Statement of Robert Iger.
Re: Senate Antitrust Subcommittee Hearing on Convergence and Consolidation in the
Entertainment and Information Industries.
Date: July 7, 1998.
Source: Senate Judiciary Committee.
Mr. Chairman:
I began my career in broadcasting 25 years ago this week, as a weatherman in Ithaca, New York. Although I was taking my first steps into the business with no idea where it might take me, the business I walked into then bears absolutely no resemblance to the business I am in today.
In 1973, broadcasting was dominated by three broadcast networks, whose locally owned and affiliated stations in most cities around the country were watched on a regular basis by upwards of 90 per cent of people’s television viewing time.
Cable was in its infancy, but its main purpose was largely to improve the picture quality where antenna reception was inadequate, not to offer a broad array of program services. Back then, it was virtually impossible for a local television station to lose money, and at the network level, virtually every show was profitable, even if it was at the bottom of the ratings ladder. Most of America still thought of Telestar when they thought of satellites, and if anyone ever talked of putting a dish on their roof, they’d immediately figure a rooftop dinner was in the offing. Computers were giant pieces of machinery that never got near your home, and chips were something you ate when you watched television. No one owned a videotape machine, and channels were still changed with tuners. I can remember my parents telling me not to change the channel, because the television set would break!
While the viewer of today remains couch-ridden, virtually everything else has changed. Today’s viewer has hundreds of shows to chose from in any given day. The daily television listing page from the Wall Street Journal that I’ve attached is stunning proof of the explosion of program choice now available to the viewer. People no longer need to get up and cross a room to select one of those choices. They usually watch television with a remote control in their hands, engaged in behavior that comedian Dennis Miller has described as a “ferret on a double espresso!” And the proliferation of choice does not end there. The viewer can watch on tape or live at his own choosing, and is often logged onto the internet before, during and after watching a television program.
Consider these staggering numbers:
Almost 40% of all American television households have 3 or more television sets. The average American household can watch just under 50 different channels. There are just under 200 different television program services now being distributed. 98% of all households have at least one television remote control device. 90% of all homes have a videotape machine. 46% of all homes have a computer, and 29% have access to the internet.
This explosion of technology and choice has profound implications for all businesses involved in providing entertainment and information to viewers. At The Walt Disney Company, we are deeply involved in these businesses and have a unique perspective on the impact that change has already had and what challenges and opportunities lie ahead. On the broadcast side, through the ownership of the ABC Television Network and ten television stations, we have invested in both content and distribution. On both the cable and satellite side, our investment has been exclusively in programming, and not in distribution. We are now one of the largest independent, non-vertically integrated programming providers to both cable and satellite. On the internet side we are stepping up our investment in content significantly, and in extending our current brands and creating new ones. Our recent investment in Infoseek is a means of having that content and our current and new brands more readily available to consumers.
Today, I would like to share with you my views of the implications of these changes both from the perspective of the businesses I manage and from the perspective of government regulation. In summary, these changes challenge businesses to be innovative and extraordinarily flexible, to be constantly willing to challenge yesterday’s assumptions in light of the changes of today and the promise of tomorrow. For the government, the challenge is forbearance and patience – to allow the marketplace a chance to work, to permit businesses to operate with the flexibility they will need to adapt quickly to change and to take advantage of new opportunities. At the same time, the government must be ever vigilant to assure that consumers have a fair opportunity to access all available services and products and that the economic benefit available from new technologies are available to all businesses.
Let me start with broadcasting. There is no question that free over-the-air broadcasting is a national treasure, and it has long been the policy of the government to promote its availability. And rightly so. More ubiquitous than telephones, the broadcast system we have developed has become the envy of the world. Just 25 years ago, the economic model that drove that success was quite secure. Given the scarcity of alternatives, all broadcasters were assured the mass audience needed to attract the significant advertising revenue necessary to fund the quality news, entertainment and public service programming that came to characterize the medium. But with the proliferation of choice this single revenue stream economic model cannot continue to work. Today, competition for viewers is fierce, and not only is program choice creating fragmentation, but the multiple set household phenomenon is fragmenting the viewers within their own homes. As programs compete for viewers, program services compete for advertising dollars. As the revenue sources come under stress due to lower viewership, competition for content and talent has risen dramatically as well. The result is a revenue base that is decreasing, while the cost of being in the business continues to rise considerably.
