[Senate Hearing 110-1067]
[From the U.S. Government Publishing Office]
S. Hrg. 110-1067
EXCLUSIVE SPORTS PROGRAMMING: EXAMINING COMPETITION AND CONSUMER CHOICE
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MARCH 27, 2007
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
----------
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska, Vice Chairman
Virginia JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota KAY BAILEY HUTCHISON, Texas
BARBARA BOXER, California OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida GORDON H. SMITH, Oregon
MARIA CANTWELL, Washington JOHN ENSIGN, Nevada
FRANK R. LAUTENBERG, New Jersey JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas JIM DeMINT, South Carolina
THOMAS R. CARPER, Delaware DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
Margaret Spring, Democratic General Counsel
Christine D. Kurth, Republican Staff Director and General Counsel
Kenneth R. Nahigian, Republican Deputy Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on March 27, 2007................................... 1
Statement of Senator Kerry....................................... 1
Prepared statement........................................... 3
Statement of Senator Klobuchar................................... 42
Statement of Senator Lautenberg.................................. 35
Statement of Senator McCaskill................................... 47
Statement of Senator Nelson...................................... 50
Statement of Senator Stevens..................................... 4
Witnesses
Carey, Chase, President and CEO, DIRECTV, Inc.................... 14
Prepared statement........................................... 16
DuPuy, Robert A., President and COO, Major League Baseball....... 5
Prepared statement........................................... 6
Jacobson, Robert D., President and CEO, iN Demand, L.L.C......... 23
Prepared statement........................................... 24
Ross, Stephen F., Director and Professor of Law, Institute for
Sports Law, Policy and Research, The Dickinson School of Law,
The Pennsylvania State University.............................. 26
Prepared statement........................................... 27
Specter, Arlen, U.S. Senator from Pennsylvania................... 40
Vogel, Carl, President and Vice Chairman, EchoStar Satellite,
L.L.C.......................................................... 20
Prepared statement........................................... 22
Appendix
Inouye, Daniel K., U.S. Senator from Hawaii, prepared statement.. 63
EXCLUSIVE SPORTS PROGRAMMING:
EXAMINING COMPETITION
AND CONSUMER CHOICE
----------
TUESDAY, MARCH 27, 2007
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 10:04 a.m. in
room SR-253, Russell Senate Office Building. Hon. John F.
Kerry, presiding.
OPENING STATEMENT OF HON. JOHN F. KERRY,
U.S. SENATOR FROM MASSACHUSETTS
Senator Kerry. Good morning.
This hearing of the full Commerce Committee will come to
order. Thank you very much for being here this morning, I
appreciate it.
I want to welcome all of our witnesses, I'm grateful to
them for taking time to come in and discuss an important
topic--certainly important to fans of baseball, and indeed, I
think a lot of sports are interested in what is happening with
respect to carriage and access. So, I think this gives us an
opportunity to explore, a little bit, where we find ourselves
today.
Last year baseball fans were able to buy what are called
``out-of-market'' games through their cable and their satellite
providers. The package of games as it was presented, and is
presented, is called ``EXTRA INNINGS'' and it allows fans
around the country to follow their home teams, no matter where
they are in the country.
And so, whether a member of the Red Sox Nation, or any
other extended fan base, people living in another city, or even
another part of the country, get access to those games for
about what it costs a family of four to attend one game.
Press reports then indicated that Major League Baseball was
close to announcing an exclusive deal with DIRECTV for carriage
of these games--and what we want to do today is explore the
parameters of this deal a little bit.
Yogi Berra once said, ``You've got to be very careful if
you don't know where you're going, because you might not get
there.'' That sentiment is as timely now as ever. We want to
examine where the parties are going, and whether this deal is,
in fact, going to get them there. Is it in the best interest of
consumers? Does it serve sports fans, and does it serve public
interest? These are legitimate questions.
Baseball, as we all know, is an integral part of our
culture. Commissioner Selig himself has said that baseball is a
social institution with enormous social responsibility, and
many of us here agree with that.
Recognizing that, baseball has also benefited from an array
of favorable government policies. The sport enjoys a broad
antitrust exemption. That allows them to negotiate carriage
deals, and gives them tremendous market power.
Baseball has also received billions of hard-earned tax
dollars to support stadium construction around the country.
Right now, only a few blocks away from here, the new Washington
Nationals stadium is being built.
One economist estimates that between 1989 and 2001, 16
baseball-only stadiums were constructed at a total cost of $4.9
billion; $3.7 billion of that cost was borne by public
revenues, taxpayer money.
We should support baseball, and I happen to personally
believe in helping to build stadiums, because I think there's
an economic return. I believe baseball, however, ought to also
serve the public interest. Therefore, it's fair to expect that
they will provide broad access to their games.
Last year, it cost a family of four almost $180 on
average--depends obviously on parking and some other costs, but
on average--about $180 to attend a Major League Baseball game.
For a lot of families, and for people living on fixed incomes,
the cost of attending a game is getting tougher and tougher.
Nevertheless, there were a record number of fans attending
Major League Baseball games last year, a reflection of their
passion and commitment to the game, and their willingness and
ability also, to make choices.
We're now less than a week away from the baseball season,
and over 250,000 people will lose access to their team's games
as they have experienced them and enjoyed them in the past.
Let me say at the outset--I'm concerned in general about
some of the exclusive carriage deals in the sports industry.
Obviously, I can understand from an economic point of view how
they are good for short-term financial needs or interests of
the sports leagues, and they may improve the competitive
position of the cable or satellite firms that get those rights.
It's not hard to see the business advantages.
But, we also need to discuss the impact of these business
changes on the baseball fans. A lot of people are concerned,
and have expressed that concern publicly, that when fans lose
access to their favorite team, or as they're forced to change
their TV service just to see the games, then, that is not
necessarily fair. It works a real inconvenience on a lot of
people, and many people think that is the wrong choice to
provide them.
Obviously sports leagues have tremendous market power. What
we need to do is ensure that their market power works in the
public interest.
The American people and fans have not been shy about
expressing their feelings about this deal. If the truth be
told, a lot of baseball fans across the country are
disappointed, and some are very angry.
So, as we come here today, we have approximately 250,000
baseball fans that currently pay a premium to see their team,
and they will lose access to those games unless they switch to
DIRECTV.
My sense is that people should not have to cancel their
current service, and switch it in order to be able to gain
access to the service they've had, or one they want to have
now.
We've heard from a lot of fans, also, who don't have the
ability to switch to satellite, even if they want to. So, what
we need to do today is look at the long-term interest in the
sport, examine this deal, hear from the parties, and really
just examine what the end-product of this deal is, and measure
it against the public interest that's on the table.
[The prepared statement of Senator Kerry follows:]
Prepared Statement of Hon. John F. Kerry,
U.S. Senator from Massachusetts
I would like to welcome our witnesses. We are conducting this
hearing today to discuss sports programming in general--and baseball in
particular--a very popular topic this time of year in Massachusetts and
all over the country.
Last year, baseball fans were able to buy what are called ``out-of-
market games'' through their cable and satellite providers. The package
of games is called ``EXTRA INNINGS,'' and allows fans to follow their
home team. So Red Sox's fans living in Washington or California could
still get access to most Red Sox games for about what it costs a family
of four to attend a game.
Press reports indicated that Major League Baseball was close to
announcing an exclusive deal with DIRECTV for carriage of these games.
We will evaluate this deal.
Yogi Berra was once heard to say, ``You've got to be very careful
if you don't know where you are going--because you might not get
there.''
That sentiment is as timely now as ever. We want to examine where
the parties are going--and whether this deal will get them there. Is
this type of deal in the best interest of consumers? Does it serve the
sports fans? These are legitimate questions.
Baseball is an integral part of American culture. Commissioner
Selig himself has said that baseball is a social institution with
enormous social responsibility. I agree with him.
Recognizing that, baseball has benefited from an array of favorable
Government policies. The sport enjoys a broad antitrust exemption. It
allows them to negotiate carriage deals, and gives them tremendous
market power.
They receive billions of hard-earned tax dollars to support stadium
construction. Right now, only a few blocks away from here, the new
Washington Nationals stadium is being built. One economist estimates
that between 1989-2001, 16 baseball-only stadiums were constructed at a
total cost of $4.9 billion; $3.7 billion of that cost borne by public
revenues--taxpayer money.
We should support baseball, and in return, I believe baseball
should serve the public interest. It is fair to expect baseball to
provide broad access to their games.
Last year, it cost a family of four almost $180 to attend a Major
League Baseball game. For too many families and people living on fixed
incomes, the cost of attending a game is getting out of reach. Still, a
record total of 76 million fans attended Major League Baseball games
last year.
We are now less than a week away from the baseball season and over
250,000 people will lose access to their team's games.
Let me say at the outset, I am concerned about exclusive carriage
deals in the sports industry. These deals may be good for the short-
term financial interests of the sports leagues; they may improve the
competitive position of the cable or satellite firms that get the
rights--I have no doubt that there are business advantages.
But we need to discuss the impact of these business changes on
baseball fans as well. I am concerned when fans lose access to their
favorite team; or, as we will discover today, they are forced to change
their TV service just to see games. That is wrong. That is a sign that
the system is not working.
The sports leagues have tremendous market power. We need to ensure
that the deals that are cut serve the public interest.
Yogi Berra also was heard saying, ``You can observe a lot just by
watching.''
Well, the American people are watching, and fans are watching, and
they have not been shy to express their feelings about this deal. Truth
be told, baseball fans all over this country are disappointed and some
are outraged.
As we stand here today, approximately 250,000 baseball fans that
currently pay a premium to see their team will lose access to those
games--unless they switch to DIRECTV.
Baseball is important to America. I believe that baseball fans
living outside the state of their favorite team should continue to have
access to Major League games without having to cancel their current
service.
Why should fans have to do that? We have heard from many fans that
do not have the ability to switch to satellite if they want to. That is
not fair, and I'm not sure it is in the long term interest of the
sport.
With today's hearing, we will get the facts on the record. And I
urge the parties to work together, in good faith, to ensure we have
broad carriage of the EXTRA INNINGS package this year.
I welcome our witnesses.
Senator Stevens?
STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
Senator Stevens. Thank you, Mr. Chairman.
As I understand it, this hearing focuses on a deal between
Major League Baseball and DIRECTV as it relates to out-of-
market games, which allows someone that has moved to watch
their favorite team from far away.
Now, Alaska doesn't have a Major League Baseball team, so
all MLB games are out-of-market for us. But I'm anxious to hear
what DIRECTV and Major League Baseball will do to ensure that
Alaskans and people similarly situated can take advantage of
these offerings.
While we only look at baseball today, exclusive contracts
exist in relation to other sports, as well, such as the NFL,
and in some instances, cable companies have the exclusive
rights to local sports programs, and satellite providers cannot
afford to purchase that programming. Of course, Alaskans are
hockey nuts, so I don't think we're involved too much in this
hearing today, but I do look forward to hearing from the panel,
to learn whether they think there should be a role for Congress
to play in the sports programming marketplace.
I'm sorry to tell you that we've got two competing
hearings, one is where Senator Inouye and I will have to join
in after the statements, but I do hope to hear the statements
as they're presented by the witnesses. Thank you.
Senator Kerry. Senator Stevens, thank you very, very much.
And, I know that Senator Specter is going to be here at some
point. He has a competing hearing, and even though he is not a
member of the Committee, he did express a desire to come by,
and he will do that, as well as a number of other Senators.
I'm delighted to welcome Rob Jacobson, the President and
CEO of iN DEMAND Networks; Stephen F. Ross, Professor of Law,
Dickinson School of Law, at Pennsylvania State University; Mr.
Carl Vogel, Chairman and Vice President, EchoStar Satellite
Systems; Robert DuPuy, President and Chief Operating Officer of
Major League Baseball; and Mr. Chase Carey, President and Chief
Executive Officer of DIRECTV Group. Thank you all for being
here, we appreciate it, we'll start with you, Mr. DuPuy. Thank
you.
STATEMENT OF ROBERT A. DuPUY, PRESIDENT AND COO,
MAJOR LEAGUE BASEBALL
Mr. DuPuy. Thank you, Mr. Chairman, Mr. Vice Chairman. I
appreciate the opportunity to appear before you today to
discuss baseball's recent agreement with DIRECTV for the MLB
Channel, and MLB EXTRA INNINGS package, and outline what we
believe are the deal's benefits for the significant majority of
our fans, and to use your words, in the best interest of our
consumers.
We are particularly pleased with something you didn't
mention in your opening statement, Mr. Chairman--that so many
baseball fans, will have access to our all-baseball channel
when it launches. And we're grateful to DIRECTV for helping us
make that happen.
It's important to emphasize at the outset, that our desire
is to have as much distribution of our games as possible. Our
contract with DIRECTV permits iN Demand, and the DISH Network,
to distribute the MLB Channel and the EXTRA INNINGS package,
also. We hope that they agree to match DIRECTV's commitment to
our fans.
Additionally, we would like to be clear that both iN Demand
and the DISH Network were given a full opportunity to
participate in negotiations over 9 months for the rights that
we were granting.
Bluntly put, this is not a matter of fans being unable to
view Major League Baseball's out-of-market games. It is a
matter of some fans not being able to watch those games on a
particular delivery system.
Out-of-market games are still available. Even if iN Demand
and DISH do not choose to participate, they are available on
multiple platforms. Baseball provides more telecast to its fans
than any other sport. Including local broadcasts, there are
about 4,500 television broadcasts per year. After a lengthy
negotiation over the renewal of a single complimentary package
of games, those games were awarded to DIRECTV. But, even now,
the other bidders have been given the chance to match
negotiated terms.
If iN Demand and DISH choose not to step up to the plate,
fans will still have several options. They can switch to
DIRECTV, they can subscribe to MLB.com and watch the games on
the Internet, and they can watch the roughly 400 games that
every fan, in every major league market has available, without
the out-of-market package. That includes virtually every one of
the local market games, all of the games that we have on ESPN,
Turner and FOX, and the All-Star game and complete post-season.
That is an average of two games per day during our season.
Fans can also, of course, listen to local games on the
radio, and all of our more than 2,400 regular-season games
nationwide, on XM Satellite Radio.
Business arrangements such as our agreement with DIRECTV
are not unusual. During the negotiation period, every carrier
had an ability to bid, and each of them put in a bid to carry
the games exclusively. To watch the Sopranos, you must
subscribe to HBO, not Showtime or Cinemax. To watch the NFL
out-of-market games, you must subscribe to DIRECTV. To watch
the NCAA and NASCAR specialized packages, you must similarly
subscribe to DIRECTV.
An even better example involves, ironically, the behavior
of two of the members of the iN DEMAND consortium. To watch
Phillies games, in Philadelphia--not in Utah, but in
Philadelphia--you must subscribe to cable. Comcast, the
dominant cable provider in the Philadelphia area, does not make
the games available to satellite distributors.
To watch Padres games in San Diego, you must subscribe to
cable, because Cox, another member of the iN DEMAND consortium,
does not make the games available to satellite. In Philadelphia
alone, more than 400,000 satellite subscribers are denied the
ability to watch their hometown Phillies, or Flyers, or 76ers
because of Comcast. That is more than twice the number of
subscribers the entire iN DEMAND syndicate had nationally for
the EXTRA INNINGS package last year.
Our agreement with DIRECTV has two principal components.
First, DIRECTV will launch the MLB Channel as part of the Total
Choice Basic Service with over 15 million subscribers
throughout the Nation when the network becomes available.
DIRECTV will have only non-exclusive carriage rights for the
MLB Channel.
Second, DIRECTV will offer its subscribers the MLB EXTRA
INNINGS package, as it has done during each of the last 11
years. We are excited by the launch of the MLB Channel. We
consider it a key to reaching the next generation of fans.
Achieving carriage of new programming networks is a difficult
proposition in today's marketplace, and DIRECTV's commitment to
distribute the channel to at least 80 percent of all of its
residential subscribers provides an exceptional start for the
channel.
It is also to our many fans great benefit that DIRECTV will
be carrying the EXTRA INNINGS package. DIRECTV has a proven
track record of developing features that significantly enhance
the viewing of the telecasts they carry, such as the NFL and
NASCAR broadcasts.
It is also worth repeating that all Major League out-of-
market games will still be available online through MLB.com,
which beginning this season will offer an upgraded picture
quality.
In summary, Mr. Chairman, baseball believes strongly in our
business judgment, and that the agreement we have reached with
DIRECTV will provide real benefits to the greatest number of
baseball fans.
Thank you, again, for the opportunity to appear today. I
have attached to my written testimony the report on this
subject that we submitted to the FCC on March 21, and I would
ask that a copy of my full statement and that report be made
part of the record of this hearing.
[The prepared statement of Mr. DuPuy follows:]
Prepared Statement of Robert A. DuPuy, President and COO,
Major League Baseball
Good morning, Mr. Chairman. My name is Robert DuPuy, and I am the
President and Chief Operating Officer of Major League Baseball. I
appreciate the opportunity to appear before you today to discuss
Baseball's recent agreement with DIRECTV for The MLB Channel and the
MLB EXTRA INNINGS package and to outline what we believe are the deal's
benefits for our fans. We are particularly pleased that so many
baseball fans will have access to our all-baseball, all-the-time
channel when it launches in 2 years, and we are grateful to DIRECTV for
helping us make this happen.
It is important to emphasize at the outset that our deal with
DIRECTV permits iN Demand, the consortium created by the cable
industry, and the DISH Network to distribute The MLB Channel and the
EXTRA INNINGS package also. We hope that they agree to match DIRECTV's
commitment to our fans. Additionally, we would like to stress that both
iN Demand and the DISH Network were given a full opportunity to
participate in negotiations for the rights that we were granting.
I want to make one point abundantly clear. This is not a matter of
fans being unable to view Major League Baseball's out-of-market games.
It is a matter of not being able to watch those games on a particular
system. Out-of-market games are still available, even if iN Demand and
DISH do not choose to participate, and are available on multiple
platforms. Baseball provides more telecasts to its fans than any other
sport. After a lengthy negotiation over the renewal of a single package
of games, those games were awarded to DIRECTV, but even then, the other
bidders have been given a chance to match the negotiated terms. There
is nothing sinister, illegal, wrongful or frankly unusual about that
form of business negotiation or result. In fact, as I will explain
later, we believe the result is a benefit to our fans.
If iN Demand and DISH choose not to step up to the plate as DIRECTV
has done, fans will still have several options. They can switch to
DIRECTV, they can subscribe to MLB.TV and watch the games on the
Internet, and they can watch the roughly 400 games that every fan in
every Major League market has available without the out-of-market
package. That includes virtually every one of the local market games
(Red Sox fans throughout the Red Sox' home territory are completely
unaffected by this deal), all of the games on ESPN, Turner and Fox, and
the All-Star Game and complete post-season. Given that our season and
post-season are about 200 days, that is about two games per day. Of
course, fans can also listen to local games on the radio and all of our
more than 2,400 regular season games nationwide on XM Satellite Radio.
As I mentioned, business arrangements such as our agreement with
DIRECTV are not unusual. During the negotiation period, every carrier
had an ability to bid, and each of them put in a bid to carry the EXTRA
INNINGS package exclusively. To watch the Sopranos, you must subscribe
to HBO, not Showtime or Cinemax. To watch the NFL out-of-market games,
you must subscribe to DIRECTV. To watch the NCAA and NASCAR specialized
packages, you must similarly subscribe to DIRECTV. An even better
example involves ironically the behavior of two of the members of the
loudest complainant here, the iN Demand consortium. To watch Phillies
games in Philadelphia (not in Utah, in Philadelphia) you must subscribe
to cable. Comcast, the majority owner of iN Demand and the dominant
cable provider in the Philadelphia area, does not make the games
available to satellite distributors. Similarly, to watch Padres games
in San Diego, you must subscribe to cable because Cox, another member
of the iN Demand consortium and the dominant cable provider in the San
Diego area, does not make the games available to satellite. In
Philadelphia alone, more than 400,000 satellite subscribers are denied
the ability to watch their home town Phillies (or Flyers or 76ers)
because of Comcast. That is more than twice the number of subscribers
the entire iN Demand syndicate had nationally for the EXTRA INNINGS
package last year. And yet, when after a 5-month negotiation, iN Demand
was the unsuccessful bidder, and even after it was given the ability to
match the DIRECTV terms and conditions, rather than do so, iN Demand
instead complained to Congress for a better business deal than it could
negotiate.
As we explained in great detail in our report to the FCC, our
agreement with DIRECTV, which covers the years 2007 through 2013, has
two principal components. First, DIRECTV will launch The MLB Channel as
part of its ``Total Choice'' basic service--with over 15 million
subscribers throughout the Nation--when the network becomes available
in 2009. The MLB Channel will be the first and only network dedicated
to providing baseball programming 24 hours a day, 7 days a week on a
year-round basis. The MLB Channel will likely include regular-season
MLB games, as well as a mix of Spring Training games, Minor League
games, games of other professional or amateur leagues, highlight shows
and other programming that will be designed to appeal to MLB's broad
fan base and that would not otherwise be available to them. DIRECTV
will have only non-exclusive carriage rights for The MLB Channel, in
which it will own a minority stake, and we will aggressively pursue
deals with other distributors.
Second, DIRECTV will offer its subscribers the MLB EXTRA INNINGS
package, as it has done during each of the last eleven years. This
package supplements national and local telecast rights. Again, our
agreement with DIRECTV also allows Baseball to license the EXTRA
INNINGS package to those entities that carried it last year, iN Demand
and DISH, provided they agree to rates, rights fees and carriage
commitments consistent with those to which DIRECTV has agreed. This
includes a commitment to distribute The MLB Channel to at least 80
percent of their total residential digital subscribers, which in the
case of iN Demand translates to approximately 40 percent of all the
subscribers of its owners, a lower threshold than required for DIRECTV,
which must distribute it to 80 percent of all of its subscribers.
Retaining the ability to license the EXTRA INNINGS package to the DISH
Network and the cable universe through iN Demand was something we did
because of our desire to provide the greatest amount of baseball to the
greatest number of fans.
It bears repeating that nothing in the DIRECTV agreement will
affect any of the national telecast rights described above or any
club's local telecasts rights. Not a single fan needs EXTRA INNINGS to
watch his or her local team's games. This situation stands in direct
contrast to the situation in Philadelphia described earlier, where the
regional sports network Comcast SportsNet distributes its local games
only via cable, in an area in which Comcast Corporation, owner of
Comcast SportsNet, is the dominant cable provider, and the similar
situation in San Diego with Cox Channel 4 and its owner Cox
Communications, again the dominant cable provider and again involving
home team games.
We are excited by the launch of The MLB Channel. Achieving carriage
of new programming networks is a difficult proposition in today's
telecommunications marketplace, and DIRECTV's commitment to distribute
The MLB Channel to at least 80 percent of all its residential
subscribers provides an exceptional start for the service. Contrary to
statements that iN Demand has made, it has never offered to match this
commitment. We hope and expect distribution will increase among other
programming distributors. In the meantime, however, at launch 15
million DIRECTV subscribers will receive an attractive selection of
games and other Baseball programming. During the course of our
negotiations with the other distributors, comments have been made--some
might call them threats--to the effect that if we do not acquiesce to
the demands of the other distributors and make EXTRA INNINGS available
on their terms, then they will never agree to carry The MLB Channel.
Notwithstanding these comments, we are confident that The MLB Channel
will be of significant interest to a wide audience, reflecting the
broad appeal of our game, even broader than some channels that are
currently widely distributed by the other distributors.
It is also to our many fans' great benefit that DIRECTV will be
carrying the EXTRA INNINGS package. DIRECTV has a proven track record
of developing features that significantly enhance the viewing of the
telecasts they carry. We were particularly impressed by the types of
innovations DIRECTV brought to the NFL's out-of-market package ``Sunday
Ticket'' and NASCAR's ``Hot Pass.'' DIRECTV's plans for the EXTRA
INNINGS package include a ``mosaic channel'' (with up to 8 game
telecasts shown simultaneously on a single screen); a ``Strike Zone
Channel'' that provides viewers live cut-ins of games in progress at
key points; high definition telecasts; and other innovations to be
developed.
We are aware that a limited number of homes in the United States
cannot receive satellite delivered programming because of line-of-sight
difficulties. We wish that were not the case, but the number of such
households is a small fraction compared to the number of households
that will receive The MLB Channel beginning in 2009. It has always been
Baseball's objective to achieve wide distribution for its telecasts and
to serve the greatest number of fans. We believe the launch of The MLB
Channel is consistent with that objective and with Baseball's
longstanding telecast practices that have generated such an
overwhelming number of national and local viewers. Again, we aim to
serve the greatest number of our fans, not a small number of
distributors.
