpenWest is and other facilities-based competitors. We are competing, and I think all of our behavior is, you know, customary and we basically meet their price. We have to build an entire franchise in many cases they do not or have not. And, we have, you know, sometimes-additional burdens put on us by the local municipalities that they may or may not have.

The question about independent programmers want to discriminate against small independent programmers. I actually think this deal has the potential to be an enabler where the content and technology community to galvanize and incubate new development. And, why do I say that?

We paid a lot of money in this merger. There is pressure for us to innovate and to create new services.

Now, not all those ideas are going to come from Comcast employees. And, so we have gone out and will go out and try to say to any new entrepreneurial, especially given our roots, can you come and with one contract with this company really make your business plan come alive and become real. And, some of the examples like the Outdoor Life Network that you mentioned, there was a group of entrepreneurs that founded that channel and they were able to make deals.

There's a competitive channel. We carry that competitor. You mentioned QVC; we carry Home Shopping Network, which we do not have any financial interest in. We have a competitor in satellite, just using that for the moment and nationally in every one of our markets. If we don't carry the best programming we're going to lose our customers and therein lies the debate in New York City right now.

And, so, as people have new ideas, whether it's things like cable modems, there's a pressure on us to make sure we're innovating and finding new revenues that are optional to the consumer and something that causes them to want to stay with Comcast.

You asked about Internet services providers and legally binding, whether we should have a condition like AOL. I would submit that we're not AOL. AOL has a huge market force in narrowband Internet, more than 50 percent penetration of all the people who get internet connections do so through AOL.

Comcast has a total of 1 million Internet connections. AOL has 30 million. So, we are an innovator in this space of high-speed broadband. I don't -- Dr. Greene, who helped us innovate cable modems; I can remember many times when people said cable modems will never work. And, even though it may sound harmless to put a condition on, it chills the financial capital that went into a brand new service like cable modems where we have less than a 10 percent market share, of broadband having -- of homes, but of total internet connections, it's a much lower number.

This is an early entrant. Now, to a specific of Earthlink and other multiple ISP's, we have said for some time we want to do business with as many connective points as possible so that consumers have the choice that they want, because if they don't take it from us, they're going to take it from DSL, our competitor. Every one of our products is competitive today, including high-speed modems with DSL and wireless.

So, we were in an exclusive arrangement with Excite at Home when we invented cable modem. The contract terminated with Excite At Home went bankrupt in December. In January we transitioned with great pain, 1 million customers off of the Excite At Home in a hurry-up way on to the Comcast high-speed network and in February announced that we wanted to get started on our commitment to do multiple ISP's and the first arrangement we made was with United Online who I believe has send you a letter and that's Net Zero and Juno.

AT&T announced an arrangement with Earthlink. The reason we begin in two cities is we want to get it right for our customers and make this work. But, you have my commitment that we -- and reaffirm what I said before, which is it's absolutely our intention, because we think it's good business, to get multiple ISP's in commercially reasonable ways throughout our company. We want to get it done. We just transitioned a million customers. I don't think it should be a condition of this deal, because we don't have a gate keeping service today. We have a brand-new competitor and we don't want to get the financial community concerned that there's going to be regulations on something we just invented.

Mr. Perry's concerns, I would like to -- he's technically knowledgeable and Dr. Greene is technically knowledgeable, so I would like to defer some of that. But, let me specifically address the big picture of settop boxes, which is on your list in the beginning. I went to the consumer electronic show with a number of cable operators this January. And I was amazed at what I saw. Everywhere this high- definition sets as Mr. Perry is talking about. And, that is clearly a real possibility that that's what Americans want. And, every one of those sets was connected to satellite. And I walk into Circuit City and I see all they want to do is sell you a satellite dish and sell you a high-definition or a flat screen monitor.

It's critical to the cable industry that we have a competitive offering. So, I came away from that saying, we have to accelerate our relationships with the settop manufacturers and to get these settop boxes available at retail so that our competitors' product, who does offer some of these functions and features isn't the only place. I met with the CEO of Circuit City last week. The first time we'd ever met. In cable modems we have all the Circuit City's stores carrying our cable modems.

In cellular telephone a previous business Comcast has been in and AT&T as well, we offered all of our products at retail. Cable television has traditionally not done that. That has to change for business reasons because our competitor has an advantage of us and if a consumer, as they replace these sets is being told by their consumer electronic industry and by the retail industry switch to satellite, I'm the loser and Comcast is the loser.

So, we are going to try to fix that and Dr. Greene will tell you all the steps that the cable industry came home from that consumer electronic show and said let's accelerate our activities there. So, hopefully that addresses some of your issues.

KOHL: You have, and I appreciate your frankness. My sense in listening to your testimony and to your response is that you are doing and outstanding job in representing your company's best interest. And, I think that's what you should do. And, I appreciate that.

Whether or not that is in the best interest of the consumers of America is, of course, open to debate, I'm sure as you would agree and open to question. I am always concerned, as I was, as you know, in the case of the satellite television companies who want to merge, I'm against it. And, when you appeared in our office we discussed it and I made it very clear I thought that that was not in the best interest of consumers to take the two biggest satellite companies and merge them.

And, I've forgotten your specific response, but I thought you understood what I was saying and was somewhat sympathetic to some of the arguments that I made about consolidation.

But, I'm going to pass it on to Senator DeWine, before I do I would just like to ask Mr. Greene, Mr. Haverkate, Mr. Perry, to respond briefly, but respond to some of the things that Mr. Roberts has said.

I'll start with you Mr. Greene.

GREENE: Thank you, Mr. Chairman, I welcome the opportunity to respond. Specifically on settop boxes, we are disappointed, as you are, that the retail market has developed so slowly. We have worked very, very hard to try to solve the problems, the technical problems that may have been part of this issue. Specifically I want to set the record straight with respect to the performance of cable and producing the POD module. In other words, there were a series of agreements; in February of 2000 there was an agreement between the Consumer Electronics Association and the National Telecommunications Association in which we agreed on the specifications for interconnection.

