Joint Appendix — Turner Broadcasting System, Inc. v. FCC

Supreme Court brief1997

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Text

m “FILED

No. bode JUL 19 1996

SSE Orne Cn

In THE

Supreme Court of the United State

OCTOBER TERM, 1995

TURNER BROADCASTING SYSTEM, INC., et al.,

Appellants,

FEDERAL COMMUNICATIONS COMMISSION, et al.,

Appellees.

Appeal from the United States District Court

for the District of Columbia

JOINT APPENDIX

Volume III

H. BARTOW FArg, III *

RICHARD G. TARANTO

FARR & TARANTO

2445 M Street, NW

Suite 225

Washington, DC 20037

(202) 775-0184

Counsel for National Cable

Television Association, Inc.

ROBERT D. JOFFE

STUART W. GOLD

ROWAN D. WILSON

CRAVATH, SWAINE & MOORE

Worldwide Plaza

825 Eighth Avenue

New York, NY 10019

(212) 474-1000

Counsel for Time Warner

Entertainment Company, L.P.

(Additional Counsel for

Parties Listed on Inside

Cover)

* Counsel of Record

Drew S. Days, III *

Solicitor General

FRANK W. HUNGER

Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

PAUL R.Q. WOLFSON

Assistant to the Solicitor

General

DOUGLAS N. LETTER

BRUCE G. FORREST

JOHN R. TYLER

JAMES J. GILLIGAN

Attorneys

DEPARTMENT OF JUSTICE

Washington, DC 20530

(202) 514-2217

WILLIAM E. KENNARD

General Counsel

CHRISTOPHER J. WRIGHT

Deputy General Counsel

Federal Communications

Commission

Washington, DC 20544

nn =e

APPEAL DOCKETED DECEMBER 21, 1995

PROBABLE JURISDICTION NOTED FEBRUARY 20, 1996

BRIAN CONBOY

THEODORE CASE WHITEHOUSE

WILLKIE FARR & GALLAGHER

Three Lafayette Center

1155 21st Street, NW

Suite 6000

Washington, DC 20036-3384

(202) 328-8000

Counsel for Time Warner

Entertainment Company, L.P.

Bruce D. SOKLER

CHRISTOPHER A. HOLT

TARA M. Corvo

MINTZ, LEVIN, COHN, FERRIS,

GLOVSKY AND PopeEo, P.C.

701 Pennsylvania Ave., NW

Washington, DC 20004-2608

(202) 434-7300

Counsel for Turner Broadcasting

System, Inc., et al.

ALBERT G. LAUBER

PETER VAN N. LocKWooD

CAPLIN & DRYSDALE, CHTD.

One Thomas Circle, NW

Washington, DC 20005

(202) 862-5000

Counsel for Discovery

Communications, Inc. and The

Learning Channel

BRUCE J. ENNIS, JR.

Kit A. PIERSON

DONALD B. VERRILLI, JR.

THOMAS J. PERRELLI

JENNER & BLOCK

601 Thirteenth Street, NW

Washington, DC 20005

(202) 639-6000

Counsel for National ,

Association of Broadcasters

and Association of Local

Television Stations

CAROLYN F.. CORWIN

MARK H. LYNCH

CAROLINE M. BROWN

COVINGTON & BURLING

1201 Pennsylvania Ave., NW

P.O. Box 7566

Washington, DC 20044

(202) 662-6000

Counsel for the Association of

America’s Public Television

Stations, Public Broadcasting

Service, and Corporation for

Public Broadcasting

EDITOR'S NOTE

THE FOLLOWING PAGES WERE POOR HARD COPY

AT THE TIME OF FILMING. IF AND WHEN A

BETTER COPY CAN BE OBTAINED, A NEW FICHE

WILL BE ISSUED.

TABLE OF CONTENTS

VOLUME I

Order, Turner Broadcasting Sys., Inc. v. FCC, Civ.

Docket No. 92-2247 (and consolidated cases) (D.D.C.

Mar. 6, 1996) (amending judgment of Dec. 20, 1995) ....

Memorandum Of Discovery Communications, Inc. In

Support Of Plaintiffs’ Motion For Summary Judgment,

App. A (May 26, 1995) (ELRA Group, Inc., Outdoor

Antennas, Reception of Local Television Signals and

Cable Television (Jan. 28, 1986) ) ............cccc00cccc0cccceecceem

Defendants’ Joint Submission Of Congressional Record

In Support Of Motion For Summary Judgment

(“DCR”), Vol. I.CC, Exh. 170 (May 26, 1995) (Com-

ments of the NAB in FCC Docket No. 85-349 (Apr. 25,

ETE a ae

DCR, Vol. IL.DD, Exh. 183 (Joint Petition For Reconsid-

eration of National Cable Television Association, Inc.

in FCC Docket No. 85-849 (Dec. 17, 1986)) ....000000000....

Exhibits Cited In Time Warner Entertainment Com-

pany, L.P.’s Memorandum Of Law In Opposition To

Defendants’ And Intervenors’ Summary Judgment

Motions And In Further Support Of Its Summary

Judgment Motion (“TWE Opp. Exhs.”), Vol. I, Exh.

4 (June 16, 1995) (Memorandum from John Abel to

Dick Hollands (Feb. 12, 1987) ) ...0...........0000000000000000....

DCR, Vol. I.P, Exh. 52 (FCC Cable Carriage Survey

Report (Sept. 1, 1988) ) 2... cccccccccccececccceeeeenseneeeneeeeenes

Exhibits To Affidavit Of Gregory M. Loss In Support Of

Time Warner Entertainment Company, L.P.’s Motion

For Summary Judgment (“LAX”), Vol. I, Exh. 11

(May 26, 1995) (NAB, Advertising Revenues Per Tele-

vision Household: A Market By Market Analysis

LAX, Vol. I, Exh. 6 (Research and Planning Memo-

randum From Rick Ducey To Jeff Baumann, attaching

Television In Transition: The Values of Broadcast

Television In A Changing Marketplace (Jan. 30,

1990) ) .. LES

TABLE OF CONTENTS—Continued

TWE Opp. Exhs., Vol. I, Exh. 20 (Memorandum from

Rick Ducey to Jeff Baumann, et al. Re: Cable Drops

And Repositions Survey (Jan. 30, 1990)) -........------------.

LAX, Vol. I, Exh. 12 (NAB, Advertising Revenues Per

Television Household: A Market by Market Analysis

(10B1) ) ----.2-----0-.-.c--cenennenrapsonenssnsnneneees -_

LAX, Vol. I, Exh. 13 (TV Digest (Jan. 7, 1991)) -......

Defendants’ Joint Submission Of Additional Evidence In

Support Of Motion For Summary Judgment (“DAE”),

Vol. VII.M. Exh. 288 (May 26, 1995) (OPP Working

Paper Series: Broadcast Television In A Multichannel

Marketplace (June 1991) ) ......-------------------ese-seennennnnennnees

LAX, Vol. I, Exh. 14 (Research & Planning Memoran-

dum From Mark Fratrik To Jim May Re: Results From

Television Financial Survey (July 19, 1991)) -............-..

TWE . Exhs., Vol. III, Exh. 42 (APTS, Harm To

PTV pa a From Cable System Shifts and Drops

(Ag. 1901) ) -...---...----ce-n-neerensnennenseneneseneseensecees pe ee es

DCR, Vol. I.Q. Exh. 71 (Comments of the NAB, attach-

ing A/B Switch Availability And Use (Sept. 25, 1991) ..

DAE, Vol. VII.K, Exh. 239 (Larry Zipin, Local Cable

Advertising Sales: 1992 and Beyond (Nov. 20, 1991) )..

LAX, Vol. II, Exh. 18 (FTC Staff Study, Carriage of

Television Broadcast Signals By Cable Television Sys-

tems (Nov. 26, 1991) ) ......-----------------cseeenennnnrennennnnnnnees ~

LAX, Vol. II, Exh. 18 (NAB, Advertising Revenues er

Television Household: A Market By Market Analysis

| ) anne One

Affidavits In Must Carry Proceedings (Feb. 12, 1993)

(Affidavit of Edward J. Weiss, Exh. 2 (Paul Kagan

Assocs., Cable TV Investor (June 23, 1992))) -.............

Page

116

120

126

134

192

iii

TABLE OF CONTENTS—Continued

LAX, Vol. II, Exh. 19 (CPB, Viewer and Listener Mem-

bership Income for Public Television and Radio Grant-

ees: Fiscal Year 1991 (Sept. 1992))

DAE, Vol. VII.G, Exh. 157 (Time Warner, Memoran-

dum from T. Bigelow to E. Hamowy (Oct. 20, 1992) ) .

LAX, Vol. II, Exh. 21 (1998 NAB Cable System Elec-

tion Survey Charts (1998)) ...

LAX, Vol. II, Exh. 22 (TV & Cable Fact Book (1993) ) .

Affidavits In Must Carry Proceedings (Feb. 12, 1993)

(Affidavit of Joseph J. Collins (Feb. 11, 1998) _.....

DAE, Vol. VII.K, Exh. 282 (The Cable Television In-

dustry: New Technologies, New Opportunities And New

Competition (Mar. 8, 1998))

DAE, Vol. VILK, Exh. 247 (Paul Kagan Assocs., Cable

TV Advertising (June 22, 1998) )

DAE, Vol. VII.M, Exh. 292 (Memorandum from Ww.

Ciciora to L. Yaeger, et al. Re: A/B Switches (June 25,

OA) Eee

LAX, Vol. II, Exh. 25 (NAB, TV Today (July 19,

SIDUTEY ) <csussissnsthocbesesesseniommmnmnistesmectonsnemmssetessasiemeancitasens ccs,

DAE, Vol. VII.K, Exh. 246 (Paul Kagan Assocs., Cable

TV Advertising (July 28,1998)) ee sts—S

DAE, Vol. VILI, Exh. 200 (Memorandum From D. Orr

To P. Beckham and B. Grumbles Re: TCNS 1994 Mar-

keting Overview (Sept. 17,1998)) ss s—

DAE, Vol. VIL.G, Exh. 161 (The History Channel: 1994

Business Plan & Financial Forecast (Nov. 1998))..

DAE, Vol. VIIL.I, Exh. 198 (Memorandum From D. Orr

to P. Beckham Re: KNWS/TV (Dec. 6, 1993))

DAE, Vol. VILE, Exh. 91 (Horowitz Assocs., Inc.,

State of Cable 1994 (1994) )

POP OO SOS SSDO SS SSS S0S8SSS SSS SSSSS0 oS eseseceoceces

247

TABLE OF CONTENTS—Continued

Time Warner Entertainment Company, L.P.’s Corrected

Appendix To Brief In Support Of Its Motion For Sum-

mary Judgment (“TWE App.”), Exh. 16 (May 26,

1995) (NAB, The Television Industry: 1994 Market-

By-Market Review (1994) ) ......-----------------e-eeeseesenneenens

TWE Opp. Exhs., Vol. II, Exh. 33 (Broadcasting and

Cable (May 28, 1994) ) .........----------cc-ecsesens-nesensensnesnnnnnnnene

DAE, Vol. VII.K, Exh. 244 (Paul Kagan Assocs., Cable

TV Advertising (June 15, 1994) ) -......-------------.-c-eee0e

Plaintiffs’ Exhibits In Support Of Their Motion For

Summary Judgment, Vol. II, Exh. V (May 26, 1995)

(Letter from NAB to FCC General Counsel (June 21,

BODE) ) nnnnn--eccececceceeennneeso--encessccnseserssnssnssnnnsenanesenscesoenesssosoenese

DAE, Vol. VILK, Exh. 243 (Paul Kagan Assocs., Cable

TV Advertising (Sept. 30, 1994)) ~.......-------------...-

DAE, Vol. VILK, Exh. 266 (Turner Broadcasting, Top

I EM EES

DAE, Vol. VII.K, Exh. 242 (Paul Kagan Assocs., Cable

TV Advertising (Oct. 26, 1994) ) ......-------.--ccceceeeeeeeneees

TWE Opp. Exhs., Vol. II, Exh. 25 (CPB, Public Broad-

casting Income: Fiscal Year 1993 (Dec. 1994)) ............

LAX, Vol. III, Exh. 35 (Paul Kagan Assocs., The Kagan

Media Index (Feb. 24, 1995) ) -.........--------ce------eneeeeneees

Defendants’ Rebuttal Declarations And Exhibits, Vol.

VIII (“Def. Reb. Decis.”), Exh. K (June 16, 1995)

(Stipulation and Supplemental Protective Order Con-

cerning Pre-Trial Use of A.C. Nielsen Data in Turner

| 2 » |)

Deposition of David Brugger (Apr. 7, 1995) .................

Deposition of James Mooney (Apr. 18, 1995) —................

Deposition of Brendan Clouston (Apr. 14, 1995) ..........

Deposition of John Huddy (Apr. 14, 1995) —....................

Deposition of Jack N. Goodman (Apr. 17, 1995) ............

Page

275

281

TABLE OF CONTENTS—Continued

Deposition of M. Peter Downey (Apr. 18, 1995, May 18, _

1995) a ee eee 341

Deposition of John C. Siegel (Apr. 18, 1995) 345

Deposition of James J. Popham (Apr. 20, 1995) _....... 346

Expert Report of Stanley M. Besen On Behalf Of Plain-

tiffs Turner Broadcasting System, Inc., et al. (Apr. 21,

ase ca I LESSEE Ab ei 349

Expert Report of Eldon J. Haakinson (Apr. 21,1995). 352

Expert Report of Tom Meek (Apr. 21, 1995) 357

Deposition of Bernadette McGuire (Apr. 21, 1995)... 360

Deposition of Joseph L. Stern (May 3, 1995) 362

Deposition of James N. Dertouzos (May 4, 1995) 380

Deposition of Eldon J. Haakinson (May 4, 1995) _.__. 385

Deposition of Linda McLaughlin (May 8, 1995) 441

Deposition of Tom Meek (May 8, 1995, May 9,1995)... 442

Deposition of Roger G. Noll (May 10, 1995) 446

Deposition of Richard Feldman (May 11, 1995) 460

Deposition of John Haring (May 12,1995) ... 461

Deposition of Charles L. Jackson (May 12, 1995) _.... 469

Turner Broadcasting System, Inc.’s Motion For Sum-

mary Judgment, Exh. I (May 26, 1995) (Cable Takes

Fresh Angle On Services, Electronic Media (May 15,

EEE Enea ee 471

Deposition of Harry M. Shooshan III (May 15,1995)... 477

Deposition of David J. Large (May 16,1995)... 480

Deposition of Jonathan C. Abbott (May 18, 1995). 510

Deposition of Lucie Salhany (May 18, 1995) .... 512

Def. Reb. Decls., Exh. H (Transcript of Telephone

Conference on Discovery Issues (May 18, 1995)) _...... 515

TABLE OF CONTENTS—Continued

VOLUME II

Appendix To Public Broadcaster Defendant-Inter-

venors’ Motion For Summary Judgment (“Publ.

App.”), Vol. 2 (May 26, 1995) (Declaration of Dr.

Charles Anderson (May 18, 1995) ) ...........-----.--sseeeee

Publ. App., Vol. 2 (Declaration of John L. Beabout

(May 18, 1995) )..............---c-c-cecsnssssesesnenssnnnensnsnnsnensnanstnnnas

DAE, Vol. IIIA (Declaration of Douglas Johnson

(May 18, 1995) ) .............-.0-ccecesesesesesseseenenssnsnanensnsnsnnnnnnnnnes

Publ. App., Vol. 2 (Declaration of David Dial (May 19,

1QDB) ) .-nceeneenceernceccecconccrensssnsrenseneesnossonssnsccssonsennnsensssnatensennees

Publ. App., Vol. 8 (Declaration of Carolyn Bailey

Lewis (May 19, 1995) ) ..............---e-essessenenesnnnnnnnnnnnnnens

Publ. App., Vol. 3 (Declaration of Denins Malloy (May

1D, 2005) ) ----crccccccceseessecersenssssecrecscneesoswonsepenssseceneneneeenstonnesoacs

Publ. App., Vol. 8 (Declaration of Steven K. Meuche

(Bag 18, 1006) ) ....-c.cceccecscoserecsesssoccernsesecsensnsenssnsesessserenensees

Publ. App., Vol. 3 (Declaration of Virgle Smith (May

BD, BBB) ) ..anccorecccocecsscescscesensscsnsecnintereseruianecnstsbostatensbocssenesnens

Publ. App., Vol 2 (Declaration of Daniel Alpert (May

DAE, Vol. ILB (Declaration of Eldon J. Haakinson

(2 § |) ee

DAE, Vol. I1.A (Declaration of Tom Meek (May 23,

)

SB BRBB) ) cccecccovnccesanesnssticcssessacsecnseonenecsosestonqnsssonsassssssassoenstecse

Memorandum Of National Cable Television Associa-

tion, Inc. In Support Of Plaintiffs’ Motion For Sum-

mary Judgment (“NCTA Br.”), Exh. B (May 26,

1995) (Declaration of Peter D. Shapiro (May 23,

| __ a

Page

521

vii

TABLE OF CONTENTS—Continued

DAE, Vol. II1.A (Declaration of Harry M. Shooshan III

I a cedamunerenes

Discovery Communications, Inc., Statement Of Material

Facts Not In Dispute (May 26, 1995) (Affidavit of

Joseph L. Stern (May 28, 1995) ) ..........cccccccccececcceceeeeeees

Declaration of Stani«y M. Besen on Behalf of Plaintiffs

Turner Broadcasting System, Inc., et al. (May 24,

A a A ee ROD A CCC ELE i ac ae

DAE, Vol. I1.B (Declaration of James N. Dertouzos

Publ. App., Vol. 4 (Declaration of Richard Feldman

I ee

Discovery Communications, Inc., Statement Of Material

Facts Not In Dispute (May 26, 1995) (Declaration of

William Goodwyn (May 24, 1995)) 0.0.00

DAE, Vol. II.B (Declaration of Roger G. Noll (May 24,

a BS TE yt lt ai a Sl cl

Publ. App., Vol. 4 (Declaration of Jonathon C. Abbott

(May 26, 1995) )

ehhh ee Te ee ee eee ee ee eee

VOLUME IIl

Affidavits In Support Of Time Warner Entertainment

Company, L.P.’s Motion For Summary Judgment

(“TWE Affs.”) (May 26, 1995) (Affidavit of E. Thayer

Bigelow (May 25, 1995)) 0...