It is also worth emphasizing that all of the Major League Baseball
game telecasts on EXTRA INNINGS will be available online through
MLB.TV, which, beginning this season, will offer an upgraded picture
quality. With future technological developments, we expect the quality
of the online viewing experience of our fans to continue to improve.
And with the significant growth of broadband penetration (which is now
greater than that of digital cable), the total number of subscribers to
our out-of-market packages (MLB.TV and EXTRA INNINGS combined) is
likely to reach new highs in the coming years.
In summary, Mr. Chairman, Baseball believes strongly that the
agreement we have reached with DIRECTV will provide the most benefits
to the greatest number of Baseball fans. Under this deal, we have been
guided by this fan-friendly approach because we view that as one of our
primary responsibilities and because we believe doing so simply makes
good business sense. Under this deal, DIRECTV, a long-standing MLB
partner that prides itself on customer service, has made a very
significant and, in our view, appropriate commitment to its customers
and to our fans. As part of this deal, we negotiated to secure for iN
Demand and DISH this window of opportunity to continue as distributors
of the EXTRA INNINGS package. We continue to hope that they will
similarly adopt a customer- and fan-friendly approach and capitalize on
their right to ``opt-in'' to this deal on the fair, reasonable and
market-based terms offered. Thank you, again, for the opportunity to
appear today. I have attached to my written testimony the report on
this subject that we submitted to the FCC on March 21.
______
Office of the Commissioner--Major League Baseball
March 21, 2007
Monica Shah Desai,
Chief,
Media Bureau,
Federal Communications Commission,
Washington, DC.
Dear Ms. Desai:
We appreciate the opportunity to provide you with information
concerning the recently-announced agreement between Major League
Baseball (``MLB'') and DIRECTV, as requested in your letter of February
20, 2007.
Our agreement sets forth the terms and conditions under which
DIRECTV has committed to carry The MLB Channel and the MLB EXTRA
INNINGS package (``EXTRA INNINGS''). In light of these commitments and
the opportunity for EchoStar's DISH Network (``EchoStar'') and iN
DEMAND (a consortium comprised of Time Warner, Comcast and Cox) to
match these commitments and ``opt-in,'' we firmly believe that our
agreement with DIRECTV best serves not only our legitimate business
interests but also the interests of our fans. We remain hopeful that
EchoStar and iN DEMAND will capitalize on this opportunity and ``step
up'' for our fans and their customers. However, even if they refuse to
match DIRECTV's commitment, our deal with DIRECTV will still ensure,
over the long run, that more of our fans have access to more of our
programming and in a more compelling format than ever before. As such,
our agreement with DIRECTV is fully consistent with the policies
adopted both by Congress and the Commission.
I. DIRECTV's Commitment to MLB and its Fans
The MLB Channel. DIRECTV will launch ``The MLB Channel,'' as part
of its ``Total Choice'' basic service package, when the network becomes
available in the year 2009. Total Choice currently reaches over 15
million households across the United States. DIRECTV has committed to
offering The MLB Channel, during the years 2009-13, in programming
packages that reach more than 80 percent of its total residential
subscribers. Because DIRECTV will have only non-exclusive rights to
carry The MLB Channel, we will aggressively seek to expand distribution
of the network through additional multi-channel video programming
distributors (``MVPDs'').
The MLB Channel will be the first and only network dedicated to
providing baseball programming 24 hours-a-day, 7 days-a-week on a year-
round basis; it will serve as the TV home for all baseball fans. While
the slate of programs for The MLB Channel is still under discussion, it
will likely include regular-season MLB games, as well as a mix of
Spring Training games, Minor League games, games of other professional
or amateur leagues, highlight shows and other programming that will be
designed to appeal to MLB's broad fan base and that would not otherwise
be available to them. The MLB Channel is intended to provide the in-
depth televised coverage of MLB, and baseball generally, that fans
cannot receive anywhere else, as well as to supplement our inventory of
game telecasts. With The MLB Channel, we will no longer be solely
dependent upon other networks to ensure that our fans receive the
substantial number of MLB telecasts that they currently receive.
DIRECTV, as a minority partner in The MLB Channel, will work with us to
develop a unique and entertaining service that appeals to our fan base
and helps promote interest in baseball at all levels.
EXTRA INNINGS. As it has done during each of the last eleven years,
DIRECTV will offer its subscribers the EXTRA INNINGS package for a
separate subscription fee during the years 2007-13. That package allows
subscribers to view certain telecasts of ``out-of-market'' MLB regular
season games, i.e., games involving teams other than the subscriber's
home team. For example, the EXTRA INNINGS package made available in New
York City would not include telecasts of games involving the New York
Yankees and New York Mets, but would include telecasts of games
involving other MLB clubs.
We launched the EXTRA INNINGS package in 1996 to supplement and to
complement the extensive array of game telecasts that we make available
to the public through a variety of sources, and thereby increase the
overall output of our game telecasts. In 2007, apart from EXTRA
INNINGS, fans in our clubs' markets will have access to an average of
more than 400 telecasts of MLB games over a combination of programming
services--the FOX broadcast network, the national cable networks ESPN
and TBS, superstation WGN, and multiple regional sports networks and
over-the-air broadcast television stations. We are proud of the fact
that no professional sports league offers its fans more game telecasts
than Major League Baseball. Nothing in our agreement with DIRECTV will
affect the continued availability of these telecasts.
Nor will anything in the agreement affect the availability of home
team MLB telecasts, which are generally the telecasts that are most
important to our fans. Indeed, home team games are not available on
EXTRA INNINGS. All fans will continue to have access to game telecasts
of their home club(s) in their home market without the need to
subscribe to EXTRA INNINGS. EXTRA INNINGS simply allows our most avid
fans the opportunity to purchase, for a separate fee, an additional
package of games over and above the significant inventory they receive
as part of their basic cable or satellite service.
II. Licensing of Other Incumbent Carriers
Although we are prepared to accord DIRECTV exclusive rights to
EXTRA INNINGS, our objective has always been to provide as much MLB
programming to as many baseball fans as possible. Thus, our agreement
with DIRECTV allows us to license EXTRA INNINGS to the other incumbents
that carried the package last season, i.e., EchoStar and iN DEMAND--as
long as they agree before the 2007 MLB season begins to rates and terms
consistent and proportionate with those to which DIRECTV has agreed.
Under our agreement with DIRECTV, EchoStar and iN DEMAND will need
to commit to a fair allocation of the total rights fees for EXTRA
INNINGS as set forth in that agreement, based on the number of digital
households that they and DIRECTV serve. Although more subscribers could
receive EXTRA INNINGS if they opt-in, the total rights fees paid to MLB
for that package would remain the same. And the per sub license fee for
The MLB Channel also would be the same for each of the incumbents. To
be sure, there would be some differences among the incumbents: (1)
DIRECTV had to ``step up'' and make the initial commitment and thus it
effectively ``set the market;'' (2) having made the initial commitment
and certain concessions in the course of negotiations, DIRECTV alone
will receive a minority stake in The MLB Channel; (3) EchoStar and iN
DEMAND receive the benefit of a ``right to match;'' and (4) while
DIRECTV and EchoStar must include The MLB Channel in programming
packages that reach more than 80 percent of their total residential
subscribers, IN DEMAND's owners and affiliates must include the network
on programming packages that reach more than 80 percent of their
digital residential subscribers only (which currently translates to
approximately 40 percent of their total residential subscribers).
Our agreement with DIRECTV was negotiated over the course of
months, and, in our view, resulted in ``fair market'' financial and
carriage commitments to MLB and our fans. We would have liked to have
commanded higher rights fees for EXTRA INNINGS, but the cost could have
included reduced distribution for The MLB Channel. We would have liked
a 100 percent penetration commitment for the channel, but we concluded
that a penetration commitment in excess of 80 percent was not
achievable in this market at this time. We would have liked to lock-up
all of these significant commitments from DIRECTV, while at the same
time retaining the ability to license EXTRA INNINGS to any other
distributor on any terms and at any time. That was not possible,
either. So we made what we deemed to be acceptable concessions in order
to secure the right to allow EchoStar and iN DEMAND the ability to opt-
in during this limited window. While in its final, heavily negotiated
form, our deal with DIRECTV may not be perfect from our perspective, it
was by far the most fan-friendly arrangement available to us.
EchoStar and iN DEMAND may well be reluctant to distribute The MLB
Channel at the required 80 percent distribution. We obviously
negotiated hard to obtain that commitment from DIRECTV and believe it
represents the penetration that the market will bear. DIRECTV has been
a very successful distributor, and we think it's fair to assume that
they regularly exercise reasonable business judgment, and did so in
making that commitment in our deal. Additionally, in our view, The MLB
Channel will provide programming of greater interest to more of the
subscribers served by EchoStar and iN Demand than many of the other
networks that are currently distributed to 80 percent of their
residential digital subscribers. So, while we understand that
distributors often prefer to restrict the distribution of independent
third-party networks, the 80 percent penetration requirement should not
be a barrier to entry for the other incumbents (and, especially, in the
case of the cable distributors who would only be required to deliver 80
percent of their digital subscribers).
While EchoStar and iN DEMAND may likewise be reluctant to pay their
fair share of the EXTRA INNINGS fees agreed to by DIRECTV, those fees
were heavily negotiated and we believe are reflective of market value.
In fact, under other proposals, we likely could have matched or even
exceeded the fees that DIRECTV is paying for EXTRA INNINGS. And, while
the other incumbents may object to being asked to pay the same ``per
subscriber served'' fee as DIRECTV, we believe that this basis of
apportionment is entirely fair and reasonable.
The bottom line is that MLB negotiated hard for this ``opt-in''
window, and we believe it affords the other incumbent distributors an
opportunity to better serve our fans and their customers on a fair and
reasonable basis.
III. The Benefits of the DIRECTV Agreement
As noted above, our agreement with DIRECTV was the product of free
and open marketplace negotiations. We did not negotiate exclusively
with DIRECTV. Rather, we approached each of the incumbents that carried
EXTRA INNINGS during the 2006 season, i.e., iN DEMAND, EchoStar and
DIRECTV. All of our incumbent distributors made bids based upon both
exclusive and non-exclusive arrangements, and we fully explored the
merits of all of these proposals. While we have finalized an agreement
with DIRECTV, the door is still open for iN DEMAND and EchoStar. If iN
DEMAND and EchoStar match DIRECTV's commitment, all fans who received
EXTRA INNINGS last season will continue to have access to EXTRA INNINGS
through their current providers. However, if iN DEMAND and EchoStar
choose not to do so, DIRECTV, which had the majority of EXTRA INNINGS
subscribers last season, would receive exclusive rights to EXTRA
INNINGS for the years 2007-13. This exclusivity would not be reflective
of MLB's preference. We would strongly prefer that all of the
distributors adopt DIRECTV's fan-friendly approach. Throughout this
process, we have been guided by our desire and responsibility to best
serve our fans. Our deal with DIRECTV presents us with the top two
alternatives for our fans, with the non-exclusive deal resulting from
``opt-ins'' as our clear preference. To the extent that, as a result of
the reluctance of EchoStar and iN DEMAND to make commitments
commensurate with DIRECTV's, an exclusive arrangement with DIRECTV
moves up a position to represent the best alternative for our fans, we
feel duty bound to capitalize on it.
Our goal from the outset has been to secure distribution of the
most MLB programming to the greatest number of our fans. For several
reasons, the commitment that DIRECTV has agreed to make is far superior
to any other offer we have received to date in terms of allowing us to
achieve that goal.
First, MLB has a very broad fan base. Last season, attendance at
our games (over 76 million tickets sold) reached an all-time high, the
third season in a row that we set a record. Our website, MLB.com,
attracted 2.4 billion visitors in 2006. And average household audiences
for nationally-televised regular season MLB games in 2006 (on FOX,
ESPN, ESPN2, TBS and WGN) were the largest since 2002, while our post-
season telecasts reached approximately 150 million viewers. Moreover,
fans have year-round interest in the sport of baseball. MLB games are
played from the beginning of March (with the first game of Spring
Training) to the end of October (with the final game of the World
Series), while baseball games from other leagues inside and outside the
United States fill most of the intervening months. TV, radio, print and
other media feature MLB news coverage throughout the year.
We firmly believe that our substantial fan base deserves to have a
24/7/365 channel devoted to baseball--a channel that also provides our
fans and us with a viable alternative as an outlet for game telecasts
and reduces the existing dependence upon other networks to satisfy our
fans' desire to receive those telecasts. And, as noted above, we
believe the level of interest in this channel will exceed that of many
channels currently carried in digital basic packages--a number of
which, of course, are vertically integrated with the cable operators
that carry them. We want partners, such as DIRECTV, that are willing to
make The MLB Channel available to the broadest possible number of
households without imposing additional charges upon our fans. In this
regard, we are perhaps no different than any other programmer.
DIRECTV's commitment to offer The MLB Channel in programming packages
that reach not only more than 80 percent of their subscribers but also
more than 15 million households, while at the same time allowing for
the ``opt-in'' opportunity for our other incumbent EXTRA INNINGS
distributors, far exceeded the commitments presented by the other
incumbents during our prior negotiations.
As the Commission is aware, independent programmers (such as MLB)
face substantial difficulties in bringing new programming services
(such as The MLB Channel) to the market. See generally Notice of
Inquiry in MB Doc. No. 06-189, 21 FCC Rcd. 1229 at 16 (2006) (seeking
to ascertain the nature and extent of such difficulties). Absent
DIRECTV's commitment to carry The MLB Channel on its Total Choice
platform, those difficulties would have posed significant obstacles to
the successful development of a new year-round 24/7 channel devoted
entirely to the sport of baseball. DIRECTV's willingness to become the
initial distributor of The MLB Channel and to provide the network to
the critical mass necessary for its deployment (regardless of whether
their EXTRA INNINGS rights were exclusive or non-exclusive) made
DIRECTV's offer the clear winner--and it is a key reason why our
agreement with DIRECTV will best serve the long-term interests of MLB
and its fans.
Second, DIRECTV has done a superior job in successfully promoting
subscriptions to the EXTRA INNINGS package. In 2006, for example,
DIRECTV accounted for more than one-half of the EXTRA INNINGS
subscribers base--even though it had less than one-quarter of all MVPD
subscribers nationwide. We believe that DIRECTV has the ability and the
desire to invigorate the EXTRA INNINGS package and to ensure that more
fans than ever choose to subscribe to that package. Indeed, DIRECTV has
a proven track record of developing innovative features that
significantly enhance the viewing experiences of premium sports
programming. We have been particularly impressed by the type of value
added services that DIRECTV has brought to the NFL's out-of-market
package ``Sunday Ticket'' and NASCAR's ``Hot Pass''--and by DIRECTV's
plans to expand the EXTRA INNINGS options to include: (a) a game mosaic
channel (with up to eight game telecasts shown simultaneously on a
single screen); (b) a ``Strike Zone Channel'' that takes viewers to
live cut-ins of MLB games in progress at key points; (c) HD telecasts;
and (d) other innovations that complement the sport of baseball,
entertain viewers and provide fans with significant entertainment
value.
Finally, if iN DEMAND and EchoStar do not match DIRECTV's
commitment for the carriage of The MLB Channel and EXTRA INNINGS, we
hope that those of our fans who are not currently DIRECTV subscribers
consider becoming DIRECTV subscribers. DIRECTV has sought to make it as
easy as possible for fans to switch to its service. As it has advised
the Commission, ``consumers can switch to DIRECTV with no start-up
costs, no equipment to buy, and no installation charges.'' Letter dated
March 2, 2007 at 5 from Chase Carey, President and CEO of DIRECTV
(``DIRECTV FCC Letter''). This would not be the first time that DIRECTV
has been the exclusive provider of EXTRA INNINGS. During the 2000
season and the first half of the 2001 season, DIRECTV was the only MVPD
to offer EXTRA INNINGS. DirecTV also has had, and continues to have,
exclusive carriage rights to other premium sports packages such as the
National Football League's out-of-market package ``Sunday Ticket'',
NCAA's out-of-market ``March Madness'' package and NASCAR's ``Hot
Pass''.
We recognize that there are some fans who are unable to receive
DIRECTV for technical reasons. DIRECTV has estimated the number of such
fans who subscribed to EXTRA INNINGS last year to be approximately
5,000. DIRECTV FCC Letter at 5. We also recognize that some number of
additional fans may prefer not to change their MVPD service to receive
EXTRA INNINGS. We would ask all of these fans to consider subscribing
to a comparable out-of-market package that is available online through
MLB.TV--an option that was not available when DIRECTV last carried
EXTRA INNINGS on an exclusive basis. Beginning with the 2007 season,
MLB.TV will offer an upgraded picture quality. With future
technological developments, we expect the quality of the online viewing
experience of our fans to continue to improve. And with the significant
growth of broadband penetration (which is now greater than that of
digital cable), the total number of subscribers to our out-of-market
packages (MLB.TV and EXTRA INNINGS combined) is likely to reach new
highs in the coming years.
If EchoStar and iN DEMAND choose not to match DIRECTV's commitment,
we sincerely regret any disruption or inconvenience that would be
caused to this limited number of fans by having DIRECTV become the
exclusive provider of EXTRA INNINGS. But we cannot put the interests of
what we believe are a relatively small minority of fans over what we
believe are the bests interests of the entire fan base as a whole.
While all of our fans are important to us, in our judgment, the
benefits of ensuring the successful launch of The MLB Channel as part
of a basic service package with more than 15 million subscribers
outweigh the unfortunate inconvenience that certain fans will face in
obtaining EXTRA INNINGS from a new provider.
DIRECTV has been an outstanding partner to MLB. Like MLB, they
believe that being committed to customer-service is just good business,
and, regardless of how many ``EXTRA INNINGS'' distributors we have
going forward, we are quite comfortable that our fans will continue to
be well-served.
IV. Congressional and Commission Policies
Should DIRECTV receive exclusive carriage rights for EXTRA INNINGS,
such rights would be fully consistent with Congressional and Commission
policies. Exclusive rights also would be typical of arrangements that
are routine in the television programming industry.
In the Cable Act of 1992, Congress specifically considered the
issue of when the Commission should prohibit exclusive programming
contracts between programming vendors and MVPDs. Congress concluded
that the Commission should do so only when the programming vendor was
vertically integrated with an MVPD; and the program access rules were
upheld as constitutional on that basis. See Section 628(c)(2)(D) of the
Communications Act, 47 U.S.C. 548(c)(2)(D); Time Warner Entertainment
Co. v. FCC, 93 F.3d 957, 978 (D.C. Cir. 1996). Even then, Congress
recognized that the Commission could make exceptions and permit
exclusive contracts after balancing a series of statutorily-prescribed
criteria. See Section 628(c)(4) of the Communications Act, 47 U.S.C.
548(c)(4), which includes the need for exclusivity to ensure the
development of new programming (such as The MLB Channel).
MLB has no ownership or other financial interest in DIRECTV or any
other MVPD, and neither DIRECTV nor any other MVPD has any ownership or
other financial interest in EXTRA INNINGS. MLB is precisely the type of
independent programmer that Congress determined, in the 1992 Cable Act,
should be allowed to enter into exclusive arrangements with MVPDs such
as DIRECTV. Over the years, the Commission has repeatedly resisted
efforts to expand (or recommend expanding) the prohibition in Section
628(c)(2)(D) to encompass exclusive agreements involving independent
programmers. See, e.g., Report and Order in CS Doc. No. 0I-290, 17 FCC
Rcd. 12124 at 74 and n. 243 (2002); Annual Assessment of the Status
of Competition in Markets for the Delivery of Video Programming, 15 FCC
Rcd. 9978, I066 (2000). As the Commission has correctly noted, ``Such
an expansion would directly contradict Congress' intent in limiting the
program access provisions to a specific group of market participants.''
17 FCC Rcd. at 74.
In supporting that conclusion as well as urging the Commission to
sunset the Section 628(c)(2)(D) prohibition on exclusive contracts, the
cable industry itself has argued that program exclusivity (such as that
accorded for the EXTRA INNINGS package) has numerous pro-competitive
and pro-consumer benefits. Indeed, the record in the sunset proceeding
(CS Docket No. 01-290) is replete with comments from the cable industry
demonstrating the benefits of exclusive programming contracts. See also
First Report and Order in MM Doc, No. 92-265, 8 FCC Rcd. 3359 at 23
(1993) (``As a general matter, the public interest in exclusivity in
the sale of entertainment programming is widely recognized.'');
EchoStar Communications Corp. v. Fox/Liberty Networks LLC, 14 FCC Rcd.
10480 at 14 (Cable Services Bureau 1999) (``public policy requires
minimal regulatory interference with private contracts entered into by
consenting parties''). There should be no question that having
exclusive rights to the distinctive EXTRA INNINGS package would make
DIRECTV a more formidable competitor to a cable industry that currently
dominates the MVPD market--and thus help achieve the competitive
balance that Congress envisioned when it adopted the 1992 Cable Act.
Certainly EchoStar and iN DEMAND recognized as much since they both
submitted bids that contemplated exclusive rights for EXTRA INNINGS.
It also should be noted that the decision to accord exclusive
rights for sports programming networks is not without precedent in the
cable industry. Cable operators themselves have been the beneficiary of
exclusive contracts for sports programming, and Congress has not taken
any action to prohibit such contracts. For example, Comcast has entered
into exclusive cable-only deals for its terrestrially-delivered Comcast
SportsNet in Philadelphia, which carries numerous games of the
Philadelphia Phillies, Flyers and Sixers. See EchoStar Communications
Corp. v, FCC, 292 F.3d 749 (D.C. Cir. 2002), aff'g 15 FCC Rcd. 22802
(2000). Likewise, Cox Communications offers its terrestrially-delivered
Cox Channel 4 San Diego, with approximately 140 telecasts of San Diego
Padres games, on an exclusive basis to cable. See also RCN Telecom
Services of New York, Inc. v. Cablevision Systems Corp., 14 FCC Rcd.
17093 (Cable Services Bureau 1999) (upholding refusal to license
regional sports networks to certain MVPDs). None of the sports
telecasts on Comcast SportsNet-Philadelphia (which includes a
significant number of home team games) is thus available to more than
400,000 DBS subscribers in the Philadelphia area; and none of the
sports telecasts on Cox Channel 4 San Diego (which also includes a
number of home team games) is available to any DBS subscribers in the
San Diego area. The number of DBS subscribers currently affected by
these cable-only deals is far greater than the number of subscribers
affected by according DIRECTV exclusivity for EXTRA INNINGS.
* * * * *
In conclusion, we recognize and appreciate the interest of the
Commission and Members of Congress in our agreement with DIRECTV. For
the reasons stated above, we strongly believe that the agreement will
benefit not only Baseball and DIRECTV but also the fans on which we
depend--and that it would be consistent with the pro-consumer and pro-
competitive policies that the Commission and Congress have adopted.
Please let us know if there is any additional information that you
believe would be necessary or helpful in preparing your report to the
Members of Congress that have expressed an interest in this matter. We
are, of course, prepared to meet with you and your staff at your
convenience to discuss any questions you may have.
Sincerely,
Robert A. DuPuy,
President and Chief Operating Officer.
Senator Kerry. Without objection, it will be. Thank you
very much, Mr. DuPuy.
Senator Kerry. Mr. Carey?
STATEMENT OF CHASE CAREY, PRESIDENT AND CEO, DIRECTV GROUP,
INC.
Mr. Carey. Thank you. Thank you, Mr. Chairman and Mr. Vice
Chairman. And thank you for inviting me to testify today.
My name is Chase Carey, I'm the President and CEO of
DIRECTV. I appreciate the opportunity to discuss baseball's
recently announced agreement with Major League Baseball.
I'd like to make five points in my opening. First, DIRECTV
reached its agreement with Major League Baseball through a fair
and open process. Second, we value this programming so highly
because we differentiate ourselves with better technology and
content leadership, particularly in sports. Third, the Baseball
Channel will be a great channel with year-round, 24-hour
baseball coverage, a truly new service for our fans. Fourth,
DIRECTV has pursued all of our initiatives with the customer in
mind, first and foremost. And fifth, our agreements comport
with the policies Congress established to create a competitive
marketplace. Let me elaborate.
DIRECTV reached its agreement with Major League Baseball
through a fair and open process. All of our cable and satellite
competitors engaged with Major League Baseball on this package.