And, in July of 2000, the FCC required that we prepare a module that could be inserted in a television set or a settop box to provide interoperability, the separation of the security module. We were on time. We delivered that products in works and it was certified.

Mr. Perry is incorrect is saying late, inadequate and not complete. Those modules are available and as proof of that, at the consumer electronics show there were two manufactures that showed television sets that accepted the POD module, were connected to the COX cable television system in Las Vegas and they worked.

So, it's not true that the specifications were not complete. In addition to that we worked with Mr. Perry's group to define the interfaces for our digital television receiver. We published those specifications. These specifications are American national standards. They are not just Cable Labs' specifications. They are standard.

In following that, we worked within the cable industry and working with manufacturers to develop the next generation of specification which were software. We've very interested in developing an attractive retail product so that the software and the applications that need to run on a settop box or a television set are very important.

The open cable specification, OCAP, provides that software. It is a fair and open specification, which provides a set of interfaces that anyone can write too. It's available to anyone for development. We've issued two sets of the specifications Mr. Perry referred to and we hope that this will also help to provide an attractive retail product moving forward in the settop box.

Thank you, Mr. Chairman.

KOHL: Mr. Haverkate?

HAVERKATE: Mr. Chairman, Brian Roberts made one comment on the programming issue. I think I got the quote down exactly right. He said if we don't carry the best programming, we will lose our customers. And, I think that's exactly the point that I've trying to make relative to our relationship and our ability to compete with Comcast AT&T where they have the control over what programming is available and have the ability to restrict access to that programming t us. So, I couldn't agree more on that point with Mr. Roberts that if we don't carry the best programming we will lose all our customers. But, if it's their programming and they get our customers and they have certainly, an incentive to withhold that programming and they have shown in the past that they will.

The second point, on the issue of this rate discrimination and improper practices in the market themselves. Brian referred to it as customary promotions, I think was the term that he used. That's not the case. The promotion is either something designed to try something new, but at least it's a public promotion. I've never once seen and ad and I don't expect I will see an ad that says please call Comcast and say that you're interested in switching your service to WOW and we'll reduce your rate by 35 percent. This price strategy is being done undercover. It's being done in secret. It's not a promotion. It's designed to restrict the ability of a competitor like us to succeed. They can call it a promotion if they want, look it up in the dictionary. It's not promotion and the intent is clear.

In fact, I think, basically, what's happening here, Mr. Chairman is they're conducting a hostile takeover of our industry one customer at a time? They probably wouldn't be allowed to buy our companies, so they've decided to buy it one customer at a time by going out to our customers and offering whatever price they have to do to take it over.

And, if it's allowed to continue I think it's going to be successful for the company that they have and the resources that they have in the young stage of development that our industry is in, there's no way, no mater good we are, no matter what products that we offer, no matter how good our internet service is, going up against that kind of odds is impossible.

So, I'd certainly appreciate, you know, any advice or attention that this matter could be given. Thank you.

KOHL: Thank you.

Mr. Perry, you have a comment?

PERRY: Yes, sir, and thank you for giving me an opportunity to respond. In addition to my duties at Mitsubishi, I'm also the chair of the video division of the Consumer Electronics Association, as well as a member of the executive board of directors. I also am pleased to serve on the Home Recording Rights Coalition, which is a grass roots organization that is dedicated to preserving consumers' normal and customary recording practices. And we happen in this transition from analog to digital that you didn't give up any of your rights.

That being said, I'd like to respond to some of these points very specifically, but still not get into an engineering discussion and I don't even play one on TV. Having said all that, Mr. Greene's response about the specification, he's referring to the POD specification. The POD is essentially an access card that slides into the front of some kind of a settop box. That specification is essentially complete.

The other specifications that are required to build a complete product are not. They are not and we cannot build to them. And, this relies kind of a central underpinning of what we're in the business of doing.

What we do in the consumer electronics' business everyday, myself and all of my competitors, is we try to develop the latest, coolest products that consumers want and they get to vote in the stores. And, what we do as manufacturers is, quite literally, bash in each other's heads in, lowering prices and increasing ingenuity and new features.

In fact, if you were to look at the projection television business as an example, in 1997, just as we were starting the digital transition of our country's infrastructure, a 50-inch projection television, a big screen TV sold for a little more than $2,000. Today, the HD version of that television sells for under $2,000. We do that every day in our business.

So, it's a little bit disingenuous to assume that there's a specification out there that we can build products too, but we simply don't. What we want to make are products that connect directly to the wall, don't require settop boxes, or we want to make settop boxes for those consumers who may need one for secondary televisions and other televisions in the home. Those specifications and the license agreements that go with them, the specs are not complete and the license terms are egregious. Let me explain how egregious one of those license terms is.

In this FILA license we are being asked to agree to allow the content provider, by encoding their digital content before they sell it to an MSO, or to allow the MSO to send a signal to turn off outputs of those products. There's two kinds of outputs on products. There's those outputs that I can record at home and enjoy my customary home recording rights, and then there's the other outputs that I can't record.

The specification and its associated license agreement specifically require us to relinquish that right to the MSO. If they want to keep all the recording capability in the settop box so they can charge, in other pay every time you press play; they can do it under these specifications.

These are some of the issues in a very, very complex document, which frankly has to be addressed before manufacturers will risk capital. Another key point, which has not been spoken about is there's two sets of specifications. There's this very complex specification that requires paying tribute to Cable Labs in the form of licensing fees and certification fees. It's very complex. It makes a very expensive consumer product. And, then there's another specification which the cable MSO's themselves can use, which is simple, no cable MSO has appeared and said we will abide by the specifications issued by our scientific organization Cable Labs. None of them have agreed to follow their own specification. That should be a pretty clear indicator of really what's going on here.

