Senate Holds Hearing on Convergence and Consolidation in Entertainment and Information

(July 8, 1998)  The Senate Antitrust Committee held a hearing Tuesday morning on technology convergence and corporate mergers in the entertainment and information industries.  Executives from Time Warner, Disney, AT&T, and Sun Microsystems testified.   AT&T CEO Michael Armstrong argued that its merger with TCI will increase phone competition.

The hearing entitled "Convergence and Consolidation in the Entertainment and Information Industries" was conducted by the Subcommittee on Antitrust, Business Rights and Competition of the Senate Committee on the Judiciary.  Subcommittee Chairman Mike DeWine (R-OH) presided.

The witnesses testified that despite mergers, services, content offerings, and consumer choices are expanding.  In particular, Michael Armstrong testified that the AT&T merger with TCI will increase competition by enabling it to enter into competition with the Bell companies.

Sen. Orrin Hatch (R-UT), who is a constant critic of Microsoft Corporation, expressed concern that Microsoft was trying to control the market for operating systems for cable set top boxes.  Witnesses argued that this would not happen, and that open standards ought to be the rule.

Senators DeWine, Patrick Leahy (D-VT), and Herb Kohl (D-WI) all asked questions about whether mergers would adversely affect the diversity or editorial quality of news.  Witnesses said that it would not.

Robert Iger said that "the number of voices attempting to reach the consumer today, attempting to deliver news and information to the consumer, has risen significantly since just a few years ago. ... I actually believe that these concerns, concerns that have existed in our business for years about consolidation, and the impact controlling news, controlling information, are less valid today, largely due to the onset of, or the advance of, technology."  Iger, who works for ABC, which in turn is now owned by Disney, also insisted that ABC could report negatively on Disney.

AT&T Merger With TCI

AT&T CEO Armstrong addressed the proposed merger between AT&T and Tele-Communications Inc. (TCI).   "This merger will enable consumers to make phone calls over cable, thereby promising an alternative to the Bell monopolies in areas TCI reaches."  He argued in his prepared testimony that "it will also enable them to have many phone lines for the price they pay for a few lines today."

Armstrong also presented a timetable for developing cable phone service: "we are hopeful of regulatory review and approval in 9 months or less. In the meantime, TCI independently will be spending $1.8 billion to upgrade their cable network to deliver more entertainment at a higher quality as well as to enable two way capability for internet and information services.  This work will be 60% complete by YE 1999 and 90% by YE 2000. It is to this upgraded cable base that we will add the capability for telephone services, at an estimated cost per household of $300-500, depending on the configuration. We plan to pilot in 1999 and begin our deployment in 2000. Build out will be driven by our ramp rate and market demand."

Armstrong also argued that the AT&T/TCI merger will create competition that will benefit consumers.  "The Bell companies, GTE, and other incumbent local carriers will not sit idly by as TCI continues to upgrade its network and add telephone service capabilities.  Although the technology has been in existence for years to turn their copper wires into broadband distribution channels, the Bells did not begin to deploy it until some of the cable companies, including TCI, started to upgrade their own networks."   He added that: "We think the merger will incent the Bells to accelerate their ADSL deployment and to deploy other Digital Subscriber Line services that operate at even faster speeds, particularly if they want to include a video offering to compete with cable service. Indeed, more competition for broadband services, including video entertainment, is a likely outcome of the merger."

Convergence

Sun Microsystem's John Marselle described the convergence that is taking place in the technologies being used in computers, television, telephony, publishing, photography, consumer electronics, appliances, and radio. "All of these mediums are either using or planning to use digital technology. In the past we have separated the world into digital and analog, into telephone and cable, into television and radio, into cellular and wireline, into long distance and local telephone, and into local area network and wide area network. Information was created by individual appliances and transmitted via discreet pipelines to specific appliances.

Marselle continued that with convergence, "these distinctions will no longer be meaningful because the digital world allows multiple forms of information to travel multiple pathways to the user -- and offers the user multiple choices by which to receive that information. Once the information is converted to streams of Os and Is (digital bits) it becomes readable, seeable, and hearable worldwide via networks, including the internet."

He concluded that, "Corporations, industries and technologies are converging and consolidating to offer more and different information through what were once divergent communications channels."

Government Policy Recommendations

Mareselle testified that there are three policies that ought to be pursued by government:

• Encryption: "We will need strong, exportable encryption to secure and protect information in the global marketplace."
• Antitrust Enforcement:  "We must also have free and open competition among the companies that will provide access to the digital environment and the means to make use of it. It is inevitable that some companies may attempt to control all the levers ..."
• Open Systems: "we must make sure that we preserve the open systems nature of the Internet by safeguarding the open interfaces that permit interoperability -- the ability of one system or program to work seamlessly with another."

Robert Iger also offered several policy recommendations:

• Regulation of Broadcasters: "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."
• Gatekeeping by Set-Top Boxes, OSs, and Navigation Devices: "broadcasters ... must be protected in their ability to put their programs and services in the hands of the consumer. ... [T]he 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."
• Cable Rate Regulation:  "If there are concerns about cable pricing, the solution is increased competition not regulation."

Armstrong also offered some recommendations:

• Open Markets: "There is one word that we must adhere to in the market as well as in regulation and legislation, and that is open.  Make sure the markets stay open.  The local exchange market in telephony is a great example."
• Open Architectures: "Make sure that the architectures that come about, be they from content, be they from operating systems, be they from communications systems, be they from networks, are open architectures, and not closed and proprietary."
• Open Technology: "We really have to make sure that we are open to technology."