TWE Affs. (Affidavit of Brendan Clouston (May 25,

1995) )

POSSESSES ESSE EEE EA SSEES ESS SSOEESESESESE SESE SSE SESS SESE S ESE SHEE SESE SORE HO eee eeeeee

ke ROPE EIN a iD I i

TWE Affs. (Affidavit of Fred Dressler (May 25,

SP Pecks inchaclttthentbtdiseamhesischsbierchdesbaniictsnsiesndedansochtsssmsncesasns

TWE Affs. (Affidavit of John F. Gault wad 25,

1995) )

ieee terre eee

Page

1032

viii

TABLE OF CONTENTS—Continued

DAE, Vol. ILA (Declaration of John Haring (May 25,

1995) )

tat teiieiettee e eee ee eeeeet

BID Poctesceseenseerenscemassnastnaiiinhreesisemnctisthiiitatendibistiiiiiinshoadsinciintinn

DAE, Vol. I1.B (Declaration of Charles L. Jackson

0} SR SE Leer ee ee

TWE Affs. (Affidavit of David Kinley (May 25,

1995) )

| EE eee Mee mS le ee NN Oe ae

Declaration of John L. Peterman (May 25, 1995) ........

DAE, Vol. II.B (Declaration of Jeffrey H. Rohlfs (May

elite ete ee eee eee eee eee ee)

STUB icieviesnenacesctestenpneepipechiaidimnitadeaninatieteatatiaaastteiatinatbtesienaen

Publ. App., Vol. 1 (Declaration of David J. Brugger

ee te iii ee

Discovery Communications, Inc., Statement Of Material

Facts Not In Dispute (May 26, 1995) (Affidavit of

David J. Large (May 26, 1995) ) 0.0

All Parties’ Joint Statement Of Undisputed Facts (May

a Rg Ie ee pln AP ye a

DAE, Vol. VII.K, Exh. 249 (Cable Advertising Over-

ey Ge ies SE tterrtertrrrrntenitie Ale i

Defendants’ Joint Statement Of Evidence Before Con-

gress, Parts 1 and 2 (May 26, 1995)

eee eee eee eee eee ee

VOLUME IV

Defendants’ Joint Statement Of Evidence Before Con-

gress, Parts 1 and 2 (May 26, 1995) (continued)...

Public Broadcaster Defendant-Intervenors’ Supple-

mental Statement of Evidence Before Congress (May

IN I ES Oats eT

DAE, Vol. VII.J, Exh. 217 (February Industry Issues

(May 26, 1995) )

Page

1098

1109

1111

1128

1134

1151

1155

1170

1180

1213

1245

1247

1249

1567

TABLE OF CONTENTS—Continued

Time Warner Entertainment Company, L.P.’s Affi-

davits In Opposition To Defendants’ And Intervenors’

Summary Judgment Motions And In Further Support

Of Its Summary Judgment Motion (“TWE Opp.

Affs.”) (June 16, 1995) (Supplemental Affidavit of

Charles W. Ellis (June 18, 1995) ) -................-.----------------

Memorandum Of Discovery Communications, Inc. In

Opposition To Defendants’ Motions For Summary Judg-

ment (“Discovery Opp. Br.”) (June 16, 1995) —-

mental Affidavit of David J. Large (June 13, 1995) ) ...

TWE Opp. Affs. (Supplemental Affidavit of Sista

Clouston (June 14, 1995) ) -......--..--..-------e---c-eceeseeeeneeees

Def. Reb. Decls. (Rebuttal Declaration of Roger G.

Bell (Femme: BA, BODE) P ccacccrecccenccnccnscenccesecscsccncorecccsnwrcocescoscese

TWE Opp. Affs. (Supplemental Affidavit of Laurence

Zipin (June 14, 1996) ) ..................------cceecseneereseneenesnenneeees

Second Declaration of Stanley M. Besen On Behalf of

Plaintiffs Turner Broadcasting System, Inc., et al.

SD TI Te icine setihicinciiacinnsttesncinseninecensienevesensncscenssontes

Def. Reb. Decls. (Second Declaration of Tom Meek

IID ii HI Piscine scanners cintinctnlinhedasatanneaniandniatntnensine

Def. Reb. Decls. (Rebuttal Declaration of Jeffrey H.

ss speisemeineccneminneeneann

Def. Reb. Decls. (Rebuttal Declaration of David E.

ee Se 0 eauipinnsnaeaneneumnanemsnanenne

Def. Reb. Decls. (Rebuttal Declaration of James N.

STE aee

Discovery Opp. Br. (Supplemental Affidavit of Joseph

rt mnenmennnssnnn

Memorandum Of Turner Plaintiffs In Opposition To

Defendants’ Motions For Summary Judgment, App. A

(June 16, 1995) (Carriage Chart (June 16, 1995)) ....

Defendants’ Supplemental Appendix In Opposition To

Plaintiffs’ Motion For Summary we (June 16,

tine wR rere te a al at atone NG «ai lt eA TR

Page

1764

1769

1784

1788

1808

1811

1925

TABLE OF CONTENTS—Continued

Defendants’ Reply Declarations And Exhibits, Vol. IX

“Det. Reply Decls.”) (June 30, 1995) (Reply Declara-

tion of Roger G. Noll (June 22, 1995) ) ...........-----------------

Def. Reply Decls. (Reply Declaration of James N.

Dertouzos (June 28, 1995) ) ........--------------eeseeeenennennnenonees

Def. Reply Decls. (Supplemental Declaration of Eldon

J. Haakinson (June 28, 1995) ) ...........-----------ecceeeseeneennees

Third Declaration of Stanley M. Besen On Behalf of

Plaintiffs Turner Broadcasting System, Inc., et al.

(Fume BO, 19DB) ...-..0.-0csenrseecereeveccnecnseonsscsensensersssrnsenesnsssnssoes

Def. Reply Decl. (Third Declaration of Tom Meek

CFeme BD, 1GBB) ) -~<na..enceecceenevcestsccvospcsnvoncnssesesoresnosessoecsosse

Appendix To Public Broadcaster Defendant-Intervenors’

Reply Memorandum In Support Of Motion For Sum-

mary Judgment (June 30, 1995) (Declaration of

Edward J. Coltman (June 30, 1995)) ~..............----...-.--

Federal Defendants’ Statement In Response To The

Court’s Order of September 7, 1995 (Sept. 18, 1995) ....

Plaintiffs’ Joint Objections To Federal Defendants’

Statement (Sept. 29, 1995) -........--....-.---c--ecseeeeseennneennnnenne

VOLUME V (Under Seal)

TWE Opp. Exhs., Vol. II, Exh. 22 (APTS, Public Tele-

vision Service and Structure Analysis (May 1991) ) -...

TWE Opp. Exhs., Vol. II, Exh. 26 (APTS, Critical

System Objectives for Public Television (1992 Status

ON ,) ———————————

DAE, Vol. VILL, Exh. 284 (Memorandum From F.

Lopez to T. Baxter, et al. Re: Adlink’s Presentations

on Retransmission Consent (June 14, 1993) ) -................

DAE, Vol. VILK, Exh. 228 (Tele-Communications,

Inc., Cable Advertising Executive Summary (Mar.

TWE Opp. Exhs., Vol. II, Exh. 23 (APTS, Public Tele-

vision in the Information Age (July 1994) ) -..................

TABLE OF CONTENTS—Continued

DAE, Vol. IILA (Declaration of Edward Lau (May 18,

) PATE ES AES TREE

DAE, Vol. ILA (Declaration of Harry M. Shooshan

III, Attach. J (May 28, 1995) ) 00.0.0.

DAE, Vol. I1.A (Declaration of John Haring, Exh. B

gh, EERE RES SE RS SE ee” * Fe

DAE, Vol. VII.M, Exh. 291 (Tele-Communications,

Inc., Corpus Christi Retransmission-consent Research

Highlights (May 26, 1995) ) 2.000.000 ce eee eee eee

TWE Affs. (Affidavit of Linda McLaughlin vated 25,

Ce en ee ee ae ae es ae a

TWE Opp. Affs. (Rebuttal Affidavit of Linda Mc-

Laughlin (June 15, 1995) ) 0.0.00 eee eeeeeeeeee ee

Surrebuttal Affidavit of Linda McLaughlin (June 29,

EEE a en ee ae ae ya

Time Warner Entertainment Company, L.P.’s Memo-

randum Of Law In Opposition To Defendants’ And In-

tervenors’ Summary Judgment Motions And 'n Further

Support Of Its Summary Judgment Motion, 8-17 (June

ARISE AE SES Le ne ee

Time Warner Entertainment Company, L.P.’s Reply

Memorandum Of Law In Support Of Its Motion For

Summary Judgment, Exhs. A and B (June 30, 1995)...

Time Warner Entertainment Company, L.P.’s Broad-

cast Station Rebuttal (June 16, 1995)

These documents do not appear in the Joint Appen-

dix. They can be found in the Jurisdictional Statement

on the following pages:

Memorandym and Order, Turner Broadcasting Sys.,

Inc. v. FCC, Civ. Docket No. 92-2247 (and consolidated

| kT | Rn

Judgment, Turner Broadcasting Sys., Inc. v. FCC, Civ.

Docket No. 92-2247 (and consolidated cases) (D.D.C.

Dec. 20, 1995)

eee tL LEE EEE EEE TTT

Page

2136

2139

2143

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2190

2221

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2264

1051

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

AFFIDAVITS IN SUPPORT OF TIME WARNER

ENTERTAINMENT COMPANY, L.P.’S

MOTION FOR SUMMARY JUDGMENT

May 25, 1995

1052

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

AFFIDAVIT OF E. THAYER BIGELOW

STATE OF New York )

) ss:

COUNTY OF New York )

E. THAYER BIGELOW, being duly sworn, deposes

and states as follows:

1. I am President and Chief Executive Officer of

Time Warner Cable Programming (“TWCP”), a division

of Time Warner Cable ( “TWC”), which itself is an un-

incorporated division of Time Warner Entertainment

Company, L.P. (“TWE”). I have previously submitted

an affidavit for this case, dated February 12, 1993, and

I incorporate the contents of that affidavit by reference

herein.

2. TWC has still not invested in any new conven-

tional cable programming services since the passage of

the 1992 Cable Act because it lacks confidence in the

ability of any new programming service to obtain dis-

tribution under the 1992 Cable Act's regulatory scheme.

At least 50-60 programmers have approached TWC to

ask for investment in new programming. TWC has re-

fused all of them. Some examples of potential program-

mers include the Career and Opportunity Network, the

Scholastic Network, C-Net, the American Health Net-

work and Ovation. Although we believed that these and

other program services would have been well received by

subscribers and had great potential to expand the variety

and depth of speech offered on cable television, the effect

1053

of the Cable Act convinced us that these vendors would

not be sound investments.

‘ cable systems are channel constrained. Only

a handful of services such as ESPN, USA Network, CNN

and MTV have fully penetrated the cable universe. Be-

yond those are several services with significant coverage

that are hoping to reach more subscribers. An even

larger number of program services have reached fewer

than 30 million subscribers and are trying to obtain more

significant distribution. This group includes services such

as E! Entertainment TV, Court TV and the Cartoon Net-

work. New ideas must compete not only against each

other but also against the established services for scarce

channel space. This makes investment in programming

services an extremely high risk. Even with substantial in-

vestment in a promising idea, prospects of carriage are

grim. : . : :

5. Although a number of cable systems have plans

to upgrade and rebuild, channel capacity will always be

scarce. Significant rebuilds will take time to accomplish

and even when they are complete, there will still be

capacity constraints limiting programming options. In

my experience, the development of cable programming

networks has always outpaced channel expansion. Back

when 20 channels seemed like a lot of space people

wondered how it could all possibly be used. Filling chan-

nels has never been a . Currently, a system with

77 analog channels has well over 100 cable networks (let

alone pay-per-view, premium services, locally originated

and distant broadcast stations) competing for whatever

space is available after must-carry, leased access and PEG

requirements are fulfilled.

. t deal of channel space which cable pro-

oiniaatamne compete for in a free market is occupied

by must-carry and retransmission consent stations. An es-

timated 30,025 are occupied by must-carry stations. An-

other 44,725 channels are vulnerable to must-carry de-

1054

mands." The Cable Act has thus effectively removed

pve fie -mypimiowmncdbanngdreedprieneteg, by on ah

which cable programmers may compete. is space is

eliminated from the pool of available channels regardless

of capacity expansion, and could readily support 30-40

new cable program services.

*” * *” ~

May 25, 1996

/s/ E. Thayer Bigelow

E. THAYER BIGELOW

[Jurat Omitted]

' Arthur D. Little Report to NCTA, April, 1995.

1055

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

™* * * *

AFFIDAVITS IN SUPPORT OF TIME WARNER

ENTERTAINMENT COMPANY, L.P.’S

MOTION FOR SUMMARY JUDGMENT

* us * *

May 26, 1995

1056

UNITED STATES DISTRICT COURT

DISTRICT OF COLUMBIA

[Caption Omitted]

AFFIDAVIT OF BRENDAN CLOUSTON

STATE OF New YORK )

”

CounTYy OF New YORK )

I, Brendan Clouston, on behalf of Tele-CCommunications,

Inc. (“TCT”), state the following based on my personal

knowledge:

1. I am President of TC! Communications, Inc., a

wholly-owned subsidiary of TCI that operates its cable

systems, as well as its satellite-delivered programming

operations.

2. TCI currently has approximately 11.5 million cus-

tomers to the cable systems that it owns and operates,

although that number fluctuates greatly.

3. In addition to its cable and satellite delivery sys-

tem operations, TCI operates or holds an interest in a

number of video programming services.

4. TCI’s cable systems have very little unused chan-

nel capacity. Although TCI intends to use digital com-

pression technology to increase the number of program-

ming options offered to subscribers, its early expectations

regarding the timing for delivery of that technology have

proven to be overly optimistic. Implementation of the

technology for any significant number of subscribers will

be phased in over a period of time, for several reasons.

First, television set top digital compression convert-

ers, which are required for a subscriber to enjoy the

1057

benefits of compression, will cost hundreds of dollars per

household. Obviously, some critical mass of subscribers

must be willing to bear at least some portion of this cost.

Second, because TCI currently does not have blocks

of unused channels for a significant number of subscrib-

ers, digital compression will require TCI to drop pro-

gramming from existing channels in order to provide the

channels needed for compression. Although this will ben-

efit subscribers that have acquired the digital compres-

sion converters, it also will result in the loss of those

channels for a majority of subscribers who would not be

directly utilizing the compression services.

Third, although TCI believes that technology has ad-

vanced to the point at which compression is possible, the

necessary technology has yet to be delivered. In addi-

tion, companies that manufacture converter boxes have

not yet proven their ability to produce the boxes, let

alone to meet the production requirements for a significant

roll-out. Finally, the perceived impact and actual result

of cable rate regulation, as set forth in the 1992 Cable

Act, has impeded TCI's ability to raise capital. This, in

turn, has slowed increases in channel capacity. In short.

TCI anticipates that constraints on channel capacity will

continue to affect programming carriage decisions even

after the implementation of digital compression technol-

ogy has begun.

5. Although TCI currently is rebuilding most cable

systems using fiber, those rebuilds as currently being con-

structed will not increase channel capacity in all cases.

At this time, the fiber is being constructed from the cable

system headend to the neighborhood, but the coaxial cable

that runs to the home is not being upgraded. Conse-

quently, these fiber rebuilds will improve picture quality

and reliability but, standing alone, will not increase chan-

nel capacity.

6. The “must carry” provisions of the 1992 Cable Act,

together with the implementing regulations, have injured

1058

TCI in a number of significant ways. First, because un-

used channel capacity is scarce, “must carry” requirements

have forced TCI to drop, reposition, or refuse to carry a

significant amount of programming that it would have

preferred to carry or at least carry on a different channel

position.