I applaud the fact that Comcast is a good support of HD-TV. They've had a number of great announcements recently and it's wonderful. Our country is trying to transition to a digital infrastructure. The unfortunate part is as we transition we need to make sure that the settop box issued by the cable company is not a gatekeeper. That's not designed to abridge normal consumer recording rights in the ability to network and all these kinds of new technologies that can happen in the home and benefit consumers.

We haven't heard any conversations about how does the cable MSO unlock their monopoly for settop boxes? If a specification truly existed that didn't come with egregious licensing terms that required us to effectively pay a competitor, you can bet we'd be making those products today.

Those are truly the issues. Thank you.

KOHL: We thank you, Mr. Perry.

I am going to turn us over to Senator DeWine right now, I need to go to another meeting, I conference committee of the bankers of reform bill, so I want to thank you all for coming. And, I'd like to turn this over to the Ranking Member of this committee, Senator Mike DeWine.

DEWINE: Thank you, Mr. Chairman.

The FCC's recent report on cable prices indicated that when consumers have effective competition of cable they enjoy lower prices. That certainly come as a shock to anybody. Competition from over builders, though, has come from new entrants and relatively small providers of small cable services. Let me ask you all, and we'll start with Mr. Roberts, why is it that the larger cable companies have not moved into other large companies' markets to bring the consumers the benefits of head-to-head competition? We haven't seen that, why?

ROBERTS: Well, in our case...

DEWINE: And, let me just say is this merger going to make that any more likely?

ROBERTS: Well, heretofore, because you serve the entire community and because you have now two national competitors in satellite, it has proven to make a lot of money. Ameritech, as was mentioned into the business and before them Florida Power and Light and others, large substantial companies who wanted to go into other markets where you have to wire up the entire community or some substantial amount of home and then, you know, see how many customers you get.

Satellite has proved to be and wireless a quicker and easier way to get a large footprint. So, in our case, we have put our money into -- when that happened, satellite occurred, we put $5 billion, as I mentioned in my testimony the last five years into upgrading our existing facility to try to sell new products and to have a more competitive offering so that customers would retain with us.

DEWINE: Mr. Armstrong?

ARMSTRONG: Senator, I think that having pursued first the acquisition of TCI and then Media One, and now putting together AT&T Comcast, we are probably the most aggressive in leaving in and committing too enormous amounts of capital to deploy broadband services.

Second, this is a very, very high fixed cost business. Whether you're an entrepreneur starting it up or whether you're transforming what's already there. I've been in three forms of networking in my career, data communication with the IBM Company for three decades and then six years with Hughes and satellite communications and wireless communications and now wire line and cable communications. And, there's some common denominators of those businesses.

One, is that they're very capital intensive and in an extremely high fixed cost nature to them and you've got to get as much content going over those infrastructures that you spent all that money to make go fast and connect to customers as you can.

So, we have been concentrating on clustering our assets so that we can leverage our capital so that we can bring more services to more people sooner. And, in that respect, we hope we cannot only converge the interest of the consumer, as was spoken too before with the interest to the cable company. Because if we can bring more services at better prices in better bundles sooner to the consumers because we clustered these properties, we will be as competitive as we can possibly be.

DEWINE: Anyone else, the panel, comments?

HAVERKATE: Senator? Yes, there is, I think two references now that implied that the new broadband companies are not building entire communities. And, generally speaking that's not the case at all, the franchises that we have in the Midwest have been completely built out.

HAVERKATE: We're providing services to 100 percent of the communities there and we're providing similar franchise requirements as the incumbent MSO, and certainly don't believe that we're getting any special treatment in that respect. There's also been an implication that our business is not a viable business. But, it certainly is. While we're still young, we still have several members of this broadband service providers association that are turning into a positive cash flow situation. We're right on the edge of becoming successful companies. And, I think if we can prove that this is a viable business model and that there is room for a second local network in these markets, considering the explosion of Internet and digital services, I think that'll lead to more competition, including the possibility of big companies competing with each other.

So, you know, I would certainly not give up on the goals of the Cable Act and having these local competition, because we're not and we think we have an excellent opportunity as long as there are some ground rules that are established now going forward?

DEWINE: How are things going for you, Mr. Haverkate in Columbus and Cleveland?

HAVERKATE: We have about 21 to 22 percent of penetration in those markets, so one in five households is connected to our network. When Ameritech built it, they built an excellent analog cable network, but they were slow to introduce digital services and they didn't introduce Internet at all because they had a DSL strategy.

When we took over, we accelerated the rollout of digital cable and Internet services. So, now we have a comparable suite of services as Comcast or Time Warner does or Philadelphia Cable does.

So, we are doing very well on increasing the range of services that we're providing to our existing customers, but we are having some serious difficulty in fighting this issue on rate discrimination that I've mentioned before where our customers are being targeted and asked, you know, to switch for a big payoff.

DEWINE: Let me ask Mr. Armstrong and Mr. Roberts, Mr. Haverkate, the following question, cable franchise agreements often require cable providers to have uniform pricing for consumers in their franchise area, at least for basic cable services. Many cable over builders have noted that when they enter into a specific neighborhood that the incumbent cable provider will offer free programming, discount prices, cash rebates in that area to prevent them from switching their customers, switching to competing services. Obviously, the customers who receive these benefits in this competition have benefited from the competition.

Let me ask you, do these types of discounts promotions violate the franchise agreements, and also, will the ability to offer this type of discounts harm consumers in the long run if new entrants are unable to establish a sufficient customer base and remain viable?

Mr. Armstrong, you want to start?

ARMSTRONG: Well, certainly. First, Senator, I don't think it'll harm consumers. I think competition is pretty darn good. We spent a lot of time competing with Dish...

DEWINE: Long run, as well as short run, they'll be better off? Clearly, in the short run they're going to be better off.