DIRECTV had no advantage in this negotiation. We simply had
greater interest than our competitors. Yes, even today, after
all of this time, our competitors can have the EXTRA INNINGS
package if they match DIRECTV's offer. To date, they have not
done so.
We value this programming so highly, because we
differentiate ourselves from our competitors through
technological innovation and content leadership, particularly
in sports. Cable differentiates itself through the Triple Play
bundle. EchoStar does through initiatives such as exclusive
international programming. Simply put, this is competition at
work.
DIRECTV's strategy has not been merely to provide unique
quality and choice in programming, but to invest in new
features, like interactivity and expanded coverage. In our
agreements with the NFL and NASCAR, for example, we have
brought an array of exciting enhancements to fans in the last
year. Through our agreement with baseball, we look to do the
same thing for baseball fans, bringing more games, more HD,
more interactivity, and new types of coverage to fans.
Beginning in 2009, the MLB Channel will feature year-round,
24-hour baseball coverage, a truly new service for baseball
fans. DIRECTV is a minority partner in this channel, because we
bring unique expertise in sports television, and we will help
build the channel. Our equity stake also reflects our
willingness to provide the initial subscriber commitment, which
is necessary to launch the channel. This is the same type of
equity we have received from other channels, and our
competitors also get equity interest when they provide launch
platforms for new channels.
Our competitors object to the bundling of EXTRA INNINGS
rights with distribution for the Major League Baseball Channel.
Yet, they know that many channels have been built that way.
Comcast bundles its regional sports networks and national
channels with emerging channels like G4. Broadcast networks do
the same thing with their stations. Dozens of cable networks
got their start that way.
DIRECTV has pursued all of our initiatives with the
customer in mind, first and foremost. While our agreements may
require customers that want EXTRA INNINGS to switch to DIRECTV,
we provide the transfer at no cost to the customer, and proudly
provide each customer with the high-quality service that
continues to beat our competitors in independent research
studies. We also took the extra step in EXTRA INNINGS to agree
to have the games available on the web.
More broadly, DIRECTV has only pursued potential exclusive
arrangements on niche programming, targeted at a small fraction
of the audience. EXTRA INNINGS is a premium service, offering
out-of-town games. Only one-half of one percent of U.S.
households subscribed last year. DIRECTV has not sought
exclusives from mainstream, must-have programming like network
programming or local sports. Our cable competitors cannot say
the same thing.
Finally, our agreement comports with the policies Congress
established to create a competitive marketplace. Congress can
always change these policies. But, it should do so within a
framework of a broader review of competition and access issues.
Such an examination might address issues such as the tying of
video and broadband access services. Why, for example, does
cable consider it fair competition to punish broadband
subscribers that do not want their video, but it is unfair
competition for us to distinguish ourselves with niche sports
packages?
In Washington, D.C., for example, Comcast charges 70
percent more for a customer who chooses stand-alone broadband
service. And, if this Committee is concerned about sports
programming, it should begin by examining the worst instances
of sports withholding. In Philadelphia and San Diego, half a
million satellite subscribers cannot watch their home teams.
In summation, we pursued a fair, competitive process where
we entered an agreement that enables us to bring exciting,
expanded content to baseball fans, and we're committed to do so
as seamlessly as possible. Together with MLB, we will provide
more baseball to more fans in a more compelling format than
ever before. I'm happy to take any questions from the
Committee.
[The prepared statement of Mr. Carey follows:]
Prepared Statement of Chase Carey, President and CEO, DIRECTV, Inc.
Chairman Inouye, Vice Chairman Stevens, and members of the
Committee, my name is Chase Carey. I am the President and CEO of
DIRECTV. Thank you for inviting me to testify today regarding DIRECTV's
recently announced agreement with Major League Baseball (``MLB'') to
continue to carry MLB's EXTRA INNINGS package of out-of-town baseball
games.
I would like to address four issues today. First, I'll describe the
fair, open, and arm's length negotiation for carriage of EXTRA
INNINGS--a negotiation resulting directly from the pro-competitive,
pro-consumer policies Congress has put in place. DIRECTV has entered
into a carriage agreement with MLB, while EchoStar and a consortium of
the biggest cable operators remain free to match DIRECTV's offer until
Opening Day. So when our competitors complain that they don't have
rights to EXTRA INNINGS, what they're really saying is that they'd like
to pay less for those rights than DIRECTV--a lament common to many
MVPDs in many circumstances.\1\
---------------------------------------------------------------------------
\1\ Time Warner's top programming negotiator recently said as
much--stating that she was not sure why people have criticized the deal
as if it were ``rigged'' against competition, when the issue really
boils down to the ``evaluation of whether acquiring programming is too
expensive or not.'' SkyReport E-News, Mar. 13, 2007.
---------------------------------------------------------------------------
Second, I will address another aspect of competition at work--
DIRECTV's plan to transform EXTRA INNINGS from a mere collection of
games in low definition to a truly compelling, high definition
experience for the most avid baseball fans. Regardless of whether our
competitors step up to the plate, DIRECTV intends to make more baseball
available to more fans in a more compelling format than ever before.
This is a big win for baseball fans.
Third, I'll explain how the competitive marketplace Congress
created will ensure that fans of our Nation's pastime will not be left
behind. If EchoStar and the cable consortium step up and match
DIRECTV's offer, their subscribers will continue to have access to this
programming from those providers. If they don't, subscribers who want
to switch to DIRECTV can do so seamlessly. The small number of
subscribers who do not or cannot switch will be able to watch games
over broadband--an increasingly viable alternative to traditional
television.
Fourth, while DIRECTV's agreement with MLB is entirely consistent
with the policies Congress established to create a competitive
marketplace, Congress can always change those policies. But I would
respectfully suggest that, if this Committee is concerned about
competition and access issues, these issues should be examined within
the broader context of communications and competition policy. Such an
examination might address topics such as the tying of video and
broadband access services, the ``slow-rolling'' of access to Internet
video, tying arrangements for programming imposed by competitors with
market power, and home-team sports exclusives. DIRECTV would be happy
to participate in such a discussion.
I. DIRECTV Negotiated a Fair and Arm's Length Agreement With MLB; Cable
and EchoStar Can Have the Same Deal if They Want It
It is sometimes difficult to remember that, little more than a
decade ago, Americans had only one choice of multichannel video
provider--the cable monopoly. Today, nearly every American can choose
among their cable operator, DIRECTV, and EchoStar. Verizon and AT&T now
also offer service in many parts of the country.
These competitors have differentiated themselves in the
marketplace. Cable, and now Verizon and AT&T, compete by offering a
``triple play'' of voice, video and data--a bundle that DIRECTV cannot
yet offer on its own. EchoStar has carved out a niche as the low-cost
provider, and offers a host of foreign language exclusives. And DIRECTV
differentiates itself through an unparalleled selection of sports
programming and unmatched technical innovation--including an investment
of hundreds of millions of dollars on new satellites to offer consumers
their local broadcast stations in HD and over 100 national HD
programming services. These unique offerings helped DIRECTV to
differentiate itself and begin to break the stranglehold of the cable
monopolies. The cable industry, in turn, found itself forced to spend
billions to innovate and become more responsive to consumers' desires--
today offering a competitive, attractive package that includes its own
differentiated video-on-demand and bundled Internet offerings.
Cable, to be sure, still possesses an overwhelming market share,
which distorts competition to this day. But the fact remains that today
there is competition where before there was none. This is the success
story Congress--and this Committee, in particular--helped write.
And this is the context in which DIRECTV negotiated its agreement
to carry EXTRA INNINGS. Several months ago, MLB initiated discussions
with a number of MVPDs and their affiliates--including DIRECTV,
EchoStar, and iN DEMAND (owned by Comcast, Time Warner, and Cox)--
regarding carriage of EXTRA INNINGS. These discussions concerned both
exclusive and non-exclusive carriage. Each competitor was given the
opportunity to compete for EXTRA INNINGS. And each did.
In the end, despite the fact that it has a modest nationwide market
share, only DIRECTV showed an interest in carrying EXTRA INNINGS on
terms acceptable to MLB, including helping to launch the MLB Channel
and carrying it widely to our subscribers. So earlier this month,
DIRECTV and MLB announced that they had reached agreement for carriage
of EXTRA INNINGS and the MLB Channel.
That agreement gave DIRECTV's competitors--all of whom had a seat
at the table during the first round of negotiations--yet another turn
at bat. Until Opening Day, MLB will allow incumbent MVPDs willing to
agree to terms equivalent to DIRECTV's carriage arrangement to offer
their subscribers this programming. In other words, Comcast and Cox and
Time Warner and EchoStar can provide out-of-town games to their
subscribers if they want to. The agreement says only that they cannot
do so on the cheap. So if they agree to pay the price DIRECTV pays,
agree to carry the MLB Channel in the same manner as DIRECTV, and agree
to comply with the other terms and conditions that apply to DIRECTV,
they can carry EXTRA INNINGS. It's their choice. This is why Time
Warner's top programming negotiator recently said she was not sure why
people have criticized the deal as if it were ``rigged'' against
competition, when the issue really boils down to the ``evaluation of
whether acquiring programming is too expensive or not.'' \2\
---------------------------------------------------------------------------
\2\ SkyReport E-News, Mar. 13, 2007.
---------------------------------------------------------------------------
Now that both iN DEMAND and EchoStar have access to EXTRA INNINGS
on comparable terms and conditions as DIRECTV, we expected EchoStar and
the cable industry to stop complaining and start competing. But they
haven't. Now they're claiming that MLB's offer to match DIRECTV's terms
isn't fair.
They first contend that the agreement is unfair because DIRECTV
will have an ownership interest in the MLB Channel (not in MLB or the
EXTRA INNINGS package). But this isn't unfair at all. To begin with,
because of DIRECTV's ownership, MLB cannot offer DIRECTV the MLB
Channel on an exclusive basis. If DIRECTV's competitors think DIRECTV's
ownership interest is inconsistent with this obligation, they already
have an avenue for redress at the FCC.\3\ Moreover, granting DIRECTV an
ownership interest in exchange for its willingness to be the ``first
mover'' in carrying this channel is a very common industry practice.
The FCC reports that cable operators own dozens of channels, including
many of the most important regional sports networks (``RSNs'') such as
those in New York, Chicago, Philadelphia, San Diego and Washington
D.C.\3\
---------------------------------------------------------------------------
\3\ General Motors Corp., Hughes Electronics Corp., and The News
Corporation Limited, 19 FCC Rcd. 473 (2004) (``News-Hughes'').
\4\ Annual Assessment of the Status of Competition in the Market
for the Delivery of Video Programming, 21 FCC Rcd. 2503 App. C (2006).
---------------------------------------------------------------------------
DIRECTV's rivals also complain that the distribution requirements
for the MLB Channel that DIRECTV agreed to are too onerous. This is
nothing but a public relations ploy. If anything, the distribution
requirement actually favors cable operators. Based on the distribution
formula in the agreement, DIRECTV has to distribute the MLB Channel to
roughly 80 percent of its total subscribers, while cable operators
would have to distribute it to approximately 40 percent of their total
subscribers. The very terms for distribution cable denounces as unfair
are equivalent to, or in many instances less stringent than, the
requirements cable operators demand for the programming they themselves
own.
DIRECTV's rivals may not like these terms. But parties who do not
like terms of carriage cannot cry foul on that basis alone. This is how
programming negotiations work. If an MVPD believes that programming is
too expensive, it can choose not to carry the programming. This happens
all the time. EchoStar, for example, doesn't carry the YES network for
this very reason, so EchoStar subscribers in New York can't watch most
Yankees games. MLB's insistence that other MVPDs live by the same deal
DIRECTV did isn't unfair, it is simply the marketplace at work--and
surely isn't a subject worthy of Congressional intervention.
II. DIRECTV's Carriage of EXTRA INNINGS Will Be a Big Win for Fans
I do not know whether EchoStar and the cable industry will
ultimately match DIRECTV's offer to carry EXTRA INNINGS. I do know,
however, that DIRECTV has big plans for EXTRA INNINGS--which is one
reason why we have (so far) been willing to pay more than anybody else
for it. DIRECTV will make more baseball available to more fans in a
more compelling format than ever before.
For starters, DIRECTV will add a mosaic channel and a Strike Zone
channel (similar to the NFL Sunday Ticket Red Zone Channel) that will
deliver live cut-ins of games throughout the country. We will also
provide great entertainment to fans with real-time scores, player and
team stats and other innovations that complement the sport of baseball.
Most importantly, DIRECTV expects to provide most, if not all, games in
high definition for the 2008 baseball season--an innovation that most
cable operators cannot match.
Moreover, as part of the EXTRA INNINGS agreement, DIRECTV will also
make The MLB Channel widely available when the channel launches in
2009.
DIRECTV's transformation of EXTRA INNINGS should come as no
surprise. This, after all, is what DIRECTV has done for other
programming. For example, DIRECTV recently completely revamped
supplemental coverage of NASCAR races. The cable industry had the
rights to NASCAR content for years, but did little with this
programming and attracted only 30,000 customers in 2006. DIRECTV
obtained the rights this year to what is now NASCAR Hotpass, and
debuted a service at this year's Daytona 500 that bears little
resemblance to cable's bare-bones offering. DIRECTV's NASCAR Hotpass
features five dedicated ``Driver Channels,'' each focusing on an
individual driver and offering multiple camera angles, real-time stats,
team audio communications and dedicated announcer teams. Although the
NASCAR season started only recently, DIRECTV already has more than
three times the subscribers to this programming than the cable industry
had in 2006.
DIRECTV expects that once it adds interactive features, high-
definition service, and the MLB Channel, many new subscribers will sign
up for EXTRA INNINGS with DIRECTV. This will make DIRECTV's service
more attractive than our cable competitors. Those competitors, in turn,
will have to improve their services to keep up. This, again, is the
vibrant competitive marketplace that Congress envisioned at work.
III. The Competitive Marketplace Envisioned by Congress Will Provide
Numerous Alternatives for Baseball Fans
The same competitive marketplace that permitted DIRECTV to obtain
the rights to EXTRA INNINGS in a fair and open manner will also ensure
that baseball fans will continue to be able to watch their favorite
teams. Right now, both EchoStar and iN DEMAND have the option to
continue to provide this programming to their subscribers--if they are
willing to pay the fair price negotiated at arm's length between
DIRECTV and MLB. Even if DIRECTV remains the only MVPD to carry EXTRA
INNINGS, however, non-DIRECTV subscribers will not be harmed in any
meaningful way.
First, consumers can switch to DIRECTV with no start-up costs, no
equipment to buy, and no installation charges. When they do so, they
will get a better service at a better value than is offered by cable.
DIRECTV, unlike cable, is 100 percent digital. DIRECTV offers more
programming than cable. On average, DIRECTV costs significantly less
per channel than cable. And DIRECTV's customer service is second to
none--having surpassed the cable industry average in each of the last 6
years.\5\ This, again, is how a competitive marketplace is supposed to
work. Unfortunately, cable operators are doing their best to prevent
this. Cable, for example, penalizes customers by dramatically
increasing the price of Internet service if the customer drops cable's
video service. To overcome cable's barriers, DIRECTV has chosen to
offer customers who want to switch no up-front costs and more
compelling content.
---------------------------------------------------------------------------
\5\ See Steve Donohue, ``DIRECTV Tops J.D. Power Survey,''
Multichannel News, Aug. 16, 2006, available at http://
www.multichannel.com/article/CA6363083.html.
---------------------------------------------------------------------------
Second, every single game carried on EXTRA INNINGS will remain
available online through MLB.com. Internet video is improving
dramatically,\6\ and MLB announced its intent to offer upgraded picture
quality this season. Thus, subscribers who choose not to (or cannot)
subscribe to DIRECTV will still be able to watch the games of their
choice. Here again, however, cable operators are attempting to hinder
the marketplace. If cable did not prohibit a direct connection between
the Internet and the set top box, MLB.com could easily be viewed on
television sets.
---------------------------------------------------------------------------
\6\ See, e.g., Peter Grant, Plugging the Web Into the TV, Wall St.
J., Aug. 4, 2006, at A11 (describing the rapid advances in online
video, and stating that, with a TiVo device, one ``can't even tell
whether it came from the TV or off the Internet.'').
---------------------------------------------------------------------------
Third, the arrangement will not disrupt competition among MVPDs. To
begin with, relatively few subscribers are affected at all. Only
230,000 non-DIRECTV customers subscribed to EXTRA INNINGS last year--
less than one -half of one percent of all television homes.\7\ DIRECTV
estimates that there are relatively few viewers--no more than 3 percent
of the cable segment (approximately 180,000 EXTRA INNINGS
subscribers)--who cannot receive DIRECTV service. This translates to
roughly 5,000 subscribers--each of whom can access the games over the
Internet. Moreover, this agreement does not deny a single fan the right
to follow his or her home team. In all of its programming arrangements,
DIRECTV has been respectful of fans' rights to view their home team
sports. EXTRA INNINGS is a premium package of out-of-town games--
designed to serve baseball's most avid fans without adversely affecting
viewership of MLB's national and local telecasts. By contrast, our
cable competitors have withheld core home team sports programming from
nearly half a million satellite customers in Philadelphia and San
Diego.
---------------------------------------------------------------------------
\7\ Not to minimize the inconvenience to these customers, but it is
worth noting that that tens of millions of subscribers ``churn,''
switching video providers every year.
---------------------------------------------------------------------------
Fourth, the marketplace will continue to provide subscribers
without EXTRA INNINGS a wealth of options for watching their favorite
sport. If EXTRA INNINGS were to disappear tomorrow, MLB would still
offer more televised games by far than any other U.S. sport. Regardless
of the MVPD to which they subscribe, fans throughout the country can
watch their home team on broadcast television or RSNs--assuming that
cable-affiliated RSNs continue to make their programming available to
all MVPDs at non-discriminatory rates. In addition, fans without EXTRA
INNINGS can still watch an impressive number of out-of-town games. On
average, more than 400 games are televised in each market--on local
broadcast television, RSNs, and MLB's national partners FOX, TBS, and
ESPN.
IV. A Broader Review of Competition Policy May Be Appropriate
Members of this Committee are naturally concerned about consumer
choice and access to content. So is DIRECTV. But Congress cannot
examine these issues in a vacuum--and certainly should not start with
this arm's length, pro-competitive deal. If it truly seeks to ensure
that every American has a choice among video providers and access to
content, this committee can choose among any number of issues that
affect far more consumers.
If, for example, this committee is concerned about the ability of
subscribers to switch MVPDs, it might examine why cable operators
dramatically increase the price for their broadband service to
subscribers that switch from cable to satellite for video service. In
Washington, D.C., for example, Comcast charges $33.99 for Internet
service when bundled with video and voice, but $57.95 for stand-alone
Internet--a 70 percent increase in price. Even though DIRECTV offers a
lower price for a better video service, consumers with cable modems
lose money by choosing DIRECTV. If Congress seeks to maximize consumer
choice--as it should--cable's tying of Internet and video services is
worthy of review.
If this committee is concerned that viewers might be denied access
to content they wish to view, it might examine whether cable operators
should be able to degrade the service their broadband subscribers
receive when accessing video content from non-affiliated websites (or
entities that do not pay to ensure access), or preclude such access
altogether. As more and more video content migrates to the Internet,
cable operators will increasingly have the incentive and ability to
determine what their broadband subscribers can and cannot see. A cable
operator could even, for example, prohibit a baseball fan from visiting
MLB.com (or, more likely, could ``slow-roll'' communications to that
site compared with communications from its own site).
If this committee is concerned about bundling channels in contract
negotiations, it might wish to focus more broadly on tying arrangements
imposed by parties with market power. For example, Comcast recently
required DIRECTV to distribute its ``G4'' gaming channel to 80 percent
of its subscribers in order to continue to carry Comcast SportsNet Mid
Atlantic at market rates. A broader examination of arrangements like
this would consider the pros and cons of today's programming
marketplace and possible ideas for revising it.
And finally, if this Committee is concerned about sports
programming, it should begin by examining the worst instances of sports
withholding. Congress and the FCC have found repeatedly over the years
that cable operators can abuse their formidable market power by
arranging to withhold programming they own. And they do that today in
Philadelphia and San Diego, where half a million satellite subscribers
cannot watch their home teams. Surely that--and not an arm's length,
non-exclusive, pro-competitive deal such as that between DIRECTV and
MLB for carriage of out-of-town games--is worthy of this committee's
consideration.
* * * * *
The video marketplace continues to evolve as competition takes hold
under the regime Congress has put in place. DIRECTV's arrangement with
MLB is part of that process--the result of fair and open competition
for programming that even today remains available to DIRECTV's rivals.
DIRECTV intends to upgrade EXTRA INNINGS significantly, giving avid
baseball fans more than they have ever had from this package before. We
will also make the transition of any subscriber who wants this
programming from DIRECTV as seamless as possible. In the end, then,
DIRECTV's agreement with MLB is an example of how the competitive
marketplace created by this committee is working--not how it needs to
be changed.
Senator Kerry. Thank you very much, Mr. Carey, I appreciate
it.
Senator Kerry. Mr. Vogel?
STATEMENT OF CARL VOGEL, PRESIDENT AND
VICE CHAIRMAN, EchoStar SATELLITE, L.L.C.
Mr. Vogel. Chairman Stevens, Senator Kerry, members of the
Committee, on behalf of EchoStar Satellite, I want to thank you
for inviting our company to discuss the important issue of
exclusive programming and its impact on consumer choice.
My name is Carl Vogel, and I am President and Vice Chairman
of EchoStar. Since we began offering services 11 years ago,
EchoStar's DISH Network has grown to become the fourth-largest
multi-channel video provider in the country, serving more than
13 million customers.
Mr. Chairman, I would ask that my written testimony be
submitted to the record.
Senator Kerry. It will be.
Mr. Vogel. Exclusive content distribution deals in any
major sport today do not promote competition. They harm
existing consumers, while limiting choices in the future. As we
sit here today, the deal presented by Major League Baseball is
designed to be an exclusive deal for DIRECTV in substance,
despite statements to the contrary regarding form and the
opportunity to opt-in.
The terms offered by Major League Baseball effectively tie
the carriage of the EXTRA INNINGS package today to a firm
commitment to launch the Major League Baseball Channel to over
10 million of our subscribers in 2009. We find these demands
inconsistent in a climate where Congress, the FCC and the
American public are asking for more choice, not less.
Despite these onerous terms, we at EchoStar stand ready to
match the current offer, in its entirety, to protect our
consumers, and remain competitive. However, in its entirety
must be apples to apples, which requires ownership of the Major
League Baseball Channel. We have made these points clear to
both Major League Baseball and DIRECTV. In response to our
request, in a letter dated March 22nd from Major League
Baseball, they state they are not in a position to offer any
equity in connection with the opt-in opportunity without
DIRECTV's consent.
Notwithstanding the irony of a distributor with a minority
interest determining the fate of the Major League Baseball
Channel, it will be interesting to see whether that consent is
forthcoming, and with what conditions, as DIRECTV reconciles
whether it wears its ownership hat for the Major League
Baseball Channel, or its hat as a competitive distributor.
With only 4 short days to bring this to conclusion, it
appears these negotiations for the EXTRA INNINGS package may
need extra innings themselves.
Given this set of circumstances, the deal with Major League
Baseball and DIRECTV regarding the EXTRA INNINGS package will
likely proceed as an exclusive, disenfranchising over 300,000
consumers nationwide. Numerous distributors, including
EchoStar, were part of building the EXTRA INNINGS brand and
consumer appeal over the last 10 years. Those customers are now
being subjected to an exclusive bait-and-switch by Major League
Baseball.
Creating exclusivity with sports content is anti-
competitive. It's particularly problematic when that very
programming has been available to a number of consumers, from a
number of distributors for a number of years.
The EXTRA INNINGS package became available on DISH Network
3 years ago, and many of our subscribers who have chosen this
season ticket live in rural areas. These customers most likely
have chosen DISH Network as a result of our low prices and
flexible packaging. In every case, our customers had the option
of choosing DIRECTV, and didn't. This incremental increase in
EXTRA INNINGS subscriptions clearly represents the best
example, where increasing--rather than restricting--access to
sports content has worked for the benefit of consumers.
Major League Baseball now wants to limit access and
rationalize the fan displacement by stating DIRECTV will
provide equipment and installation free of charge. This
alternative fails to recognize any price differentiation
between EchoStar and DIRECTV. In many cases, a switch to
DIRECTV is tantamount to a 33 percent rate increase, just to
gain access to the EXTRA INNINGS package. For Major League
Baseball to reach into consumer's pockets, and suggest this is
a reasonable choice, is not only disrespectful, but clearly
points out Major League Baseball has, in this instance,
relegated themselves to a well-compensated sales agent for
DIRECTV.