To cite but three of the many example, TCI's s Redlands

and Colton, California systems were forced to drop The

Weather Channel, VH1, CNBC, Trinity Broadcasting

Network, and Sneak Preview, in order to add five broad-

cast stations each pursuant to the “must carry” rules.

In Allen, Texas, a TCI system likewise was forced to

drop MTV, Lifetime, American Movie Classics, CNBC,

QVC and Request 2 to accommodate six “must carry”

broadcast stations.

7. Second, dropping and rearranging channels to ac-

commodate “must carry” demands have resulted in cus-

tomer confusion and complaints. Because we carry serv-

ices that our subscribers want, and because consequently

dropping those services makes our subscribers unhappy,

TCI did everything it could to avoid dropping services

while still complying with the 1992 Cable Act. The prob-

lem has been magnified by the fact that often the broad-

cast stations that TCI has been forced to carry are un-

popular or even duplicative. Not only are these stations

unable to attract new subscribers, they also cause dis-

satisfaction among existing subscribers. The bandwidth

that the channel occupies could be better used to offer pro-

gramming that subscribers want.

8. Third, as a matter of policy, TCI prefers to launch

a particular programming service on all or a significant

number of its systems at the same time. As mentioned

previously, TCI’s cable systems have very little unused

channel capacity. By using up channel space, “must

carry” constraints have made it difficult, if not impossible,

to operate within this policy.

1059

9. Fourth, “must carry” rules have harmed TCI by

denying it control over its own property. Indeed, even

in instances in which broadcast stations would have been

carried in the absence of the “must carry” rules, the rules

have given TCI’s systems less flexibility in the positioning

of those stations. The rules also have removed the possi-

bility that TCI itself could decide whether to continue

carrying a station in the event of a format or quality

change, even if subscribers express their preference for

other programming over a “must carry” broadcast station.

10. Finally, the “must carry” rules have increased cap-

ital and administrative costs and caused a tremendous ad-

ministrative burden for TCI and its individual systems.

11. The most important source of revenue for TCI is

subscription revenue. Revenues from advertising com-

prise a small part—less than 5% in 1994—of TCI’s total

revenue. TCI currently is incapable of delivering na-

tional advertising on all of its systems. And digital inser-

tion technology, which will improve TCI’s advertising

delivery capabilities, will not have a significant impact on

TCI’s cable advertising revenues for a number of years.

Thus, TCI favors programming lineups that are popular

with subscribers over lineups that may increase advertising

revenues but are less popular with subscribers.

12. TCI’s programming interests also have been in-

jured by “must carry” requirements. Broadcast stations

that TCI and other cable operators are forced to carry

deprive cable programmers of channel space for which

they could otherwise compete on the merits. This makes

it harder for TCI and others to launch new programming

services, regardless of subscriber demand for such serv-

ices, and ultimately harms subscribers and cable operators

through its effect of decreasing programming choices.

13. TCI continues to have its editorial discretion im-

peded by “must carry” requests up to the present day.

Under the 1992 Cable Act, there were broadcast stations

1060

that elected “must carry,” but chose not to perfect their

“must carry” rights because of the copyright liability they

would incur. However, in 1994, Congress changed the

Satellite Act. This has resulted in these stations perfect-

ing their rights and forcing carriage on the cable systems.

These new actions have further constrained channel ca-

pacity and further limit TCI’s freedom of speech and

editorial discretion in making programming carriage

decisions.

14. It is important to TCI to carry broadcast stations

that our subscribers value. In the absence of “must carry,”

“we carried, and would continue to carry, broadcast sta-

tions that our subscribers desire. TCI’s business will not

change in that regard. Furthermore, the advent of com- —

peting technologies, such as DBS, will make it more at-

tractive to TCI to continue to provide local broadcast

stations that these new technologies do not provide.

May 25, 1995

/s/ Brendan Clouston .

BRENDAN CLOUSTON

{[Jurat Omitted]

1061

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

APPENDIX TO

PUBLIC BROADCASTER DEFENDANT-INTERVENORS’

MOTION FOR SUMMARY JUDGMENT

VOLUME 4

(EXPERT WITNESS DECLARATIONS)

Dated: May 26, 1995

1062

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

DECLARATION OF M. PETER DOWNEY

1. I am M. Peter Downey, and I hold the position of

Senior Vice President of Program Business Affairs for the

Public Broadcasting Service (“PBS”). In that position,

I supervise PBS’s contracting process with program pro-

ducers and the monitoring of producers’ compliance with

PBS’s administrative policies. I have held the position

of Senior Vice President with responsibility for Program

Business Affairs since 1980.

Background and Expert Qualifications

2. Prior to joining PBS, I spent 13 years in a variety

of production-related positions at WGBH, a public broad-

casting organization in Boston, Massachusetts. This in-

cluded five years as a television producer-director, fol-

lowed by eight years as Opeartions Manager for all of

WGBH’s film, television and radio production, and en-

gineering operations.

3. I joined PBS in 1977 as Director of Operations and

was responsible for managing the operational aspects of

PBS’s transition from terrestrial to satellite distribution

of public television programming. In mid-1978, I was

elected Senior Vice President for Corporate Affairs and

served as principal management liaison to the PBS Board

of Directors. In 1980, I was given responsibility for a

variety of program support activities, including program

scheduling, management of PBS’s program purchasing

mechanism (the Siation Program Cooperative), contract-

1063

ing with program providers, and managing various ad-

ministrative policies related to the acceptance and dis-

tribution of programming.

4. Since 1980, I have, from time to time, supervised

a number of additional PBS departments and activities,

including advertising, promotion, corporate information,

development, computer services, audience research, cor-

porate administration, conference services, personnel, pro-

gram data and analysis, and PBS Enterprises (PBS's for-

profit subsidiary). Over the past seventeen years, I have

played a significant role in numerous PBS policy and

business initiatives, including: supervision of two different

PBS cable program service initiatives (1980 and 1990);

design and introduction of a new PBS corporate logo and

corporate identification system (1984); several proposals

for a PBS national advertising effort (1984-1986); de-

velopment of new Nationa! Program Funding Standards

and Practices (1987); development of new On-Air Offers

Policies (1989); development of a new program manage-

ment structure and pricing system (1988-1990); new pro-

ducer contracting policies (1994); and numerous other

corporate strategic plans and initiatives. In the course of

my thirty-plus years of service in the public television in-

dustry, I have gained extensive knowledge of most aspects

of public television, including programming, station and

PBS operations, cable relations, viewership and member-

ship patterns, and systemwide economic and strategic is-

sues. In addition, I have become familiar with the objec-

tives of public television and the ways in which public

television’s performance and achievements are ordinarily

measured.

5. In my seventeen-plus years at PBS, I have au-

thored dozens of intra-system white papers intended to de-

scribe and advance particular PBS policy and operational

initiatives. I also collaborated in the writing of, and am

the subject of, a Harvard Business School Case Study that

examines “The PBS National Advertising Plan” that I

1064

advanced in the mid-1980’s.' In 1986, I authored a

“Public Television Financial Abstract” for the PBS Board

of Directors that detailed the macroeconomics of public

television and laid the foundation for a transition four

years later to a more centralized form of programming for

public television. In 1988, I was the principal author of

“PBS's Strategic Plan for the 1990's.”

6. In my current capacities, I am called upon fre-

quently as PBS’s spokesperson on a variety of subjects

including system finances, relations with cable, relations

with corporate and foundation underwriters, PBS’s con-

tracting practices, PBS’s poliices with respect to ancillary

income from program-related activities, and similar mat-

ters. In August 1993, I submitted testimony to the U.S.

cember 1989, I testified before the Copyright Board of

Canada in the Matter of Royalties for Retransmission of

Distant Radio and Television Signals to become effective

January 1, 1990.

7. The opinions expressed below are based primarily

on the knowledge and experience I have gained in con-

nection with the many positions I have held at PBS and

WGBH. In addition, I have consulted certain data and

various studies, as indicated below. Where appropriate,

I have cited the source of my information. I am also

aware of the expert opinions that Jonathan C. Abbott and

Dr. Roger Noll intend to express concerning public tele-

vision stations in this case, and I believe my opinions are

consistent with, and supportive of, their views.

Public Television Objectives:

Public Service, Universal Access, and Diversity

8. Public television is a not-for-profit business whose

objective is public service, not private gain. The mission

1 The PBS National Advertising Plan; Harvard Business School

Case Study #0-587-152; Teopaca, John L. and Greyser, Stephen A.;

1065

of public television is to provide quality programming and

services to all Americans. The value of public television,

therefore, cannot be measured in commercial marketplace

terms. For public television, every viewer is important.

9. Local public television stations strive to fulfill the

mission of public tglevision by serving the diverse needs

within their communities. For example, in addition to

all those who benefit from public television’s general serv-

ices for audiences, an estimated 29.5 million school chil-

dren attending approximately 70,000 schools now have

daily access to public television’s instructional program-

ming services. Public television is the number one

resource for classroom programming in the country, and

these instructional services are used by nearly 2 million

teachers. Public television also provides college tele-

courses for more than 325,000 degree-candidates each

year. See Exhibit A to this Declaration.

10. Given public television’s mission, the use of Niel-

sen ratings, for example, to measure the “worth” of public

television would be wholly inappropriate. To illustrate,

if all 325,000 degree-candidates were to view the same

episode of a telecourse at the same time * * *. Judged

by commercial standards, such a program would not sur-

vive. However, in public television, such a program

would continue to be aired in order to serve the needs

of the 325,000 degree-candidates.

11. Universal access is central to public television’s

mission. As Congress declared in The Public Broadcast-

ing Act of 1967, public television services should be

“available to all citizens of the United States.” 47 U.S.C.

§ 396(a)(7). To help make its programming and serv-

ices universally accessible, public television has been the

leader in providing closed captioning for the hearing im-

paired, descriptive video service for the visually impaired,

and foreign language programming, for example.

12. Consistent with the congressional policy of univer-

sal access, the Federal Communications Commission

1066

(“FCC”) has allocated a portion of the broadcast spec-

trum to noncommercial educational television stations

(commonly referred to as “public television stations”) and

required that those stations furnish a “non-profit and non-

commercial broadcast service.” 47 C.F.R. § 73.621.

This has enabled the establishment of approximately 350

community-based stations that provide public broadcast-

ing service to their respective communities.

13. Public television is also founded on the principle

of diversity. 47 U.S.C. § 396(a)(5). Each public tele-

vision station endeavors to provide programming that will

serve diverse needs of viewers within the community to

which it is licensed, particularly those who are unserved

or underserved, such as minorities and children. Public

television stations are operated and controlled by local

institutions, and each station’s programming choices and

scheduling decisions are made entirely by that station.

Where two or more public television stations serve the

same community, they have been established to serve dif-

ferent community needs and they offer services that are

not duplicative of one another. It is therefore untrue that

“PBS” stations are all alike; rather, there are vast dif-

ferences between and among the programming and other

services provided by overlapping public television stations

—perhaps more so than between and among commercial

network affiliates. Attached as Exhibit B to this Declara-

tion is a list of all of the second, third, and f PBS

pro-

member stations in major markets and the special

gram niches they fill.

14. Even in the Washington, D.C. area, a unique

market reached by five public television stations. each

Station targets its service to different audiences and seeks

to provide a unique service to meet the needs of its

tive audiences: (i) WETA, the largest of the five, offers

mainstream PBS programming to a general audience; (ii)

WHMM, licensed to Howard University, offers program-

ming oriented to African-American audiences; (iii)

1067

WNVC offers an “international” service with a broad

variety of foreign language programming for international

expatriates; (iv) WNTV, the sister station of WNVC,

offers primarily instructional television services; and (v)

WMPT/ Annapolis, one of several transmitters owned and

operated by Maryland Public Television, provides many

programs with a focus on Maryland.

15. Furthermore, to the extent the same PBS programs

are available to these stations, PBS’s membership and finan-

cial policies strongly encourage public television stations

in the same market to schedule the same programs at dif-

ferent times (“time-shift”). To illustrate, in the greater

Los Angeles area, there are four public television stations:

KCET, a community institution, provides a general au-

dience service; KLCS, operated by the Los Angeles Uni-

programming to Los Angeles County public schools; and

KVCR/San Bernardino and KOCE/Huntington Beach,

both licensed to community colleges, distribute college

telecourses for degree-seeking students. In addition to

having differentiated services, these stations’ program

schedules are very different from one another and avoid

the simultaneous broadcast of duplicative programming.

16. It is my expert opinion that any action that

diminishes a local public television station’s access to its

intended audience would frustrate clear congressional

policies of universal access and diversity, and would in-

hibit the public television station’s ability to fulfill its

public service misison. The loss of any station in a market

diminishes the accessibility and diversity of public tele-

vision programming available to all viewers in that market.

Thus, wholly apart from any financial consequences, the

diminution or denial of access harms public television

stations and the public they are licensed to serve.

1068

The Importance of Cable in Meeting Public

Television's Objectives

17. Public television has long been dependent on cable

carriage to achieve its objectives and, in particular, uni-

versal access. This is because cable carriage overcomes

the signal reception problems that handicap viewers’ ac-

cess to public television stations. Approximately two-

thirds of public television stations operate in the UHF

experience and observations as head of engineering opera-

tions for WGBH, WGBX and WGBY in Massachusetts

(channels 2, 44 and 57, respectively), I can affirm that

UHF stations are at a significant disadvantage relative to

VHF stations, and that this phenomenon particularly dis-

advantages public television.

18. Other things being equal, the quality of the UHF

signal that is receivable in a community is inferior to that

of the VHF signals. While, to some extent, these UHF/

VHF differences could be mitigated by operating UHF

stations at the highest permissible power level (500,000

watts of Effective Radiated Power), relatively few public

broadcasters operate at this ERP level because it is diffi-

cult for a non-profit, noncommercial institution to justify

the benefit of the additional reach the extremely high

energy costs.

19. Cable also enables public television to overcome

problems with poor signal quality. In particular, public

television stations suffer from the fact that their trans-

mission towers are often situated well away from the

commercial towers serving the same community. This is

sometimes the result of unaffordable land costs, or because

able to them.

1069

Loss of Cable Carriage Results

In Loss of Viewers of Public Television

20. Based on discussions with a ae a

personnel over the years, | am aware a sys-

tem’s failure to carry a local public television station

results in loss of viewership for that station. If a cable

system drops a public television station, by definition, the

system's subscribers can no longer receive the station's

signal thronugh the cable. Depending on the strength of

the station's signal, local terrain features, the existence of

pESes

Han

heal

1070

because of the lack of proximity to popular commercial

network stations.

22. The problem of shifts is further exacerbated if the

shift is to a channel that is so high that a cable subscriber

cannot receive that channel without a “converter box.”

Many subscribers will be reluctant to purchase or lease

this additional equipment and some may be unfamiliar

with it or unaware of its availability. Even if cable com-

panies provide their customers with the necessary physical

equipment, these companies may not necessarily install it.

23. Thus, the subscriber may need to overcome a num-

ber of obstacles in order to receive a public television

signal on its new channel assuming the cable subscriber

even knows where to find the public television station.

The station may be required to spend time and consider-

able resources on a promotion campaign to publicize its

new channel location (or to obtain a reversal of the chan-

nel switch). Even when such campaigns are successful,

the station is still likely to experience an extended loss of

viewership until subscribers resolve their confusion and

adjust to the new (or restored) channel location.

Loss of Cable Carriage Results in Harm to Public

Television's National and Local Programming

24. As the Declaration of Jonathan C. Abbott ex-

plains, a station’s loss of access to viewers due to cable

drops and shifts will result in a loss of membership reve-

nue and other forms of financial support for the public

television station’s service. This would have a direct ad-

verse effect on the public television station’s program-

ming or other services.

operating

mix of funding on which a particular public television sta-

tion relies, any substantial loss of funds from any source

from a cable drop, for example—will most likely translate

to a dollar-for-dollar reduction in programming budgets,

and thus a direct diminution in the volume (and/or

quality) of the programming provided by the station.

programming distribted nationally by PBS to all public

television stations is likely to be reduced, and this results

in barm to all stations and their respective viewers.

27. Specifically, the programs made available by PBS

through the NPS are a significant part of the program-

ming that most public television stations offer. These

1072

its possible for PBS to obtain programming, and the sta-

tions’ contributions are leveraged so that, currently, an

annual station investment of approximately $90 million

yields $250 million to $300 million worth of NPS pro-

gramming. PBS’s ability to acquire high-quality produc-

tions for the NPS depends on the amount of money

that public television stations are collectively able to

aggregate for national programming, which in turn de-

pends on their individual station revenues. Accordingly,

the quality and quantity of NPS programming is related

directly to the ability of each public television station to

pay for it. 4

28. A reduction in revenues will also injure a station’s

ability to acquire programming from sources other than

PBS. Most stations produce some amount of local pro-

gramming, and they also acquire programming from

regional public television networks and from commercial

sources. The decision as to what programming to pro-

duce and/or acquire (including what amount of PBS

programming to acquire) rests with the local station.

Almost all public television stations subscribe to the NPS,

1073

The Need for Must Carry Regulation

30. During the 1985 to 1992 period, I did not have

responsibility for collecting information on adverse (or

beneficial) cable actions involving public television sta-

tions and therefore did not personally maintain a sys-

tematic count of the numbers of cable drops and shifts.