Although broadcasters still offer the most valuable and the most watched programs, the ability to maintain quality, and to provide a wonderful array of national and local program and public affairs is in real jeopardy. This year, of the ten most profitable television networks, only one (NBC) is a traditional free over-the-air network. The others are all cable networks, that benefit from a dual revenue stream of advertising dollars and subscription fees. At the local level, ABC’s ten local television stations continue to provide their communities with very high quality news and public service, but as their audiences decrease, and migrate to other program sources, the cost of providing local news and information will get tougher to support.
Competition will only grow for both audience, product and talent. Already, cable program services are using their increasing revenue base to compete aggressively – and with growing success -- for the best talent, the most valuable sporting events, and the strongest programs. Broadcasters must contend with this ever increasing cost of generating product while at the same time bearing the significant added cost of the transition to digital television.
This does not mean that it is time to abandon hope for preserving free over-the-air broadcasting and all of its attendant benefits to the public. But for the broadcaster to survive, two things must happen:
First, broadcasters must find innovative ways to develop new product and services that will lead to additional revenue streams. We must deal with an inescapable truth: The dual revenue model of the cable business is a far healthier (and over the long term more viable) economic model than the single revenue model of advertiser supported free broadcasting. To remain competitive broadcasters similarly must find ways of developing and sharing in additional revenue streams.
Second, the government must afford broadcasters the room and flexibility to accomplish that objective. Broadcasters are still saddled with ownership and operational regulatory restrictions that were conceived when broadcasters commanded 90% of available audience and when three television networks were the only real available options. It is time – indeed long since time – to cast those restrictions aside. Does it really make sense to impose a 35% national ownership cap on television station ownership given the proliferation of other forms of distribution? Does it really make sense to impose rules that effectively micromanage network and station operations when no other distributor of programming is similarly constrained? And yet there are those who would impose even further obligations on broadcasters or constrain innovation in the name of preserving free over-the-air television. Those efforts, I fear, will cause precisely the opposite effect. Broadcasting has to be given room to breathe if it is to survive. If broadcasters are given the flexibility to innovate and expand the breadth and depth of their services to the public, digital technology may provide an answer, but that path is not without substantial risk. Although digital technology will be costly to adopt, it may provide broadcasters with the necessary opportunity to create new sources of revenue. However, this transition is not for the faint of heart, and it may cause consolidation in the broadcast business, as those unwilling to support (or incapable of supporting) this capital expense opt to sell their properties before spending millions to attract the viewer of tomorrow.
One reason the investment in digital television is risky is there is no real way of knowing how much people will spend on the home electronic products needed to consume new digital television, or how fast this will occur. It is a real digital “chicken and egg” situation, reminiscent of what happened when color television became available. Until programmers (mostly networks) spent huge sums of money to produce television in color, there was no perceived viewer interest. Even then the pace of conversion was slow – it took well over ten years to reach a 74% penetration level. The “if we build it, they will come” scenario may unfold here, but the complexities of digital migration, and the unknowns about consumer behavior and the magnitude of the costs involved make this a far more risky proposition than color television.
But, in my opinion, a broadcaster must spend to remain in the business. To remain of interest to the consumer, television programs must create more compelling features such as bigger, sharper pictures, digital sound, along with computer-like character traits enabled by digital technology.
We envision a world in which the computer and the television adopt many of each other’s technical capabilities. The television will provide its consumers with many of the services currently available to computer users, and the computer will provide television-like pictures for consumption in a desk top form. Because we believe people consume available content in different ways, we see them coexisting as two appliances, although they will have much more in common.