Our motives are very straightforward. We want to compete.
In conclusion, we're quite certain that consumers would far
prefer a world where exclusives over regional sports, the NFL
Sunday Ticket and the EXTRA INNINGS package did not exist. Such
relationships currently do not promote competition, but rather
limit consumer choice to one provider. This proposed EXTRA
INNINGS exclusivity with DIRECTV does not expand the market, it
merely provides for the migration of subscribers from many
providers to one.
Certainly, exclusive content relationships today may be
within the letter of the law, but they can't possibly meet the
spirit of Congressional intent.
Thank you, and I look forward to answering your questions.
[The prepared statement of Mr. Vogel follows:]
Prepared Statement of Carl Vogel, President and Vice Chairman,
EchoStar Satellite, L.L.C.
Chairman Kerry, and members of the Committee, on behalf of EchoStar
Satellite, I want to thank you for inviting our company to discuss the
important issue of exclusive sports programming.
My name is Carl Vogel, and I am President and Vice Chairman of
EchoStar. Since we began offering service 11 years ago, EchoStar's DISH
Network has grown to become the 4th largest multi-channel video
provider in the country serving more than 13 million subscribers.
Exclusive content distribution deals in any major sport today do
not promote competition. They harm existing consumers while limiting
choices in the future.
As we sit here today, the deal presented by Major League Baseball
is designed to be an exclusive deal for DIRECTV in substance, despite
statements to the contrary regarding form and the opportunity to ``opt-
in.''
The terms offered by Major League Baseball effectively tie the
carriage of the EXTRA INNINGS package today to a firm commitment to
launch The MLB Channel to over 10 million of our subscribers in 2009.
We find these demands inconsistent in a climate where Congress, the
FCC, and the American public are asking for more a-la-carte choices.
Despite these onerous terms, we stand ready to match the current
offer in its entirety to protect our consumers and remain competitive.
However, in its entirety must be apples-to-apples, which will require
EchoStar to acquire a pro-rata ownership of The MLB Channel. In a
letter dated March 22nd, from Major League Baseball, they state they
are not in a position to offer any equity in connection with this
``opt-in'' opportunity without DIRECTV's consent. It will be
interesting to see whether that consent is forthcoming, and with what
conditions, as DIRECTV reconciles whether it wears its ownership hat
for the MLB Channel or its hat as a competitive distributor. With only
four short days to bring this to conclusion, it appears the
negotiations for the EXTRA INNINGS package may need some extra innings
themselves.
Given this set of circumstances, the deal with Major League
Baseball and DIRECTV regarding the EXTRA INNINGS package will likely
proceed as an exclusive deal, disenfranchising over 300,000 consumers
nationwide. Numerous distributors, including EchoStar, were part of
building the EXTRA INNINGS brand and consumer appeal over the past 10
years. Creating exclusivity with sports content is anticompetitive;
however, it is particularly problematic when that very programming has
been available to a number of consumers, on a number of platforms, for
a number of years.
The EXTRA INNINGS package became available on DISH Network 3 years
ago and many of our 55,000 subscribers who have chosen this season
ticket live in rural areas. These consumers most likely have chosen
DISH Network as a result of our low prices and flexible packaging. The
incremental increase in EXTRA INNINGS subscriptions clearly represents
the best example where increasing, rather than restricting access to
sports content has worked in favor of consumers.
Major League Baseball now wants to limit access and has
rationalized the fan displacement by stating DIRECTV will provide
equipment and installation free of charge. This analysis fails to
recognize any price difference between EchoStar and DIRECTV. In many
cases, a switch to DIRECTV is tantamount to a 33 percent rate increase
just to gain access the EXTRA INNINGS package. For Major League
Baseball to reach into consumers pockets and suggest this is a
reasonable choice is not only disrespectful but clearly points out that
Major League Baseball has in this instance, relegated themselves to a
well compensated sales agent for DIRECTV.
Our motives are very straightforward. We want to compete.
In conclusion, we are quite certain that consumers would far prefer
a world where exclusives over regional sports, the NFL Sunday Ticket
and the EXTRA INNINGS package did not exist. Such relationships do not
currently promote competition, but rather limit consumer choice to one
provider. This proposed EXTRA INNINGS exclusivity with DIRECTV does not
expand the market; it merely provides for a migration of subscribers
from many providers to one. Certainly, exclusive content relationships
may today be within the letter of the law, but they cannot possibly
meet the spirit of Congressional intent.
Thank you, and I look forward to answering your questions.
Senator Kerry. Thank you very much, Mr. Vogel. I appreciate
it. Mr. Jacobson?
STATEMENT OF ROBERT D. JACOBSON, PRESIDENT AND CEO, iN DEMAND
NETWORKS, L.L.C.
Mr. Jacobson. Thank you, Mr. Chairman, Mr. Vice Chairman,
my name is Rob Jacobson. I'm the President and CEO of iN
DEMAND.
iN DEMAND is a programming company owned by Comcast, Time
Warner Cable, and Cox Cable. We provide a variety of
entertainment programming, including sports packages such as
NHL Center Ice, NBA League Pass, MLS Direct Kick, and until
this season, MLB EXTRA INNINGS.
There has been a lot of controversy about DIRECTV's attempt
to get exclusivity for baseball's EXTRA INNINGS package.
Baseball recently said it would offer that package to us, but
for reasons I'll explain, that offer was unreasonable, and
clearly designed to protect the exclusive arrangement that had
previously been agreed to by DIRECTV and baseball.
In order to break the log-jam, and ensure that consumers
across America have access to the games, last week we made a
counter-offer. We agreed to carry EXTRA INNINGS, and the
Baseball Channel--a new channel not projected to launch until
sometime in 2009--on the same terms as DIRECTV, which is what
baseball said, publicly, they were looking for. Our offer was
not exclusive. Baseball immediately rejected that offer, and
today, we are offering to carry EXTRA INNINGS on the same terms
as DIRECTV, and put off the issue of the Baseball Channel until
it actually launches. This would ensure that for the next 2
years, at least, all baseball fans would have access to the
EXTRA INNINGS package. If we're unable to reach an agreement,
and the channel launches, we give baseball the right to cancel
the EXTRA INNINGS deal. We think this is a fair compromise.
Let me give you a little history and tell you why our offer
is in the best interest of sports fans everywhere. We've
offered EXTRA INNINGS on a non-exclusive basis since July 2001.
Our most recent agreement with baseball expired at the end of
last season. We began discussions with baseball almost a year
ago to renew our non-exclusive deal. Last summer, baseball
asked whether we'd be interested in offering EXTRA INNINGS on
an exclusive basis. We said that would not be in the best
interest of baseball fans and would not be viable for us, given
the program access rules, which prohibit exclusive contracts
for cable-affiliated programmers like iN DEMAND. We expressed a
strong desire to continue to license the EXTRA INNINGS on a
non-exclusive basis. We even offered a 400 percent increase in
guaranteed fees, to no avail.
A major sticking point in the negotiations was baseball's
insistence that cable could only carry EXTRA INNINGS if it also
agreed to deliver the Baseball Channel to millions of
customers, regardless of whether they wanted to view, and pay
for, the channel.
In late February, several weeks prior to the announcement
of the DIRECTV deal, we made a proposal that ensured baseball
would be guaranteed $100 million annually for EXTRA INNINGS. We
also committed that iN DEMAND's owners would distribute the
Baseball Channel to 15 million homes at baseball's requested
price. We made a binding offer that was non-exclusive, and we
did not ask for an ownership interest in the Baseball Channel.
Baseball never called us back.
Eventually, baseball decided to pursue an exclusive
agreement with DIRECTV. The public reaction was overwhelmingly
negative. In response, baseball and DIRECTV decided to dress up
their exclusive deal to make it look like it wasn't exclusive.
Baseball said it would give iN DEMAND the opportunity to
``match'' the DIRECTV deal, but we had to do so by the end of
this month, or the games would be unavailable to cable
subscribers for the next 7 years. But, baseball's proposal to
cable is dramatically more expensive for cable than it is for
DIRECTV. In order to get EXTRA INNINGS, baseball is insisting
that iN DEMAND's owners pay a disproportionate share of the
$100 million annual cost of EXTRA INNINGS, and carry the
Baseball Channel on terms significantly more onerous than
DIRECTV. In addition, baseball gave DIRECTV a 20 percent
ownership interest in the Baseball Channel, and said it will
not offer iN DEMAND a similar interest. Baseball's claim that
it's merely asking iN DEMAND and EchoStar to match the DIRECTV
deal is wrong. In fact, taking into account all elements of
baseball's offer, baseball is insisting that we pay many times
more than what it had asked DIRECTV to pay.
Last year, EXTRA INNINGS was available to almost 100
million homes. Under an exclusive DIRECTV deal, it would only
be available to DIRECTV's 16 million customers. Over 80 million
cable and EchoStar customers would be denied access to the
games. This would be especially unfair to the many fans who
previously purchased and enjoyed those games.
DIRECTV says there's no harm, because these are only out-
of-market games, not ``home'' games. But, if you're a Red Sox
fan living in Washington, D.C., the Nationals are not your
``home team.'' Baseball has a choice. It can offer the games to
100 million homes, or 16 million homes. Either way, it's
guaranteed $100 million per year. We think the choice is
obvious. Thank you for the opportunity to testify today.
[The prepared statement of Mr. Jacobson follows:]
Prepared Statement of Robert D. Jacobson, President and CEO,
iN DEMAND, L.L.C.
Mr. Chairman and members of the Committee, my name is Rob Jacobson,
and I am President and CEO of iN DEMAND.
iN DEMAND is a programming company owned by Comcast, Time Warner
Cable, and Cox Cable. We provide sports, movies, and other
entertainment programming through our INHD high-definition channel,
pay-per-view, subscription video-on-demand, and out-of-market sports
packages. We sell these services to a variety of distributors,
including cable, overbuilders, telcos, and DBS. Our sports packages
include NHL Center Ice, NBA League Pass, MLS Direct Kick, and, until
this season, MLB EXTRA INNINGS. We have been effectively frozen out of
negotiations for the NFL Sunday Ticket by the NFL.
There has been a lot of controversy about DIRECTV's attempt to get
exclusivity for MLB's ``EXTRA INNINGS'' package. MLB recently said it
would offer that package to us, but for reasons I'll explain, that
offer was unreasonable--and clearly designed to protect the exclusive
arrangement that had previously been agreed to by DIRECTV and MLB.
In order to break the log-jam and ensure consumers across America
have access to the games, last week we made a counter-offer. We agreed
to carry EXTRA INNINGS and The Baseball Channel, a new MLB channel not
projected to launch until sometime in 2009, on the same terms as
DIRECTV--which is what MLB said publicly they were looking for. Our
offer was not exclusive. We're ready to execute an agreement by Opening
Day. MLB immediately rejected that offer.
Even now, we would enter into a deal for carriage of EXTRA INNINGS
on the same terms as DIRECTV. If The Baseball Channel launches in 2009,
we would give MLB the right to cancel the EXTRA INNINGS deal if it
cannot reach a satisfactory agreement for carriage of the new channel
with our owners. This would put off the issue of The Baseball Channel
until it actually launches and ensure that for the next 2 years at
least, all baseball fans will have access to the EXTRA INNINGS package.
We think this is a fair compromise.
Let me give you a little history and tell you why our offer is in
the best interests of sports fans everywhere.
We have offered EXTRA INNINGS on a non-exclusive basis since July
2001. Our most recent agreement with MLB expired at the end of last
season.
We began discussions with MLB almost a year ago to renew our non-
exclusive deal. Last summer, MLB asked whether we would be interested
in offering EXTRA INNINGS on an exclusive basis. We said that would not
be in the best interest of baseball fans and would not be viable for us
given the program access rules, which prohibit exclusive contracts for
cable-affiliated programmers, like iN DEMAND. We expressed a strong
desire to continue to license EXTRA INNINGS on a non-exclusive basis.
We even offered a substantial increase in guaranteed fees--an increase
of nearly 400 percent--to no avail.
A major sticking point in the negotiations was MLB's insistence
that cable could only carry EXTRA INNINGS if it also agreed to deliver
The Baseball Channel to millions of customers, regardless of whether
they wanted to view and pay for the channel.
In late February, we made a proposal to MLB that ensured MLB would
be guaranteed $100 million annually for EXTRA INNINGS and committed
that iN DEMAND's owners would distribute The Baseball Channel to 15
million homes at MLB's requested price per subscriber--all on a non-
exclusive basis. MLB never called us back.
Eventually, MLB decided to pursue an exclusive agreement with
DIRECTV. The public reaction was overwhelmingly negative.
In response, MLB and DIRECTV decided to dress up their exclusive
deal to make it look like it wasn't exclusive. MLB said it would give
iN DEMAND the opportunity to ``match'' the DIRECTV deal, but we had to
do so by the end of this month or the games would be unavailable to
cable subscribers for the next 7 years. The problem is that MLB is not
really interested in a non-exclusive deal with cable and DIRECTV. Its
proposal to cable is, in fact, dramatically more expensive for cable
than it is for DIRECTV and is unreasonable and unfair.
In order to get EXTRA INNINGS, MLB is insisting that iN DEMAND's
owners agree to assume a disproportionate share of the $100 million
annual cost of EXTRA INNINGS and agree to carry The Baseball Channel on
terms significantly more onerous than DIRECTV. In addition, MLB gave
DIRECTV a 20 percent ownership interest in The Baseball Channel and
said it will not offer iN DEMAND a similar interest or comparable
economics. MLB's claim that it is merely asking iN DEMAND and EchoStar
to match the DIRECTV deal is wrong. In fact, taking into account all of
the elements of MLB's offer to us, including the fact that it gave an
ownership interest to DIRECTV but refused to give an ownership interest
to us, the amount MLB is insisting that iN DEMAND pay is many times
greater than what it has asked DIRECTV to pay.
MLB has claimed that we previously made an exclusive offer for
EXTRA INNINGS. That is not true. At one point, MLB became concerned
that if it did a deal with us, DIRECTV would walk away from EXTRA
INNINGS. MLB insisted that if that happened we would have to make up
the money it lost because DIRECTV walked away. We agreed to do that,
but we never bid for exclusive rights for EXTRA INNINGS, nor did we
want exclusive rights.
Last year, EXTRA INNINGS was available to almost 100 million homes.
Under an exclusive DIRECTV deal, it would only be available to
DIRECTV's 16 million customers. Over 80 million cable and EchoStar
customers would be denied access to the games. This would be especially
unfair to the many baseball fans who previously purchased and enjoyed
those games.
DIRECTV says there would be no harm because these are only out-of-
market games, not ``home'' games. But if you're a Red Sox fan living in
Washington, D.C., the Nationals are not your ``home'' team. If an
exclusive deal were allowed to stand, hundreds of thousands of fans
across America would no longer be able to watch their favorite teams.
And, we're not talking just about baseball. DIRECTV has out-of-
market NFL games and early rounds of the NCAA basketball tournament
exclusively. We used to have a NASCAR package which allowed us to show
races from cameras inside the cars. Now DIRECTV has that NASCAR package
exclusively. DIRECTV's strategy is to capture exclusivity for high-
profile sports across-the-board. That is not fair to consumers.
MLB has a choice. It can offer the games to 100 million homes or 16
million homes. Either way it is guaranteed $100 million per year. We
think the right choice is obvious. On behalf of baseball fans
everywhere, we appreciate the Committee's willingness to hold this
hearing and we look forward to working with you to find effective
solutions to this growing problem.
Thank you for the opportunity to testify today.
Senator Kerry. Thank you very much, Mr. Jacobson.
Professor Ross?
STATEMENT OF STEPHEN F. ROSS, DIRECTOR AND
PROFESSOR OF LAW, INSTITUTE FOR SPORTS LAW, POLICY
AND RESEARCH, THE DICKINSON SCHOOL OF LAW,
THE PENNSYLVANIA STATE UNIVERSITY
Mr. Ross. Mr. Chairman, Senators. Thank you very much, for
inviting me today. It's an honor to appear on this side of the
table, returning after 20 years of being behind you, when I
used to work as a counsel on the Senate Judiciary Committee.
It's a pleasure to be back on the Hill.
I've heard all of this testimony about how fair or unfair
everybody's being to each other, but the issue before this
Committee ought not be who's being fair to competitors, but how
they are being fair to the Anchorage resident who, as Senator
Stevens correctly points out, is an out-of-market fan for every
team. To some of Senator Kerry's constituents' parents, who
have retired to Florida or Arizona, and are avid members of Red
Sox Nation. To the fan of a club other than the Philadelphia
Phillies, who lives in the South New Jersey area, and wants to
follow the 76ers and Flyers as well as their favorite team. I
have to concede, knowing Minnesota, that I think it's really
very public-interested of Senator Klobuchar to be here, since
virtually everybody in Minnesota is a Twins fan, but
nonetheless, there may be a few recent imports there, or
National League fans who can't stand the designated hitter, who
want to get out-of-market games there.
And these consumers will clearly be harmed, if they prefer
other rivals to DIRECTV, for other reasons--perhaps beyond
their control. Moreover, if the other people at this table
respond the way that, in an un-regulated, normal marketplace,
you would expect people to respond--which is by entering into
their own exclusive deal--this will get worse for everyone.
This is not like Sears getting an exclusive with Levi's
jeans, where Lee's can respond with an exclusive with Macy's,
and consumers simply have to walk across the shopping mall. If
Mr. Jacobson's members respond by expanding on the examples
that Mr. DuPuy and Carey criticized, and then if Mr. Vogel
responds in a similar manner, you really have consumers getting
harmed in a very significant way, by this deal.
Unlike the exclusive practices that Mr. Carey discussed,
it's far different to try to differentiate yourself with
international programming, targeting a completely separate
audience, than when you're entering into exclusive deals
targeting the same audience. If you are an immigrant, and you
enjoy TV from South Asia, you can subscribe to Mr. Vogel's
client. If you are interested in some of the high-quality
NASCAR programming, you can subscribe to Mr. Carey's
programming--these deals we're discussing today apply to
millions of consumers, across the board, it's fundamentally
different.
This would not be a problem if there were not two
fundamental non-competitive marketplace problems. First, this
is not really a deal between Major League Baseball and DIRECTV.
This is a deal between 30 Major League Baseball owners, who
under the common law have the right to sell their games
everywhere, and have chosen, all of them, to sell rights
exclusively through this particular deal. Some of you might
have been as surprised as I was to realize that only half of 1
percent of Americans subscribe to out-of-market baseball, when
there are 90 million Americans who no longer live where they
grew up. Why don't more Americans watch their national pastime
and their favorite team? It's because, they may not be
interested in paying $160 last year, $200 next year (if you
don't get a head start) for EXTRA INNINGS, because they might
just want to watch their own team. But, they can't watch only
their own team. I cannot call up Frank McCourt--the owner of
the Los Angeles Dodgers--and get a deal to watch Dodger games
in Central Pennsylvania. The only way to do it is through Major
League Baseball, because of an agreement that--with regard to
the National Football League--was held illegal in 1953.
Second, this would not be a problem if there was aggressive
competition between about 10 retail outlets for cable or
satellites, and DIRECTV did not have an opportunity to profit
on its Choice package, which is why it's driving--it wants to
drive so many people to get its Choice package. If it didn't
make extra money on its Choice package, it couldn't have
afforded to pass this on to Major League Baseball.
Thus, Mr. Chairman, sports is a unique programming driver.
And so, special legislation is justified, if the industry can't
work out a deal itself. Now, it may be--from listening to all
of these parties--that we're just quibbling about the deal.
But, for those of you who were in Washington, D.C. last year,
you saw how long it took to work out a deal to get the
Nationals to come here over the objections of the Orioles; how
long it took for Mr. DuPuy--with brilliant negotiation on his
part--to finally put together a package to buy off Peter
Angelos; how long it took to have an addition deal to get
Washington Nationals games on cable so people in this area
could watch Nationals games.
Now, in the end, it all worked out. But the question is,
how long should American baseball fans have to suffer while
these people at this party finally work out a deal that will
achieve Mr. DuPuy's goal of as much distribution of the
national pastime as possible?
I'd be happy to answer your questions.
[The prepared statement of Mr. Ross follows:]
Prepared Statement of Stephen F. Ross, Director and Professor of Law,
Institute for Sports Law, Policy and Research, The Dickinson School of
Law, The Pennsylvania State University
Mr. Chairman and members of the Committee:
It is an honor and privilege to be invited to join a panel of
industry leaders to offer an independent view, based on over two
decades of scholarship and teaching concerning sports and competition
policy, in discussing the impediments to the free flow of interstate
commerce as millions of Americans seek ways to take advantage of
technological advances to watch non-local Major League Baseball games
in their homes.
General Thoughts on Exclusive Dealing
The issue before the Committee today is whether the exclusive
dealing arrangement between Major League Baseball (MLB) and DIRECTV,
whereby DIRECTV becomes the only source for out-of-market games not
shown on national networks, is in the public interest. As the Supreme
Court has recognized,\1\ exclusive dealing arrangements are both
legitimate and indeed can have pro-competitive effects. In traditional
markets where consumers have free access to retail markets, the Court
has declared that, as a matter of antitrust law (in my view, this
reasoning also applies to sound regulatory policy), these arrangements
should only be questioned when there is a serious risk that they will
foreclose access to supply or outlet by other firms.\2\ Thus, an
agreement by Sears to exclusively sell Levi's blue jeans is unlikely to
harm consumers; there are ample other retail outlets for Levi's rivals,
and ample other jean manufacturers for Sears' competitors. If there are
efficiencies in exclusivity, the likely market response is for Lee to
reach an exclusive deal with Macy's, etc. Consumers unhappy with Sears'
selection are only harmed to the extent they have to walk across the
shopping mall.
---------------------------------------------------------------------------
\1\ Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320 (1961).
\2\ Id. At 334.
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Harm to Baseball Fans
In contrast, baseball fans face significant harm because of various
pre-existing agreements as well as the recently announced exclusive
MLB/DIRECTV deal. Those who have other reasons to prefer DISH Network
or cable must either forego quality telecasts of out-of-market baseball
games,\3\ or suffer exploitation by subscribing to multiple multi-
channel video distribution platforms that require the purchase of
duplicate programming and unnecessary equipment. The exclusive deal
reinforces the harm that already befalls the millions of Americans who
do not live within the local media market of their favorite team,
because of a horizontal market division agreement entered into by MLB
owners that, in the context of football, has been illegal for over 50
years.\4\ There is no public interest justification in forcing
consumers to purchase a distribution platform that is inferior for
their needs, or duplicate platforms, just to watch their favorite
teams. These consumers include:
---------------------------------------------------------------------------
\3\ Standard antitrust analysis properly focuses on whether a
product or service faces competition from ``reasonable substitutes''
that will draw consumers if there is a small but significant increase
in price or decrease in quality of the good or service in question.
Courts have generally found that major sports are sufficiently unique
in consumers' hearts--baseball is, after all, the national pastime--
that a small increase in the price of watching a favorite baseball team
will not send enough fans to the library or to cricket websites to
render the move unprofitable. See, e.g., National Collegiate Athletic
Ass'n v. Board of Regents, 468 U.S. 85 (1984) (college football is a
market distinct from professional football or other forms of
entertainment); International Boxing Club v. United States, 358 U.S.
242 (1959) (championship boxing is a market distinct from non-
championship boxing).
Likewise, the issue here concerns quality telecasts to be displayed
on television sets of increasing size and clarity. Although some fans
may prefer the convenience of watching webcasts of out-of-market games
on their computers, or others are willing to endure the significant
reduction in picture quality when subscribing to mlb.com, these
webcasts are not the sort of reasonable substitutes for EXTRA INNINGS
TM that either antitrust doctrine or public policy ought
require.
\4\ United States v. National Football League, 116 F.Supp. 319
(E.D. Pa. 1953).