However, in the course of my conversations with public

television station managers during this period, I became

aware that there was considerable concern about the fact

that cable systems had dropped some stations or shifted

the channel of others. Particularly during the period

from 1985 to 1988, it seemed that I was learning on a

daily basis, about new drops and shifts and the detrimental

effects resulting therefore. The apparent mounting num-

bers of such drops and shifts stations were creating con-

siderable turmoil in the public television industry.

31. Moreover, based on my conversations with station

manager, it appeared that there was a pattern of drops

and shifts, and this was alarming. Specifically, during the

1985 to 1988 period, I became aware of instances where,

over a relatively short period of time, several stations on

cable systems owned by some of the nation’s largest

multiple system operators (“MSOs”) had experienced un-

announced drops. This posed a serious threat to any

station carried by that MSO. Thus, even though a station

that was being carried by that MSO was not ultimately

dropped, the constant threat of a drop was disturbing to

that station.

32. Further, it was a widely-held belief in the public

television industry that the cable industry may have

been on its “best behavior” during the late 1980s and

early 1990s when Congress and the FCC were actively

total number of drops and shifts may have been during

this period, I believe that considerably more drops and

shifts would have occurred absent the prospect of must

carry legislation. Indeed, I and my public television col-

1074

leagues believe that, absent any must-carry regulation,

cable operators would feel free to drop and shift public

television stations whenever it suited their economic in-

terests. This would result in significant injury to public

television stations, particularly those that are the second

and third stations in a market.

Conclusion

33. Based on the foregoing, it is my expert opinion

that must carry legislation serves an important interest in

furthering public television’s objectives. Cable carriage

is critical to public television’s ability to achieve its ob-

jectives, including public service, universal access, and

diversity. A public television station’s loss of cable car-

riage deprives its viewers in cable households of access

to the station’s programming and services, and deprives

the station of the revenues that enable it to fulfill its

mission. Particularly in periods such as the current one,

when federal funding is in peril, the absence of must-

carry rights would leave many public television stations

with significantly fewer resources, with the result that

public television stations’ operations would be restricted,

they would not be able to fulfill their public service mis-

sion, and the American people would be deprived of

services.

May 25, 1995

/s/ M. Peter Downey

M. PETER DOWNEY

1075

[EXHIBIT A]

[PBS Logo]

The Educational Power of Public Television

At a Glance

Kindergarten through 12th Grade

* Public television is the number one resource for class-

room programming in the country.

* 1.8 million teachers have access to public TV’s educa-

tional programming and services.

* 29.5 million students served.

* 70,000 schools reached throughout the United States.

* 1,500 individual instructional programs, including math

and science, distributed annually via satellite.

* 300 programs in reading arts alone.

* PTV, The Ready to Learn Service on PBS, to be

launched by 11 model-site stations in July 1994, will

provide a nine-hour block of children’s programming,

increased support services and outreach materials for

children, families and caregivers.

Higher Education

* PBS’s Adult Learning Service (ALS) is the largest

source of telecourses in the world. ALS added nine

new telecourses in 1993, bringing the total to 58. Six

more will be available in 1994.

ALS has enabled more than 2.3 million adults to earn

college credit since 1981.

* Over 325,000 students enrolled for college credit in

1992-1993, a 9.7% increase over 1991-1992.

More than two-thirds of America’s 3,000 colleges use

ALS telecourses.

1076

* Going the Distrance—ALS is developing this new serv-

ice to offer students nationwide the opportunity to earn

a two-year degree through college telecourses.

Distance Learning

* More than 5,000 high school students in 28 states take

advanced mathematics, science and foreign languages

through Satellite Educational Resources Consortium

(SERC) “distance learning” courses (live classes link-

ing teachers and students via satellite).

* 18 SERC courses are available, including probabiilty &

statistics, discrete mathematics, honors world geography,

Russian, Japanese, Latin, economics, calculus and

physics.

Telstar 401, PBS’s new satellite, will aggregate public

television and other services, creating the world’s largest

educational neighborhood in the sky.

Special Services

* Mathline—A new service, to be launched in Fall 1994,

will use a variety of technologies to provide informa-

tion, materials and training to help educators and

parents teach math more effectively and to make math

more effectively and to make math more fun and rele-

vant for students.

PBS ONLINE—A growing new electronic communica-

tion service that provides a wide variety of high-quality

educational and informational materials to parents,

teachers and students.

Learning Link—The K-i2 educational component of

PBS ONLINE, the service is a dynamic curriculum tool

and resource for teachers and students.

* Child Care—THE SESAME STREET Preschool Ed-

ucational Program (PEP) and the MISTER ROGERS’

NEIGHBORHOOD Child Care Partnership give child-

1077

care providers educational resources for active, creative

lessons tied to these series.

: Business—Over 500 businesses, from small to Fortune

500 companies, have used The Business Channel, video-

based training programs available through PBS.

* Health Care—More than 1,000 hospitals have used

PBS’s interactive videoconferences and training pro-

grams to keep professional staff up-to-date on medical

information, issues and trends.

* Agriculture—46 land grant colleges and two agencies

of the U.S. Department of Agriculture use Ag*Sat, op-

erated by Nebraska Educational Television, to reach

thousands of agribusinessmen and women nationwide.

Prime Time

* Nearly 97 million Americans are informed by public

television each week.

* “More than TV”—many PBS senes provide teacher and

user guides and community outreach materials.

February 1994

1079

1078

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1083

1082

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

ENTERTAINMENT COMPANY, L.P.’S

MOTION FOR SUMMARY JUDGMENT

* 7”

AFFIDAVITS IN SUPPORT OF TIME WARNER

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1084

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

STATE OF NEw YORK )

) ss.:

CouNTY OF NEW YORK )

AFFIDAVIT OF FRED DRESSLER

FRED DRESSLER, being duly sworn, deposes and

states as follows:

1. I am Senior Vice President of Programming for

Time Warner Cable (“TWC”) a division of Time Warner

Entertainment Company, L.P. (“TWE”). I have held

that position since 1987. The facts set forth below are

personally known to me to be true.

2. TWC has been injured by the must-carry provisions

of the 1992 Cable Act. The must-carry rules infringe

upon TWC’s First Amendment rights by forcing cable

systems owned and/or operated by TWC and its Divisions,

as well as those in which TWC has an interest (“TWC

systems”) to carry certain broadcast stations at the ex-

pense of programming that TWC might otherwise desire

to deliver to its subscribers.

3. As Senior Vice President in charge of Program-

ming, I regularly deal with programming services desir-

ing to obtain or expand carriage on TWC systems or alter

the terms of that carriage. As part of my responsibilities,

I am in charge of evaluating the value and desirability of

programming services, of contracting for carriage of such

programming, and of advising individual Divisions as to

1085

the desirability of carrying particular types of program-

ming on their systems and the optimal mix of program-

ming each system carries. There are currently approxi-

mately 128 national and 40 regional satellite-delivered

cable services available for carriage to TWC and its Di-

visions. TWC and its Divisions choose among those com-

peting programmers, and programmers considering the

launch of new programming, as well as broadcasters and

distant signals. In evaluating the wide variety of pro-

gramming available to TWC cable systems, I consider the

content of various programming services, the price of the

services and other terms of a possible affiliation agree-

ment. Choosing the content of the speech available to

TWC systems and advising local systems about that con-

tent is one of the most important elements of my job.

The must-carry provisions of the 1992 Cable Act hamper

my ability to do my job both by interfering with the abil-

ity of TWC and its Divisions to speak using the content

they desire and by limiting the content available for car-

riage on TWC systems.

4. To acquire programming for TWC systems, TWC

often guarantees a certain level of carriage in exchange

for the delivery of that programming at specified rates and

conditions. Thus, the price of the programming may de-

pend on the level of carriage reached on TWC systems

and may vary accordingly during the course of the agree-

ment. Because a significant portion of TWC channel ca-

pacity is occupied by must-carry broadcasters, TWC’s

ability to guarantee higher levels of carriage has been im-

paired, and TWC’s ability to meet its existing contractual

commitments has likewise been endangered.

5. The must-carry rules have interfered with launches

of new cable programmers. Cable programmers derive

revenue from license fees paid by distributors such as

cable operators for the right to exhibit programming to

their subscribers and from fees paid by advertisers who

1086

sponsor programming on their service. Because license

fees and advertising revenues depend upon the carriage

of the service, it is crucial to the viability of a new serv-

ice that it persuades as many operators as possible to

offer the service to their subscribers.

6. New national cable programming services need to

attract millions of subscribers in order to attain economic

viability. Even new regional services may need to reach

a million or more subscribers to survive. By requiring

cable operators to devote substantial channel capacity to

must-carry broadcast stations, the 1992 Cable Act de-

prives such services of vital opportunities to gain dis-

tribution.

7. The 1992 Cable Act’s requirement that cable op-

erators devote a substantial share of their channel capac-

ity to must-carry broadcasters leaves less channel capacity

for new cable programmers to compete for. On TWC

systems, must-carry broadcasters occupy approximately

10% of channel capacity on average, and on specific

individual systems, the percentage is often greater. Par-

ticularly when considered along with channels occupied

by government-mandated leased access programming and

PEG channels, all government-mandated programming

takes up a significant proportion of channel space. The

ability of these stations to tie up channel capacity without

having to compete for it on the basis of that program-

ming has caused many potential new cable programmers

to fail (such as the Americana Cable Network) or to

put off their launches of new services until such time as

more channel capacity is available.

8. Because of the must-carry provisions, if TWC wishes

to add new programming of its own choosing that does

not qualify for must-carry status on systems where must-

carry broadcasters have filled its channel capacity, it

would have to increase its channel capacity at great

expense, which would ultimately have to be borne by our

1087

customers, thus requiring them to pay more without get-

ting any additional programming that they truly desire.

9. TWC is injured when new cable programmers fail

to launch. TWC seeks to deliver wide varieties of speech

and ideas suitable to each community it serves. To per-

suade subscribers to purchase its product, TWC depends

on its ability to offer a variety of programming. When

new programming fails to launch, TWC loses its ability

to add that programming to its lineups and likewise loses

an opportunity to become more attractive to potential

consumers.

10. Given the opportunity (including available chan-

nel capacity), TWC would have launched or seriously

considered launching the following new cable services on

some of its systems, at least on a test basis to evaluate

their content and performance:

BET on Jazz Home Shopping /Horizon Cable

Discovery Network Time Mood on Demand

Traveler Encore/Starz

Discovery Network/Living 8S: The Shopping

Channel/Fingerhut

Discovery Network/Quark Z Music

Adventure Channel Lottery Channel

America’s Health Network National Health Network

Arts and Antiques TV Muchmuasic

BBC/Reuters/Telemondo News Ole T.V.

Service

Booknet Outdoor Life Channel!

Campus Television Network Ovation

Classic Sports Network Recovery Net

Collectors Channel SCOLA/Satellite

Communications for Learning

Fitness Interactive T.V. Macy’s

Television

Fox Movie Studio Newstalk TV

Game Show Channel The Health Channel

1088

Game Channel Univision

Gaming and Entertainment Viva Television Network

Channel

GEMS Television Women's Sports Network

Golden American Network World African Network

Golf Network

How To Channel

Kaleidoscope/ America’s

Disability Channel

Las Vegas Television

Network

11. TWC also would have considered carrying the

Americana Television Network on more of its systems if

more channel capacity had been available. The Ameri-

cana Television Network launched and went dark within

the space of twelve months, due in part to lack of avail-

able channel capacity for which it could compete for

carriage.

12. Because subscribers provide the bulk of cable rev-

enues through subscription fees, programming is the

mainstay of the cable business. When making program-

ming decisions at TWC, the ability to sell advertising on

cable services is not usually a consideration and has never

been a deciding factor. Advertising is viewed as an in-

cremental opportunity to be taken advantage of when

and where possible.

* * * 2

May 26, 1995

; /s/ Fred Dressler

FRED DRESSLER

[Jurat Omitted]

1089

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

AFFIDAVITS IN SUPPORT OF TIME WARNER

ENTERTAINMENT COMPANY, L.P’S

MOTION FOR SUMMARY JUDGMENT

May 26, 1995

1090

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

STATE OF New YORK )

ae =

COUNTY OF WESTCHESTER )

AFFIDAVIT OF CHARLES W. ELLIS

CHARLES W. ELLIS, being duly sworn, deposes and

states as follows:

1. I am Executive Vice President for Time Warner

Cable, a division of Time Warner Entertainment Com-

pany, L.P., a position I have held since September 1986.

I submit this affidavit to show the injury to Time Warner

from the must-carry provisions of 1992 Cable Act.

2. I supervise operations in the following Divisions of

Time Warner Cable: Greater Boston, Cincinnati, Colum-

bus, Memphis, Northeast Ohio, New England, Reading/

Eastern Pennsylvania, Western Ohio and Western Penn-

sylvania. I have personal knowledge of the injury to the

Divisions from the must-carry provisions of the 1992

Cable Act.

3. The must-carry provisions of the 1992 Cable Act

have injured TWC. The must-carry provisions have re-

quired (and continue to require) TWC systeis to use

valuable channel space to carry certain broadcast stations

that those systems did not and would not choose to carry.

This mandatory carriage has resulted in a number of

problems for TWC beyond the obvious First Amendment

problems in being forced to provide certain speech and

being barred from providing other speech in its place.

1091

Customers on many TWC systems strongly objected to

the loss of cable programming on their systems and its

replacement with broadcasters who did not interest TWC

customers. In other systems, customers objected to the

removal of cable programming from basic tiers in order

to add broadcasters customers did not want or could

easily receive over the air. These incidents created con-

siderable customer dissatisfaction that often reached the

local franchising board, jeopardizing the TWC Division’s

status not only with individual subscribers but with en-

tire franchises. By forcing TWC systems to carry broad-

casters customers do not want at the expense of program-

ming they want to see, the must-carry laws force TWC

to allow its subscribers to believe TWC is not responsive

to their needs and desires. Historically, one of the most

important problems faced by cable systems, including

TWC systems, has been (and still is) convincing con-

sumers that the cable system is responsive to them and

their needs. Customer satisfaction with programming and

service is the most important goal of our business; any

slippage in that area has dire con

tion rates to cable. sequences for subscrip-

4. The must-carry provisions of the 1992 Ca

have also harmed TWC by causing TWC cae

reposition programming they want to carry on their head-

ends in order to make room for broadcasters they are

required to carry. On the simplest level, repositioning in-

jures TWC systems because it requires them to invest

time and money in notifying subscribers of changed line-

ups and in making the technological changes a reposition-

ing requires. More importantly, repositioning injures

TWC systems because it creates customer dissatisfaction.

When a cable programmer is removed from the basic

tier in order to add yet another home shopping station

or a broadcaster providing local programming for an

entirely different locality, customers object. They also ob-

ject when cable programmers are moved to part-time

Status, or when a repositioning makes programming more

1092

difficult to find. All of this adds to customer dissatisfac-

tion and the perception of TWE systems as unresponsive

to their customers. That dissatisfaction is substantially

heightened when the system cannot explain the reposition-

ing or other changes by pointing to the significant en-

hancement in programming quality that caused it, but

instead has undertaken to displace desirable cable pro-

grammers with additional unwanted programming readily

available over-the-air.

* * *

May 25, 1995

/s/ Charles W. Ellis

CHARLES W. ELLIS

[Jurat Omitted]

1093

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

AFFIDAVITS IN SUPPORT OF TIME WARNER

ENTERTAINMENT COMPANY, L.P’S

MOTION FOR SUMMARY JUDGMENT

May 26, 1995

1094

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

STATE OF NEw YORK )

COUNTY OF WESTCHESTER )

AFFIDAVIT OF JOHN F. GAULT

JOHN F. GAULT, being duly sworn, deposes and

states as follows:

1. I am Executive Vice President for Time Warner

Cable (“TWC”), a division of Time Warner Entertain-

ment Company, L.P. (“TWE”). I submit this affidavit to

show the injury to plaintiffs from the must-carry provi-

sions of the 1992 Cable Act. The facts set forth below

are personally known to me.

2. In 1994, TWE through TWC and affiliated com-

panies, owned and operated cable systems in approxi-

mately 2,100 franchise areas throughout the United

States, which reached approximately 9 million subscribers.

TWE built, acquired and renovated these costly assets

to enable it to deliver the speech of its choosing to all

those interested in hearing it.

3. I supervise operations in the following Divisions

of Time Warner Cable: Appleton/Green Bay, Indiana/

Illinois, Jackson/Monroe, Kansas City, Milwaukee, Na-

tional, Oceanic and Shreveport. I have personal knowl-

edge of the injury to the Divisions from the must-carry

provisions of the 1992 cable act.

4. TWC and its local divisions exercise editorial dis-

cretion in determining which program services should be

offered to subscribers. In making such determinations,

1095

TWC personnel choose from among the entire array of

programming services that are available. They take into

account such factors as local tastes; local demographic

characteristics, including such variables as age, household

size and composition, income levels, occupational char-

acteristics and education attainments; the quality of pro-

gramming; the needs and interests of identifiable segments

of the local population, including minority and ethnic

groups and the availability of news, information and en-

tertainment to cable subscribers from non-cable sources,

including broadcast television stations, movie theaters,

cultural and sporting events and non-electronic media.