The Walt Disney Company currently has many of its 1500 Walt Disney Imagineering employees developing technology and program content to take advantage of this convergence. By applying this technology, we believe not only that we will create more multidimensional, more attractive programs, but that we will create enhancements to the current program model that could generate additional revenue, or at least allow us to maintain current revenue levels, even in the face of increasing competition. This will enable free-over the air broadcasters to maintain the quality of programming that to date is unrivaled in our business.
In order for all of this to occur, not only must broadcasters take the risk of spending to “go-digital,” but they must be protected in their ability to put their programs and services in the hands of the consumer. The Telecommunications Act of 1996 provided broadcasters with the necessary spectrum allocation to provide over-the-air digital programming to consumers. But we must not lose sight of the fact that around 70% of households currently receive television over a wire. And, in the digital world, the number and significance of possible gatekeepers will only continue to grow as set top boxes, operating systems, navigation devices and return paths take on increasingly important functions in interacting with consumers. In that world, gatekeepers could exercise enormous power over what products and services consumers can access and the opportunities for businesses to share in the revenues generated. To remain viable in that world, broadcasters must be able to maintain an unfettered ability to reach their consumer base and have a fair chance to profit from the opportunities spawned by digital television. Government must be wary of the power that gatekeepers could wield to interfere with those objectives, although we believe government intervention should be a last resort.
We must also ask patience. Although a calendar for digital roll-out has been mandated by the legislation, it is quite possible the technological hurdles, as well as early consumer indifference could render this calendar impractical. While we are fully committed to making the investment needed to stimulate consumer acceptance of digital television at the earliest possible date, neither we nor the government can dictate when that will occur. We will do our part. We ask only that the government react to the pace of roll-out with flexibility and with a real world appreciation of the business realities that we confront.
I’d like to turn my attention in the direction of the cable business, and more particularly, of its economic model, and the cable programming business today.
The economic model of cable is potent, because it generates revenue from two sources: advertising and subscription fees. As cable program services grew, and cable operators invested heavily to deliver these program services to consumers, the strength of this model became even more apparent. The more subscribers, the more revenue from fees, and the more revenue from advertisers seeking new ways to reach the television consumer. The lifeblood of this model is mass distribution. Apart from pay cable services which charge viewers a monthly per channel fee, all other cable programming networks are entirely dependent on being as widely distributed as possible. For advertiser supported networks, mass distribution is needed to generate both meaningful advertising and subscription revenues, and it is the combination of those revenues that enable cable programmers to offer the widest array of quality programming to the largest possible audience at the lowest possible rate per subscriber. Even the rare commercial free network, such as the Disney Channel, can be offered to the public on something other than a pay TV model, only if mass distribution can be assured. Finally, cable operators, which regularly receive local advertising inventory in the programming services they carry, likewise benefit from mass distribution in the form of advertising revenue that can reduce pressure on rate increases.
It is this economic model that has enabled cable program networks to generate the substantial revenue needed to develop innovative and high quality programs: from music to the arts, from sports to movies, to children’s programming. The upshot has been a spectacular proliferation of choice -- the average cable household now receives 49 different channels, and almost 200 different program services are now available. The increasing share of audience that cable programming overall now enjoys is perhaps the strongest evidence of the growth in quality and diversity of cable programming.
As I stated earlier, The Walt Disney Company is heavily invested in the cable business as a programmer, and not as a distributor or cable operator. We have enjoyed a profitable and very successful relationship with our distributors over the years, and fully expect this will continue. But, the recent ESPN contract with The National Football League focused a lot of attention on the cable business and on cable rates, and increased the tension between programmer and distributor. I would like to help put that rights acquisition in perspective.
