Thank you, Mr. Chairman.
My name is Kirby J. Campbell, and I am the CEO
of The Armstrong Group of Companies, an independent cable business
serving 208,000 subscribers in several states, including Ohio,
Pennsylvania and West Virginia.
Our company is also a member of the American
Cable Association. ACA represents more than 930 independent cable
businesses serving more than 7.5 million subscribers primarily in
smaller markets and rural areas across the United States. ACA
members serve customers in every state and every U.S. territory and
also in nearly every congressional district represented by the
members of this Committee.
Unlike some larger companies you hear about,
ACA members are not affiliated with program suppliers, big telephone
companies, major ISPs or other media conglomerates. We focus on
smaller market cable and communications services, often in markets
that the bigger companies choose not to serve.
Like other ACA members, our company, The
Armstrong Group, specializes in serving residential and business
customers in smaller markets and more rural areas. Our company today
is on the forefront of providing advanced telecommunications
services to customers in these markets, including high-speed cable
modem Internet service and digital cable television. Our customers
want broadband, and we're delivering it to them.
THE ISSUES FACED BY SMALLER MARKET CABLE
SYSTEMS IN THE DEPLOYMENT OF BROADBAND SERVICES
I am pleased to have the opportunity to speak
to you for several reasons.
First, our company and the members of the
American Cable Association are rapidly deploying broadband services.
At The Armstrong Group, we connected our first high-speed Internet
customers in 1997 and today serve 18,000 Internet customers,
including 1,100 small businesses.
On the deployment of broadband in smaller
markets, we have a success story to tell. Our company and other ACA
members are making substantial investments in system upgrades and
are taking calculated business risks to launch broadband services in
our markets. By the end of this year, we will offer Internet and
digital cable to more than 90% of our 208,000 customers. In our
case, we will have invested more than $130 million and more than
$600 per subscriber to deliver these new services. Our technical
platform is superior to almost all major metropolitan cable systems.
When it comes to deployment of cable modem service in smaller
markets and rural areas, our company at Armstrong and other ACA
members are part of the solution, not part of the
problem.
We find it ironic that so many attempts are
being made to incent huge conglomerates like the RBOCs to service
smaller markets and rural areas in order to close the so-called
"Digital Divide." Our company and the hundreds of others in the ACA
are already there.
In December 2000, the American Cable
Association commissioned a study of its members to determine the
extent of broadband, high-speed cable modem deployment in its
members' cable systems. The results were impressive. Despite the
many challenges faced by my company and other ACA members to launch
broadband, the facts show that weïre doing it. The ACA survey showed
the following:
- Current regulatory and legislative policies
have encouraged investment in infrastructure. The marketplace is
working.
- The imposition of mandatory open access laws
or regulations would impose significant additional costs and deter
investment.
- Current ACA members' expansion plans will
double the number of homes passed by broadband services within the
next 12 to 24 months.
- ACA members have invested hundreds of
millions of dollars to install fiber, upgrade plant, and acquire
equipment necessary to offer cable modem services and other
advanced services.
- Most ACA members obtained the capital
required to upgrade networks and purchase equipment from sources
typical for smaller business - banks or retained earnings.
- ACA members indicated that they would not
risk the investment necessary for this expansion if burdensome
regulations were imposed on cable modem service in their
markets.
- Many ACA members provide cable modem service
through negotiated agreements with unaffiliated ISPs.
?Despite the success story that's taking place
in our company and so many other ACA members' companies, the
deployment of broadband services is threatened by certain facts,
proceedings and cost trends. These problems and challenges fall into
four specific areas:
- Access to capital. Access to
capital is vitally important to the deployment of broadband in
smaller markets and rural America, but adequate sources for this
capital are limited. Initiatives considered by Congress can
address this concern by providing for technology neutral
credits, loan guarantees or low-interest loan programs that will
make capital more affordable and readily available to launch
broadband services in smaller markets.
- Forced carriage of both analog and
digital broadcast signals. The effect of mandatory dual
digital broadcast television carriage (dual must-carry of local
television stations' analog and digital broadcast
signals) on cable systems with limited bandwidth will result in
lost capacity and lost important broadband services that our
customer want. The substantial costs and adverse effects of
paying for a forced transition to digital will stop or hinder
the advancement of high-speed Internet - particularly in rural
areas.