Residents in areas with heavy thunderstorm activity (such as
Florida) who prefer cable because of concerns about weather-
---------------------------------------------------------------------------
related interference with important sports broadcasts
Residents of local markets (like metropolitan Philadelphia
and southern New Jersey) who are fans of local basketball and
hockey teams but out-of-market baseball teams, and would under
planned agreements be required to subscribe to cable for some
teams and satellite for others
Virtually all residents of states without a local team (like
Alaska, Hawaii, or Nevada) or states with many retirees from
other states (like Florida, California, or Arizona): there is
no reason that the only way they can watch games of their
favorite teams is to acquire a single product, MLB EXTRA
INNINGS TM, from a single retailer, DIRECTV
Consumers in multi-residence dwellings who are not allowed
to select their preferred retailer, and where the landlord,
homeowners' association, or other decision-maker is
insufficiently interested in baseball to switch to DIRECTV
Restraints on Interstate Commerce: Horizontal Market Division
To be clear, the agreement that sparked this hearing did not arise
from the free market. First, there is the horizontal market division by
MLB owners. Under the common law, the home team owns a property right
in the radio and television rights to baseball games.\5\ However, the
MLB owners have agreed to significant limitations on these common law
rights. Each club will only broadcast games in its assigned geographic
territory, licensing the visiting club for the purpose of broadcasting
games in its own home territory, and assigning to MLB the exclusive
right to sell games not only to free-to-air networks (a right protected
by the Sports Broadcasting Act) but most significantly the exclusive
right to sell non-network games to satellite or cable only through MLB
EXTRA INNINGS TM (which is not exempt from antitrust
scrutiny).
---------------------------------------------------------------------------
\5\ See, e.g., Pittsburgh Athletic Co. v. KQV Broad. Co., 24 F.
Supp. 490 (W.D. Pa. 1938).
---------------------------------------------------------------------------
Were it not for this web of agreements, the MLB/DIRECTV deal would
raise few problems for consumers. Those interested in the convenience
of a single package of all out-of-market games could purchase EXTRA
INNINGS TM from DIRECTV. A Los Angeles Dodgers fan outside
southern California, or someone who simply enjoyed the final years of
play-by-play from hall-of-famer Vin Scully, would likely find it
possible to purchase Dodger telecasts, acquired from the Dodgers by
DIRECTV, DISH Network, or the local cable company. Other intermediaries
might offer a syndicate of games in competition with EXTRA INNINGS
TM.
Antitrust precedents suggest that the MLB agreements are anti-
competitive and ought to be illegal. In United States v. National
Football League,\6\ a very sophisticated district court decision that
presaged by 30 years the antitrust analysis of broadcast restraints
later adopted by the Supreme Court,\7\ the court noted that sports
leagues had a unique interest in promoting competitive balance among
member teams so that, to the extent that a rival team's out-of-market
telecast would significantly harm live attendance, the league could
agree to prevent this. However, the court rejected the NFL's effort to
bar out-of-market telecasts that simply competed with the home team's
telecast of road games: the only effect there was to limit output and
raise rights fees for the home team, a result that was not legitimate
or pro-competitive. As later courts have recognized,\8\ leagues can
adequately protect competitive balance with regard to television rights
sales by revenue sharing, rather than output limits.
---------------------------------------------------------------------------
\6\ 116 F. Supp. 319 (E.D. Pa. 1953).
\7\ National Collegiate Athletic Ass'n v. Board of Regents, 468
U.S. 85 (1984).
\8\ Chicago Professional Sports Ltd. v. National Basketball Ass'n,
961 F.2d 667 (7th Cir. 1992).
---------------------------------------------------------------------------
The courts have also recognized, in antitrust litigation, that
broad licenses awarded by competing copyright holders through
intermediaries can be pro-competitive, when these are non-exclusive
licenses. Thus, the Supreme Court rejected a lower court holding that
Broadcast Music and ASCAP violated the Sherman Act by offering a
blanket license for the vast majority of copyrighted songs.\9\ On
remand, the court of appeals upheld the legality of the arrangement,
but only after finding that potential licensees had real alternative
ways of acquiring rights.\10\ This was because the Justice Department
had challenged, many years ago, the agreement among almost all the
Nation's songwriters to grant exclusive licenses to BMI or ASCAP--
grants akin to the out-of-market assignments that individual team
owners have made to DIRECTV--and the parties by consent decree had
agreed to limit the license to a non-exclusive grant.\11\
---------------------------------------------------------------------------
\9\ Broadcast Music, Inc. v. Columbia Broadcasting System, Inc.,
441 U.S. 1 (1979).
\10\ Columbia Broadcasting System, Inc. v. American Soc'y of
Composers, Authors & Publishers, 620 F.2d 930 (2d Cir. 1980).
\11\ CBS v. Broadcast Music, 441 U.S. at 10-11, citing United
States v. American Soc'y of Composers, Artists & Publishers, 1940-1943
Trade Cas. (CCH) 56,104 (S.D.N.Y. 1941).
---------------------------------------------------------------------------
It is bad enough that these agreements meet the ``hallmark''
definition of unreasonable restraints of trade, by increasing price,
reducing output, and rendering output unresponsive to consumer
demand.\12\ In fact, these agreements are even more inefficient and
anti-competitive than would be the case if all rights to all games were
assigned to a single entity. Because the additional costs of showing
games to out-of-market fans is virtually zero, such an entity would
likely sell, in addition to local rights and EXTRA INNINGS
TM, other packages to other consumers. For example, there
are surely many fans who would pay, on a per game or per team basis,
for out-of-market games. These are not authorized now, not because the
sale would not be profitable, but because the MLB owners can not agree
on how to divide the profits.\13\
---------------------------------------------------------------------------
\12\ NCAA, 468 U.S. at 107.
\13\ There are at least two recent examples of this phenomenon. In
1992, the English Premier League, having agreed to show 60 of its 380
matches exclusively on the BSkyB satellite, rejected BSkyB's offer to
show 90 matches for a 50 percent increase in fees. At about the same
time, the National Basketball Association succeeded in strictly
limiting the very popular broadcasts of the Chicago Bulls featuring
Michael Jordan, despite evidence that Bulls' broadcasts had minimal
effects in other markets, refusing to copy MLB's practice of taxing
superstation revenue.
---------------------------------------------------------------------------
Insufficient Competition in Multi-Channel Video Distribution
An analysis of the economics of rights sales for out-of-market
games demonstrates that the current scheme would be implausible except
for two additional deviations from the free market: (1) insufficient
competition between DIRECTV, DISH Network, and cable permits excess
profits from consumers of ``basic premium'' programming; (2) by tying
the sale of EXTRA INNINGS TM to its ``Choice'' package,
DIRECTV is able to increase its excess profits and the agreement in
question reflects a sharing of those increased excess profits between
DIRECTV and Major League Baseball.
Although there are important differences in the economics of
English football and North American sports, on both sides of the
Atlantic we see leagues that offer entertainment products with no
reasonable substitutes selling broadcast rights to a major programmer
in return for a large, fixed sum of money. Policy questions about
exclusive agreements for prime sports programming have also arisen in
the United Kingdom, and have been insightfully analyzed in a working
paper widely distributed among sports economists.\14\ Economists David
Harbord and Marco Ottaviani detail the profit-maximizing strategy for
the various market participants. First, they note that leagues are
likely to sell rights for a fixed rather than per-subscriber fee. A
fixed fee avoids the problem of the rights-purchaser tacking on its own
excess profits charge to that imposed by the league.\15\ Because MLB
doesn't know precisely how many fans will subscribe to EXTRA INNINGS
TM, or how effectively DIRECTV will market the product, it
has an even greater incentive to sell for fixed fees, as the rights-
purchaser is better able to accept the risk of marketing the product
effectively during the course of the contract. If the rights purchaser
is effective in maximizing revenues from resale and advertising,
results of which are usually reported in the trade press, the league
can profit from the rights purchaser's success to secure even higher
rights fees for the next contract. (For example, the NFL's first
network contract with CBS gave each owner $300,000/yr. Three years
later, the second contract gave each owner $1 million/yr.)
---------------------------------------------------------------------------
\14\ David Harbord & Marco Ottaviani, ``Contracts and Competition
in the Pay-TV Market,'' London Bus. School Dep't of Economics Working
Paper No. DP 2001/5, available at http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=289334.
\15\ This phenomenon is known to economists as ``double
marginalization.'' Suppose the profit-maximizing price for EXTRA
INNINGS TM is $160/year. (Any increase in price reduces
demand, unless a product is essential to life. Thus, raising the price
from $150 to $160 will cause some marginal consumers to discontinue
patronage, but if the number is small enough, the increase is
profitable. If 100 consumers refuse to go along with the increase, this
would cost MLB/DIRECTV $15,000. But if a 10,000 consumers are willing
to pay $160, this is an additional $100,000. At some point, the number
of consumers discontinuing purchases outweighs the additional income,
just short of that point is the profit-maximizing price.) If MLB sold
rights on a per-subscriber basis, they would want to fix the price at
$160 minus DIRECTV's costs. If these costs were $5/subscriber, MLB
would set the rights sale at $155. However, this would leave DIRECTV
with no excess profits. DIRECTV would rather get some excess profits,
even at the expense of losing some customers. So DIRECTV would be
likely to charge $170 or more, costing MLB some customers and some
profit. These problems are avoided by a lump-sum sale.
---------------------------------------------------------------------------
Next, Harbord & Ottaviani explain why a rights-purchaser, having
paid a lump-sum to obtain rights for which there was no substitute,
would want to re-sell rights on a per-subscriber basis to its cable and
satellite rivals. Ordinarily, they observe, by re-selling to rivals,
the rights purchaser increases the marginal operating costs for its
rivals at the same time it fetches additional revenue. This ``makes
reselling more profitable for the firm which acquires the rights, and
hence more likely to occur.'' \16\ Re-selling on a per-subscriber basis
results in higher rights fees (because the league can capture a portion
of the additional profit to be obtained from reselling on a per-
subscriber basis) and maximizes output (more people subscribe).
---------------------------------------------------------------------------
\16\ Harbord & Ottaviani, supra, at 8. To the extent that there are
strategic gains from raising rivals' cost, the incentive to re-sell is
even stronger.
---------------------------------------------------------------------------
Applied to American baseball, Harbord & Ottaviani's analysis
suggests that DIRECTV would find it profitable to resell EXTRA INNINGS
to cable networks and DISH Network, and that MLB would share in this
profit through a higher lump-sum fee for the exclusive rights to out-
of-market baseball games. So why have DIRECTV and MLB done the
opposite? We can infer from the parties' preference for an exclusive
deal that DIRECTV is willing to forego this opportunity, and indeed pay
MLB more than the total amount that MLB might reasonably expect to
receive from sales of EXTRA INNINGS through various retail outlets.
This is because DIRECTV would prefer to force some out-of-market
baseball fans to switch their patronage to DIRECTV, rather than obtain
all the revenue from out-of-market fans, regardless of which
``retailer'' these fans patronize. DIRECTV's ability to obtain more
revenue from those fans that remain with or switch to DIRECTV than it
could by charging the full monopoly price for EXTRA INNINGS TM
to all out-of-market fans is most likely due to their ability to obtain
even greater super-competitive profits from those that switch.
Suppose one million fans would be willing to subscribe to EXTRA
INNINGS TM at $160 per season, but that 200,000 of these
will not patronize DIRECTV (perhaps they fear thunderstorms, prefer
programming available only on cable, can't afford two systems in areas
where local cable is unavailable, don't have a clear south-facing view
on their property, must use the system subscribed by the landlord,
etc.). That's $32 million in lost revenue. The exclusive deal means
that DIRECTV plans on making this up by obtaining new customers from
cable or DISH Network. If 300,000 EXTRA INNINGS customers switch to
DIRECTV's Choice package (at $480/yr) + EXTRA INNINGS TM,
that's an additional $144 million in revenue (from Choice, not MLB
games, which these fans were already purchasing via cable or DISH
Network). If DIRECTV's operational and programming costs in servicing
the new customers was not well below $144 million, this scheme wouldn't
be profitable. Only the excess profits on the Choice package--which
baseball fans are required to purchase as a condition of subscribing to
EXTRA INNINGS TM--is what allows DIRECTV to profitably enter
into an exclusive deal.
One other explanation is theoretically possible--that there are
huge cost-saving efficiencies from an exclusive dealing arrangement.
However, no one has, to date, seriously made this claim on behalf of
MLB or DIRECTV.
Summary of Economic Analysis
The foregoing analysis suggests that the MLB/DIRECTV exclusive deal
reflects the ability of these sellers to exploit baseball fans because
of the lack of any substitute products, and thus impose a monopoly
price and significantly reduce output. Out-of-market games will
henceforth only be available on DIRECTV, presumably at the monopoly
price. The absence of alternative means of obtaining out-of-market
games means millions of consumers will pay more. But it also means that
output is substantially reduced, because of foregone purchases (all of
which would be considerably above the marginal cost of production) from
(i) expatriate fans of one particular team willing to pay a lower price
to watch their favorite team but unwilling to pay for the EXTRA INNINGS
package; (ii) avid fans who have other preferential reasons to prefer
to continue to subscribe to cable or DISH Network; (iii) marginal
customers of satellite programming, who otherwise prefer DIRECTV's
programming but decline to pay the ``basic premium'' price charged by
DIRECTV because it reflects in part the need to share profits with MLB.
This is bad public policy.
Ways That Legislation Can Protect Consumers
There are a number of ways that existing or potential legislation
could protect baseball fans against exploitation by inefficient and
anti-competitive broadcast agreements:
Existing antitrust laws could be used to invalidate these
unreasonable restraints of trade.
Specific antitrust legislation could be enacted to
facilitate this result.
Regulatory legislation could minimize the excess profits
that satellite and cable providers enjoy from their ``basic
premium'' packages, or could directly prohibit the bundling
essential to the exclusivity scheme by requiring ``a la carte''
pricing.
Strategic legislation could also be introduced by leading
members of this committee as a means of facilitating voluntary
pro-consumer compliance by industry.
Existing Antitrust Enforcement
As detailed below, even vigorous enforcement of the antitrust laws
by the Justice Department would face significant obstacles to quick
resolution in time to protect sports fans. Unfortunately, the record of
the current Antitrust Division leadership does not lead to a confident
prediction of such enforcement. The obstacles to private litigation to
effectively protect consumers are even greater. For these reasons,
reliance on existing law is unlikely to constitute an adequate public
policy response by this Congress.
A government enforcement action should be able to rely on the
precedents discussed above to establish that the horizontal restraint
among MLB clubs is an unreasonable restraint of trade. The exclusive
broadcast territories are neither necessary to promote competitive
balance among member teams nor to prevent any efficiency-deterring free
riding. The only way in which a club's sale of their games into another
geographic market could harm competitive balance would be if the
additional revenue generated from these out-of-market rights fees would
enable the teams to acquire enough talent to enable them to dominate
the league. This scenario is implausible for a number of reasons. There
is no evidence that these fees would be significant enough to affect
competitive balance. More important, there is no reason why the leagues
could not share these revenues, as Major League Baseball has with teams
whose games are carried nationwide via locally-based superstations.
Nor can the leagues, in this context, sensibly claim that the
restraint is an intra-firm restraint among the ``single entity'' of the
league, rather than the horizontal agreement among independent clubs.
Because of the economics of rights sales, a single firm would sell all
rights in all games that are going to be televised to the highest
bidder, who could then re-sell the games to consumers in a price
discriminating manner designed to yield the greatest revenue (noting
again that the marginal costs of selling a game once it is being
televised is virtually zero). The EXTRA INNINGS package is the only way
that out-of-market fans can get games, not because this is DIRECTV's
preference, but because it is the choice of the majority of MLB clubs.
DIRECTV would clearly be better off if it could price discriminate by
selling the EXTRA INNINGS package to those with a demand for over 1,000
baseball games, and selling a smaller package of games (or even
individual games on a pay-per-view basis) to its subscribers unwilling
to pay for EXTRA INNINGS. Rather, individual games are unavailable to
out-of-market fans, despite the potential for profitable sales, because
transactions costs prevent owners from agreeing on how to divide the
spoils. As a result, the interest of the league-as-a-whole in
maximizing revenues from television sales is subordinated to the
interests of individual teams in protecting their own local broadcast
rights and preventing rivals from attaining a competitive advantage
from more successful out-of-market rights sales. This is not the
``unity of interest'' that the Supreme Court has required to exclude
agreements among formally separate entities from review under section 1
of the Sherman Act.\17\
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\17\ Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 771
(1984).
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Existing precedents with regard to tying arrangements might also
support a claim that DIRECTV's practice of bundling EXTRA INNINGS
TM with its $40/mo. Choice package is also unreasonable.
However, there are several serious obstacles to successful government
prosecution of such a lawsuit. First, MLB could claim that the
judicially-created baseball exemption applies to broadcast restraints.
Although good arguments can be made that the exemption does not
apply,\18\ the result is ultimately an uncertain question likely to
require ultimate resolution, after years of litigation, by the Supreme
Court. Second, although DIRECTV's bundling practices would appear to be
unreasonable under existing precedents,\19\ these precedents have come
under criticism by commentators \20\ and justices.\21\ Moreover,
current regulation of cable and satellite practices by the FCC might be
held to preclude antitrust scrutiny of this behavior.
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\18\ When the Supreme Court last revisited the issue in Flood v.
Kuhn, 407 U.S. 258 (1972), the Court explicitly rejected its original
holding that baseball was not interstate commerce, instead re-affirming
the exemption because of baseball's ``unique characteristics and
needs'' and Congress' ``positive inaction'' in sustaining the judicial
precedents. It is clear that baseball has no unique characteristics and
needs with regard to broadcasting, a fact Congress recognized by
including baseball as a sport covered by the limited exemption for
package sales to free-to-air networks contained in the Sports
Broadcasting Act. Congress' positive inaction with regard to the
baseball exemption, upon which Justice Blackmun relied in Flood,
related almost entirely to labor restraints. When Congress overturned
that specific aspect of Flood in enacting the Curt Flood Act of 1995,
it is clear that continuing legislative concern almost entirely related
to protecting the unique characteristics and needs of minor league
baseball, not broadcasting practices that MLB shares in common with the
NBA and the NHL.
In addition, lower courts have suggested that the exemption applies
only to the ``business of baseball'' and not to the ``business of
broadcasting.'' Henderson Broad. Corp. v. Houston Sports Ass'n, 541 F.
Supp. 263 (S.D. Tex. 1982). Especially in light of courts' explicit
recognition that MLB can lawfully require clubs to share revenues from
rights sales, Chicago Professional Sports Ltd. Partnership, supra, 961
F.2d at 675, there is no reason why subjecting television agreements to
standard antitrust analysis would compromise ``the business of
baseball.''
\19\ The current Supreme Court doctrine is expressed in Jefferson
Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2 (1984). Firms engaged
in a substantial amount of interstate commerce may not force consumers
to purchase a product, service, or copyright license as a condition of
purchasing a more desired license, where the seller has ``market
power,'' the arrangement requires the purchase of two ``separate
products,'' and the tying is not necessary to introduce a new product
or to ensure the reliable use of either. Applying this precedent, it is
clear that DIRECTV has market power in the sale of EXTRA INNINGS
TM, as there are no reasonable substitutes for out-of-market
MLB games. Forcing purchasers of EXTRA INNINGS TM to
purchase the Choice package constitutes a tied sale, because there is
distinct and separate consumer demand for both products. Finally, there
is no need to tie well-established programs in the Choice package with
uniquely desirable MLB games in order to penetrate a market, and there
are no reliability issues in subscribing to one or the other.
\20\ See, e.g., Robert Bork, The Antitrust Paradox, 365-381 (1978).
\21\ See, e.g., Eastman Kodak Co. v. Image Tech. Servs., 504 U.S.
451, 487 (Scalia, J., dissenting); Hyde, 466 U.S. at 32 (O'Connor, J.,
concurring).
---------------------------------------------------------------------------
Private enforcement is even more problematic. The obstacles stated
above pose major litigation risks that would deter private antitrust
attorneys from commencing expensive litigation. Because the proposed
exclusive deal is prospective, treble damage relief (and accompanying
attorneys fees funded by the damage award) would not be available for
that aspect of the challenge. My own experience as a public interest
advocate has been that private firms are unlikely to view the grant of
statutory attorneys fees provided for in the Clayton Act as a
sufficient economic incentive to undertake the costs of uncertain
litigation. In addition, private litigation on behalf of consumers who
currently patronize DIRECTV would have to confront complex issues that
would arise in light of the contract-by-adhesion DIRECTV requires all
customers that provides for disputes to be arbitrated.
New Antitrust Legislation
This committee could defer to your Judiciary Committee colleagues,
who could consider specific legislation that amended the Sports
Broadcasting Act to prohibit the sort of bundling or exclusive dealing
practices identified in this testimony. There is a long history of
specific legislation enacted by Congress to outlaw specific anti-
competitive practices: indeed, the Clayton Act was passed to
specifically outlaw tying arrangements arguably illegal under the
Sherman Act, over the objections of former President William Howard
Taft, who left the White House to accept a chaired professorship at
Yale Law School and wrote a book arguing for the adequacy of the
Sherman Act on this and other points.\22\
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\22\ William Howard Taft, The Anti-Trust Act and the Supreme Court
(1914).
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Regulatory Legislation
As Judge Richard Posner famously observed, a ``firm that has no
market power is unlikely to adopt policies that disserve its consumers;
it cannot afford to. And if it blunders and does adopt such a policy,
market retribution will be swift.'' \23\ The corollary, of course, is
that firms with market power can afford to disserve consumers and
market retribution will not be swift.
---------------------------------------------------------------------------
\23\ Valley Liquors, Inc. v. Renfield Importers, Ltd., 678 F.2d
742, 745 (7th Cir. 1982).
---------------------------------------------------------------------------
Either expressly, or by delegation to the FCC, this committee could
craft legislation that recognizes that market retribution is not swift
in either the market for out-of-market baseball games or the market for
delivery of multi-channel video distribution. A variety of regulatory
approaches might be considered. I would be pleased to continue to work
with you and your staff if any of these are of particular interest:
Listed Events Legislation: A variety of other countries have
enacted legislation that specifically requires a variety of
important sporting events to remain on free-to-air television,
for the benefit of millions of consumers.
``A La Carte'' Pricing: Satellite and cable companies could
be prohibited from requiring lengthy subscriptions to their
``basic premium'' packages as a condition of subscription to
high-demand sport programming. The analysis above suggests that
DIRECTV would quickly lose its incentive to pay MLB for
exclusive rights if cable subscribers could, in a secondary
market, acquire DIRECTV equipment and then simply subscribe to
EXTRA INNINGS TM without having to pay $40/mo. for
Choice.
Specifically Ban Sports Exclusivity: Unlike general
delegations contained in the Sherman Act or the Federal
Communications Act, Congress is free to write specific
legislation to deal with specific industry problems. Based on
the economic analysis summarized above, the Committee could
conclude that copyright holders and their licensees can fully
exploit their intellectual property rights by sale and re-sale
and there is no legitimate justification (sharing in excess
profits from limited retail competition is not legitimate) for
exclusive agreements in this area.\24\
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\24\ This legislation would also prevent cable companies from
aggressively competing in a consumer-harming way by acquiring their own
exclusive sports programming rights and refusing to re-sell to
satellite outlets.
Another example, of perhaps little interest to most Americans but
of keen interest to millions, especially recent immigrants from south
Asia or the United Kingdom, concerns the rights to satellite
broadcasting of international cricket matches. Thus, DISH Network
obtained exclusive rights for the International Cricket Council's World
Cup contests currently being played in the West Indies, while DIRECTV
obtained exclusive rights to a large number of international contests
throughout the year. Devoted cricket fans need to either subscribe to
both or forego the ability to watch these matches in their homes.
---------------------------------------------------------------------------
Strategic Behavior--by Major League Baseball and by the Senate Commerce
Committee
Both business and political actors often behave strategically--they
act in a way that may or may not further immediate short-run goals in
order to achieve long-run objectives. Although MLB owners are rightly
accused of being short-sighted and greedy in some instances, there are
many other occasions where MLB owners have decided that the long-term
health of the national pastime is more important. It is possible that
this is one of those occasions: that MLB owners see a strong future in
the development of The Baseball Channel, and the exclusive agreement
with DIRECTV is simply a negotiating strategy to persuade DISH Network
and cable companies to re-sell The Baseball Channel on favorable terms.
If market retribution were swift among cable and satellite
programmers, this would not be a problem. If MLB's demands were not
unreasonable, then so many consumers would shift to DIRECTV that rival
MVPDs would have to go along. If MLB's demands were unreasonable, then
DIRECTV would lose so much money that it would eventually back out.
However, anyone inside the Beltway is familiar with the lack of swift
retribution reflected in the lengthy negotiations that were required
before millions of Capital-area baseball fans could obtain Washington
Nationals local broadcasts on their stations. The FCC has already
recognized that market retribution is not swift in a number of non-
sports contexts involving cable mergers, requiring programmers and
distributors to either reach agreement on terms or submit their
unresolved disputes to binding commercial arbitration.