ARMSTRONG: Sure. And, I think in the long run they're going to be better off also. We spent a lot of time competing with Dish and my old outfit, Direct TV, as well as over builders, as well as Bell companies, and, as Brian mentioned, in some cases, wireless outfits.

I don't think it violates, to my knowledge, to be competition. I do think it's wrong if people start to price below cost in order to keep them long-term, that's very bad and that's not the right thing to do at all. And, I know, at least in our company's case, we've never, never approached that.

So, my bottom line, Senator, is I think it's good to have competition. I think we've got a lot of competition and over builders aren't the only ones we're reacting too day-by-day.

DEWINE: Mr. Haverkate, any comment?

HAVERKATE: Yes, I do, I don't believe they responded to the question about franchise requirements. But, for the most part the franchises do address the issue of discriminatory pricing and charging uniform rates and publicly disclosed rate across the entire customer base.

So, in most cases, this practice that I've been talking about today certainly appears to be in violation of the franchise agreements that the municipalities have.

Secondly...

DEWINE: It would be?

HAVERKATE: It would be, is in violation, yes, because the rates are supposed to be publicly disclosed, which they're not, in uniform, which they're not.

The second thing is, certainly it's hard to argue against a lower rate at a discount that a -- certainly, everyone wants to get a deal. But, if the price of a allowing this activity to happen is the elimination of competition, be assured that, you know, rates will go up faster in the future, choices of internet service will be reduced, the competition in the digital arena will not exists. And, it's -- we're not talking about a short-term, long-term like three years from now, if this issue isn't addressed immediately and some stop is put to it, the companies of this size, if they have the intent, have the ability to put us out of business, not next year, but this year.

So, it's a very serious issue. They keep talking about the satellite industry. Well, I want to talk about the local network industry that's spent so much money, time and effort to put themselves at place and now it's being at risk.

DEWINE: Mr. Roberts, any comment?

ROBERTS: Thank you. A couple points, first of all, I have tremendous admiration for a fellow entrepreneur, the Ameritech Company, which is, you know, a substantial, not part of SBC, built some of these markets and I believe your company was able to buy them for less than they, substantially less than they had spent to build them.

So, that's the entrepreneuring model at work. And, he's absolutely entitled to pursue his business and I wish him good luck. The reason we keep referring to satellite, as a major competitor is that is where the vast -- first of all, it's available everywhere in the country, not market by market. And, of course, in the last couple of years, Congress has passed to -- the Satellite Home Viewer Act, to allow satellite to have all the local broadcast signals. And I believe what has been referred to in the local franchise of one rate is the level of service that includes the local broadcast signals, so- called B1.

And, I believe if there is a certain community where there is some behavior then you could complain to that community or complain to the FCC. So, again, I guess I step back and say I don't see it as a merger issue, the satellite industry and the overbuild industry are competing and we're responding in turn by upgrading our networks, investing, clustering, as Mike mentioned, and, hopefully, creating a compelling proposition to the consumer.

DEWINE: Senator Specter?

SPECTER: Thank you very much, Mr. Chairman. One of the concerns, which I have, involves the tie-ins between sports teams and cable. Two examples come to mind and there are a number of examples that come to mind. One example is the Braves network; another example is the Yankees network. I heard recently that a substantial charge was being added to the cable subscribers of Yankee's games and they've had a relationship of this arrangement is that enormous revenues go to the teams like the New York Yankees. And, they're able to buy pennants and buy World Series championships almost at will.

Mr. Haverkate, you're nodding in the affirmative, I think I'll start with you. You appear to agree with me.

HAVERKATE: Well, I certainly agree 100 percent with your comments so far.

SPECTER: Well, what is the extent of major sports teams' ability to control television, cable television to acquire more funds, which then in turn can be used to buy players and buy pennants?

HAVERKATE: Well, they have an enormous ability there. The example that you're using in New York, while we don't -- WOW doesn't operate in New York, I know that RCN and other members do. Typically the negotiations go something like this, we decided to put this number of games on this channel and this is what the rate is and you have until Friday to agree to it.

If you were a competitive provider like we are or like the satellite industry is, and you have a lower market share and you're doing everything that you can to try to hold on to the customer that you have, the last thing you need is to not have a programming like the New York Yankees.

So, in effect, we agree to whatever demands they have, no matter what the price is. And, generally speaking the cable MSO's have had to do the same thing because if they don't do it, then, you know, they're painted as the bad guys and, you know, withholding key programming from consumers.

Occasionally, there's a company like Cable Vision that says no and takes the heat on it. But, generally speaking, all the leverage in that negotiation is with the sports owners and the sports channel and the cable companies have very little to do with it in my experience.

SPECTER: Do the Yankees own a cable network?

HAVERKATE: I believe they do. I'm not -- since I don't operate in the New York market anymore, I've only been following this particular issue through the trade press. So, maybe Mr. Roberts or Mr. Armstrong would know the details more than myself.

SPECTER: Does anybody know for sure whether the Yankees own a network? Mr. Armstrong with an affirmative nod?

ARMSTRONG: No, it's 50/50.

ROBERTS: I think they own 50 percent of the network and they sold the other 50 percent to some investors recently in the last year.

SPECTER: Mr. Perry, what do you think Congress ought to try to do about that, if anything?

PERRY: Well, sir, I think concentrations of power, as commented very early, I think, in some of the opening comments, are not necessarily bad, if, in fact there's oversight. And, if an environment is created that where this power can be put to tremendous use of allowing for competition and allowing for equal access and allowing for lots of entrants to innovate and bring technology to the party, which is something that we do in our business.

SPECTER: But, how can you have oversight or how can you have competition? It's a full circle. The Yankees own the system or 50 percent of it; they must have had a good reason for bringing investors in. That produces revenues because people like to watch the Yankees because they're good. And that enables them to borrow a lot of money to buy more players who are good. What happens to competition in the American League? I'm frankly more worried about Atlanta because they're in our division, but let's stick with the Yankees.