The content of programming services is often decisive in

making such determinations. For example, a TWC cable

system located in a conservative “middle American” com-

munity may choose to offer subscribers a greater array

of Christian religious programming, while a TWC sys-

tem located in a more ethnically diverse urban center

might place greater emphasis upon program services, in-

cluding those oriented to persons who speak languages

other than English, that would have appeal to those

audiences. For example, TWC’s cable system in Queens,

New York, a community rich in ethnic diversity, offers

Greek, Korean and Hindi channels, among others.

5. TWC takes its programming decisions very serious!

and exercises | the same type of editorial ‘Senltion that

newspaper editors employ in determining the content of

the daily newspapers. In addition to individual systems

discerning the best way to maximize customer satisfac-

tion, TWwC conducts numerous subscriber preference and

satisfaction projects.

6. TwC cable operators try to continually refine their

channel line-ups (now within the confines of the 1992

Cable Act) So as to increase subscriber satisfaction and

appeal. The diversity of services offered can be quickly

ascertained simply by comparing the channel line-ups of

systems across the country. Where a particular program

service is carried in all or virtually all TWC systems, it

is because that service has demonstrated broad appeal to

1096

United States television audiences and is an economically

attractive choice.

9. Even bandwidth which is AEs technically —

of use for analog channels cannot always be programmed

For example, some traps may trap too broadly to be

confined to a single channel. A trap of a channel on

channel 58 may also trap portions of channels 57 and 59,

making those channels unprogrammable. There may also

be unusable channels on a system because of interference,

or because the channels are on an aeronautical frequency,

or for other technical reasons within a system. For ex-

ample, although the bandwidth from 0-54 MHz might

theoretically be usable for the delivery of video program-

ming, equipment manufacturers do not supply equipment

to use that bandwidth.

16. The must-carry provisions of the 1992 Cable Act

have injured TWC. The must-carry provisions have re-

quired (and continue to require) TWE systems to use

valuable channel space to carry certain broadcast stations

that those systems did not and would not choose to

carry. This mandatory carriage has resulted in a number

of problems for TWC beyond the obvious First Amend-

ment problems in being forced to provide certain speech

and being barred from providing other speech in its

place. Customers on many TWC systems strongly ob-

jected to the loss of cable programming on their systems

and its replacement with broadcasters who did not in-

terest TWC customers. In their systems, customers ob-

jected to the removal of cable programming from basic

tiers in order to add broadcasters customers did not want

or could receive over the air. These incidents created

considerable customer dissatisfaction that often reached

the local franchising board, jeopardizing the TWC Divi-

sion’s status not only with individual subscribers but with

entire franchises. By forcing TWC systems to carry

broadcasters customers do not want at the expense of

programming they want to see, the must-carry laws force

1097

TWC to allow its subscribers to believe TWC is not re-

sponsive to their needs and desires. Historically one of

the most important problems faced by cable systems, in-

cluding TWC systems, has been (and still is) convinc-

ing consumers that the cable system is responsive to them

and their needs. Customer satisfaction with program-

ming and service is the most important goal of our busi-

ness; any slippage in that area has dire consequences for

subscription rates to cable.

17. The must-carry provisions of the 1992 Cable Act

have also harmed TWC by causing TWC systems to re-

position programming they want to carry on their head-

ends in order to make room for broadcasters they are

required to carry. On the simplest level, repositioning in-

jures TWC systems because it requires them to invest time

and money in notifying subscribers of changed line-ups

and in making the technological changes a repositioning

requires. More importantly, repositioning injures TWC

systems because it creates customer dissatisfaction. When

a cable programmer is removed from basic in order to

add yet another home shopping Station or a broadcaster

providing local programming for an entirely different lo-

cality, customers object. They also object when cable

programmers are moved to part-time, or when a reposi-

tioning makes programming more difficult to find. All

of this adds to customer dissatisfaction and the perception

of TWE systems as unresponsive to their customers. That

dissatisfaction is substantially heightened when the system

cannot explain the repositioning or other changes by

pointing to the significant enhancement in programming

quality that caused it, but instead has undertaken to dis-

place desirable cable programmers with additional un-

wanted programming readily available over-the-air.

as * * a

May 25, 1995

/s/ John F. Gault

Joun F. GAULT

[Jurat Omitted]

1098

FOR THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

DEFENDANTS’ JOINT SUBMISSION OF

EXPERT AFFIDAVITS AND REPORTS

IN SUPPORT OF MOTION FOR SUMMARY JUDGMENT

VOLUME ILA

Dated: May 26, 1995

1099

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

EXPERT DECLARATION OF JOHN R. HARING

I, John R. Haring, depose and say as follows:

1. I am submitting this Declaration in support of the

motion for summary judgment made by defendants in the

above captioned proceeding.

2. I received M.Ph. and Ph.D. degrees in economics

from Yale University. Between 1983 and 1990 I worked

t the Federal Communications Commission, where I was

the Chief of the Office of Plans and Policy, and then the

Chief Economist of the FCC. I am currently a Principal

of Strategic Policy Research, Inc., an economics and

public policy consulting firm, where I provide consulting

services to a variety of clients in the mass media and

telecommunications industries. Additional details regard-

ing my qualifications as an expert in this proceeding can

be found in Exhibit A, hereto.

* * * *

21. Loss of cable carriage can reasonably be expected

to cause a broadcast station’s advertising revenues to

decline, and that loss of revenue-producing potential will,

in turn, likely cause a reduction in profits, program

expenditures, and the quantity and quality of over-the-air

broadcast programming. In 1991, two FCC (Yale Ph.D.)

economists prepared an extensive analysis of the plight of

broadcast television in the current video marketplace. See

Florence Setzer and Jonathan Levy, “Broadcast Television

in a Multichannel Marketplace,” Office of Plans and

1100

Policy Working Paper Series No. 26, FCC, Washington,

D.C., June 1991. They conclude that:

Broadcast television . . . has suffered an irreversible

long-term decline in audience and revenue share,

which will continue throughout the current decade.

In the next ten years, broadcasters will face inten-

sified competition as alternative media, financed not

only by advertising but also by subscription revenues,

and offering multiple channels of programming, ex-

pand their reach and their audience. Television

broadcasting will be a smaller and far less profitable

business in the year 2000 than it is now. Although

broadcasting will remain an important component of

the video mix, small-market stations will find it par-

ticularly difficult to compete, and some are likely to

go dark.

These authors note (/bid., p. 3) that their “study shows

that a reduction in the quantity and quality of broadcast

service is highly likely.” Owen and Wildman, Video

Economics, Harvard University Press, 1992, p. 255, note

that: “Ultimately, of course, the disadvantages of over-

the-air broadcast stations (limited channels, single chan-

nels, and no practical means to charge viewers) may lead

them to be superseded entirely, either by cable or by

some different technology. But not in the 1990s.”

22. A station’s advertising revenue depends in part on

the number of commercial exposures it can supply, and

the number of exposures a station produces depends on

the fraction of its potential audience it can attract with

its programming. Loss of carriage reduces potential audi-

ence size and thus the actual audience size (number of

exposures) any given fraction can produce. The empirical

work of Mr. Meek and Dr. Rohlfs confirms the existence

of this relationship between potential and actual audience

size. See Expert’s Report of Tom Meek and Expert’s

Report of Jeffrey H. Rohilfs.

1101

23. The relationship between cable carriage, audience

size, and advertising revenues for a broadcast station, is

widely recognized and forthrightly acknowledged by the

cable industry in cable industry documents produced as

a result of discovery in this case. For example, in June of

1993 the Times Mirror Company, a large MSO, con-

ducted “A Study to Assess the Impact of the Loss of

Cable Carriage for a Broadcast Television Station.”

This study, and related documents, are appended hereto

as Exhibit B. (pages TM 000222—-TM 000234)

24. This study concluded that “the ability of a broad-

cast television station to easily reach its audience through

cable television is crucial. ... If the number of viewers

(as measured by ratings) changes then advertising rev-

enues will also change. . . . The loss of cable carriage

could cause a significant decrease in a station’s ratings

and a resulting loss in advertising revenues.” Exhibit B,

at p. TM 000224.

25. The study examined the impact of loss of all cable

carriage on an actual broadcast station in a market that

had only 47% cable penetration, and concluded that “a

drop as small as 10% in the number of cable viewers

could result in a decline of $3.0 million in advertising

revenues. ... In a market with higher penetration, the

impact would be even greater.” Exhibit B, at p. TM

000225.

26. As its revenue-producing potential declines, a sta-

tion’s derived demand for programming also declines,

likely resulting in a reduction in the quality and/or quan-

tity of its programming and the audience fraction it can

expect to attract. Reductions in the quantity and quality

of broadcast programming will reduce the economic wel-

fare of viewers, especially those who rely on over-the-air

reception, but potentially others as well (viz., subscribers

1102

to cable systems on which dropped or uncarried stations

retain carriage).

27. Cable carriage has been a significant factor ex-

plaining growth in the number of UHF television stations,

and the loss of carriage may reasonably be anticipated to

speed their decline. In the past, UHF suffered from well-

known problems with over-the-air reception that limited

the potential size of the audience for UHF stations. This,

in turn, inhibited UHF stations’ ability to program com-

petitively. Noll, Peck and McGowan, Economic Aspects

of Television Regulation, Washington, D.C.: Brookings

Institution, 1973, p. 103, observe that: “The funda-

mental problems of UHF stations are small audiences and

low revenues, and, hence, the inability to provide better

than low-budget programming.” These problems inhib-

ited the growth of UHF service for many years. Cable

carriage improved the quality of UHF reception and

helped foster a significant expansion of the service. A

recent economic study (see Economists, Inc., An Eco-

nomic Analysis of the Prime Time Access Rule, March 7,

1995) presents evidence indicating that carriage of UHF

stations on cable into a rising number of cable house-

holds has served to eliminate or reduce greatly the so-

called “UHF handicap.”

. * * *

31. Cable system operators have equity positions in

many cable program services. In its Annual Assessment

of the Status of Competition in the Market for the Deliv-

ery of Video Programming (September 28, 1994), the

FCC reports that the number of vertically-integrated na-

tional programming services has grown substantially since

1990, and that approximately 53 percent of program-

ming services were integrated with cable operators in

1994. These equity positions give cable system operators

an opportunity to share in the earnings of such services,

which typically reflect sales of national advertising and

1103

payments from system operators. A cable system oper-

ator therefore has a rational economic incentive to drop

a broadcast station and substitute a cable program service

in which the operator has a financial interest, whenever

the operator expects the gains from increased carriage of

the cable program service, including the benefits from

equity participation, will exceed any losses from dropping

the broadcast station.

32. Cable advertising revenues are growing and are

expected to increase rapidly, and cable system operators

are aggressively pursuing opportunities to increase their

advertising revenues. Cable TV Advertising reports that

gross cable television advertising billings had reached

nearly $4 billion by the end of 1993 and forecasts gross

billings in excess of $10 billion by 2001. The large mul-

tiple cable system operators (who serve the bulk of sub-

scribers) are implementing programs to upgrade advertis-

ing hardware and software, improve employee skills, and

supply closer substitutcs for broadcast national spot adver-

tising through greater clustering of systems and utilization

of interconnects. See, inter alia, Paul Kagan Associates,

The 1993 Cable TV Advertising Report; Paul Kagan

Associates, The Cable Interconnect Report (various num-

bers); Paul Kagan Associates, Cable TV Advertising;

Larry Zipin, “Local Cable Advertising Sales: 1992 and

Beyond: Revised”; Comcast Cable Advertising: National

Sales Meeting; Tele-Communications, Inc., Cable Adver-

tising, March 1994; TCI Advertising Sales Executive

Summary, January 11, 1993; TCI Advertising Strategic

White Paper, January 1, 1992; Times Mirror Cable Tele-

vision, Strategic Plan, 1991-1995; Cable Advertising Bu-

reau Five-Year Strategic Plan, Local Advertising Develop-

ment, February 1, 1993; American Television and Com-

munications Corporation, Strategic Plan for the 1990s,

November 29, 1988; Time Warner Cable, 1994 Business

Plan; Time Warner Cable, Ad Sales Status Report 1993;

Time Warner Cable, Presentation to the Time Warner

1104

Board of Directors, July 18, 1991; Cable Advertising

Bureau Report, Regional Networks (undated).

33. Additional documents supporting my conclusions

regarding the relevance and increasing importance of

local advertising revenues, as an increasingly important

component of total cable system revenues, can be found

in Defendants’ Joint Volume VII, at Exhibits 216, 218,

223, 229, 230, 232, 233, 242, 243, 244, 245, 246,

247, 248, 249, and 257. Because of the volume of those

documents, they are not separately attached to this

Declaration.

34. A cable system operator possesses a rational eco-

nomic incentive to drop a broadcast station and substitute

a cable program service on which the operator can sell

local or national spot advertising, whenever the operator

expects the gains from carriage of the cable program

service will exceed any losses from dropping the broadcast

station. In a Time Warner document appended hereto as

Exhibit C (pages TWS 0163 - TWS 0181), Larry Zipin,

Vice President—Advertising Sales, Warner Cable Com-

munications, Inc., “Local Cable Advertising Sales: 1992

and Beyond,” November 20, 1991, p. 6, states that: “As

a result, anything that places a limitation on the size,

composition, and accessibility to the Cable Advertising

Audience, diminishes Ad Sales’ revenue potential; and,

conversely, anything that increases the size, composition

and accessibility to the Cable Advertising Audience in-

creases Ad Sales’ revenue potential.” Zipin (p. 6) notes

that: “Since viewership requires converting the subscriber

base into a Basic Cable Audience, then an MSO impacts

viewership with every decision regarding channel carriage,

dial position, tiering/packaging and most specifically

tune-in advertising/cross channel promotions (emphasis

added).” Zipin (p. 8) states that: “Eliminating video

tape and moving towards computer processing should

1105

overcome the obstacles that currently place limits on com-

mercial insertion accessibility. It is estimated that proto-

types will be available in 1992; with 1993/1994 as a

probable horizon that would make a company-wide con-

version of technology possible.” Zipin (p. 11) states that:

“It is anticipated that this software will be available for

industry-wide proliferation by mid-1992. Since these

designs include interactivity with existing hardware and

multi-headend configurations, it represents the type of

revolutionary technological advance that will raise the

revenue potential of the entire business to new levels.”

Finally, Zipin (p. 14) notes that: “It is important to point

out, that even when the capacity to access this inventory

improves, this inventory is, nonetheless, finite. Unlike

local TV and Radio—but more like Newspapers—Cable

Systems may be in a position to create ‘as much inventory

as they can sell’. This relates to the issues of Cable Op-

erators becoming programmers of their own local chan-

nels, regional/local news channels, etc. To whatever ex-

tent these ventures are successful in attracting an audience;

Cable Advertising Sales potential also increases propor-

tionately with its ability to reach these audiences with com-

mercial messages.” In a Time Warner Cable Memo-

randum from Don Stone to Bill Grimstead, dated May 25,

1994, Mr. Stone worries that competition from a low-

power transmitter would lower cable advertising sales and

inquires whether: “To deal with this competitive threat,

could we refuse to carry this low power feed and continue

to carry KMPH like we are now. This would keep Bakers-

field advertisers from having access to the Time Warner

homes through KMPH’s low power signal and force them

to buy in Fresno to reach Bakersfield. It would also be

more difficult for KMPH to sell in Bakersfield without

the Time Warner homes.”

* * * «

1106

37. Generally, the only potential loss to a cable pro-

grammer of dropping a local broadcast station is the

possibility that a station will be so highly valued by cable

subscribers that a substantial number of those subscribers

would cancel (or be willing to pay significantly less for)

their cable subscriptions if that station were dropped.

Thus, in general, a cable operator is likely to drop lower

valued, lesser viewed broadcast stations before dropping

more highly valued stations with more substantial viewer-

ship.’ This suggests that in the near future, absent a must

carry requirement, cable operators would be more likely to

drop independent stations, particularly UHF stations, than

they would be to drop network affiliate stations. Over

time, however, as the incentives and opportunities to sub-

stitute cable programming for broadcast programming

increase, cable operators would be increasingly likely to

drop even network affiliate stations.

* * * *

44. I want to emphasize the importance of a trend that

will both make it more likely that local broadcast stations

will be dropped, and will increase the impact of a drop

1 The strength of the demand for a local broadcast station, as

for a cable program service, is not accurately gauged simply by the

number of viewers who watch that program once a week or more.

A particular station may have 20,000 viewers, but most of those

viewers may have only slight interest in the programming of that

station, and would not cancel their cable subscriptions (or be

willing to pay substantially less) if that station were dropped.

Conversely, a particular station—say, a foreign language station—-

may have only 5,000 viewers, but they may care passionately about

that station, and would cancel their cable subscriptions (or be

willing to pay significantly less) if that station were dropped.