There are a variety of situations where public policy may require
government intervention, but where the best solution would be a
voluntary agreement among private parties rather than direct
legislation. An excellent example of that technique was recently
employed by this committee, when under Senator McCain's chairmanship
there were explicit overtures to MLB owners and players to agree on new
procedures for steroid testing or face Federal legislative
intervention. The result was a voluntary deal that is probably superior
to anything Congress could have done.\25\
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\25\ The substance of the agreement, and whether the agreement or
proposed legislation accurately reflects the public interest in an
appropriate balance between protecting (i) players' health, (ii) the
integrity of the game from health-harming, performance-enhancing
behavior, and (iii) privacy rights, is of course beyond the scope of
this testimony as well as my scholarly expertise.
---------------------------------------------------------------------------
Likewise, if it appears that the best resolution of this
controversy is voluntary agreement among MLB and the various
programming distributors, perhaps this committee could proceed
strategically by threatening onerous legislation (barring collective
sales of sports broadcasting rights to satellite and cable, mandating a
la carte programming, authorizing FCC rate regulation of premium
programming, etc.) unless the parties reach a voluntary agreement or
agree to submit the matter to binding commercial arbitration.
Conclusion
The MLB/DIRECTV exclusive deal is not like a facially-similar
contract between Sears and Levi's. Rather, the deal reflects (1) cartel
behavior by MLB clubs in refusing to sell out-of-market rights to their
games except via EXTRA INNINGS TM on DIRECTV and (2) a
willingness of DIRECTV to share the excess profits it enjoys from its
Choice package with MLB. Millions of baseball fans who no longer live
near their favorite teams are harmed by their inability to watch their
teams' local broadcasts except via EXTRA INNINGS TM, and
harmed particularly by being forced to do so via DIRECTV. This
committee has a variety of arrows in its legislative quiver to protect
consumers from this sort of exploitation.
Senator Kerry. Thank you very much, Professor, we
appreciate the testimony very much. We've been joined by
Senator Lautenberg, Senator Klobuchar.
Senator Klobuchar, do you have any opening you want to
make?
Senator Klobuchar. I'll say a few remarks with my
questions, Senator Kerry. Thank you.
Senator Kerry. Thank you very much.
Senator Lautenberg?
STATEMENT OF HON. FRANK R. LAUTENBERG,
U.S. SENATOR FROM NEW JERSEY
Senator Lautenberg. If I may, Mr. Chairman.
I appreciate the fact that you're holding this hearing--
thank you, Mother.
[Laughter.]
Senator Klobuchar. I'm letting that go, Senator Lautenberg.
Senator Kerry. I would, if I were you.
[Laughter.]
Senator Lautenberg. With new ways to access TV programming
from satellite dishes, digital cable, through the Internet, and
even television on cell phones, our ability to access programs
seems to be increasing substantially. And it's nearly
unimaginable that, as the number of ways to watch this
programming increases, it's becoming more difficult for some
people to actually watch individual programs. And yet, it
appears that this is exactly what's happening.
Mr. Ross noted the New Jersey problem, and we had faced a
serious problem--as far as we were concerned--last year. The
Rutgers football team finished the season ranked 12th in the
country, and was invited to play in the Texas Bowl. You can
imagine what kind of spirit followed them from the State of New
Jersey.
But, because the NFL owned the rights to broadcast the
Bowl, and the League was in a dispute with the cable companies
over the new NFL Network, 1.7 million out of a population of
2.5 million cable customers--1.7 out of 2.5 million--had no way
to watch Rutgers play in that game.
Well, luckily after a week of negotiations between the NFL
and New Jersey's cable companies and my office, we were able to
strike a deal that got the game on TV.
Now, I'm a former businessman, and I understand that cable
companies, satellite providers and sports leagues all want to
turn a profit, that's not an inappropriate thing at all. But,
what we must make sure is that the consumer doesn't lose out.
And as I look at Major League Baseball's EXTRA INNINGS deal
with DIRECTV, I'm particularly concerned about baseball fans in
South Jersey. Now, Philly fans in South Jersey must subscribe
to Comcast to watch their team play, because of an exclusive
deal, and there's a lot of enthusiasm in South Jersey for the
Phillies and the Eagles and sports played in Philadelphia. But,
if those same fans want to watch other teams also, they may
have to subscribe to both Comcast and DIRECTV, and it's not
fair.
And, I do want to add to my comments, the fact that we
finally got cable and the National Football League Network
really to sit down and figure out a way to present this very
exciting, unusual, unique experience that we had with Rutgers
going to the Texas Bowl. It took a lot of hard going, but I
think all parties were principled in the fact that they
understood that people in New Jersey wanted desperately to see
the game, and they did, and so it worked out well.
Mr. Chairman, the same thing needs to happen here. Mr.
Ross, I heard you say that exclusivity was not ruled out as a
legitimate practice. But, our Committee here is going to stay
tuned, based on the leadership of Senator Kerry. We need to
make sure that more business opportunity for the leagues and
cable companies translates into more choices for consumers.
I've said it before--TV watching has become the principal
information dispenser in our world. We see it by the decline in
newspaper interest, and the increasing opportunity that cable
TV has to present vital matters to the population at large.
And so, when it gets to that kind of a presence, you're
looking at something that is almost commodity-like in
character. We have to make sure that people aren't deprived of
this. Once again, I state that the companies have a right to
get a return on their investment and their hard work. But it
can't be done without keeping the interests of the public
sharply in focus.
Thank you.
Mr. Chairman?
Senator Kerry. Thank you very much, Senator Lautenberg.
I appreciate the testimonies, I appreciate some of the
point/counter-point on the deal, and I want to try to see if we
can flush this out a little bit, to understand it so it's easy
for the consumer and others who are trying to follow it.
Mr. DuPuy, let me just check with you on the guiding
principles as you approach this deal. I would assume that you
buy into, or support Commissioner Selig's notion of the social
institution and public responsibility component of baseball.
And, I also assume that as you approach this--or I would hope--
that one of the guiding principles is the notion that you want
this to be as accessible to as many people as possible.
Mr. DuPuy. We want as much--as many games distributed to as
many people as possible. That's correct, Mr. Chairman.
Senator Kerry. Now, just at first blush, sort of a quick
take of any laypersons looking at this deal, they look at
DIRECTV and they see 15 million subscribers. Now,
understandably their notion is here, you're going to market a
good product, you're going to do what--and I acknowledge, I
think DIRECTV's NASCAR offerings and other things are
innovative, creative and interesting. And, it has sparked a
kind of consumer response. So, we're assuming there will be
some uptake. But, whatever that uptake, however, 15 million is
not 75 million. And 75 plus 15 is the 97 plus whatever that is
the current universe that is available to America.
So, how, from a layperson's point of view, do you make the
judgment and come to the conclusion, ``Hey, it's better to
narrow this down to 15 million people, rather than to have it
available to almost 100 million people?''
Mr. DuPuy. Three points, Mr. Chairman. First of all, we
hope that iN DEMAND and DISH opt in. We want it available to
all consumers.
Second, it isn't 75 million. It's only available to digital
homes, and the digital home universe is less than that. My
belief is that iN DEMAND is about 32 million, that DISH is
about 13, plus 16 for DIRECTV, so it's about 61 million, versus
the 90 or 100 million.
Senator Kerry. Well, let's say----
Mr. DuPuy. But, the third, and----
Senator Kerry. The same principle still applies, though.
Mr. DuPuy. And, we want it available to as many people as
possible.
Senator Kerry. But it may not be. As the deal was
constructed, it wouldn't be.
Mr. DuPuy. But, the Baseball Channel, 24/7, 365 days a
year, will be available to 15 million fans coming out of the
box. And we view that as key, and critical to our survival. You
heard Mr. Jacobson's disdain for the Baseball Channel. We, as a
business matter, view the Baseball Channel as critical to our
long-term survival, and in the interest of our fans who want
more baseball. And that's why we are willing to do a deal with
DIRECTV, who has supported the Baseball Channel, and the launch
of the Baseball Channel, to 15 million of our fans.
Senator Kerry. I don't think I read Mr. Jacobson's comments
as disdain, and I hope your negotiations aren't in that sort of
a state of understanding at this point. I understood it as
seeing it as a channel that's down the road. It's not going to
be out there until 2009, I believe, is that correct?
Mr. DuPuy. We've had it on the drawing board now for 10
years and----
Senator Kerry. I understand.
Mr. DuPuy. It's launching in 2009.
Senator Kerry. Right. But, his counter-offer--at least on
its surface, and I'm not getting into all of the numbers here,
and I'm not trying to do a deal/counter deal--but just
listening to what I heard, that seemed like a pretty powerful
offering to suggest. You're going to get the same money, you
get the right of refusal to kick them off if they don't take
the channel when it's up, and you have a 2 year basis for the
fans to be able to continue to enjoy what they enjoy today.
Now, for a fan consumer, reaching America base--what's the
matter with that?
Mr. DuPuy. We believe, number one, that DIRECTV has the
right to begin to help us build the channel, and to invest----
Senator Kerry. Well, there's nothing to stop them from
doing that.
Mr. DuPuy. Well, it will. Because there's no guarantee--
we've seen what other leagues have gone through in their
efforts to launch channels. We've seen what's happened with the
NFL, we've seen what's happened with the NBA. And there is no
assurance that we will gain carriage of the Baseball Channel,
which is why we made it a critical element of these
negotiations, Mr. Chairman.
Senator Kerry. But again--let's come back to that for a
minute--I'm just trying to understand this.
Mr. DuPuy. Yes, sir.
Senator Kerry. What I heard is that you can go ahead and
you've got a 20 percent ownership that's going to DIRECTV,
you'd go forth in your joint venture, you'd invest--as you
are--in the production of the channel. iN DEMAND, representing
those cable interests would have the opportunity to offer the
out-of-market games now, this year, next year, and decide
whether or not they're going to come in, on what terms, and
negotiate with you. If they don't, as I understand it, you can
then take away from them the EXTRA INNINGS.
Mr. DuPuy. They've had 9 months to negotiate this
transaction, Mr. Chairman. And it seems to me----
Senator Kerry. Well, in fairness, during the period of that
negotiation, as I understand it, you had rejected their
offering. They offered three times more than what they're
currently paying for EXTRA INNINGS.
Mr. DuPuy. Well, I don't believe that to be accurate on the
math, but we had a negotiation----
Senator Kerry. Well, let me ask you--am I misinterpreting
something, Mr. Jacobson?
Mr. Jacobson. No, Senator, you've not misinterpreting it.
In fact, we've made several offers to baseball, all of which
were rejected, and as I mentioned, the last offer that we made
prior to our counter-offer last week, we offered 15 million
subscribers for the Baseball Channel. We offered up to $100
million a year for EXTRA INNINGS, no share of the Baseball
Channel, non-exclusive, and that offer was not so much as
responded to.
Senator Kerry. So, what are we missing here?
Mr. DuPuy. We did respond, Senator. We have a contract with
DIRECTV. We offered terms to iN DEMAND and DISH that were in
parity with the DIRECTV deal, and iN DEMAND had said no.
Senator Kerry. So, what it seems--iN DEMAND said no to the
parity, but when you say parity, parity is not parity if they
don't get ownership.
Mr. DuPuy. Well, I disagree with that, sir.
Senator Kerry. Why is that?
Mr. DuPuy. Well----
Senator Kerry. That's sort of apples and oranges, isn't it?
Mr. DuPuy. No, I don't----
Senator Kerry. Well, you had one deal with DIRECTV, but
you're saying, ``if you offer the same thing'' to the others.
But they can't offer the same thing because they don't get an
ownership.
Mr. DuPuy. We believe that the equity was for additional
consideration, sir. We believe that the equity was as a result
of DIRECTV coming in, being the early mover, making the market.
DIRECTV agreed that they would provide 15 million homes. Mr.
Carey signed a blank piece of paper, and agreed to step up and
guarantee 15 million homes.
Now, someone else wants to come in and say, ``Oh, now that
you have it established, and we know we're going to have 15
million homes, we want a piece of that equity, as well.'' It is
very common in the broadcast industry for the early movers to
get a piece of equity. Much like iN DEMAND or Comcast owns
Versus and owns the Golf Channel, which are carried on
satellite, very common to give early movers a piece of equity.
Senator Kerry. Sure, I understand that. And, obviously in
the investing world you need to be able to cut that kind of
deal, and I certainly respect the need to attract capital and
go forward with some kind of business plan, I understand that.
What I'm trying to get at here, though, is representing the
public interest, and the fan base, it seems to me there ought
to be some way to skin this cat, where your equity is
respected, where your deal goes forward, but you still provide
a fair access here for a broader base to be able to share in
this product. And, it would seem to me, in the end, you all
benefit. That everybody benefits. It's a win-win-win--you win
because you're going to have revenue increased, you're going to
have increased base to appeal to, you folks win because you
continue to carry, and the fans win--most importantly--because
they get a multiple choice of how to access this. Why is that
unreasonable?
Mr. DuPuy. I come back to the first point I made, Mr.
Chairman, and that is we hope they do opt-in. But certainly,
you wouldn't suggest that we would hand the games over to them
at whatever price they wish to pay----
Senator Kerry. I'm not suggesting that. But they have not,
it seems to me, tried to negotiate a ``whatever'' price. They
have, in fact, met your demand of a parity--equal price, same
price--but different level of subscribers.
Mr. DuPuy. That's correct.
Senator Kerry. And it's reasonable to understand why there
would be a different level of subscribers, because you can't
get to 80 percent of 65 million, and consider that the same
thing as 15 million. Am I wrong? Am I missing something,
Professor Ross? Do you want to weigh in?
Mr. Ross. I'm not sure if you're missing something, because
I'm not an expert in this area, in the details of the
commercial area. I would add an analogy that the members of
this committee may be familiar with, because it's something the
FCC has done in many cases. Recognizing the market
imperfections, in cases where you have vertical integration,
they have recognized that there's a real need to get a deal to
be done so people can watch programming. And, if parties can't
agree to a deal, they have to agree to binding commercial
arbitration.
Now, you're a persuasive guy, Senator Kerry, so I have to
say in listening here, what you seem to say is making sense to
me. I know I have a great respect for Mr. DuPuy's commercial
acumen, so I have some skepticism that maybe I'm missing
something in your--superficially what you have to say. But, one
way to solve this would be for the parties to all agree to
binding commercial arbitration so they get a deal that is fair
to them in some way, whatever that is. And then the bottom line
is Senator Lautenberg's concerns are met, and fans aren't
deprived of games.
What is really going on here, is that in order to ensure
maximum access to the Baseball Channel in 2009, Major League
Baseball is trying to leverage that at the expense of fans now.
It may be 10 years from now, fans will be better off, by that
process--maybe not, we don't know. But that's the dynamic here.
Senator Kerry. Well, it's a fair question, but I think--I'm
not trying to reach too far here. I'm trying to get into a sort
of, you know, reasonable place. But it does seem to me, Mr.
DuPuy, that what's driving this, to a large measure, at least
from an outsider's perspective looking in, is MLB's commitment
and passion for this channel.
Mr. DuPuy. That's correct, Senator.
Senator Kerry. That's really what's driving it.
Mr. DuPuy. We concede that. That our business judgment is
that the establishment of the channel and getting enough homes
to launch the channel is what is driving this negotiation,
that's correct.
Senator Kerry. And, if that is true, why is that not
ultimately an exercise of your market power? To the negation to
this larger public interest?
Mr. DuPuy. Because we're increasing output, sir. We
broadcast all of our games. And again, I don't think this is a
matter of every game should be available----
Senator Kerry. When you say ``increasing output,''--well,
but somebody drew an analogy in their testimony, I forget who
it was, it might have been Mr. Carey, about HBO and Sopranos,
et cetera--this is a different kind of content we're talking
about. It's a different kind of product, a different kind of
base. So, I don't think that analogy works.
And, in the same way, when you say we're trying to drive
this content, it seems to me, again, there ought to be a way
for reasonable people to work out, without violating this
investment interest, which I respect, and the capital, the
business approach to this--the long-term time, energy,
investment, idea and so forth, but still allow folks to get in
on a reasonable economic basis, so you have a broader consumer
base. Which, ultimately, if you're looking down the road, my
hope would be that the channel is a raging success, that in
fact, you do have a better product, that DIRECTV's creativity
and intervention here, and how they define the product spurs
the others to do the same, so that in the end, Major League
Baseball has a much larger fan base, with a much more diverse
portal.
Mr. DuPuy. We share your hope, across the board. And we
believe the terms that were offered and have not been accepted,
were reasonable. We heard the Senator, we heard the fans, and
we made this package available to all bidders.
Senator Kerry. Well, I want to come back to explore that.
Senator Specter is here, and I want to respect his time, and
others'. But I do want to go back to get both Mr. Vogel and Mr.
Jacobson in on this discussion, about what might, in fact,
work, and hope everybody doesn't get into this kind of fixed,
hard-based descriptive style, using adjectives that sort of
push people away, rather than bring people together.
Senator Specter?
STATEMENT OF HON. ARLEN SPECTER,
U.S. SENATOR FROM PENNSYLVANIA
Senator Specter. Thank you, Mr. Chairman. And thank you for
convening this hearing on this very important subject. The
Judiciary Committee has had a look at it, and maybe with the
merger of the Commerce Committee, and the Judiciary Committee
we can do some good here.
I have grave concerns about what is happening on paid
television, generally. The MLB activity, and the issue of EXTRA
INNINGS mirrors what the NFL has been doing with the Sunday
Ticket, and more recently with a Thursday/Saturday program. I
believe that this is a movement along the line of very, very
substantial charges for sports fans in America.
There is no doubt that America is addicted to NFL Football,
and Major League Baseball. It's a love affair--I became
involved in it many years ago myself, when there was very
little to do on the plains of Kansas except look at the box
scores. And now, every Sunday when the Phillies and I are in
town together, I go, and I am a regular at the NFL, and I know
my views are shared by millions of Americans.
We have a difficult situation, when we try to do anything
about what Major League Baseball is doing because of the
antitrust exemption, which has been judicially created.
Congress has flirted with the idea from time to time of
conditioning it, or changing it, but we have not been able to
do that.
But I think, Senator Kerry is on the right line, what he
has written to the FCC, you have a proposed sale of DIRECTV to
Liberty, there is a potential involvement by the Department of
Justice on the antitrust implications, so we're not entirely
powerless, but what we would like to see happen is that the
parties on their own would work out reasonable arrangements to
make EXTRA INNINGS available to more fans.
And, I know that there has been the suggestion that the
offer has been made to other potential carriers, and it's been
rejected, and they have a few more days to take up the offer.
But, the issue turns--as I understand it--on the requirement
that it be subscribed to, in Comcast's case for example, and I
have an extra special interest in Comcast, which is
Pennsylvania-based. For obvious reasons, we would have to put a
charge on too many of Comcast's subscribers.
I note in the press, Senator Kerry, you have made a comment
about not having seen the contract, and raised a question as to
whether we have a right to, but I think perhaps we might be a
little bit more assertive there, and examine it. And see what
the details are on the refusal of Comcast and Warner and
others, and the others in the combine was to undertake.
But, this is something I would hope that Major League
Baseball would work out on its own, and would find a way to
satisfy other carriers so that more baseball fans can see it.
Once the season starts, there are going to be a lot of people
who understand what they're not saying. Right now, they don't
really know it, because there are not too many people who are
concerned about what goes on in Russell 253. But when they see
things happening in Major League Baseball parks around the
country, and can't watch it on television, there's going to be
a tremendous reaction. And when the fans react, Congress may
react. And if Congress reacts, you may be well-advised to act
before we do. Thank you, Mr. Chairman.
Senator Kerry. Thank you, Senator Specter, very much. I
know you've been involved in this, I remember when Senator Bill
Bradley was here, and we had a round on the issue of the
antitrust issues, and I certainly respect your involvement in
this for a long period of time. So, I appreciate you being
here, and your leadership on it.
I have some more questions, but I think I've sort of done
my first round, so let me come back, Senator Klobuchar.
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Thank you, Senator Kerry, and thank you,
all of you, and I just want to explain a little my background
and interest in this--besides adjusting Senator Lautenberg's
microphone--my interest in this is that I grew up in a sports
family, my dad covered the Vikings and the Twins for the
Minneapolis Star Tribune for many, many years, has written a
number of sports books, and I grew up in the days of Calvin
Griffin, and the Mets Stadium, when the Twins were training in
a park owned by the Animal Rescue League.
And, I've seen the evolution of professional sports, and
actually wrote a book on the building of the Metrodome, and the
involvement of professional sports in that. It was my college
essay at Yale, and they tried selling it at the Dome next to
the Twins caps and the purple inflatable swords at the Vikings
games--it didn't do that well--but, it's still actually used at
colleges. And, part of my interest in writing that book was to
look at just the public interest value of sports, and how it's
a shared interest of the citizens. And, so when I look at this
issue, that's where I come from on this.
And, as Professor Ross has pointed out, there are a lot of
Twins fans all over the country--last year we had the MVP, the
Cy Young Award Winner, and the American League batting
champion. And so, I'm assuming that millions of Americans only
want to tune in to watch the Twins. So, that's why I'm
interested in this issue.
So, my first question is, of you, Mr. Carey, and that is,
how many Americans cannot get access to DIRECTV, either because
of the location of their home, or the building they're in, or a
building that doesn't allow it?
Mr. Carey. From a line of sight, essentially, it would be
slightly less than 2 percent. We run 1\1/2\ plus percent of
customers, so I guess if you took the number of cable
subscribers--it's obviously not relevant to those EchoStar
subscribers who have the same issue in terms of line of sight,
it would be the 200,000 or so cable customers that may have a
line of sight issue. It would be a number slightly less than
5,000 homes that subscribed to EXTRA INNINGS last year that
could have a line of sight issue that would prevent us
providing the service.
We do provide the broadband access, so that every customer,
obviously, can get it through broadband. But that would be the
number of, again, fewer customers--around 5,000 cable customers
out of the ones that had it last year, that may have a line of
sight issue, or some landlord issue, although legally,
landlords aren't allowed to block satellite access.
Senator Klobuchar. Does anyone want to add to that? Your
perspective, Mr. Jacobson?
Mr. Jacobson. I appreciate your interest in sports,
Senator, I am an EXTRA INNINGS customer--I was--I live in
Manhattan, I live in an apartment building. I'm not going to be
able to see these games now, unless I want to huddle around my
4-inch computer screen, and I really don't think that's much of
a substitute for me, or for our customers.
I'm not sure where Mr. Carey's statistics come from, I
don't know what the number is, quite frankly, what the exact
number is. We have gotten thousands of letters from concerned
fans, asking us, ``How am going to be able to see these
games?'' Either because they don't have sufficient line of
sight, or they live in apartment buildings, or they're just not
predisposed to change.
I mean, there are a huge number of these customers who are
getting other services today from cable--whether they're
getting broadband service from cable or whether they're getting
telephone service from cable--so, it may not be a question of
whether or not they can switch. It may be a question of whether
or not, legitimately, they want to switch. And if they don't--
because they don't want to give up those services--should they
have to sort of double-down on costs? Should they now have to
get DIRECTV and cable, and only increase their costs? I don't
think that's fair, I don't think that's very consumer-friendly,
and we literally have gotten thousands of requests from
customers about this, who are very concerned, and they're very
angry.
Senator Klobuchar. OK.
Mr. Carey. Can I just clarify, the number--from years of
experience, we track every sale, we know how many line of sight
issues we have, so it is 1\1/2\ to 2 percent of our customers
that order DIRECTV that have a line of sight issue. So, it's
pretty mathematical to say, it's about 5,000 customers out of
the 200,000 EXTRA INNINGS----
Senator Klobuchar. Mr. Ross?
Mr. Ross. I want to just chime in to say, I have no reason
to doubt Mr. Carey's factual assertions, but there are a couple
of other facts that I think you need to take into account.
One is the number of apartment buildings, especially for
seniors, that will negotiate really attractive deals with one
company or another. And if they happen to have negotiated a
really good deal where you get free cable as part of your rent,
it's economically impractical, because you're already paying
the rent, to expect people to get DISH or DIRECTV, even if it's
technologically possible to do so.
Second, and I note your timing was good with Senator Nelson
coming into the room, because I know from personal experience
from relatives that are his constituents that there are--as he
well knows--a lot of weather-related activities in Florida
during the summertime, and people who demand instant access,
like for sports, you have a serious problem with satellites,
and you know, there's just nothing human nature can do about a
massive thunderstorm coming in to interfere with the satellite
channel. And so there are a variety of reasons why the number
of people who, for practical purposes, can't switch, is larger
than the number who, for technological reasons, can't switch,
which was the initial part of your question.