To do that, I need to start with a little history. For over the past ten years, ESPN has televised one half season of NFL games. (TNT had the other half season.) The rates to cable operators were set accordingly. Well prior to this most recent NFL negotiation, and well before the price of the package was even known, ESPN entered into contracts with its major distributors to provide for appropriate rate adjustments for the entire ESPN service pending the outcome of those negotiations. If ESPN acquired the full season package its rate would go up to reflect the substantially greater value of the service. Conversely, if ESPN lost all NFL games, its rate would go down. The adjustment was pegged to the enhancement or loss of value delivered as a result of the number of NFL games directly carried by ESPN. It had nothing whatsoever to do with the price paid to the NFL for those games.
After fiercely competitive negotiations, ESPN was successful in acquiring rights to the full season package this year. This led to a corresponding rate adjustment for the reasons I have just discussed. Nevertheless, mindful of the pressure on cable prices, we did not simply enforce the rate adjustments that had been agreed to before the NFL negotiations even began. Rather, we took steps to mitigate the cost of our enhanced service by offering cable operators significantly increased local advertising opportunities and a number of other contractual concessions we were not otherwise obliged to make. We believe that these concessions should significantly mitigate the impact of the rate adjustment. However, questions about this deal have resulted in a greater scrutiny of cable rates, leading some to suggest that additional regulation is necessary. We do not agree. Cable remains a real bargain to the consumer.
Some have suggested that regulations be created to force services like ESPN to be distributed on an “a la carte” basis, prohibiting operators from offering these services together for package prices that are affordable to the consumer, and economically reasonable for the distributor. If this occurs, the model that has spawned the investment that has led to the growth in quality and diversity of cable programming will crumble. If forced in an “a la carte” direction, the cost to the consumer of each individual channel will necessarily go up, and the number of people subscribing to various services will accordingly shrink. As this occurs, the ability of operators and the programmer to generate advertising revenue will also decrease, thereby putting even more stress on the subscription side of the equation leading to even higher prices for the service. In other words, the model that has given birth to all of this product will no longer apply, and most cable programming will become essentially a pay per view business, with very high subscription fees necessary to support high quality programs like the NFL. This cannot be in the public interest and we are steadfastly opposed to the suggestion. Others have proposed that the government extend the sunset of cable regulation and re-regulate cable. Again, we do not believe that the public would be best served by this course. History teaches that regulating cable pricing constrains the raising of capital for investment and stifles innovation in programming. These concerns should be particularly pronounced today. Cable operators should be encouraged to raise and spend the money to build out their digital plants on the quickest possible timetable. And programmers should be encouraged to invest in the development of programming that will further improve the quality of analog programming and help stimulate consumer interest in digital cable. Cable operators and programmers will do this only if they can count on the fair returns that a free market can provide. Few will take the risk if the prospects of return on investment will be dictated by uncertain and ever changing government regulation.
If there are concerns about cable pricing, the solution is increased competition not regulation. Some have expressed frustration at the pace of increased competition following the 1996 Act. I would urge patience. These are big bets in a rapidly changing technological world. Investments and competition often don’t happen as rapidly as some predict – indeed about the only thing that is true about past efforts to predict the future of this business is that every prediction about how things would evolve and the pace of change has been wrong. It would likewise be wrong to conclude that the solution is to regulate the way to greater competition. It is too soon and there is simply too great a risk of an adverse consequence of trying to “control” and regulate a market that is changing as quickly as this one. Companies need to have the flexibility to respond to and take advantage of technological changes and should be encouraged to do so. Regulations, particularly those born of impatience, will have precisely the opposite effect. As a result regulation should be viewed only as an option of last resort.
I thank the Committee for this opportunity to explain the challenges our businesses face today, and to share my thoughts about the challenges that lay ahead. In the end, success in our business (television) will rely on three things:
Access to talent and content, and the ability to pay for it;
Access to technology, also an economically dependent imperative, and
Access to the viewer or consumer, for without the ability to place content in the hands of the consumer, there is no supportable economic structure.
I would, of course, be happy to answer any questions that you may have.