- Mandatory open access in smaller
markets. The effect of open access regulations, if imposed
on these markets, will create a chilling effect to hinder or
even stop the development of broadband services in smaller
markets and rural America, where the marketplace is already
working.
- The high cost of programming supply and
other annual cost increases that far outstrip the rate of
inflation or cost of living. These costs are being borne
disproportionately by smaller businesses in the cable industry.
Independent cable companies pay 25-30% more for programming than
the larger cable companies and must absorb significant annual
programming increases that far outstrip the trend in retail
cable rates for independent cable businesses. Another
potentially chilling factor is pole rent - the amounts charged
by utilities or cooperatives to independent cable businesses for
the right to attach cable to utility poles. If utilities or
cooperatives, which are using federal funds to build their
infrastructure, are allowed to triple or quintuple their rates
for pole rent, as some have begun to do, the impact on rural
areas would be devastating. In very rural areas with only 10-15
customers per mile, these new rates could be $10.00 per
subscriber per month. The end result of these increases is that
important capital and resources are taken away from resources
that would otherwise fund the development and deployment of
broadband service in smaller markets and rural America.
Before discussing each of these areas
individually, it is important to understand what makes serving
smaller markets and rural areas unique and why certain factors
impact us disproportionately. The most basic factor is that it is
much more expensive on a per customer basis to provide expanded
bandwidth and advanced services in rural America. The main factor is
the number of homes in a given mile. While an urban area will have
100 or more homes per mile, we provide service in areas down to 15
homes per mile. Our company-wide average is only 45 homes per mile.
Fewer customers per mile in smaller markets and rural areas mean a
substantially larger investment per customer for all services,
including broadband. This fact alone puts pressure on all other
operating factors.
In the telephone and electric business, this
fact of operation has been understood for years, and that's why
telephone companies and electric cooperatives providing service in
rural America have been subsidized for years by the federal
government. Smaller, independent cable businesses have not been
subsidized. We have achieved our success through independent risk
financing and sweat equity. However, we are not here to ask for
subsidies, but rather only a level playing field that could easily
be tilted against us by any one of the following factors. And if
this field is tilted, it will certainly impact and adversely affect
the deployment of broadband in smaller markets and rural
America.
(1) Access to Capital and Technology
Neutral Solutions to Encourage Broadband Deployment are a Must to
Serve Smaller Markets with High-Speed Internet, Digital Cable and
Other Broadband Services.
Our company and all ACA members face the
challenges of building, operating and upgrading broadband networks
in smaller markets and rural areas. For most of these companies, the
capital required to upgrade networks and purchase equipment came
from sources typical for smaller businesses - banks or retained
earnings. In other words, our capital comes from Main Street, not
Wall Street.
But this investment is not easy to make or to
obtain. When independent companies like mine and need to raise money
to serve smaller markets and rural America, we sign personal
guarantees. My company has taken the financial risk to make
investments in a robust broadband infrastructure in smaller markets.
Far from languishing on the wrong side of a Digital Divide, our
customers have access to high quality cable modem service today.
Current expansion plans of ACA members will double the availability
of the cable modem service within 24 months. In some cases, these
markets are ahead of broadband deployment in urban
centers.
Compared to RBOCs and the largest cable and
media companies, most independent cable businesses face serious
difficulties in finding sources of capital. Many communications
lenders are not interested in lending to smaller companies serving
smaller markets.
This is true because the loans sought by
smaller, independent companies are generally smaller than loans
sought by larger companies, and thus do not produce the same for the
bank in lending fees, interest, etc. In addition, there can be a
longer payback and return on a loan to service a sparsely populated
smaller market compared to an urban market with hundreds of
subscribers per mile.
Therefore, many independent companies find
themselves seeking loans from local, general service banks on Main
Street rather than the experienced commercial communications lenders
on Wall Street. Moreover, many of these smaller loans with the local
banks are "hit or miss" and may depend on a number of factors
unrelated to the project itself.