PERRY: As we discussed earlier, being a Burks County boy and actually having taught Economics at a couple colleges in the Burks Country area, it is a fact of life that all companies, as they grow, tend to desire to stifle competition and to exert more market power. I believe that's why the 1996 Telecommunications Act was passed. I believe that's why the federal government has a wide range of legislation and regulatory oversight on all of these issues.

And, I believe that that oversight has to be properly employed and vigilantly.

SPECTER: Do you think the oversight could do something about the Yankees practices?

PERRY: I'm not so sure whether there's specific legislation or regulatory authority to address that issue. However, it is -- this specific issue that you bring up, while it's not particularly an issue that our industry focuses on, does have an effect of being exclusionary. And, let me explain how that works.

Today, while we have two DBS satellite providers, one offers sports programming packages that are highly attractive and the other cannot. They cannot because the arrangements for the provisioning of programming are exclusionary. They, in fact, are used as a competitive weapon.

And, that's market power at work, which a lot of us would probably say is probably inappropriate use of market power. That's going to flip to the cable side fairly quickly. It's been commented on that they have a national competitor called satellite.

Well, our country is in the middle of this digital television transition. In fact, all of the local broadcasters in the Philadelphia market have transitioned. This transition allows the local broadcasters to deliver high-definition, very high-quality pictures and broadcasters like CBS and ABC deliver their primetime schedules in high-definition.

Well, one of the things that's not being brought up here today is that cable has a very natural advantage in this marketplace. Even if Echo Star purchases Direct TV they cannot offer HD programming in all their markets. They will be relegated to 12 channels of HD and lower resolution programming across the rest of the country. Where cable, because they are a wired, on the ground system, will be able to deliver, if they wish, high-definition programming in every market of the country.

So, while in fact, they are competitors, they don't necessarily compete on equal footing. So, I went a little bit over the answer to your question, sir, but, you know, these are part of the intricacies that affect how these business models work and whether they're really fair to the consumer.

PERRY: Our company, and, frankly, our industry really doesn't have a position for or against this merger. Our position is that the regulatory and legislative authority that are already there should be enforced to ensure that if this goes forward, that the consumer is treated fairly and they have all this access and they have the right to get this variety of programming and services without the settop box or contracts creating exclusionary environments to control them.

SPECTER: Mr. Betty, do you agree that cable has that kind of an advantage over satellite?

BETTY: I really don't have opinion on the subject.

SPECTER: Well, that's refreshing.

Mr. Armstrong?

ARMSTRONG: Senator, do I take a shot? I find myself very uncomfortable doing this, but I was six years in the satellite industry and we started Direct TV. The satellite industry can provide more capacity by advanced satellite technology, better use of frequency on the transponders and reuse of the spectrum.

It's called a spot beam technology that will enable them to, in fact, implement the same frequency in different geographies from a geosynchronics satellite system. And, so, while I think that we in the cable industry have some advantages over satellite, I just don't buy in to that's one of them.

PERRY: I would point out, sir, if I could, that the people who are promoting the deal between Echo Star and Direct TV, I believe when they have come to the Hill, they talked specifically about a commitment to deliver, I believe, local-to-local, local broadcast in standard definition in all TV markets and 12 channels of HD. If it as part of their business plan to deliver HD in every market, I'm sure that would have been offered up.

DEWINE: Mr. Perry, let just interrupt Senator Specter and let me just say that we will certainly be interested in getting the answer to that question.

SPECTER: Well, I'm concerned about the impact on sports, which is readily apparent. There are a lot of questions, which are on the table, which defy analysis and are very, very hard to figure out. And, there is a sense of unease in the Congress, at least in this member, on mergers and acquisitions.

But, unless there's a violation of the anti-trust laws, the lessoning of competition, and candidly there does not appear to be that here, there is no legislative reach to object. And, a number of us have wrestled with what has happened, not just here, but everywhere on the gigantic concentration. And, there is a sense, as Jefferson said, about a feeling of a discomfort with the size, with the gigantic nature so many, many of the lines. And, we see the import in the number of ways. We see it in sports where America has a love affair with sports. And, I have seen this cable operation work to the disadvantage of most of the teams.

We have a franchise in Western Pennsylvania in Pittsburgh doing very well right now, but a small market team has a very, very tough time surviving. The big market teams where they tie into cable really have it, really have it made. We wrestled on this subcommittee with a problem of franchise changes and while this does not directly effect the issues here, it does in an indirect way, as to cable's import on helping teams like the Braves or the Yankees where the franchises are extracting enormous sums of money, a billion dollars of public money for stadiums in Pennsylvania.

I'd introduced legislation, which would require major league baseball or the NFL to pay for three-quarters of the cost of stadium construction. The NFL has a $17.6 billion multi-year television contract, it doesn't go over cable, but the extortion of the big cities is just overwhelming. We're trying to put our hands around the issues. Does anybody have any ideas as to what we might do on the examples we have on the table, the Yankees or the Braves?

Mr. Armstrong, you've been in this business a long time, what do you think?

ARMSTRONG: I don't think that qualified me, but I do think that there is a very natural market tug between the love affair, as you have rightly put it, with sports teams and American consumers. We love our sports. We idolize our heroes and we do a pretty good job whether it's from the sky or on the ground of bringing that action to everybody, almost too much of it some weekends. But, right now, we have a difficult tug.

And, by the way, Senator, it's not just the NFL and the NHL and the NBA; also you have things like an ESPN who have rate increases every year that are very high, double-digit rate increases for what they bring as well.

And, what we're trying to do, to the best of our ability, is to tier them so we can price them to the people who want to watch them. And, to try to mitigate the impact on the basic service that many people take as their fundamental service.

So, that what I hope over time is that market forces lead us to if people are going to want to watch it that much and the teams are going to charge that much for people to watch it, we can evolve to the ability to tier it so that the people that do watch it pay for it and not all the other people.