Mr. Carey. I would say, of the 5,000----
Senator Klobuchar. If I could just go to another, one
question, that I'm just trying to clarify here, and that's when
I heard about the details on this, did iN DEMAND actually
negotiate for exclusive rights, or not? Because I seem to hear
different things from different people, about what happened
here.
Mr. Jacobson. Well, I can answer that, Senator. We never
did, we've never negotiated for exclusive rights, we were asked
to make Major League Baseball whole in the event that DIRECTV
decided it no longer wanted to be at the negotiating table,
which we agreed to, but we were never interested in negotiating
for exclusive rights.
Senator Klobuchar. OK. Mr. DuPuy?
Mr. DuPuy. That's a matter of semantics, Senator. What they
did was submit an offer that said, ``We will pay you `X,' if
you have no other distributors of the product.'' And had
certain terms and conditions attached to that.
Senator Klobuchar. OK, my last question here is, just as we
look at how to resolve this, I'd just like to hear, briefly, 30
seconds from each of you, if you think that we should resolve
this issue in the context of a broader effort to address
competition, the area which is what we've heard from DIRECTV,
or do you think we should specifically focus on this.
Mr. Jacobson?
Mr. Jacobson. You know, I'd just like to come up with a
solution, Senator. I think we posed a reasonable solution. To
the extent that this committee can help us bridge the gap, I
think that that would be terrific, but I think what we
proposed, in light of the fact that the baseball channel is not
going to be launching for 2 years, let's give the fans
something today, let's not penalize them today for something
that may or may not happen 2 years from today, and I think
that's a fair compromise.
Senator Klobuchar. Mr. Carey?
Mr. Carey. They have the opportunity to offer this
programming. They don't like the financial terms of it. There
are an array of programming agreements we have which I don't
like the financial terms of. We pay re-transmission rights to
many broadcast stations, cable doesn't. We have onerous
contracts that are much more expensive than cable's--I don't
run down to Washington every time, you know, we have a contract
issue or a programming issue or a cost issue and ask for it to
be arbitrated or legislated. You know, we deal with it, that's
the marketplace. And at times, we stepped up to an agreement,
you know, we entered into the agreement in good faith, went
through an honest process, we have taken the risks, we're the
only ones today with a signed contract, we're on the hook for
significant risks without knowing where that contract ends up.
We're taking the further risk of the uncertainty about
exclusivity and non-exclusivity, and the other parties simply
don't like the business terms. Quite frequently, I don't like
the business terms, but I deal with it in the marketplace. And
I think, there has to be a consistency with how these issues
are dealt with.
Senator Klobuchar. Mr. Vogel? Last one.
Senator Kerry. No, I was just going to say, we need that
last question. Go ahead, answer the----
Mr. Vogel. OK. Well, I think that, that is a much broader
issue. I think access to sports content is the fundamental
issue, and Major League Baseball happens to be the example in
front of us today.
I think that--as I said in my testimony--it limits
competition. We came into the Major League Baseball EXTRA
INNINGS package late. We added 50,000 customers, in three short
years. Those customers had the choice of cable, they had the
choice of DIRECTV, yet they made a choice to opt-in with
EchoStar. Now, that's being taken away from them. So, I think
the broader issue should be addressed by Congress.
Given that we're only four short days away from opening
day, I tend to agree with Mr. Jacobson, that this channel
doesn't launch until 2009, and there should be a way that we
can share in the rights fees that DIRECTV has negotiated, and
make Major League Baseball whole on a per-subscriber basis,
based on its carriage, and move on and address the broader
issue of access to sports rights, and how that impacts
competition.
Senator Klobuchar. Thank you very much.
Senator Kerry. Thank you, Senator Klobuchar.
Let me just remind colleagues, we're going to go around
with a 7-minute round, and then we'll come back.
Senator Lautenberg?
Senator Lautenberg. Thanks, Mr. Chairman.
Do any of you have any idea about how much of TV-watching
is dedicated to sports?
Mr. Carey. I don't have a figure off the top of my head.
Senator Lautenberg. Well, obviously the volume of interest
in sports is fantastic. I can think of nothing that crosses all
kinds of lines to attract people to watch things more than
sports--from golf to NASCAR.
Mr. DuPuy, do you worry about the loss of a body of
interest in baseball as we go through this exclusive
arrangement? One of the things that I can tell you in my
office, that we get constant complaints about is the increasing
cost of TV viewing. However that it is purchased. So, I just
wonder whether we're in some ways going to kill this golden
goose.
In New Jersey, for instance, we had this very serious
question about what happened with the Rutgers Football game.
That there were going to be 1.6 million people, roughly, unable
to get the game. That had our phones ringing a lot.
But, through cooperation of the cable companies and the
National Football League, we were able to sound out an
agreement. And there's not a more energetic population about
sports than those folks in New Jersey, our crowded little
State. And why there is so much indignation at the fact that
New York wants to recover the teams that we took from them,
it's outlandish.
[Laughter.]
Senator Lautenberg. If you look at the Nets and the Giants
and the Jets, some nerve.
[Laughter.]
Senator Lautenberg. I'm sure that you with your sports
interest, must have been watching when the YES Channel was
being discussed. And there was a question about whether or not,
it could be offered, and people wanted it very much, except
when a very small fee was going to accompany that watching. And
there was a total lack of interest, I mean, down in the single
digits, of those who wanted to watch it and would pay for it.
And so, I think you have to be very careful, as I think
Senator Specter said it very directly, that eventually if it
comes across this desk enough, things will happen that you
don't like.
And, I'm not issuing a threat here, but I simply ask, Mr.
DuPuy, is there no fear that people will be deprived of seeing
the games if this exclusive arrangement continues as it is?
Mr. DuPuy. No, Senator, there are two answers to that.
Number one, I share your concern, you know, about future
generations of fans. In an ever-increasing environment of
multiple entertainment options, appealing to the next
generation of fans is one of our critical objectives. And
that's why we want to appeal to the broadest array of fans with
the broadest amount of programming we can, which is why the
launch of the Baseball Channel, in our business judgment, is so
critical.
And, while we don't want to inconvenience any fan who has
had a product, and wants to retain a product, to make the
Baseball Channel available to 15 million fans on its launch,
and to ensure that it will have a platform to appeal to 15
million fans, is trying to address those very concerns.
Second, there are alternatives. This is not that fans can't
watch the games. They can switch to DIRECTV, or they can watch
the games online. It may not be their desired alternative, that
may not be their desired platform, but they can still watch
them.
Third, we hope that iN DEMAND and DISH do, in fact, step up
and continue the arrangement. So, yes, we share your concern
about not alienating any fan.
Senator Lautenberg. Well, you say they can view it online,
but is that an adequate substitute?
Mr. DuPuy. We televise all of our games through broadband,
and in fact, more homes have access to broadband today, than
have access to digital TV. So, it's available to more, and the
quality of the monitors, the quality of the broadcast, we've
increased the 700 mbs this year, the quality of it is actually
quite good. It's not, in most homes, a 4-inch screen, it's a
much bigger monitor than that.
Senator Lautenberg. Mr. Carey?
Mr. Carey. Yes, I just wanted to add, I guess, two things.
One is, we have respected that, again, the majority of
sports remains broadly available--Sunday afternoon football,
Sunday night football, hundreds of baseball games, post-season,
local sports--throughout sports. Really, the cornerstone of
what really makes up, the programming that sports fans are
interested in, we have made broadly available, we think it
should be broadly available. What we've talked about here, and
what DIRECTV has pursued, is really the premium packages to a
narrow group of customers that pay a premium price for an
expanded level of coverage. We invest to enhance that coverage,
but there is a great deal of sort of the core sports that
remains available.
Early on you talked about the situation in South New
Jersey, and I guess what I do want to clarify there is, we've
given the cable operators in that area the opportunity, to
carry EXTRA INNINGS, as well as the Philadelphia games. We've
never had the option, we don't today have the option, it's not
in economic terms, we've never been given the right to offer
the Philly games or the local Philadelphia sports to the local
Philadelphia fans. It's not a right we have. And I would argue,
when you talk about sports interest, that is a much more core
issue in terms of what appeals to the broadest public interest.
Access to those local teams really are at the heart of what
most people follow day in, day out in their lives. And when you
talk about the passion of sports, it is generally, for their
local teams, for those people who live in those local markets.
Senator Lautenberg. I urge you all to try and do your best
to solve this problem. Because having it solved here is not a
particularly good idea.
Thank you very much, Mr. Chairman.
Senator Kerry. Thank you, Senator Lautenberg.
Senator McCaskill?
STATEMENT OF HON. CLAIRE McCASKILL,
U.S. SENATOR FROM MISSOURI
Senator McCaskill. Mr. Ross, I'm curious about the
antitrust part of this. Clearly, the legislative history of the
1961 Act that, basically through Congress, kind of blew out the
antitrust laws, clearly the legislative history said sponsored
telecasting does not include subscription television. And, I
know there was a lawsuit, the Shaw case, that was settled. Now,
I'm trying to figure out if the purpose of that lawsuit was to
make sure that someone could buy one team, and not have to buy
the whole darn thing--I'm trying to figure out how that
settlement helped them? Because it doesn't appear to me that
that settlement helped them.
Mr. Ross. When I once served on a university committee, the
general counsel reminded me before every meeting that he was
the lawyer, and I was the professor. You would have to ask the
lawyers why that case was settled on those terms.
If this was a hearing on the Justice Department settlement
of that case--it was a private suit--I would have had a lot to
say. It did not accomplish the public interest orientation of
most fans. There were some fans who, for whatever reason,
happened to prefer 1 week of NFL season, and not another week,
and they benefited by that settlement, and the attorneys were
rewarded in the settlement, but that was not an effective
settlement of the underlying issues in that case.
Major League Baseball has a lot more games, and there are a
lot more out-of-market games that are not available for
broadcast on the networks than would be the case of many fans
who are out-of-market fans elsewhere, and so the needs are, and
the antitrust problems are even greater here.
Now, with regard to the antitrust issue, you of course,
have the question of the baseball exemption, is it still valid?
And, if it is valid, does it apply to this issue? Given that
Flood v. Kuhn makes absolutely clear that baseball is
interstate commerce, this committee clearly has the authority
to pass non-antitrust legislation that simply regulates this
industry, on an industry-specific basis. It obviously has the
authority to regulate some of the questions that both sides
have been complaining about here, about exclusivity--whether
its the right of cable companies to exclude DIRECTV from its
programming, or vice versa. So, there's ample opportunity to
legislate here, but there are a variety of issues that could
tie up private antitrust litigation for years, before consumers
will get a chance to benefit. Thus, although there might not be
some interesting litigation issues worth pursuing, this is
clearly not something--unlike other areas--where you and
Senator Kerry can just say, ``Go litigate this in court.'' That
really isn't going to resolve the issue for sports fans in the
next half decade.
Senator McCaskill. And there have been no signals, I
assume, from Justice that they're interested in looking at
exclusivity, as it relates to sports marketing on subscription
television?
Mr. Ross. Not that I am aware of, and, no.
Senator McCaskill. I would ask both Mr. Vogel and Mr.
Carey. The problem I've got with the exclusivity as it relates
to your particular product is that, it's very difficult for a
consumer to go back and forth. I don't even want to begin to
tell you the saga of the decisionmaking of DIRECTV versus DISH
in my house. You talk about ugly, divorces are made of this
stuff.
[Laughter.]
Senator McCaskill. You know, the NFL is a big deal to my
husband and so is baseball, and I've got to tell you the
computer monitor will never make it in my household. Most of
the people I know who have the passion for sports that want to
watch the number of games that are now possible to watch
because of our technology and because of the use of our
airwaves, whether they're public or whether they're satellite.
You know, online isn't going to get it unless we get to the
point that is much less confusing than it is now for the
average consumer.
What I'm worried about is that I'm going to be sitting in
this committee hearing a couple of years from now and there's
going to be a merger proposed. The rational for the merger is
going to be, ``Well, if we just combined, if we just bought the
other one, well, then the whole problem of who gets exclusivity
is going to go away,'' and then we don't have any competition.
I just would like both of you to comment as to whether or not
you envision, either one of your companies coming before this
committee with the rationale for merger, that ``Gosh, if we
could just get together we would solve that old baseball, that
pesky NFL versus MLB problem.''
Mr. Carey. Can I, let me first address the----
Mr. Vogel. Since Chase has all the rights, he should
comment first.
[Laughter.]
Mr. Vogel. I'll comment later.
Mr. Carey. First----
Senator McCaskill. By the way, I went with you and that's
why I'm in so much trouble.
[Laughter.]
Mr. Carey. I'm trying to solve that problem.
Senator McCaskill. I made the choice and boy have I
regretted it. Every Sunday I have to hear it.
Mr. Vogel. And that's why I'm here. I'm trying to solve
that problem for you.
Senator McCaskill. And by the way, he wanted me to switch
and I explained to him how expensive it would be.
Mr. Vogel. Thank you. I would agree, 33 percent increase.
Mr. Carey. Everyone's going to say, I hope you're a DIRECTV
customer. And we will try to take care of that.
Mr. Vogel. A valued customer, Chase.
Mr. Carey. You know, I, in all honesty, we do make changing
a very seamless process. There aren't charges up front. And,
actually in many ways, to our chagrin, an awful lot of people,
about 20 percent of our customers every year, and 20 percent of
EchoStar's, and probably more of cable's are changing services.
Senator McCaskill. If you think it's seamless, I need to
talk to you.
Mr. Carey. Well, we do----
[Laughter.]
Mr. Carey.--we spend a lot of time on it, but you have an
enormous number of homes. You probably have something in the
neighborhood of 20 million homes today that every year are
changing their service provider. In many ways we wish people,
once they were put in place, wouldn't change and 20 percent of
your customers are changing every year. And, it's a different
20 percent. There are a lot of customers moving around. There
are a lot of offers out there, in many ways, to entice people
to change. So, there is, certainly, a great deal of change and
we spend a lot of time to make it as friendly as possible to
make those changes happen. But, the fact of the matter is, an
enormous number of people are changing very frequently.
Senator McCaskill. You don't envision using this as an
excuse to merger?
Mr. Carey. We're certainly not having any conversations
today about a merger.
Mr. Vogel. They're selling Liberty. News Corp.'s interest
is going over to Liberty.
But, I'm glad to hear you're a consumer and you're making
exactly the point I tried to make in my testimony, we've
enjoyed access to this EXTRA INNINGS content for 3 years. We
have expanded the market. This transaction now forces the
consumer, through no fault of their own, to make a change. And,
there is a difference in our price-point versus DIRECTV's
price-point. We didn't take a $5 rate increase on our core
package this year, we took a zero rate increase on our package
this year.
And, this is about migrating customers from one platform to
the DIRECTV platform. Is it easy? You know, it's a matter of
degree. It wouldn't be easy in my house. It's not easy in
anybody's house, best I can tell. But, the fact of the matter
is, consumers had the choice to purchase DISH, DIRECTV, or a
cable operator. They had the choice to get EXTRA INNINGS as
part of that purchase decision. That choice is now being taken
away, through no fault of their own, and we don't see that as
particularly fair.
And, that's why I said earlier, we think that all sports
content ought to be subject to a broader review in this
particular forum, and we'd be happy to participate in that.
But, we don't think forced change by a content provider is in
the best interest of consumers, by any means.
Senator McCaskill. Thank you, Mr. Chairman.
Senator Kerry. Thank you very much, Senator McCaskill, we
appreciate it.
Senator Nelson?
STATEMENT OF HON. BILL NELSON,
U.S. SENATOR FROM FLORIDA
Senator Nelson. Mr. Carey, DIRECTV apparently has exclusive
rights to both Pro Football and Major League Baseball. Are
exclusive sports programmings deals the answer to the triple-
play threat from cable and other video providers?
Mr. Carey. First, let me just clarify, right now that
baseball actually still is in a place where it could be non-
exclusive or exclusive, so it's not decided. But, to answer the
question, we have clearly pursued content, generally, as an
area to differentiate ourselves. In many ways, as we said, as
the cable players do with the bundle, with broadband, to use
that as a way to differentiate themselves and create offers for
customers that make it punitive to choose cable broadband
without video. We have looked at content, we look at other
areas--service, content, technology--as areas to differentiate,
but content is an area we are trying to differentiate. We
invest significantly in original content, in interactive
content, and we've gotten things like the NFL.
We've not just taken the rights, we've taken those rights
and invested in creating new features and new enhancements.
NASCAR we just took this year. A level of NASCAR, the races
themselves remain on broadcast, on various broadly distributed
providers. But, we've taken the NASCAR rights that cable used
to have. And, when cable had it last year, it generated about
30,000 customers. We took those rights, invested significantly,
and I think there have only been four or five races this year.
We already have over 100,000 customers to our NASCAR package,
because we created an array of new exciting features to
energize that.
So, we have looked at sports as a place that we can bring
new features, new enhancements, new energy, and new excitement
that really does differentiate us against our competitors who
use other tools. And you're right, cable would look at
broadband, the broadband bundle, as their primary vehicle
today, certainly their lead vehicle in the market for
differentiating themselves.
Senator Nelson. Well, how do these agreements comport with
antitrust law, and other FCC regulations?
Mr. Carey. I'm not an antitrust expert, so I'm not sure I
can provide commentary on the antitrust aspects of it. We
negotiated with baseball, we negotiated with others. I mean, it
was an open process in baseball. All parties had an
opportunity, we certainly had no edge, we just had an interest.
We had an interest, and a belief we could do unique things with
this package. And, we continued to enter into an agreement that
exists today that provides a non-exclusive or exclusive
arrangement. So, we pursued it. We pursued it in an open
market, in a competitive marketplace. We did succeed in
reaching an agreement, and that agreement still provides for an
exclusive or non-exclusive option on the other players' part.
Senator Nelson. Constituent ``X'' has their, they have the
triple-play. They have their Internet, they have their
telephone, and they have their television all coming in on one
wire. Now, what am I to tell Constituent ``X'', who lives in
Fort Lauderdale, Florida and they happen to move there from
Boston. And, they want to watch the Red Sox. What should I tell
Constituent ``X''?
Mr. Carey. Well, I might suggest one solution to that would
be, if the cable companies offered broadband and telephony
services in a way that they could take another video provider,
such as DIRECTV, without being financially penalized. That
would be a much better market solution and a much more pro-
competitive market solution than in being able to say you have
to bundle those three things together and you get financially
penalized if you want to buy different video service with those
other providers.
Senator Nelson. That person who has it, could they see the
Boston Red Sox by watching it on their computer?
Mr. Carey. Yes, they could.
Senator Nelson. And, how much would that cost?
Mr. Carey. I think the cost is a little under $100.
Senator Nelson. OK. And, now Mr. Jacobson?
Mr. Jacobson. Yes, Senator.
Senator Nelson. What's wrong with that?
Mr. Jacobson. Well, I don't think most people would
consider that a satisfactory solution, Senator. I don't think
you were here for the earlier part of when I was speaking about
my own situation. I live in Manhattan, I come home, and I want
to watch the games on my television. I have a big plasma
screen, and I want to watch them on the television. I don't
really care to watch it on my laptop. And I don't----
Senator Nelson. Can you hook up your laptop to your
television screen?
Mr. Jacobson. You know, Senator, I barely can turn the TV
on. I mean, I----
[Laughter.]
Mr. Jacobson.--you know, figuring out how to wire that
together would be impossible for me, and I don't think that the
broadband solution is in anyway a satisfactory substitute. Now,
maybe if I was on the road and I was in a hotel room and I
needed to pick up a game, that might work, but, certainly not
as an every night proposition.
Senator Nelson. Well, let me ask you this. Now, some of
your cable companies, in your consortium, certainly have some
exclusive sports deals, as well. For example, Comcast has the
exclusive right to the Philadelphia Phillies, and Cox has the
rights to some San Diego Padres games. Many cable operators
also have local news channels that they do not make available
to satellite providers, such as DIRECTV and EchoStar. So,
notwithstanding the FCC's terrestrial exception that apparently
allows you to not share this programming, how is that fair to
consumers?
Mr. Jacobson. Well, you know, Senator, I run a programming
company. I don't work at a cable system and as far as the
terrestrial exception, I think, you referred to, I'm not at all
familiar with it. It's not the business that I'm in. And, I
don't mean to try and duck your question. Really, it's just not
something I have any expertise in.
Senator Nelson. Mr. Chairman, I don't think Constituent
``X'' in Fort Lauderdale, Florida is satisfied yet.
Senator Kerry. Senator, iN DEMAND is sort of the middle
person here marketing these things for a number of cables, so I
accept what Mr. Jacobson is saying on that, but I agree with
you. I don't think they are necessarily satisfied.
Were you finished?
Senator Nelson. No. Mr. Chairman, I'm not, because I want
to pick that up. If you are a Phillies fan or a San Diego
Padres fan, you have an exclusive deal to show them. Can people
in Philadelphia watch the Phillies if they're not tuned in to
that particular channel?
Talk to me about that Mr. Ross, you're shaking your head,
no.
Mr. Ross. These are, Mr. Jacobson's employers, but this is
not within his duties, hence, the difficulty your question is
posing for him. They have these exclusive agreements, and you
can only get them on cable, and you can only get them if you
buy a $35, $40 basic premium package. I must confess that
hearing some of the testimony here reminds me of Claude Raines
in Casablanca, who is shocked, shocked that there is bundling
going on here.
Mr. Carey is outraged that the cable companies would bundle
a telephony programming and the Internet. And, yet, this whole
problem would be mitigated, although not eliminated, if you had
the option to subscribe to only sports programming. So, then
for example, if Senator McCaskill's staff is still here,
Senator McCaskill could have solved her problem by putting up a
second dish--maybe she wouldn't have liked that aesthetically,
and then kept her DISH Network for whatever purpose she wanted
and then just gotten Sunday Ticket from DIRECTV and paid them
whatever price her husband was willing to pay for that--which
was probably a lot.
The problem is you can't do that today. You can't get the
sports programming, unless you also subscribe to some basic
premium package, which runs $25 to $45 a month. And, which
means, that if you want to get these competing packages, like
the Philadelphia person you were talking about, Senator Nelson,
they would have to get Comcast, $40 a month, ESPN, TBS, all
those channels, plus the Phillies, and then they would have to
get DIRECTV for their out-of-market games, and $40 a month, et
cetera. And so, that's one of the----
Senator Nelson. Is that----
Mr. Vogel. That's not accurate in our case. We provide
those packages----
Senator Nelson. Hang on 1 second.
Mr. Vogel.--free of charge and a la carte.
Senator Nelson. Mr. Ross, in your opinion is that in the
best interest of the consumer?
Mr. Ross. I haven't studied the issue of general bundling
to know. Among the many solutions to this problem, one of them
would be getting rid of bundling. Whether that's the better
solution as opposed to abolishing exclusivity, as opposed to
getting rid of the antitrust exemption, as opposed to Senator
Kerry just inviting all these people over to his house and
locking them in a room until they come out with a solution, I
don't really know which one is the best solution.
Mr. Vogel. Can I just say----
Senator Nelson. Mr. Vogel, you had a comment. Please.
Mr. Vogel. I'm sorry. Yes, sir. In DISH Network's case, we
don't force a buy-through of a basic package to get access to
incremental content that's available a la carte. So, the model
that Professor Ross described is not our model at all. And, we
can do that, and I believe DIRECTV can as well, just by virtue
of our technology being digital and being able to address each
individual receiver, and each individual home, with whatever
content that they wish to purchase. We don't force a buy-
through through the analog tier to get access to additional
content.
Mr. Carey. Can I just say on the bundle, because it's not a
shock, I mean, I recognize fully the bundle exists. I guess, my
question is, if this is about the consumer which is a bigger
issue? Having 20 plus million cable-bundled customers that
really aren't able to make a video choice because they're
financially penalized if they don't buy all three together or
20 million plus broadband customers on the bundle or 200,000
customers that you're talking about the EXTRA INNINGS. I think
that is the question if there's an issue here about customer
choice.
Senator Nelson. Mr. DuPuy, did you and Bud Selig know that
you were going to really stir up a hornet's nest when you
negotiated this like this?
Mr. DuPuy. Senator, what we had hoped is that everyone
would participate so it would not have happened, but we were
very concerned, as I've mentioned before, about providing the
maximum amount of programming to the maximum amount of our
fans, I guess would be my best answer.