Thus, from the perspective of the cable operator, the demand for

a particular broadcast station (or for a particular cable program-

mer), cannot be measured simply by the ratings of that station or

cable programmer. For example, many of the premium or pay TV

cable programmers have modest ratings, but they are nevertheless

carried because there is obvious demand for those programmers

by cable subscribers who are willing to pay an additional fee to

receive them.

1107

should one occur. This is the marked trend towards in-

creasing horizontal concentration, clustering, and inter-

connects, that is, greater effective economic integration,

among cable operators. If there are 25 independent cable

operators in a particular television market, each serving

the same number of subscribers, if one of those cable

operators substitutes a cable programmer for a local broad-

cast station, the broadcast station will still have access to

24/25ths of its potential cable household audience, and

the local ad availabilities made available to the cable

operator by the substituted cable programmer will only

reach 1/25th of the potential cable households in that

television market. But if one MSO owns or controls

all of the cable systems within a particular television

market, and decides to substitute a cable programmer for

a local broadcast station on all of the cable systems in

that market, the broadcast station will have lost all of its

potential cable household audience, and the local ad avails

made available to the cable operator by the cable pro-

grammer will be able to reach 100% of the potential cable

households in that television market.

45. Others have noted the clear and undisputed trend

toward increased horizontal concentration, clustering and

interconnects. I note that as of June 1993, in almost half

of the ADIs in this country (94 out of 200), one MSO

controlled 50% or more of the cable subscribers. Memo-

randum from Jay L. Kriegel to Jim May, June 10, 1993

(DAE VOL. VII, EXH. 213). Data produced by Time

Warner, which provides information on the fifty largest

ADIs, indicates that as of June 1992, even before the

Cable Act was enacted, in twenty of these ADIs a single

MSO already controlled 50% or more of the subscribers.

and in eleven of these ADIs a single MSO already con-

trolled 40% or more of the subscribers. And in ten of

the remaining ADIs, a single MSO already controlled be-

tween 30-40% of the cable subscribers. “MSO Consoli-

dated Analysis,” June 2, 1992 (TWS 0011 1752: DAE

VOL. VII, EXH. 207). Additional documents support-

1108

ing my conclusions regarding the relevance and increas-

ing importance of clustering and horizontal concentration

can be found in DAE VOL. VII, EXH. 213, 214 and

237. Because of the volume of the exhibits referred to in

this paragraph, they are not separately attached to this

Declaration.

46. In summary, it is my opinion, as an economist

familiar with these industries, that there was a reasonable

basis for Congress to conclude that, absent a must carry

requirement, the economic health of local broadcast tele-

vision would be in genuine jeopardy. Given the increasing

incentives and opportunities for cable operators to sub-

stitute cable programming for broadcast programming,

Congress had a reasonable basis to make the predictive

judgment that, absent must carry, an increasing number of

local broadcast stations would be dropped, not carried, or

otherwise disadvantaged by cable operators acting in their

own economic self-interest.

47. It is also my opinion, as an economist, that local

broadcast stations who were dropped or denied carriage by

cable operators would suffer significant financial injury

and would be compelled to reduce the quantity and/or

quality of their programming. As a consequence, over

time a significant number of them would be likely to go

off the air, resulting in an absolute decline in the number

of local broadcast stations. Decreases in the quantity and

quality of over-the-air viewing options will harm con-

sumers who do not subscribe to cable, with adverse dis-

tributional consequences to the extent that nonsubscribers

have low incomes.

48. Finally, it is also my opinion, as an economist,

that the must carry requirement is rationally and coher-

ently related to the Congressional goals, and will directly

and materially further those goals.

May 25, 1995

/s/ John Haring

JOHN HARING

1109

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

AFFIDAVITS IN SUPPORT OF TIME WARNER

ENTERTAINMENT COMPANY, L.P.’S

MOTION FOR SUMMARY JUDGMENT

May 26, 1995

1110

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted !

AFFIDAVIT OF ROBERT A. HILLYER, JR.

ROBERT A. HILLYER, JR., being duly sworn, de-

poses and says:

* te ® *

9 On the 9 systems we operate, we are carrying |

or 2 commercial broadcast channels subject to must carry

rules and 2 to 4 commercial broadcast channels subject

to retransmission consent. We are also carrying | or 2

PBS channels subject to the educational television must

carry rules. Between 29% and 46°% of the basic service

channe's we offer are commercial and PBS channels sub-

ject to must-carry or retransmission consent. Although

Hillcom’s cable systems are very small, represent an in-

significant market, and are barely economically viable,

we are not considered small cable systems under must-

carry because we offer more than 12 channels per system.

Thus we can be required to carry up to 7 qualifying com-

mercial and 3 qualifying PBS broadcast channels out of

a maximum capacity potential of 18 to 21 channels. This

is extremely prejudicial to other existing or potential pro-

grammers, and limits our ability to provide the most

attractive service possible with our limited resources.

— a * %*

May 25, 1995

s/ Robert A. Hillyer, Jr.

Rospert A. HILLyverR, Jr.

[Jurat Omitted]

1111

FOR THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

DEFENDANTS’ JOINT SUBMISSION OF

EXPERT AFFIDAVITS AND REPORTS

IN SUPPORT OF MOTION FOR SUMMARY JUDGMENT

VOLUME ILB

Dated: May 26, 1995

1112

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

(Caption Omitted]

EXPERT DECLARATION OF CHARLES L. JACKSON

I, Charles L. Jackson, depose and say as follows:

1. My name is Charles L. Jackson. I am a Principal

of Strategic Policy Research, Inc. (Strategic Policy Re-

search), an economics and public policy consulting firm

located in Bethesda, Maryland I provide consulting serv-

ices to a variety of clients in the mass media and telecom-

munications industries. Before co-founding Strategic

Policy Research in 1992, I was a Vice President of Na-

tional Economic Research Associates, Inc. (NERA) and,

prior to that, co-founded the consulting firm of Shooshan

& Jackson Inc. which merged its practice with that of

NERA Before beginning consulting, I served on the staff

of the Communications Subcommittee of the US. House

of Representatives and was on the staff of the Federal

Communications Commission. I have authored or co-

authored numerous studies on public policy issues in tele-

communications and have testified before Congress on

issues of technology and telecommunications policy. I

earned the B.A. degree from Harvard College in Applied

Mathematics and the degrees of M.S., E.E. and Ph.D.

in Electrical Engineering from the Massachusetts Insti-

tute of Technology. My full curriculum vita, including

publications and prior testimony, is attached as Exhibit A.

2. The capacity of cable systems—the number of

channels delivered to subscribers has—grown from a

few channels in the early days of cable to more than a

hundred in state-of-the-art systems and will continue to

grow for many years to come Improvements in tech-

nology, primarily improved amplifiers and fiber optics,

have permitted this capacity expansion in the past Im-

them make more money, (2) franchise requirements or

franchise-related political decisions dictate such an expan-

sion, and (3) as equipment wears out it is replaced

with higher-capacity equipment. My view of the future of

cable capacity is quite conventional It was widely held

in 1992 and could be found in journal articles, trade press

articles, equipment manufacturers’ advertisements and

statements by cable firms. Credible witnesses, including

the Chairman of the FCC and the spokesman for the

National Cable Television Association, testified before

Congress in 1992 supporting such a vision of the future.

3. The capacity of a cable ssytem is normally meas-

ured in channels. There are different measures of capac-

ity. One is the number of channels of television program

service a consumer can chose among at one time. This

is the activated capacity of the cable system. Another

measure is the total number of channels in a system that

the cable operator could activate without extensive invest-

ment—I call this the actual capacity of a system. For

example, a system may have an actual capacity of 60

channels but an activated capacity of only 55 channels.

At any time the activated capacity can be easily measured

with little dispute. The actual capacity is, of course,

always larger but is a softer number There are channels,

for example the two known as A-1 and A-2, which many

cable system managers prefer not to use because of the

potential for interference from the cable system to aero-

1114

nautical navigational systems. If a cable system chooses

to use channels with potential to interfere with aeronauti-

cal communications, they must be more vigilant in guard-

ing against signal leakage from the cable system. In

many systems adding additional channels results in a

slight degradation of the quality of the existing channels

on the system. Hence, the limit on the number of channels

that can be added is set, in part, by the acceptable quality

loss on the other channels. Finally, there is the capacity

of state-of-the-art systems. Cable systems are built with

a variety of vintages of plant and equipment. One addi-

tional useful measure of capacity is the actual capacity

of a brand-new, top-of-the-line cable system built with

current technology. I call this the state-of-the-art capacity.

In the discussion below I show how the state-of-the-art

capacity has improved over time.

4. Cable capacity, however measured, has grown enor-

mously over time. Early state of the art cable systems had

12 or fewer channels. Today, start-of-the-art cable sys-

tems can carry about 160 analog channels or a thousand

digital channels. A comprehensive 1971 study described

the state-of-the-art as 25 or 26 channels [See On the

Cable: The Television of Abundance, Report of the Sloan

Commission on Cable Communications, McGraw-Hill,

1971 (DAE VOL. VILR, EXH. 430), p. 192.] Today

cable operators run systems with a capacity of 160 chan-

nels. This is an increase in the capacity of state-of-the-

are systems of 135 channels or slightly more than 600

percent over 24 years. On an annual basis, this is an

increase of about five channels per year in the state of the

art or a compound growth rate of cable capacity of about

eight percent per year. Another way to view the historical

growth of capacity is to consider the activated capacity

available to the average cable subscriber over time. Paul

Kagan Associates provided estimates of this quantity in

their publication The Kagan Media Index {September 30,

capacity in 1984 to have been 23.4 channels and the

1994, p. 2]. Kagan shows the average cable channel

1115

capacity in 1994 to be 43.6 channels. By these numbers,

the average subscriber gained access to 20.2 additional

channels in ten years—a growth rate of about two chan-

nels per year. These two estimates of annual cable capac-

ity growth are roughly consonant—with state-of-the-art

capacity growing at five channels per year and operational

capacity growing at two channels per year. Clearly one

would expect the possible to grow faster than the realized.

The limits of the possible have grown and cable has been

implementing the improved technology.

5. Several forces drive cable operators to increase

their system capacity. First, of course, is the added oppor-

tunity to carry additional services and thus justify higher

rates to consumers made possible by increases in channel

capacity. Second, local franchise authorities frequently

request or require capacity upgrades at the time of a

franchise renewal or transfer. Third, cable systems, like

trucks or air conditioning systems, degrade over time and

ultimately have to be refurbished—a process that is called

a “rebuild” in the cable industry. Such system rebuilds

typically occur once every 10 or 15 years. At the time

of a rebuild, it is natural to upgrade the system to current

technology—a step that expands channel capacity. Thus,

just the wear and tear of the elements combined with the

changes in the available technology would cause cable

systems to expand capacity over time.

6. I expect the substantial expansion of channel capac-

ity throughout the cable industry to continue over the next

several years. The historical trends of the last quarter

century will continue—although growth, measured in

sheer channel numbers, will be greater in the future than

in the past. The future will bring enormous expansion

of cable capacity. Further, the basis for my belief in fu-

ture capacity expansion is so strong and broad that I

believe that it would be unreasonable for any similarly

informed person to believe otherwise. Moreover, it was

reasonable in 1992 to anticipate that these expansions

would occur. My view is based upon consideration of

1116

(1) the state and trends in the basic underlying technolo-

gies, (2) product announcements, and advertisements by

manufacturers, (3) statements by cable executives about

plans to adopt new technologies, (4) reports from the

cable industry research consortium, CableLabs, on new

technology, (5) congressional testimony by representa-

tives of the cable industry, (6) examination of planning

documents, capacity surveys and other documents pro-

vided by the plaintiffs as part of the discovery process,

and (7) my experience and familiarity with the industry.

7. One route to capacity expansion has been improve-

ments in cable electronics—most notably cable system

amplifiers, but also modulators, converters, passive devices

and cable itself. Modern cable electronics permit building

or upgrading cable systems to 550 MHz or even 1000

MHz (1 GHz) capacity. A 550 MHz cable system can

carry about 80 channels of programming, a 750 MHz

system can carry about 110 channels and a 1 GHz system

can carry 160 channels of traditional analog television

signals. As a result, expanding capacity to 1 GHz (or

160 channels) of information capacity in an alluring way

for cable operators to position themselves to offer the

many anticipated video and information services to the

home. Upgrades are becoming cheaper over time—TCI

recently announced implementation of a new network

architecture that would allow it to upgrade from 300

MHz to 750 MHz with only a 10 to 15 percent increase

in extra cable placement. [See “TCI Details New Archi-

tecture,” Multichannel News, April 3, 1995 (DAE VOL.

VILR, EXH. 431), p. 43.]

8. Fiber optic transmission offers a second route to

capacity expansion. Fiber optic cables have thousands of

times more carrying capacity than the earlier coaxial cable

technology. Today’s practical fiber systems exploit only

a small fraction of fiber’s capacity. Even so, they provide

cable system operators with valuable building blocks.

Installation of fiber optic systems offer cable systems effi-

ciencies. Fiber systems provide greater reliability than

1117

the older coaxial cable and carry signals longer distances

without amplification, reducing service costs. Installing

fiber backbone in a cable system reduces the number of

amplifiers in cascade between the headend and the average

consumer substantially increasing the reliability of cable

service. Fiber backbone also permits either an expansion

of the cable system’s capacity, an increase in picture

quality at the residence, or some combination of channel

expansion and picture quality improvement. Additionally,

installing fiber prepares cable companies to compete in

other telecommunications markets such as voice telephony

and mobile communications. I believe that the cost of

installing fiber backbone in a cable system is affordable.

The costs of fiber upgrades vary depending upon the

density of the cable system, the number of households

served by each fiber node and other factors. I understand

that the costs of such upgrades can be as low as $40 or

$50 per subscriber and range up from that point depend-

ing upon how deep fiber is put into the cable system.

[See “Evolving from FSA to passive cable networks,”

CED: Communications Engineering & Design, September

1994, p. 60.] The adoption of fiber by many cable oper-

ators indicates that fiber is affordable. Industry analysts

also recognize this affordability. For example, one study

shows a fiber upgrade cost of $90-225 of capital expendi-

tures per subscriber. [See “The Cable Television Indus-

try: New Technologies, New Opportunities and New Com-

petition,” March 8, 1993 (DAE VOL. VII.R, EXH.

426), at 1.]

9. Digital compression is a third driving technology

behind channel expansion. Compression does not pre-

clude—and, in fact, complements—fiber optic technology

and analog bandwidth expansion. Digital compression is

a way of transmitting video and audio signals by convert-

ing a TV picture to a series of “Is” and “Os”, and then

eliminating redundant information, thereby reducing the

amount of data that needs to be sent. Similar processes

are familiar to anyone who has watched a letter go

through a fax machine. When the fax scanner moves

1118

beyond the signature line, the page speeds up. This is

because fax machines use a simple form of data com-

pression—using an abbreviation to indicate an all white

region. Typical digital compression systems being de-

ployed by the industry can compress typical video pro-

gramming by about a factor of 6 to 1. That is, six com-

pressed digital signals can fit into a channel that carries

only one convention analog signal. The biggest part of

the cost of converting a cable systems arises from the

digital converter boxes that must go into each household

that gains access to the digital signals. Such converter

boxes cost about $200 today. Since much of the cost of

these boxes arises from their internal digital electronics,

the cost of these boxes should fall just as the price of

computer memory chips has fallen over the last decade.

Notice that it is not necessary to install such boxes in all

households to gain additional channel capacity through-

out a cable system. Consider a cable system with several

pay services. Assume that the lowest penetration pay

service is subscribed to by only 10 percent of subscribers.

Installing digital converters for that 10 percent and mov-

ing the pay service to digital frees up the channel previ-

ously carrying the pay channel. More generally, if cable

systems use digital capacity to provide pay services, then

they can migrate most pay services to digital and free up

several channels without having to purchase a digital con-

verter for all households. Market analysts consider de-

ployment of digital services to be affordable. One group

estimated digital compression deployment of digital serv-

ices to be affordable. One group estimated digital com-

pression deployment costs in the 1994-2000 time frame

to be about $170 per subscriber. [See Ibid.] And, like

fiber, compression techniques are highly likely to improve

and become cheaper over time.

10. Improving technology for traditional cable service

as well as the potential to offer additional services in the

future will motivate continued and accelerated channel

capacity expansion within the cable industry. This view

1119

is supported by results of cable capacity analyses con-

ducted for networks interested in the potential for car-

riage on cable systems. A November 1994 “State of

Cable Operator Survey” conducted by Horowitz/Cohen

found that 65 percent of operators surveyed intended to

increase capacity to a projected average of 79 channels

within the next two years. [See D00985, D001123 (DAE

VOL. VIIL.R, EXH. 91).] Kagan’s March 1994 “Cable

TV Technology Report” reported that cable operators

were focusing on channel capacity to meet competition

from DBS and potential 70 to 80 compressed digital

channels available through DIRECTV. Kagan interpreted

a sample of cable operators to indicate a shift of nearly

3 million subscribers to a higher bandwidth by year end.

[See NOO11247 (DAE VOL. VII.R, EXH. 447).] A

table of MSO planned upgrades catalogued by Boftz &

Company in October 1994 indicated the pervasiveness

of upgrade plans. The table below restates the numbers

cataloged in the report by Bortz and Company.