And, I hope the market will enable that to happen over time.

SPECTER: Well, I didn't any part of your answer to the issue of how to break up the Yankees.

DEWINE: Or beat them.

SPECTER: Mr. Roberts, I know that there's an element with Comcast and the sports teams that you have an interest in. Would you comment on the ways you see your practices evolving with the Flyers or the other sports teams and I think some activities in Washington too, to ameliorate this kind of an issue?

ROBERTS: Well, I think you put your finger on the pulse of a quagmire. And I don't know that anybody has the answer we all would be maybe chasing it right today. We recognize that love affair and want to be associated with it. But, at the same time, it is a cost and there is an unevenness, as you point out. And, I think you probably need to talk league by league on that evenness because in some leagues there's a cap or some sort of less extreme disparity between teams.

At the same time, we -- our behavior in the sports business is pretty consistent with the norm of the industry. It's not a market leader, the way the Yankees are right now or the Braves on a national basis with having their games available everywhere and that creates an extra revenue. And, you're right, for years they've done better.

So, there is a cause and effect. And, I think the point you made about stadiums is we know from Philadelphia that that's exactly the tough problem for what to do and if we didn't have it then the teams may have moved. And, I don't know, but I think it is worthy in going back to the earlier discussion on cable rates at least that there is an understanding that this is a complicated, multi-layered problem not just somebody desiring to raise rates 5 percent and gee, that's great.

In fact, the cost of sports is going up way greater than that amount of money, as you know.

SPECTER: Mr. Armstrong, I'm advised that you are to be the chairman of the board of AT&T Comcast and there is a provision that the chairman cannot be removed without the approval of 75 percent of the board before the year 2010. That's more job security than Senator DeWine and I have. We have to run and can be defeated more often at a lower figure. Is it true that you will be the Chairman of the Board or the plan is and can't be retired without a vote of 75 percent of the board?

ARMSTRONG: That provision is currently in there, Senator. It does not apply to me, however, until 2010. It applies to me until the spring of 2005. And, it applies so that I will be able to help with this transition to assure the success of this company in coming together, deliver on the synergies that we promised the shareholders. And, so for me, it's a transitional vehicle.

SPECTER: Just until 2005? Why is the provision in there then if it's only applicable to whoever takes over after you until the year 2010?

ROBERTS: I think it applies to in all probability myself and as you may know or know that Comcast today the family, the Roberts Family has 88 percent approximately of the votes. In the merger discussions between ourselves and AT&T it was negotiated that we would reduce that voting percentage from hard control, if you will, north of 51, to 33 and a third. And, so, it was a balance package of governance to say since we're now below it would require a three-fourths of the board so that there would be a stability that division that we painted out which is going to take many years to fulfill could happen, that our investment had been with a number of years since we went public for 29 years. My father's had hard control of the company and in giving that up, which was a huge line to cross, but in order to help create this company, this was a negotiated balance and will be put before all the AT&T shareholders to see whether they like this deal or whether they don't and we'll live with that outcome.

SPECTER: So, what you're saying, in effect, because you have so many obligations under this arrangements, you want to be sure that you're in a position to...

ROBERTS: Make them happy.

SPECTER: ... operate the company to make sure that you can -- the company and you can fulfill your commitments.

ROBERTS: And, that was the basis of us wanting to go forward with making this large investment in this company as for our family's investment.

SPECTER: Thank you very much. My time has expired, long since actually. There is a letter, which has been written by AFLCIO to the Securities and Exchange Commission raising quite a number of issues. And, you probably already responded to it. I would like to have this made a part of the record...

DEWINE: Without objection.

SPECTER: ... Mr. Chairman.

DEWINE: It will be made a part of the record.

SPECTER: And, also to have your responses to the issue which are raised here, to repeat, I believe, you've already responded to them, but I think that our record here ought to have those response as well.

DEWINE: And, I would advise all the members of the panel that the members of the committee have the opportunity to submit written questions. And, those can be submitted.

Senator Specter, anything else?

SPECTER: That concludes my line.

DEWINE: Let me, I'm going to jump around a little bit with a few additional questions. I want to get back to this -- the issue about exclusive contracts in regard to programming and maybe get some comments about that.

The ability of many program distributors to get access to programming is obviously a key element of being a valid competitor in this business. Let me ask you what do you believe would be appropriate, though, concerning the program access rules in regard to the exclusive deals for programming. And, a good example, of course, would be Direct TV's deal with the NFL Sunday package, the NFL Sunday ticket, or if you want to watch any football game in the country about the only way you can really do that is to buy that package. You can't buy it from cable. You can't buy it from anybody else but Direct TV.

Mr. Armstrong, you're smiling.

ARMSTRONG: I'm smiling, Senator, because when I was in Direct TV we negotiated this arrangement with the NFL.

DEWINE: So, you're responsible for that, huh?

ARMSTRONG: I use the word we. They own it now. And, the company at the time paid quite a premium to put that package together. And, the time we were betting a lot on would we have a kind of package that would differentiate us in the marketplace? The NFL felt they were clearly within the rules of the road in program access to cut such a deal with a satellite carrier.

On the same token, after coming to AT&T and getting in the broadband cable business, I recognized how outrageous this was.

DEWINE: Saw it from a little different perspective?

ARMSTRONG: Absolutely. And, so, I can only say that I think the program access rules as interpreted by the FCC have held up that transaction. And I think now Commissioner Powell, Chairman Powell, and the commission are taking that under review and we have yet to learn their direction.

DEWINE: Although, that has been in effect, though, since when?

ROBERTS: 1992.

DEWINE: What year?

ROBERTS: 1992. So, basically, it's been in effect for 10 years.

ROBERTS: And it said that the FCC at the end of that period would review it. And, that's the process we're in right now.

ARMSTRONG: That's where we are now.