Senator Nelson. And, in your opinion, as a representative
of MLB, is that done with regard to your present arrangement?
Mr. DuPuy. We would prefer to have everyone opt in, you
know, as I again mentioned before, we don't want to
inconvenience any fan, but the launch of the channel with 15
million homes, we think does service the great majority of
fans, particularly when viewed against the number of
subscribers to the EXTRA INNINGS package, yes sir.
Senator Nelson. Since you've got the Baseball Channel
coming on in 2009, what do you think ought to be done in the
meantime?
Mr. DuPuy. What I think ought to be done in the meantime is
that everyone ought to participate and that we ought to
continue, and everyone ought to agree to carry the channel and
we ought to participate, and go forward arm in arm.
Senator Nelson. Let the record show that Professor Ross was
vigorously shaking his head yes.
[Laughter.]
Senator Kerry. Thank you, Senator. The record will show
that, thanks to your observation.
Let me pick up here, if I may, and I thank everybody for
engaging in this dialogue.
The Communications Act, as we have amended it--and I've sat
here through the years and done that, I guess a couple times--
gives the general powers of the Commission, ``the Commission
from time to time as public convenience, interest, or necessity
requires shall have exclusive jurisdiction to regulate the
provision of direct to home satellite services.'' So, obviously
all of you are sitting here with a very real public interest
component as to what might define that necessity or interest. I
want to get back to the basics here, and then also get specific
a little bit and then we can wrap it up.
Currently, Mr. Carey, DIRECTV carries EXTRA INNINGS,
correct?
Mr. Carey. Correct.
Senator Kerry. Currently, Mr. Vogel, DISH carries EXTRA
INNINGS, correct?
Mr. Vogel. That is correct.
Senator Kerry. Currently, Mr. Jacobson, iN DEMAND offers
through it's represented group--Cox, Time Warner et cetera--
EXTRA INNINGS, correct?
Mr. Jacobson. That is correct, Senator.
Senator Kerry. So, everyone sitting at this table is in the
current state of EXTRA INNINGS availability, including,
obviously, Major League Baseball because you're what's
provided. If this deal goes through in 4 days as it's currently
constructed, half that table gets wiped out. They no longer
offer it, it comes down to you, and it's basically an exclusive
deal. So, we go from your universe, how many people?
Mr. Jacobson. Last season, we distributed EXTRA INNINGS to
about 25 million digital cable customers.
Senator Kerry. Your universe, Mr. Vogel?
Mr. Vogel. Thirteen million digital cable customers.
Senator Kerry. Thirteen and twenty-five.
Mr. Vogel. I would say digital satellite customers, excuse
me.
[Laughter.]
Senator Kerry. Let the record show that Mr. Carey is
smiling. We have them coming together here folks.
[Laughter.]
Senator Kerry. Mr. Carey, your universe, 15 million?
Mr. Carey. Sixteen million.
Senator Kerry. Sixteen million. So, we're taking 25 and 15,
13 and saying you've got to switch, if you want to continue,
you've got to change if you want to get it, or you're out. Now,
it's not that many people getting it, I understand. We're now
in a universe that is a much smaller number of people who've
chosen to do it.
I don't know, maybe that is because of this fee and people
don't want to do it. Maybe it would be smarter to offer it for
less, and have more people do it and then more people would go
to the ballpark et cetera, and so forth and so on. I certainly
run into an awful lot of people that are getting fed up, on
some level, with professional sports in general because of
costs, I mean, you hear this everywhere. And, they switch into
college. It's happening, I'm not going to name, but certain
sports, I think, are having greater problems with that than
others. But, I'd be concerned about it, if I were an owner.
And, particularly, I think, we should be aware of how people
are treated as we go forward.
What concerns me is putting this public interest on the
table. Obviously, you all understand making a deal and I
understand and I think everybody at this table and outside
understands that DIRECTV saw an opportunity and it took it. It
made an offer, it's been creative, and it's got a concept, a
vision of how it wants to offer this, and they're trying to go
down that road. So, we're trying to mix and match the public
interest with a legitimate business interest here.
Now, what I don't understand is why, on a two-year basis,
which is approximately what it would be--that's what it would
be, I guess--it wouldn't be reasonable to continue the status
quo if you can't come to an agreement in the next four days?
That way you don't drive people into having to switch, and
being angry, and maybe losing some of them altogether, with the
proviso that at the end of that period of time, when the
channel comes on, you have the full option, Mr. DuPuy, of
taking them on or putting them off. If they meet the deal,
fine. If they don't, they're not there.
What's the matter with that interim period to sort this
out?
Mr. DuPuy. Well, as I tried to explain before, Senator, we
have engaged in those discussions with all three of these
parties for almost a year now. And, there has been no agreement
to meet the price allocation either. The formula that was
proposed by iN DEMAND was not the formula that we had----
Senator Kerry. I understand that.
Mr. DuPuy.--proposed.
Senator Kerry. Let's talk about that for a minute.
Mr. DuPuy. Yes, sir.
Senator Kerry. Currently, the EXTRA INNINGS deal is you're
going to carry it for 7 years, $100 million annually, correct?
Mr. DuPuy. It starts lower than that, but that's the
average annual value, yes, sir.
Senator Kerry. They have to carry your channel?
Mr. DuPuy. Yes, sir.
Senator Kerry. Your channel has to reach 80 percent of
subscribers, and it must be carried on the basic tier, correct?
Mr. DuPuy. Yes, sir.
Senator Kerry. And, DIRECTV gets a 20 percent equity in the
deal?
Mr. DuPuy. Yes, sir.
Senator Kerry. In the channel?
Mr. DuPuy. In the channel.
Senator Kerry. Now, the terms that were made available to
the others did not include the equity, and it had a per-
subscriber license fee that matches DIRECTV, but they're
required to carry a match to 80 percent of their subscribers--
--
Mr. DuPuy. Yes, sir.
Senator Kerry.--correct? Now----
Mr. DuPuy. The digital subscribers only.
Senator Kerry. Right. And they don't get an equity in the
deal?
Mr. DuPuy. Which would be about 40 percent of their total,
versus the 80 percent that Mr. Carey has agreed to carry.
Senator Kerry. OK. Now, as I understand it, cable objects
to how that is going to be divided between the two, I mean,
their objection is that it requires them to calculate their
percentage of contributions based on the overall share of the
digital universe. And, that presents them with two problems,
doesn't it?
Problem number one is that they would have to use all of
their digital cable subscribers in calculating that fee, which
means ultimately, because of the way they grow, that they would
wind up paying a disproportionate share of the fee, wouldn't
they?
Mr. DuPuy. There are two different concepts here. How the
fee for the EXTRA INNINGS package is allocated, and what
percentage of homes, digital homes are committed to the
Baseball Channel. And, your first description was about the
latter and the allocation issue, I think, is about the former.
The allocation issue that we believe is appropriate, is
based on the number of homes to which they have this product
available. Otherwise, it's a disincentive for going out and
obtaining customers. For example, iN DEMAND could sell one
subscription to the EXTRA INNINGS package and DIRECTV could
sell a million subscriptions or 999,000 subscriptions and iN
DEMAND would only pay a fraction, a very tiny fraction, of the
overall amount because they didn't market it as well and they
defeat the exclusive.
What seems to us to be fair is, you have 25 million homes
that you have available to sell it, they have 16 million homes
that they have available to sell it to. If you each sell it and
market it to the same number of people, you will each pay the
proportionate amount. If you do a better job in marketing it,
you'll get a better deal on it because you'll----
Senator Kerry. What's the matter with that, Mr. Jacobson?
Mr. Jacobson. Well, the way effectively what Mr. DuPuy is
describing is that we would be responsible--assuming EchoStar
came in--for 51 percent of the costs for 39 percent of the
subscribers. That is, we would effectively be paying 30 percent
more.
Now, if Mr. Vogel doesn't do a deal with them then we're
going to pay even more. We're going to pay about 62, 63 percent
of the cost for about 40 plus percent of the subscribers for
about a 50 percent hike in price. I don't know that I agree
with what Mr. DuPuy said. I think the same rules would apply if
DIRECTV subscriber base suddenly dropped and ours went up, then
I guess we'd pay more also. But, the way cable operators pay
and the way that cable networks have always paid is on a per-
subscriber basis, and we think that that is fair.
Senator Kerry. So, that's really where the divide is right
now?
Mr. Jacobson. I think that's part of it, and I also think,
what you pointed out about the equity or the value transfer is
another part of it. Because I think that is something that is
potentially worth hundreds of millions of dollars which has
been made available to one distributor, but has not been made
available to another.
Senator Kerry. So--is that the major sticking point for
both cable and EchoStar? Is there a requirement to carry the
baseball on the expanded basic tier?
Mr. Vogel. We've----
Senator Kerry. If that provision were dropped, and I'm not
sure it could be, but if that provision were dropped, would you
take, would iN DEMAND take the deal?
Mr. Jacobson. Well, I think we still have----
Senator Kerry. Even though you have to pay more
proportionally for the EXTRA INNINGS?
Mr. Jacobson. And, we rectified the equity, or the value in
the channel? I think if that were the proposition then, you
know, we'd certainly consider that. I still don't think it
would be fair, Senator, because I think I'd be paying a
disproportionate share of my costs, but I would certainly
consider that.
Senator Kerry. Let me ask DIRECTV. Mr. Carey, is the only
reason you're paying that $100 million, is that price arrived
at based on the exclusivity?
Mr. Carey. The $100 million is an exclusive price. And
clearly if it was non-exclusive----
Senator Kerry. If I could just intervene for 1 second.
Mr. DuPuy, when you mentioned earlier that Mr. Jacobson had
offered a deal in which they'd pay ``X,'' if they were the only
ones. Was there also an offer of ``Y,'' if they weren't?
Mr. DuPuy. I don't know if it was in that. They have made a
non-exclusive offer, yes.
Senator Kerry. OK, they have. What's the sticking point on
the non-exclusive offer?
Mr. DuPuy. The sticking point was----
Senator Kerry. Is on the subscriber distribution?
Mr. DuPuy. We wanted carriage----
Senator Kerry. It's the subscriber distribution.
Yes, Mr. Ross?
Mr. Ross. One interesting question that the Committee ought
to think about here is why Mr. Carey, who will have the
exclusive rights if the other offers aren't met, doesn't then
turn around and resell the rights I don't know if he could do
it legally, but I don't know why Major League Baseball would
object to re-selling to Mr. Vogel and Mr. Jacobson for 50 cents
less than DIRECTV would collect. So, basically, his rivals
would not be making any money on the deal, he's making all the
money on the deal. And, if he says, ``I'm not interested in
doing that,'' for the Committee to carefully examine why. He's
obviously interested in getting some consumers over to him.
But, there are obviously going to be some Major League Baseball
fans who, for whatever reason, aren't going to switch to
DIRECTV. Why would he forego the opportunity if he's going to
sell Major League Baseball EXTRA INNINGS on DIRECTV for $200,
to not resell it to Mr. Vogel for $199.50, and make all the
money on the consumers who for--whatever other reason--don't
want to switch to DIRECTV and that way, yes Mr. Vogel pays
more, Mr. Carey gets more, but consumers get the whole product.
Mr. Carey. I guess, quite simply today we don't have the
rights. I mean, we're not a rights broker. We buy rights for us
to use, I guess we could engage that way, but have not, we're
not in the business of buying rights to resell to our
competitors. I mean, again, it's certainly something good for
business that we could contemplate, but we're not in the
rights-brokering business, we acquire rights and usually rights
holders are not that enthused in having a third-party represent
their rights.
Senator Kerry. That brings us to the nub of this issue.
That really brings us right into the core of it, which is, you
buy rights so that your competitors don't have them. That's
what you just said.
Mr. Carey. Yes, we buy rights for ourselves.
Senator Kerry. Correct. You buy rights for yourself and
you're not in the business of giving your competitors the
rights you have.
Mr. Carey. We don't sell rights as we don't buy rights from
our competitors, or sell rights.
Senator Kerry. I understand that.
Mr. Carey. The rights holders, typically, and in this case
included, the rights holders have the--we've given the ability
for the rights holder to offer those rights to third parties,
but it's the rights holder that are offering the rights, not us
offering the rights.
Senator Kerry. But, the way people are interpreting this
back and forth, and the way this negotiation has gone--and, you
know, I've been privy to some negotiations over the course of a
lifetime, obviously yours here, these accusations that
somebody's not negotiating in good faith, somebody's not really
negotiating, you make an offer that's not a real offer, you go
back and forth--and in the end, it's the bottom line that
drives it. We all understand that.
But, here there's a different bottom line. I mean, that's
why we're having a hearing here. That's why we're in this
Commerce Committee room. It's a different bottom line, it's not
just the economic issue. It's the public interest, it's the
sports interest, it's baseball's interest, that's what it
means. And it's hard to marry the deeply felt, and I think,
earnest belief of the Commissioner, that this is a social
institution with enormous historical and cultural ties to the
country and a larger public interest with the economic interest
that's represented here.
You're driving for the best business deal you can get. I
understand that. That may not be the best deal for baseball,
frankly, or for the fan. And, sometimes there are compromises.
And, the question here is whether or not you can find one. I
mean, frankly, you talk about a seamless transition. That's not
a seamless transition for a consumer whose telephone and TV and
Internet are all provided by one entity. It's not seamless.
And, it is not a realistic assessment. I mean, you have to
think about how people use their computers. You have a laptop,
you have a workstation in your home. You go to your
workstation, you take your laptop, and you have anything from a
14-inch, 17-inch, who knows. Few people walk around--or lug
around, because you can't travel with them--they're too heavy.
So, you know, the practical reality is you have a small screen,
you put it on your laptop or table in front of you and you do
some work. That is not a destination baseball game watching
event.
In a world where people are increasingly enticed to go out
and get their big plasma screen and their big LCD and that's
the way you want to watch it, with surround sound and maybe
some friends sitting around, and whatever. So, it's not a
realistic offer to say, ``Gosh, it's going to be available on a
dot com.'' The reality is that what's seamless is letting
people have the opportunity to be able to share what they have
today, that's seamless. But, also, to have a fair price paid by
those who don't have the deal.
I respect your approach to this, et cetera, and I
understand the drive of Major League Baseball to get the
channel out there, which I think could be a great thing. I
understand that. It would be a better thing if it was available
to a whole bunch more people. That's how it's best. And, that's
how the public interest is going to best be served here.
That's truly seamless, that's the easiest thing for the
fan. If you've got EchoStar, ``Wow, I can get Major League
Baseball EXTRA INNINGS here. It's going to cost me a little
more, here's what I pay.'' And the same thing, you know, on the
other channel and you guys have the opportunity, because you're
developing the station to be more creative and do whatever
you're going to do and offer it in a different way. And, you
can offer your extra package, I think NASCAR, you know, you can
get NASCAR on Speed and you can go watch it, but you can also
buy in and get your four car location and your pit crew and all
that other stuff and it's fun. So, people pay more for that.
So, there are all kinds of ways to skin this cat. What I'd
like to see, if it's possible, and I know there are only 4
days. But, it seems to me that maybe we can get some extra
innings out of Major League Baseball here to say, ``Let's sort
of hold the status quo for a period of time, with fair
payment.'' And, you've got to work this out--and I'd love to
mediate it, but I'm not in the business of doing that. I'm
confident you can get some arrangement that adequately reflects
the subscriber base and the appropriate level of eyes watching
it to pay. Which is what ought to be measured fundamentally.
And, have easy access for everybody to be able to try and get
at this.
Now, you know, I hope that you can do that. I think that in
the end, I truly understand in the business point of view, it's
a good deal for DIRECTV. I understand why you'd want it all by
yourself and I'm sure you'd make a terrific offering with it. I
understand why it's good for you folks in the long run, but I
don't think it's as good as having it on every one of those
channels.
And, I think, Mr. DuPuy, you said, I don't remember where
the words were. I think you said a little while ago, the
broadest public interest, the broadest base is what you want.
But, by definition, that's multiples of millions of more people
and I urge you to try to, you know, find a way to see if you
can't skin that cat a different way.
You want to comment on that?
Mr. DuPuy. Two brief comments, Senator. One, is--in your
comment about bottom line, this was not about maximizing profit
for us. Frankly, we believe that if we had just gone out and
cut a non-exclusive deal, irrespective of the Baseball Channel,
we probably could have done better, short-term, in a short-term
deal, economically, than what we currently have.
What this was about was serving the maximum number of our
fans with the maximum amount of programming, and that's what
drove these negotiations. So, I appreciate your concern, and we
would----
Senator Kerry. But, by definition, how can that be the
maximum number of fans?
Mr. DuPuy. Because----
Senator Kerry. If, on day one, if in 4 days, 250,000 people
are going to wake up, and they can't get it.
Mr. DuPuy. Because in 2 years, 15 million will have access
to the Baseball Channel, which we are not assured without this
deal.
Senator Kerry. I'll lay you odds, I bet you I could
construct a deal where you can get an assurance of a Baseball
Channel, and everybody's carrying it.
Mr. DuPuy. Well, the NBA would love that, the NFL would
love that, and we would love that, as well. And that was our
objective here, was to make the maximum amount available, to
the maximum number of fans, that's why we did it.
We hear your concerns, and our doors remain open, and we
will be happy to continue the dialogue with both iN DEMAND and
EchoStar.
Senator Kerry. Anybody, yes, Mr. Jacobson?
Mr. Jacobson. I just want to add, Senator, as I mentioned
earlier, we offered to carry the Baseball Channel in front of
15 million customers, which is guaranteed carriage that Mr.
DuPuy is talking about, prior to the announcement of the
DIRECTV deal. After they announced the DIRECTV deal, and said
we'd have a right to match, we matched DIRECTV customers,
subscriber for subscriber--so those are two, guaranteed
opportunities for carriage of the Baseball Channel, and the
first time we never heard back, and the second time we were
rejected within an hour.
Now, we think that our offer today to try and figure out a
solution for the fans next week, and put off for some time for
discussion of the Baseball Channel is fair, and it's consumer-
friendly, and as you pointed out, it's a seamless solution.
Senator Kerry. Well, when you say ``put off,'' let me in
fairness, I mean, if you're laying out your business plan, and
you're proceeding forward, and you have to invest and you have
to hire creative talent, and do what you have to do, you have
to know where you're going, right? So, from their point of
view, they don't want to just leave it out, hang it out there
and put it off forever, it would seem to me.
Mr. Jacobson. I'm not suggesting that it would be forever,
Senator, I'm happy to come up with a date and time, out in the
future, that at least gives the fans access to the games, but
let's face it--the season's starting next week. We were given 3
weeks to try and, not only negotiate, but execute a very
complicated transaction. I have multiple partners, we have a
lot of cable affiliates, it's not just my three owners, it's a
fairly sophisticated transaction, that evidently took Major
League Baseball and DIRECTV some 6 months to execute, and I was
asked to do it in 3 weeks.
Senator Kerry. Well, Mr. DuPuy, what's the possibility, in
your judgment, of trying to keep the status quo for a period of
weeks here, and sit down in good faith and see if we can't get
folks together and, you know, pull off an agreement that meets
everybody's needs?
Mr. DuPuy. We've tried to do that for 9 months, Senator. We
have 4 days before our season starts. Mr. Carey has to launch
his product.
We'll continue the discussion. We will make our best
efforts to continue the discussion, bring it to resolution as
quickly as possible. Our goal is to, again, we'd like everybody
to opt in. If we can figure out a way to do that----
Senator Kerry. He can launch his product without launching
it exclusively, can't he?
Mr. DuPuy. Well, someone has to sell it, and decide who's
going to pay what to whom.
Senator Kerry. I understand, but--if you did that, it seems
to me that in the next few days--it shouldn't be impossible to
figure out a fundamental fee basis, I mean, you know what's
been in front of you for months, you know how this thing is
going to divide, essentially, over those 9 months you've been
working that.
I'm sorry, Mr. Carey?
Mr. Carey. Yes, I just, I do want to add, on our behalf,
you know, we are not indifferent to time, here. I mean, we are
the one party today under contract, on an exclusive or a non-
exclusive--we provided the two options--we would market it
differently, depending upon how it is arrived at.
Senator Kerry. I understand.
Mr. Carey. We certainly do have concerns, this is a
legitimate process to get to a legitimate end by everybody
here, this is a process that has been, seems to have been, more
focused on press releases than meetings to negotiate.
We, ultimately, entered into--I'll go back to what I said--
an honest process to end up with these rights, went the extra
mile of accommodating a non-exclusive and an exclusive
arrangement. This is about economics, because that's--they
don't like the economic terms. And, essentially, the noise has
been about economics. Yes, we've taken a risk, we've stepped
up, we have a binding contract that has left us at risk on
what, on two different fronts, and we expect that risk we've
taken to be respected, it would be respected in any other
process any of us engaged in, in terms of succeeding to arrive
at an agreement, you know, that we stepped up to achieve, we've
provided certain rights in here, but we don't, really--this
process--it is important to us this is not an open-ended
process. You know, over the last few weeks, I've----
Senator Kerry. Well, that's fair. But, let me sort of
conclude it by saying, I think the process has been driven--you
talk about press releases and this and that, and you made a
comment a little while ago about, it shouldn't be necessary to
come to Washington in order to resolve a contract, and so
forth--I respect that.
We're not here because any party at this table came to us
to intervene in a contract. We're here because constituents--
people we represent and the public interest--leaped up at us
when we noticed this deal, and people got in touch with us.
Mr. Carey. I understand.
Senator Kerry. And, we're here because it has, essentially,
been driven by the economic piece to the exclusion of a
sufficient balance of the public, broader public interest
piece. And, I think, frankly, the public relations piece, in
terms of a league's relationship with its fan base, the people
it represents. And, I think, the interest here is, indeed, in
having something truly seamless, and something that works for
the broadest fan base.
I also believe very deeply, that that is ultimately in the
best interest of Major League Baseball. And, I think it's
possible to get the best of both worlds here. I really believe
that, if there were a good faith effort to do that.
So, maybe in the next 4 days--is there a plan for anybody
to be sitting down and talking? Is there any meeting that's
scheduled? Or, is this clock just going to run, and that's
where we are?
Mr. Jacobson. I hope it doesn't. I'm, you know, we'd be
happy to meet, and we'd be happy to try and come up with a
solution. I thought we tried to address----
Senator Kerry. Well, has anybody sat down face to face, Mr.
DuPuy? Has there been a--has this been just a paper
transaction?
Mr. DuPuy. There were two face-to-face meetings on March
9th.
Senator Kerry. What's the possibility of having a face-to-
face meeting in the next couple of days? Next 24 or 48 hours?
To see if you could work out something on this, or not?
Possible?
Mr. DuPuy. We're willing to meet, yes sir.
Mr. Jacobson. We're certainly willing to meet, Senator.
Absolutely. And we're willing to try----
Senator Kerry. Everybody's willing to meet, but when you've
set the times in the next 4 days, will you actually arrive at a
time? And----
Mr. Jacobson. We will set a time to meet.
Senator Kerry. All right. I appreciate that. I think the
fans would appreciate it if you all could work something out
that makes sense here. And in the long run, we all understand--
you've got to balance a number of different interests here, but
I think it would be great to see if you can't do that in a
thoughtful, publicly spirited way.
Thank you very much, we appreciate you coming today.
[Whereupon, at 12:13 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
Today, the Committee will be examining the impact of exclusive
sports programming contracts on sports fans. With the baseball season
set to open in just a few days, this is a very timely discussion.
The video programming industry is evolving quickly. The emergence
of new distribution platforms has increased competition among cable,
satellite and other video programming providers.
When it comes to sports programming, this evolution, in principle,
translates into new ways that fans can watch and follow the progress of
our favorite teams. However, as more choices become available, concerns
have arisen about the impact of exclusive sports programming deals. We
must watch this trend closely to ensure that the interests and
expectations of consumers are protected.
This brings us to today's hearing. Many sports fans are intensely
loyal to their ``home teams'' even when living a long distance away. In
the case of my constituents in Hawaii, they have no major league home
team to follow. Instead, Hawaiians are fans of many teams from all over
the country. They want to cheer for their teams like all fans, and they
deserve fair access to out-of-market games. After all, for them, their
only choice is out-of-market games.
Sports programming deals that either overtly or effectively limit
the availability of such programming on competing video programs raise
difficult questions about whether all fans are getting fair access to
their favorite major league sports events. It is important that this
committee keep a close watch on this situation, and makes sure that the
consumer does not lose out with exclusive sports programming
agreements.
I would like to thank Senator Kerry for his leadership in this
matter, and I look forward to hearing from the witnesses assembled here
today.