Upgrade/Rebuild Plans

Target Date Subscriber

to Complete Base To What

MSO Rebuild Affected Level?

(1) — @) (3) (4)

Time Warner Year-end 1998 95% 750 MHz

Continental Year-end 1997 100% 550 or 750 MHz

Comcast Mid-year 2000 100% 750 MHz

Cablevision

Systems Mid-year 1996 50% 750 MHz

Cox Cable Year-end 1996 75% 750 MHz

MetroVision Year-end 1995 75-80 % 750 MHz

Adelphia Year-end 1999 100% 750 MHz

Times Mirror Year-end 1999 75-80% 750 MHz

Viacom Year-end 1966 75% 750 MHz

Colony Year-end 1999 100% 550 or 750 MHz

Source: Bortz & Company survey results, prepared for The Travel

Channel, (DAE VOL. VILR, EXH. 160).

As a guide to interpreting these numbers, a 550 MHz system has a

capacity of approximately 80 analog channels, a 750 MHz system

has a capacity of approximately 110 analog channels and a 1,000

GHz system has a capacity of approximately 160 analog channels.

1120

11. These survey results are confirmed by the plans of

the cable companies. For example, Time-Warner’s Plant

Upgrade Guidelines for the 1995 budget year states that

a forward bandwidth of 750 MHz is typical and should

support 79 analog channels and 33 digital channels.

[TWD00010285-00010286 (DAE VOL. VII.R, EXH.

448) (RESTRICTED).] Similarly, cable MSO Cable-

vision states “In conjunction with its fiber optic construc-

tion program, Cablevision is also upgrading its existing

coaxial cable television plant to increase channel capacity

for the delivery of additional programming and new serv-

ices. All of the Company’s cable television systems haven

[sic] minimum capacity of 35 channels and 70% of them

are currently offering at least 52 channels to subscribers.

As a result of the upgrades, it is anticipated than [sic] by

1995 virtually all Cablevision subscribers will be sewed

[sic] by cable television systems having a capacity of at

least 52 channels and most will be capable of offering 77

channels.” [See Cablevision WWW site on May 23, 1995

http //moon.cablevision.com/cvchtml.txt]

12. Digital compression is expected to be installed by

the cable industry in significant quantity later this year

or early next year. The cable industry has already made

significant investments in compression technology. For

example, TCI, our nation’s largest cable system operator,

makes the following statement in its latest SEC Form 10K

filed March 31, 1995.

Compressed digital video technology converts as

many as ten analog signals (now used to transmit

video and voice) into a digital format and com-

presses such signals (which is accomplished primarily

by eliminating the redundancies in television im-

agery) into the space normally occupied by one ana-

log signals. The digitally compressed signal will be

uplinked to a satellite, which will send the signal

back down to a customer's satellite dish or to a cable

system’s headend to be distributed, via optical fibar

1121

and coaxial cable, to the customers home. At the

home, a set-top video terminal will convert the digital

signal back into analog channels that can be viewed

on a normal television set. The Company intends to

begin offering such technology to its cable subscrib-

ers as the set-top terminals become available for dis-

tribution. The Company has established the Na-

tional Digital Television Center in Denver during

1994 to compress, uplink, encrypt and authorize re-

ception of digital television signals as well as provide

digital television and multimedia production services.

Through March 1995, the Center has established

long term contracts to provide services to a dozen

content providers, digitally compressing and distrbut-

ing more than 100 channels of programming.

On May 10 of this year, Communications Daily reported

Hewlett-Packard’s announcement that it had received

350,000 more orders for its digital set-top. (A 100,000

unit order from Cox and an additional 250,000 from

TCI.) (DAE VOL. VIILR, EXH. 429) It appears indis-

putable that the cable industry is moving toward the roll-

out of compressed digital services.

13. Those who follow the cable industry were, in

1992, well aware of these technological developments.

Bandwidth expansion and the advent of digital compres-

sion could be foreseen for many years. For example, a

1983 textbook, Cable Communication by Thomas F.

Baldwin (DAE VOL. VII.R, EXH. 432), Prentice Hall,

1983, stated that “an increase from 400 to 500 MHz

would add 17 more channels at a nominal increase in

system cost.” That book also discussed compression and

observed that three to one compression would permit a

400 MHz system to carry 150 channels. In 1992, hard-

ware vendors were already actively promoting their digital

advertisement (unnumbered insert), Cablevision, March

23, 1992 and Scientific-Atlanta advertisement (unnum-

bered insert), Multichannel News, November 30, 1992

1122

compression systems in the trade press. [See Magnavox

(DAE VOL. VII.R, EXH. 433).] The evaluation and

selection process for digital compression standard were

well underway by mid-1992. CableLabs planned to test

and choose a digital compression delivery system by year’s

end, and HBO and PrimeStar Partners held competitions

to determine their own digital compression systems. [See

“Standards? What Standards?,” Cablevision, May, 4 1992

(DAE VOL. VII.R, EXH. 434), pp. 66-68.] CableLabs,

the research and development consortium of cable tele-

vision system operators, predicted the transformation of

cable systems to hybrid analog-digital systems beginning

in about 1994. [See “SPECS News from CableLabs,”

October 1992 (DAE VOL. VII.R, EXH. 435), p. 1.]

While discord on an industry standard for compression

had threatened to delay the technology, 1992 brought

convergence between the industry’s compression efforts

and the emerging world standard for coded bitstream and

decoder requirements known as MPEG (Motion Picture

Experts Group). Late in 1992, General Instrument Corp.

announced expansion of capacity of its digital-compression

system by over 60 percent, yielding between 7-16 video

channels per standard analog channel over satellite and

cable links. [See GI: We Have 16:1 Compression Ra-

tios,” Multichannel News, October 19, 1992 (DAE VOL.

VII.LR, EXH. 436), p. 2.] Viacom Inc. announced its

selection of the Scientific-Atlanta compression system for

delivery of Showtime Networks Inc. and MTV Networks

units to hotel and private cable markets by first quarter

1993, and digital delivery to cable TV headends by sec-

ond or third quarter of 1993. [See “Viacom Taps S-A’s

Open Compression,” Multichannel News, November 16,

1992 (DAE VOL. VII.R, EXH. 437), p. 1.] Discovery

Communications Inc. created the “Your Choice TV” re-

mote control ordering system to simplify consumers’ ef-

forts to choose programming. [See “Discovery Debuts

Remote for 500-Channel Universe,” Multichannel News,

December 14, 1992 (DAE VOL. VIILR, EXH. 438),

p. 1.]

1123

14. By 1992, improvements in cable electronics were

permitting capacity upgrades toward | GHz of capacity

of analog capacity. Because digital compression could be

counted on to expand capacity roughly six-fold, an up-

grade to a 1 GHz system carrying only gidital signals

would yield a capacity of 1000 channels. In 1992, Time

Warner Cable had already upgraded part of its Queens,

N.Y. cable system to 1 GHz, carrying 150 channels. [See

“The steps to 150+ channels with | GHz,” Communica-

tions Technology, September 1992 (DAE VOL. VILR,

EXH. 439), p. 46.) Viacom was rebuilding part of its

system in Castro Valley, California to | GHz for market-

ing testing, and designing the rest to accommodate easily

a future upgrade to 1 GHz. [/bid.| Time Warner's Roch-

ester, N.Y. system, Adelphia systems, and Rogers systems

in Canada were all being designed with capability to up-

grade to | GHz. [/bid.| Cable hardware vendors actively

encouraged cable providers to upgrade systems to | GHz.

[ Viewsonics Inc. advertisement (insert), Communications

Technology, December 1992 and Regal Technologies Ltd.

advertisement (insert), Communications Technology, De-

cember 1992 (DAE VOL.;; VII.R, EXH. 440).}

15. Again, by 1992, many cable companies had begun

to integrate fiber into their systems. As cable focused less

on expanding into new neighborhoods and more on better

programming and cable service, upgrades presented the

opportunity to incorporate fiber optic transmission tech-

nology. Despite the advent of the 1992 Cable Act, cable

operators planned significant increases in fiber and ampli-

fier purchases. [See “Operators’ "93 Plans: The Buck

Stops Here,” Multichannel News, November 30, 1992

(DAE VOL. VILR, EXH. 441), p. 3.] Suppliers and

operators claimed declining fiber costs now made install-

ing fiber-to-the-feeder less expensive than installing a

straight 500 MHz coaxial build. Cable operators were

laying excess fiber in anticipation of future services like

personal communications network, telephony or video-

1124

on-demand. [/bid.] By early 1992, Continental Cable-

vision had already embarked on a $7 million consolidation

and fiber upgrade of cable plant in southern New Hamp-

shire. [See “Fiber optics: Shaping cable’s future,” Com-

munications Technology, March 1992 (DAE VOL.

VILR, EXH. 442), p. 26.] In 1992, Cox Cable expanded

the number of systems targeted for fiber-to-the-service-area

(FSA) upgrades to 17. Such companies reportedly saw

movement toward 500-MHz FSA as a transition point for

MSOs who anticipated need for more than 78 channels

before digital compresison were viable. [See “Cox Moves

More Aggressively on Fiber Optics,” Multichannel News,

June 22, 1992 (DAE VOL. VILR, EXH. 443), p. 29.]

Vendors promoted fiber system facilities and demonstra-

tions. [See Harmonic Lightwaves Advertisement (Insert),

Communications Technology, December 1992 (DAE

VOL. VILR, EXH. 444.)]

16. In 1992, a poll of the cable industry showed that

nearly half of the respondents expected that their rebuild/

upgrade plans would result in an increase in the system

bandwidth (and thus in system channel capacity). [See

“Building Blocks,” Cablevision, September 21, 1992

(DAE VOL. VILR. EXH. 445), p. 44.] In 1992, CEO

Thayer Bigelow of Time Warner Cable Programming

anticipated that as many as 90 percent of the roughly 75

percent of the cable industry with 35 to 40 channels

would be upgraded to 550 MHz (78 channels) by 1997.

[See TWS00141149 (DAE VOL. VILR, EXH. 157)

(RESTRICTED).| High cable equipment manufacturer

stock performance in 1992 was partly attributable to in-

creasing fiber-optic upgrades and developments in digital

compression technology. [See “Cable Upgrades Boost

Supplier Fortunes,” Broadcasting, December 14, 1992

(DAE VOL. VILR, EXH. 446), p. 51.]

17. These views of the future of cable channel capac-

ity were not only well known in the industry, they were

communicated to the Congress by credible speakers. For

1125

example, FCC Chairman Sikes testified before Congress

in 1992 that the cable industry was aggressively investing

in fiber and digital technologies. [See S. Hrg. 102-672:

Cable-Instructional TV and S. 1200 Communications

Competitiveness and Infrastructure Modernization Act of

1991 (CR VOL. LK, EXH. 19), at 49).] Tom Gillet

(former vice-president of CableLabs, later consultant to

and spokesman for the cable industry) testified in the

same proceeding stating “On the cable television fiber/

coaxial hybrid there will also be many enhancements.

Capacity is growing to | gigahertz, digital transport is

being added, two-way capabilities are expanding and com.

pression will soon be deployed.” [/bid. at 72] Phil Ver-

veer, Counsel for National Cable Television Association,

presented testimony that all 20 of the largest MSOs had

begun installation of fiber within their systems, that fiber

installed by these companies had increased 400 percent

since 1988. and that cable industry fiber deployment was

predicted to grow at an annual rate of 25 percent over

the subsequent decade. [/bid.] In that testimony, Mr.

Verveer, the cable industry, witness, twice refers to cur-

rent cable systems as having capacity of more than 150

channels. “The existing coaxial cable to every home is

theoretically capable of carrying 160-170 channels of

sandard, 6-MHz NTSC television.” [/bid. at 122.] “By

combining fiber optic trunking and feeder applications

with the coaxial cable currently running from the curb

into the home (and which can carry more than 150 video

channels) cable systems need not rip out and replace

their enitre networks in order to bring consumers the

benefits of fiber.” [/bid. at 136.) In this example,

Mr. Verveer appears to be speaking of the capacity of

the cable itself. His fundamental point is that the capacity

of a cable system can be expanded by installing fiber and

new electronics but reusing the existing cable plant. No

witness contradicted these correct assertions by these wit-

nesses about the current and likely future state of cable

technology. Cable television technology and the imple-

1126

mentation of that technology has progressed, as shown

by my discussion above in paragraphs 4 to 12, along the

lines anticipated in 1992.

18. Further in the future, I expect more fundamental

changes. Traditionally, cable systems were like broad-

casting—the same bundle of signals went to every house-

hold and the TV set (or the set-top converter) picked off

the specific signal a consumer wanted. Another approach

is to dedicate a few channels to each household, and then

route onto those channels the programming requested at

that house. In essence the cable system would become

more like a telephone system or a computer network.

The viewer could dial-up the program he or she wished

to watch. The limitation on the number of program serv-

ices a consumer could choose among would be created

by the number of program services available at the cable

system’s switching point, not by the capacity of the cable

plant to the household. Such a switched architecture

would be quite similar to the telephone network which

lets users dial calls to millions of destinations—although

it permits talking on only one call at a time. The com-

bination of high capacity on the cable, small serving

areas fed by cable, and switching capabilities at the head-

end, yields a network design that can support a virtually

unlimited number of channels. Consequently, the long-

run vision for cable is not a world of 500 or 1.000 chan-

nels, but rather a world where the consumer can pick

from a menu of tens of thousands or millions of program

choices. The limitation on program services will not be

the size of the highway to the home—rather the limitation

will be the supply of programming.

19. The driving forces for most of these improvements

in cable do not raise from inside the cable industry itself.

Rather, the cable industry offers just one more market

for improvements in communications technologies. The

growth in cable capacity comes from the same roots that

drive the growth in the capacity of modern personal com-

1127

puters, of the Internet, and of services such as Direct TV’s

digital home satellite service. Almost everyone has, by

now, seen an advertisement on network television with

“Frank Fontana” touting the merits of compressed digital

television. Any one who has regulary used a computer

for word processing over the last decade is aware of the

vast increases in the capabilities of those systems. The

Internet has moved from being a research tool for the

computer science community to a tool of everday com-

morce. The same technologies—improved electronics and

fiber optics—that lie at the heart of these now familiar

advances will expand the capacity of cable television sys-

tems manyfold.

May 25, 1995

/s/ Charles L. Jackson

CHARLES L. JACKSON

1128

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

AFFIDAVITS IN SUPPORT OF TIME WARNER

ENTERTAINMENT COMPANY, L.P.’S

MOTION FOR SUMMARY JUDGMENT

May 26, 1995

1129

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

AFFIDAVIT OF DAVID KINLEY

DAVID KINLEY, being duly sworn, deposes and says:

1. I am President of Sun Country Cable, Inc. and Sun

West Cable, Inc. (d/b/a Sun Country Cable, “Sun”). I

have been President of the Company since its formation

in 1986.

2. I am also Chairman of the Small Cable Business

Association (“SCBA”). I was elected Chairman of the

SCBA in May, 1993. SCBA is a trade association with

370 member companies serving over 2 million subscrib-

ers. The average member system has about 1,000 sub-

scribers and 30-35 channels. I submit this Affidavit in

support of Plaintiff's Motion for Summary Judgment.

3. An affidavit has previously been submitted for this

litigation on February 12, 1993 by Lynette J. Simpson

on behalf of Sun. I hereby incorporate by reference the

contents thereof.

4. Sun is composed of 16 systems with an average of

611 subscribers per system. Thirteen of our systems have

35 channels. Two systems have 12 channels and one

system has 60 channels. We currently have plans to re-

build one of our 35 channel systems to 550 MHz. We

have no plans to expand our other systems. None of our

systems have unused activated channel-space.

5. Our systems are typical of small independent cable

systems. Unused activated channels are extremely rare.

Large scale expansion plans are uncommon. The cost

of increasing capacity is fixed—it costs the same amount

1130

regardless of the number of subscribers. Since the average

small cable operator has less than 1000 subscribers, the

cost of expanding is prohibitive when examined on a

dollars-per-subscriber level.

6. Since the last affidavit was filed, Sun has suffered

significant injury because of must-carry. The Los Altos

Hills system has been forced to add the following signals

to its line-up: KMTP, KCNS, KFBC, KLXV and KFTY.

Yet another station, KBI-TV, has recently demanded car-

riage pursuant to must-carry. We had never received a

written or verbal request for any of these stations from

any subscriber. In fact, since they have been added they

have generated complaints. The must-carry stations in-

clude a second Asian language station (the system already

carried Asian language programming from San Francisco)

and 2 religious programming networks.

7. The Tuolomne system, which has 31 channels and

approximately 1700 subscribers, has been forced to add

KCSO (a Spanish language channel) and KSCH (a sta-

tion with a religious format) to its system. Neither of

these stations was ever requested by a customer. Because

the system did not have enough unactivated capacity to

add 2 channels, it had to drop KTVU, an independent

broadcaster outside of the ADI, to comply with must-

carry requirements. KTVU was the only station on the

system carrying news from the San Francisco area. Be-

cause many subscribers are people who live in the Bay

area and weekend in Tuolomne, dropping KTVU caused

a great deal of customer dissatisfaction.