ROBERTS: And, I think that that's an appropriate point to -- because it doesn't apply to the satellite industry and does apply to cable and it's probably -- it has, I think, worked in today having 16 million customers who now have satellite dishes. The question is is it still appropriate or does it need to be modified. And that process is ongoing.

DEWINE: Staying with you, Mr. Roberts, the D.C. Circuit Court recently ruled that the 30 percent cable ownership cap was not valid and needs to be revisited by the FCC. What do you think about that? Do you think a cable ownership cap is important?

ROBERTS: Well, I...

DEWINE: And, what would be the level?

ROBERTS: ... don't know that I have an answer as a number. I would defer to what's going on in other industries.

DEWINE: You all would not be violating that, right?

ROBERTS: Well, that's one of the points that I would -- that was what I was going to say...

DEWINE: It's close.

ROBERTS: Well, we would be right about 30 percent if you assume that we are able to successfully and we plan to, and I want to confirm what Mike had said earlier about the Time Warner interest. That we're going to dispose of that partnership. The remaining company, based on the old rules would be right around 30 percent, I think slightly under.

That has, as you said, been remanded. I think one of the reasons that I think this transaction, hopefully, doesn't present difficulties, as somebody mentioned earlier, well, about broadcast stations, what about newspapers. Today, Comcast AT&T none of that is there. And, I think you have to do all these rules in their totality.

What is the number of TV stations that can be owned? What is the number of the networks? So, I think you have to look in the totality and the same in the phone industry. But, I don't think this transaction, even if the old rules where in place, would be violative. So, we're hopeful to participate in that process with the FCC to help them set kind of set of rules that both the courts uphold and apply uniformly.

So, diversity of voices, which somebody mentioned earlier, I think that's a critical thing to safeguard. I would submit that cable television has added more to the diversity of news and information over the last 25 years in this country than almost any single industry contribution.

DEWINE: So, the summary of your answer is what?

ROBERTS: The summary of the answer is I think something higher than 30.

DEWINE: I guess so.

ROBERTS: At least 30. We're OK.

DEWINE: At least 30. OK. 40?

ROBERTS: I really don't know, honestly.

DEWINE: Mr. Armstrong?

ARMSTRONG: Yes, sir.

DEWINE: Comment at all?

ARMSTRONG: I would just say two things. One, I think it out to have a minimum of a four in front of it. I wouldn't even think the three was appropriate. Number two, and I hope they do away with the attribution rules, which lend to the counting of subs when they set this thing. That would be a good step forward.

DEWINE: Mr. Haverkate?

HAVERKATE: Well, size is a factor for their broadband services providers, generally speaking, either one of these companies in their current size are already large enough to take actions to trample our business. So, we're concerned more about the rules of the game and the action and behaviors that are permitted then we are about the size of the company.

DEWINE: Senator Specter, anything else?

SPECTER: No, thank you.

DEWINE: Well, let me -- was just trying to keep going back, I've got a couple more here. Both AT&T and Comcast own programming, not as much as some other cable systems, but nonetheless, this merger will increase vertical integration. There are a number of concerns associated with this type of consolidation. For example, I mentioned this in my opening statement, independent programmer may find it more difficult to gain access to cable systems, as cable companies own more programming.

In addition, competitors may have difficulty gaining access to programming owned by the incumbent cable system.

Concerns with issues such as these, the Department of Justice imposed conditions on the liberty TCI transaction requiring that the company not discriminate against independent programmers or competing program distributors.

Let me ask the panel would similar non-discrimination provisions relating to programming be appropriate in this merger? Anyone?

Mr. Haverkate?

HAVERKATE: I would certainly think that would be a good idea. But, in addition to that, if you were an independent programmer and you were trying to get access on the AT&T Comcast network and they said to you, one of the terms and conditions of you getting on your system is that you're a exclusive on our system and you're not allowed to sign an agreement for carriage on our competitor, believe me, that's what they'll do. Because getting on that large of the network is key to their business, getting on our network is not key to their business.

So, this issue of kind of collecting these programming assets and holding them in tight control is a key issue on whether this competition is going to last in the marketplace or not.

And, especially going back to Senator Specter's point where a company actually owns the sports teams in the same market where they can say we're going to carry these only on our network and we're not going to sell them to our competition in the network, that basically locks out all other competitors in that market.

ARMSTRONG: Senator DeWine, I think similarly when you look at the opportunity provides customer choice of ISP's having non- discriminatory access to things like video streaming or restrictions on provisioning that content over the pipe committed, the home would also be important in order to maintain competition in an open access environment.

ROBERTS: If I might.

DEWINE: Roberts?

ROBERTS: Thank you. Between the two companies I think we have about 6 percent or less of the cable networks. As you mentioned, it's not very many. I think we pride ourselves on the good relationships we have with both large content companies, but also small and medium sized companies. We have a relationship with News Channel 8 right here in the district, with the Weather Channel, Word Network, with, as I mentioned earlier, Outdoor Life Channel, and many others.

I really think, if you're on a pro-competitive path, you know, any regulatory restrictions have consequences and I think today there are safeguards in place and we are in a competitive business. Again, we're trying to put the totality -- actually, we have very few exclusive agreements with independent programmers, such as you're referring to and virtually none that I can think of, against WideOpenWest.

So, I do think it's a very -- the marketplace is working.

DEWINE: Mr. Armstrong, Mr. Roberts, last year it was reported that at least one cable company attempted to require a popular programmer to agree not to permit its programming to be delivered over the internet. As high-speed Internet access becomes available to more consumers, either through cable companies, phone companies, or other providers, many people believe that video streaming over the Internet could bring competition into the multi-channel video market in coming years.

Yet, established distributors of video programming, such as cable companies, may have an incentive to prevent this emerging competition. Let me ask you will a merger such as the one that you propose that increases the market power of individual cable firms, enable the ability to block or delay video distribution from these emerging competitors? And, do either of your companies have agreements in place today that prevent or limit distribution of content over the Internet? And, will you commit not to enter into such agreements?