The federal government has already begun to
consider a number of proposals that would help to encourage broadband deployment by providing
tax credits, federal loan guarantees or other federal grant or
low-interest loan programs. These ideas would help independent
companies in smaller markets and rural areas obtain the capital they
need to launch broadband services. We support these
ideas.
The key to success for these programs would be
to ensure that they are technology neutral and easily obtainable
through a streamlined, simplified application process.
It is important for the programs to be
technology neutral because this would ensure that all technologies
(cable, wireless, satellite, etc.) are encouraged to make use of the
funds or credits. At the same time the competition for the funds
would help speed deployment where it is so vitally
needed.
As mentioned earlier, ACA members are already
deploying advanced services in many rural areas, and we are uniquely
positioned to expand into other rural markets. Our company and ACA
would enjoy the opportunity to work with the Small Business
Committee in considering technology neutral solutions that would put
capital in the hands of smaller, independent businesses to encourage
broadband deployment in smaller
markets and rural America.
(2) The Unintended Consequences of
Mandatory Digital Broadcast Carriage on Cable Systems with Limited
Bandwidth Will Derail Broadband Deployment in Rural
America.
A second issue facing threatening independent
cable's progress is the broadcast industry's campaign to force dual
carriage of analog and digital signals during the transition to
digital television. The forced carriage of both the analog and
digital broadcast television signals of local broadcast stations on
smaller market cable systems would absorb most of the bandwidth we
are developing for broadband services. This would undercut our
ability to roll out new services our subscribers want, just so
broadcasters could get a free ride for both analog and digital
signals. Mandating digital carriage would cause the loss of
important existing analog and digital programming and high-speed
Internet services. It would also create a significant chilling
effect on the development and deployment of new advanced
telecommunications services to these markets.
The ability to provide these new services is
essential to attracting the capital necessary to upgrade our smaller
market systems in response to marketplace demand. It is already
difficult enough to attract the capital necessary for broadband,
which provides a new revenue stream, let alone finding the money for
a forced transition to digital, which would provide no new
revenues.
Mandating digital broadcast carriage on smaller
market cable systems would force other existing important services
off our systems in order to accommodate digital broadcast signals,
which few of our customers could watch now anyway.
An important point is often missed in this
debate: the government has given broadcasters both the analog and
new digital spectrum to transmit both of these signals during the
transition period before digital broadcast signals are mandated in
2006. But the law has not granted smaller market cable systems
additional bandwidth to carry any of the additional broadcast
signals.
We have to pay for our additional bandwidth
through costly system upgrades. We can only pay for these upgrades
by carrying services our customers will pay us for. Currently, our
customers are not requesting digital broadcast signals in our
markets.
From a technical, operational, economic and
practical standpoint, we cannot carry all of the digital and analog
signals of the local broadcasters. The reason? Because we are still
required to devote up to fifty percent (50%) of our channel line-ups
for other mandated carriage set-asides, such as analog must-carry,
retransmission consent, non-commercial educational programming,
public, educational and governmental programming, and leased access
programming, not to mention the current analog, digital and
high-speed data services our customers now demand and
expect.
Who will make the choice to tell my customers
what they can and can no longer receive as a result of dual
must-carry or mandated digital broadcast television carriage? And is
this the right thing to do? I think not. But one thing is certain.
Our company and other ACA members like ours will get blamed for it,
while dissatisfied switch to direct broadcast satellite service.
This result could threaten the viability of smaller market cable
systems, which would certainly be an unintended consequence of this
policy.
As far as smaller market cable systems are
concerned, the FCC has gotten this one right - no dual carriage
during the transition period. When you hear broadcasters demand a
legislative fix for their dual carriage demands, we encourage
members of this committee to carefully consider the consequences for
smaller market cable systems and consumers.
The High "Cost" of Converting to Digital
and the Threat to Broadband Deployment
Right now our company is engaged in a
competitive race to improve our systems through the use and
deployment of digital cable services and high-speed Internet. These
services are a reality today. They are available now. They are
helping us improve to our systems and provide advanced higher
quality telecommunications services to our customers
today.
Our company is using these services to close
the so-called "Digital Divide" in smaller markets now. These
services and the required systems upgrades are costly. For example,
on average it costs about $130,000 to install a digital cable
headend that will enable our customers to receive significantly more
services that they want. But not all customers take these services
right off, and the return on investment for a digital headend like
this one is lengthy. In addition, you can understand how difficult
it is to economically spread that cost across a system that may only
serve 500 customers.