8. Our customers have requested numerous program-

ming services, including American Movie Classics, Turner

Classic Movies, the Sci-Fi Channel and the Cartoon Net-

work. Limited channel capacity and budget constraints

make it impossible to meet all such customer requests.

Being forced to add must-carry stations has made it even

more difficult to satisfy any customer demands. Our

1131

budget allows us to add only one or two signals each year.

Because of must-carry, not only is our scarce spectrum

taken up by unwanted channels, but also the costs of

adding the stations wreak havoc on our capital expendi-

ture budget.

9. Adding each station caused us to incur approxi-

mately $2,000 in capital costs to rearrange or activate

the channels. We have had to buy equipment for the

headend to enable the changes to be made. Furthermore,

under FCC rules and frequently under local franchise pro-

visions, we must notify subscribers of changes in signal

carriage and channel position assignments. Additional

costs have been incurred providing subscribers with ex-

planatory materials and revised channel line-up cards. We

would have preferred to spend the capital in more effective

ways, such as on programming or equipment upgrades.

10. Must-carry requirements impose incalculable costs

in loss of business goodwill. Customers blame changes on

the cable system and drop service rather than learn new

channel alignments. This is true particularly when, as in

Tuolomne County, programming is deleted. Such a loss

of goodwill is devastating, particularly for a system with

few subscribers.

11. Most of our revenues are derived from subscriber

fees. Advertising accounts for only a negligible amount

of our revenues. Only 2 of Sun’s systems have advertis-

ing at all. The minimal amount of advertising we do

have is produced on a character generator. Advertising

accounts for a mere .1% of our revenues. Clearly our

programming decisions are unaffected by potential adver-

tising revenue.

12. We do not have the technology to insert ads on

cable programming nor do we have plans to buy equip-

ment that would enable us to do so. Cable advertising

equipment requires expenditures of at least $10,000-

$20,000 per headend. In addition it is very complicated

1132

to install and operate. The logistics of creating, running

and selling ads make advertising a very unappealing in-

vestment for small operators. Even leaving aside the cost

and difficulty of selling ads, advertising would be far

more costly than any revenues it could generate. Digital

insertion technology is not feasible for us.

13. As chairman of the SCBA, I am aware of very

few small operators who have the availability to insert

ads into cable programming. It is my experience that

for the reasons discussed above, most small systems do

not have plans to obtain analog tape equipment to enable

them to do so. Even the very few small operators that

do have analog tape do not heavily rely on advertising

for revenues, Advertising accounts for at most only 1-2%

of their revenues.

14. Small cable operators, including Sun, are increas-

ingly feeling the effects of RCA/Hughes dishes and other

forms of satellite transmission as competition. Must-

carry has limited small cable operators’ ability to offer

the wide variety of cable programming which subscribers

demand. Subscribers have increasingly turned to alterna-

tive sources to receive more cable programming. Com-

petition from MMDS has been of particular concern to

Sun Country.

15. The retransmission consent provisions of the

Cable Act have also been a source of concern for small

cable operators. The small operator has no leverage

against major broadcasters who have elected retransmis-

sion consent. Customer demand requires operators to

carry the major broadcasters. Broadcasters are fully

aware of their leverage so they elect retransmission con-

sent and exploit the weak position of the small operator.

This depletes the systems’ operating budget and elimi-

nates funds that could be used for programming or

expansion.

16. In sum, must-carry has deprived Sun and other

small operators of their channel space without compensa-

1133

tion. It has forced us to incur costs to rearrange line-ups

and add channels to carry stations of dubious quality.

For the most part these costs can scarcely be afforded by

a small operator. This has had a deleterious effect not

only on the financial health of the systems, but also on

their ability to offer attractive line-ups. This makes it

harder to compete against other forms of satellite trans-

mission. Small operators, who themselves are often

Struggling to survive, have been forced to subsidize local

broadcasters without any corresponding benefit to their

own business or their subscribers.

May 25, 1995

/s/ David Kinley

Davip KINLEY

[Jurat Omitted]

1134

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

(Caption Omitted]

TELEVISION

MEMORANDUM OF NATIONAL CABLE

ASSOCIATION, INC. IN SUPPORT OF PLAINTIFFS’

MOTIONS FOR SUMMARY JUDGMENT

1135

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Caption Omitted]

DECLARATION OF GREGORY L. KLEIN

DisTRICT OF COLUMBIA | 8S:

GREGORY L. KLEIN makes this declaration and

states:

1. Since January 1986, I have held the position of

Director of Economic Analysis at the National Cable

Television Association, Inc. (“NCTA”). I submit this

declaration in support of plaintiff National Cable Tele-

vision Association, Inc.'s Motion for Summary Judgment

in Civil Action No. 92-2495.

2. I hold a Masters degree in Engineering Economics

from Indiana State University in Terre Haute, Indiana

and a Masters degree in Economics from Boston College

in Chestnut Hill, Massachusetts. I am responsible for

collecting, tabulating, and analyzing information that

bears on NCTA’s positions before Congress and the Fed-

eral Communications Commission. I have testified as an

expert witness before the Copyright Royalty Tribunal.

I have also submitted numerous affidavits on behalf of

the Association.

3. The information contained in this declaration is

based on personal knowledge as well as on information

found in reports and other professional publications that

are generally relied on by experts in the field of cable

programming and operations.

4. My declaration primarily discusses the following

topics: the constraints on cable channel capacity and the

1136

costs of adding new channels (44 6-12, 41-43); the in-

creases both in cable subscribership and in the number

of broadcast stations over the same period (44 14, 17,

18); and the current and projected estimates for local

advertising revenues for cable systems (44 32-33). In

addition, my declaration demonstrates that the burdens

imposed by the must carry rules on operators and pro-

grammers exceed those imposed under the must carry

rules struck down by the Court of Appeals in the Century

decision (44 19-27), and that these burdens can be ex-

pected to increase due to changes in the Copyright Act

and Federal Communications Commission actions with

respect to ADI modifications (44 28-31). My declaration

also demonstrates the limitations of the data relied upon

by defendants’ experts to demonstrate cable system local

signal carriage (44 34-40). .Finally, my declaration ex-

plains that virtually all broadcast stations that chose re-

transmission consent reached carriage agreements with

cable operators (44 44-45).

5. NCTA is the principal trade association of the

cable television industry in the United States. NCTA

represents owners and operators of cable systems serving

most of the nation’s 61 million cable households, as well

as more than 100 national and regional cable program-

ming networks.

6. Television signals are electromagnetic impulses that

are transmitted to viewers’ television receivers, where they

are translated to produce video images and sound. The

primary difference between broadcast technology and

cable technology is the medium through which these elec-

tromagnetic impulses travel. Broadcast transmissions

travel through the air in various frequencies, with the

sum of all available frequencies being the frequency

“spectrum.” This spectrum is physically limited, and can

bear only a certain number of television signals. Cable

television, by contrast, transmits electromagnetic impulses

to viewers through metal wires such as coaxial cable,

1137

with different signals traveling at different frequencies

inside the cable. Ensefliect: the debie-nete as a colt

contained electromagnetic spectrum; this allows cable tele-

vision operators to transmit signals without regard to the

specific spectrum limitations that govern broadcast tele-

vision. As I explain below, however, the carriage capac-

ity of cable television is limited.

7. The number of programming sources available to

ae television operators has risen sharply as the number

Seas to cable service has increased. In 1976,

were 4 national cable programming networks. Cur-

rently, 128 national and 40 regional cable networks offer

programming and approximately 43 more networks are

planned. Cable Programming not available through

broadcas t television includes satellite-delivered networks

specializing in quality children’s programming, black

aa dee a Programming, artistic programming, science

= nature documentaries, sports, news, and public af-

airs, including coverage of the United States Congress.

8. All cable television systems have a defined cha

capacity. As of October 1, 1994, 86 percent of all US.

systems for which capacity data was available had a

maximum capacity of less than 54 channels. Twenty-two

percent had a capacity of less than 30 channels. I am

aware of less than half a dozen cable systems in the

United States that have channel capacities in excess of

a (equal to the number of national net-

9. As the principal trade association f

or the cable

television industry, we know that available channel ca-

pacity is highly constrained in our industry. Our under-

standing is consistent with the results in the Arthur D.

Little study entitled Availab ;

Cable TV Systems. vailability of Channels in U.S.

10. Upgrading or rebuildin

: ; g cable systems to increase

channel capacity requires large capital investments—

1138

generally in the millions of dollars for any particular

local system. Paul Kagan Associates, Inc. estimates that

the cable television industry spent $1.12 vm Be ~

building cable systems in 1994, at an average

$26,000 per mile. Another $746 million was spent on

upgrading cable systems, at an average cost of $9,400

per mile. These costs are not expected to fall; rather,

Paul Kagan Associates predicts that the average cost of

rebuilding a cable system will increase to $29,000 per

mile by the year 2000, while the average cost of upgrad-

ing a system will rise to $11,600 per mile. Although

emerging technologies such as video compression may

provide new ways of expanding capacity, these tech-

nologies, too, promise to be expensive. Paul Kagan

Associates estimates that delivery of digital converters

(an important component in the deployment of digital

technology) will be delayed until 1996 and the cost per

converter will be around the $600 level.

11. Considering existing channel capacity and the cost

of adding new channels, as well as the continuing devel-

opment of new sources of programming, it Is clear that.

for the foreseeable future, the supply of programming

available to cable television operators will exceed the

carriage capacity of all but a handful of local cable

systems.

12. In the future, emerging technologies such as high

definition television (HDTV) and interactive program-

ming, as well as innovative services like the presentation

of films at staggered starting times on different channels,

will compete with traditional sources of programming for

available channel capacity.

13. In the course of my work at NCTA, I have had

occasion to review most if not all publicly available

research regarding carriage of local broadcast television

signals by cable television operators. The most compre-

hensive study of the incidence of broadcast signal car-

riage was conducted by NCTA and Price Waterhouse

1139

during the summer of 1988. This investigation showed

that the 3,966 responding cable television systems were

carrying 98 percent of all broadcast stations that would

have qualified for a carriage preference under the interim

must-carry rules invalidated in Century Communications

Corp. v. FCC, 835 F.2d 292 (D.C. Cir. 1987). Ninety-

four percent of these systems reported carrying all sta-

tions qualified for must-carry status under the interim

rules, and an additional 3 percent carried enough quali-

fied stations to satisfy their carriage obligations under

the rules struck down in the Century decision.

14. According to the FCC, the number of operational,

full power commercial broadcast television stations in the

United States rose from 915 in July 1985 to 1,147 in

December 1992 to an all-time high of 1,167 in April

1995. The number of operational, non-commercial edu-

cational broadcast television stations in the United States

rose from 299 in July 1985 to 362 in December 1992

to 364 in April 1995, a 22 percent increase. As with

commercial stations, more educational television stations

than ever before were broadcasting in 1995. During this

same time period, there was a dramatic growth in the

number of low power television stations. In July 1985,

the FCC reported 343 operational LPTV stations. By

December 1992, there were 1,310 LPTV stations and

by April 1995, there were 1,623 LPTV stations opera-

tional.

15. Throughout the 1985-1992 period, according to

data provided by Cable Data Corporation (“CDC”),

those cable systems that are required to report their local

signal carriage on average carried over 7 local stations.

Precise estimates for any given period are subject to

change due to the changing nature of the CDC data.

even for historical time periods.

16. Cable television serves about 64 percent of all

U.S. households with television. Competing technologies

(such as MMDS, SMATV, DBS, and TVRO) provide

1140

service to approximately 5 percent of television homes,

while 31 percent of all television households receive only

over-the-air broadcast service. In fact, DBS ~~

broadcast satellite), a service using high-powered _—

lites to distribute programming received on an 18 ~-

dish, already offers significant competition to the ca

industry. Although launched less than two years ago,

analysts have noted that DBS will have approximately

2.2 million subscribers by year end and is —

have over 5 million subscribers by the year 2000. (

Paul Kagan Associates, Inc., Cable TV Investor, May 18,

1994, p. 4.) Indeed at the end of 1994, two of the

major companies involved in DBS (USSB and DirecTV )

reporting adding 2,000 subscribers per day. (See The

Atlanta Journal and Constitution, November 6, 1994.)

17. Public broadcasting stations have claimed a

i tant share of all television viewing oO

—* cad they recorded a 4 share during the 1993/

1994 season, up slightly from a 3 share during the 1985/

1986 scason. Independent stations have experienced an

increase during the same period and currently record a

21 share, up from a 15 share during the 1985/1986

season. The top 3 commercial broadcast networks ex-

perienced a decline in their share of viewing from a 66

share during the 1985/86 season to a 52 share during

the 1993/94 season, but they remain the most-watched

programming on television. Combined, broadcast tele-

vision accounted for more than 70 percent of all tele-

vision viewing during the 1993/94 season.

18. In 1980, 55 percent ee

television actually subscribed and cable penetr

22.6 percent of television households. Today, cable

passes over 95 percent of television households and sixty-

four percent of homes passed by cable currently sub-

scribe.

19. The must carry requirements in the (1992 Cable

Act are significantly broader than the regulations adopted

1141

by the FCC in 1987. In order to assess the effects those

differences might be having on the extent of the impact

of must carry on cable operators and cable programmers,

I conducted the analysis described in paragraphs 21-26

below.

20. The recent Arthur D. Little study of carriage of

must carry stations indicates that, by December 1994,

roughly 30 percent of cable systems added television sta-

tions in compliance with the latest set of must carry

rules. See Declaration of Peter Shapiro, Exhibit 2. Cable

systems required to add stations serve more than 50

percent of the nation’s cable subscribers.

21. I conducted an analysis of the 270 instances of

broadcast television stations identified in the Arthur D.

Little “Carriage of Must-Carry TV Broadcast Stations”

report as being added by cable systems in the Arthur D.

Little sample to comply with the must carry rules. The

purpose of my analysis was to determine the extent to

which broadcast television stations added pursuant to the

most recent set of mandatory carriage requirements would

have “qualified” as must carry stations under the interim

rules adopted by the FCC in 1987 as a result of the Joint

Industry Compromise that included defendants NAB and

INTV and which were struck down by the Court of Ap-

peals for the District of Columbia Circuit in the Century

decision.

22. The Century rules differ greatly from the current

mandatory carriage rules. The Century rules more nar-

rowly defined what constituted a “must carry” station.

Under the Century rules, a commercial television station

could qualify for mandatory carriage only if the cable

system was within a 50 mile zone of the station and the

station satisfied a minimum viewership test of a 2 percent

share and 5 percent CUME (net weekly circulation) in

noncable households in the county in which the cable

system is located (stations in operation for less than one

year were exempt from the viewing test) and the station

1142 es

would not be a distant signal for copyright purposes.

This compares to the current rules that grant stations

must carry rights throughout their Area of Dominant In-

fluence (“ADI”) and impose no viewership test. More-

over, the Century rules limited the number of qualified

commercial and non-commercial must carry stations

which a system was required to carry to 25% of usable

activated channels, in contrast to the current rules’ re-

quirement to devote up to one-third of a system’s channel

capacity to carriage of commercial television stations

(and to add noncommercial stations on top of that).

23. Likewise, the Century rules limited the number of

noncommercial stations that a cable system was required

to carry. Systems with less than 54 activated channels

were only required to carry one local noncommercial

station and systems with at least 54 activated stations

were required to carry two noncommercial stations. By

comparison, the current rules do not limit the number

of local noncommercial stations which systems are re-

quired to carry if they have in excess of 36 channels.

24. Based on my analysis, I have determined that only

37 instances, or 14%, in the ADL sample involved sta-

tions that would have been required to be added as must

carry signals if the Congress had reinstated the Century

rules, rather than using the expanded set of “must carry”

requirements.

25. The remaining 232 instances, or 86%, involve

situations where, based on available data, the operators

would not have had to add stations under the Century

rules. Forty-eight of these 232 instances involve commer-

cial stations that fail to meet the mileage criteria of the

Century rules. The addition of the station in 18 other

instances would not have been required because it would

have forced carriage to exceed the percentage of activated

channels which cable systems were required to devote to

carriage of qualified must carry stations. An additional

43 instances involve the carriage of non-commercial sta-

1143

tions added in excess of the maximum number of non-

commercial stations required under the Century rules.

Moreover, 116 instances involved stations which, based

on age on viewing data from November 1994

appear to fail to meet the minimum viewership

cluded in the Century rules, The November 19a tame

reflects viewing nearly 18 months after the effective date

of the must carry rules. See Attachment A for a descrip-

tion of methodology used for this analysis. The remaining

instances involve low power stations and stations which

were distant” signals for copyright purposes, neither of

which had carriage rights under the Century rules. In

one instance, the data was questionable and so I ex-

cluded it from my analysis.

' 26. In sum, my analysis indicates that the vast ma-

jority of the new burden of carrying additional Nonettonnt

Stations imposed by the must carry statute on the repre-

sentative sample of cable operators in the ADL sample

was caused by the differences between the statute and the

Century rules.

27. These results are not surprising. The use of a

eo ADI to determine whether the station is a “local”

station for must carry purposes is inherently problematic.

Many A

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