ARMSTRONG: Senator, let me try at that. The answer is yes, video streaming, indeed, will be enabled by websites. There's a couple of billion websites out there. There are people, everything from maybe you and I and doing some video streaming with full motion pictures of family to people who have servers that, in fact, charge pay per view kind of services that come from video streaming. It is very difficult in which to monitor those bit streams as they come through in terms of the content that they're carrying.

On the other hand, we can now monitor with our networks how much consumption people are using. You might be interested to know that in the Excite At Home days when we did an analysis with over 3 million subscribers to a broadband service Excite At Home offered, that 5,700 consumed 30 percent of the network. We tended to call them the net hogs. And, they're obviously using a lot of capacity that we're spending a lot of capital on.

And, so what the industry is going to have to migrate to and the technology is there to do it, is the understand what the consumption is that is causing us to spend so much capital to keep the performance levels up, the reliability there and the service level is appropriate. And, charge for it. I look at it as a business opportunity. If websites want to video stream, if ISP's want to video stream, if portals want to video stream, terrific. I'd just like to get paid for that consumption and the capital I've got to put forward to let that happen.

ROBERTS: I totally want to just say that I agree on the point that as a business model, we're trying to take 10 percent of consumers and give them more than 10 percent or reason to buy a cable modem. And, if they want to get stream video, this hearing, I believe, is being streamed on CSPAN 3 and that is a practice now that is very common. And, that's one of the benefits of cable modem. So, absolutely want to encourage it in and Mike's point about finding a way to charge for different consumption models is very logical.

I think the second point you raised is sort of a kin to a broadcaster, if they were streaming the -- one of the big networks and yet the local broadcaster said what about the integrity of what I purchased, or my business relationship. So, I think what you're referring to is probably if we're being asked to pay for a channel that's then given for free over the Internet is that a good business model and so we're not every blocking any websites. We have never done that. Excite At Home never did that, to my knowledge. And, the -- what I think you're referring to, is just -- and, has not been any contracts where this has been a dispute with our company that many programmers ever raised with me. I think we have agreed we're going to try, as this becomes more prevalent, find a acceptable business model so that they can begin to stream the content if that's what the consumer wants and find a secure way for them to get paid and to make sure that there's an integrity to the product.

DEWINE: Mr. Roberts, I know that you company started as a family-owned business. It remains a family-owned business. It was started by your dad and your dad's been seated very quietly behind you during this whole hearing, I just, before we close, wanted to see if he might have any brief comments, before we close this down.

ROBERTS: It would be my honor to turn it over to the elder statesman.

B. ROBERTS: Thank you, Robert. Thank you very much and I am slightly prepared. I want to thank you for giving me chance to say a few words, pardon my throat.

DEWINE: Well, my thought, as you can call, Mr. Roberts has been bad throughout the hearing, so you're doing very, very well, sir.

B. ROBERTS: Thank you. You know, I've had a lot of experiences in my life, but this is the first time I've an opportunity to talk to a Congressional committee.

DEWINE: They're to be avoided, Mr. Roberts.

B. ROBERTS: I learned how to avoid them for 60 years. I'm really quite thrilled to be here today and I know you've heard from Brian and Mike what an incredible vision we really have for what Comcast and AT&T Broadband can become.

What's especially wonderful for me personally is that I've had the opportunity to work side-by-side with my son Brian and seeing sort of taking a family business that I founded over 30 years ago and seeing it grow into a leader in the cable and broadband community industry, long distance from Tupelo, Mississippi where we started.

Brian and I think of ourselves as an entrepreneur. We think that that's the spirit that makes American business the best in the world. Being an entrepreneur means understanding your customer, being willing to take risks, but to do it intelligently so that you can build and grow something that customers really want.

We will keep that spirit in this new company and we will deliver the quality and the value that Comcast customers have come to expect. And, we'll continue to create the kind of competition that you in Congress want to see. I was very interested in the many questions you asked and I hope you received clear answers. I also hope that you share our belief that this merger is really a good thing for America's consumers.

Thanks again for giving this few moments.

SPECTER: Mr. Chairman, if I may comment, I'm glad...

DEWINE: Senator Specter?

SPECTER: ... I stayed until the very end. You should have been the lead witness. This would have been a much shorter hearing had you...

B. ROBERTS: It would have lasted longer.

SPECTER: ... said that at the outset. I complimented you at the start, Mr. Roberts, and would compliment you at the conclusion for what you've done and your comments on entrepreneurialship, you are certainly exhibit A and Brian is exhibit A-plus.

B. ROBERTS: Well, thank you very much.

SPECTER: You've done a great job on your own and a great job in producing your successor.

B. ROBERTS: Thank you.

SPECTER: Thank you.

Thank you, Mr. Chairman.

B. ROBERTS: Thank you.

DEWINE: Mr. Roberts, thank you very much.

Senator Specter, thank you. Let me thank all of our witnesses for their testimony today. There are clearly some points of disagreement about specific issues related to this merger. The Department of Justice and the FCC must look closely at program access issues and consumer choice regarding ISP's. They should do what is necessary to protect consumer choice.

I encourage the agencies to look closely at media consolidation in general and put in place rules to protect the marketplace of ideas that is so vitally important to this democracy of ours. Should this merger be approved, we expect AT&T Comcast to live up to the promises that they have made today in terms of new services and faster deployment.

I, again, thank the members of the panel. I thank the audience and the hearing is adjourned.

END

NOTES:
[????] - Indicates Speaker Unknown
   [--] - Indicates could not make out what was being said.[off mike] - Indicates could not make out what was being said.

PERSON:  HERBERT KOHL (60%); PATRICK J LEAHY (57%); ORRIN G HATCH (55%); STROM THURMOND (54%); ARLEN SPECTER (54%); 

LOAD-DATE: May 3, 2002