We face the same situation with the substantial
investment necessary to deliver high-speed cable modem Internet
service. It's expensive, and the return is a long one.
Still, these services are available now. They
are not on the drawing board or potentially available sometime in
the future. Our company is doing right now what policymakers want -
improving our service, enhancing competition in the marketplace, and
closing the "Digital Divide" by providing advanced
telecommunications services.
But what if the significant funds that it takes
to launch digital cable or high-speed Internet are forced to cover
the costs of dual must-carry or mandatory digital broadcast
carriage? Plainly, something would have to give.
The adverse effect on broadband deployment would be
more than an unintended consequence of mandating digital broadcast
television carriage. It would be a direct result.
(3) The Effect of Open Access Regulations
if Imposed On Smaller, Rural Markets Will Create a Chilling Effect
to Hinder or Even Stop the Development of Broadband Services in
Smaller Markets and Rural America, Where the Marketplace is Already
Working.
For smaller markets, the relevant policy goals
are: (i) continued rapid deployment of broadband services, and (ii)
maintaining a regulatory environment that encourages investment in
companies serving these markets. The emphasis by Congress and the
FCC to date on regulatory restraint and marketplace solutions has
succeeded in smaller markets and rural America. Our company has
taken a substantial financial risk to bring Internet services to our
customers. Why should someone who has not taken this risk be allowed
to come in and skim off profit? This could stop Internet deployment
dead in its tracks. And why should small rural cable operators be
burdened with real open access when large ILEC's have yet to open
their networks in a meaningful way.
By recognizing the unique circumstances and
economic considerations of smaller market providers in rural
America, this Committee can avoid unintended consequences in broadband deployment and ensure
that the desire by some industries to regulate does not drown out
the concerns of independent cable and the smaller market customers
they serve.
As we have shown, despite many challenges,
independent cable has accepted the challenge to launch broadband
services. But this impressive success begs one question: With the
higher costs associated with serving lower density markets, what
drives this progress? The evidence points to one consistent answer
the absence of burdensome regulation spurs investment in broadband deployment.
ACA members surveyed report that they developed
their broadband business models on the assumption that marketplace
forces would govern their provision of cable modem service. Nearly
all ACA members currently providing cable modem service indicated
they would not risk additional capital at this point if the service
were to face burdensome regulations in their markets.
(4) The Effect of Uncontrollable Cost
Increases which are Being Borne Disproportionately by Smaller,
Independent Cable Businesses Could Have a Major Impact on the
Financial Viability of These Companies and, Therefore, Their Ability
to Upgrade Their Systems and Provide Advanced Telecommunications
Services, Like Broadband Technologies.
Programming costs are skyrocketing. Why?
Because they can. Giant media companies, like Disney, or vertically
integrated programmers, like Time Warner/AOL, own most cable and
satellite programming networks. Aside from the fact that programming
costs are increasing by 20% each year or more, smaller, independent
cable businesses pay 25-30% more for programming than larger cable
businesses.
Huge media content conglomerates, vertically
integrated programmers and the unintended consequences of
retransmission consent are major contributors to this problem. The
huge media conglomerates - Disney/ABC, CBS/Viacom, NBC/GE, Fox, Time
Warner/AOL - all use their enormous market power to hold hostage the
carriage of broadcast networks and local broadcast stations they own
through the "retransmission consent" process every three years.
Retransmission consent under the 1992 Cable Competition and Consumer
Protection and Policy Act allows the owners of broadcast networks
and stations to withhold the right of a smaller, independent cable
business like mine to carry the network or station unless we agree
to the broadcast ownerïs terms of consent. With the enormous power
wielded by these conglomerates, we have no ability to negotiate fair
terms at all. We are at their mercy.
As a result, more and more overpriced
programming is being forced on to our cable systems in order to
secure retransmission consent. This takes up precious bandwidth,
significantly increases our costs and expenses and takes away
valuable resources for launching broadband in our
systems.
Skyrocketing costs for sports programming are
another major factor. Our costs for sports programming increased 40%
in 2000 alone. Our customers must eventually pay for these
out-of-control increases. Smaller, independent cable businesses
should be able to buy programming on the same basis as larger cable
companies. There is no cost basis or economic justification for this
discrepancy.
Another area of growing concern is pole rent -
the cost we pay a utility or a cooperative for the right to attach
our cable lines to their poles. While typical rates to rent a pole
are $6-$9 annually, our company recently received notice of an
increase that would increase our pole rent to $47.25 per pole per
year in areas providing telecommunication services. This is a
totally unwarranted increase because no physical aspect of our
attachment has changed at all. As previously mentioned, this could
amount to an increase in costs of more than $10.00 per subscriber
per month in rural areas. Who could introduce new broadband services
in smaller markets and rural areas under these
circumstances?
Independent cable businesses are under enormous
pressure to keep rates to consumers within either the rate of
inflation or cost of living. However, suppliers of programming
services, pole rents, etc., are under no such restriction - either
mandated by regulation or the marketplace. If these costs continue
to skyrocket out of control to the point where smaller, independent
cable businesses can no longer afford them, how can there ever be
hope of long-term broadband deployment in smaller
markets and rural America?
What Can Be done? Some Potential
Solutions.
Full deployment of broadband services, like
high-speed cable modem Internet and digital cable service, cannot be
accomplished or even be expected to succeed unless the barriers to
further deployment are removed. While there may be a number of
solutions to eliminate these barriers, we offer several suggestions
to address the barriers discussed in our testimony.
Access to Capital
- Provide incentives to lenders and financial
institutions to lend money for broadband projects in smaller
markets and rural areas.
- Consider "technology neutral" plans that
would provide tax credits, loan guarantees or low-interest loans
to lower the cost of capital, increase access to it, and help spur
broadband deployment.
Mandated Digital Broadcast
Carriage
- Refrain from imposing "dual must-carry" on
smaller, independent cable businesses that would be required to
carry both the analog and digital broadcast television signals of
television signals.
- Let the marketplace develop solutions to
digital carriage and technology concerns. Imposing dual must-carry
won't help if the technology and digital programming are not
available to the consumer on a cost-effective basis.
- Consider eliminating smaller, independent
cable businesses from the myriad requirements of mandated carriage
of certain types of programming to increase bandwidth that would
then be available for broadband deployment.
Open Access
Regulations
- Promote plans that would encourage
marketplace negotiation between independent cable businesses and
unaffiliated Internet Service Providers. The marketplace is
already working to solve these concerns.
- Refrain from imposing mandated open access
regulations, which would hinder or even stop the development of broadband deployment in smaller
markets and rural areas.
Increasing Programming, Pole Rent and
Other Operational Costs
- Hold hearings and seek detailed information
from programming owners on the actual costs of programming and the
various rates charged to providers of varying sizes. Find out how
the increasing cost of programming is affecting independent cable
businesses and discouraging broadband deployment.
- Prohibit huge media conglomerates from tying
new programming services or digital broadcast carriage to analog
retransmission consent and also from forced bundling of
programming services.
- Extend and strengthen current programming
access regulations from the 1992 Cable Act, as amended.
- Consider applying other principles, such as
unfair trade practices, to programming business practices.
- Tighten the provisions of the Pole
Attachment Act to eliminate huge, unjustified rate increases of
utilities, and extend the provisions of the Act to municipalities
and cooperatives.
CONCLUSION
In conclusion, our company's future and our ACA
members' future lie in the deployment of broadband services. We have
already embraced it.
Independent cable companies are responding to
marketplace incentives, making substantial investments in
infrastructure. The marketplace is working.
The results are exactly what the Congress
intended - delivery of advanced services to an increasing number
of consumers in smaller markets through market-based
solutions.
However, severe barriers face us if we are to
continue to deploy broadband throughout all smaller markets and
rural areas. These barriers could derail the enormous gains that
have already been made. My company and all of the members of the ACA
are concerned that these barriers could stop broadband deployment
cold.
We're committed to working with the Committee
on solutions that will enable us to eliminate these barriers and
further encourage broadband deployment throughout
smaller markets and rural America.
I would like to sincerely thank the Committee
again for allowing me to speak before you today.