Electronically Filed Docket: 14-CRB-0010-CD (2010-2013) Filing Date: 09/15/2017 04:52:09 PM EDT TABLE of CONTENTS

Electronically Filed Docket: 14-CRB-0010-CD (2010-2013) Filing Date: 09/15/2017 04:52:09 PM EDT TABLE OF CONTENTS

VOLUME I: Written Rebuttal Testimony of the Joint Sports Claimants TAB

Written Rebuttal Statement...... MEMORANDUM James M. Trautman...... 1 Dr. Mark A. Israel...... 2 Dr. Nancy A. Mathiowetz...... 3

Dr. William E. Wecker and R. Garrison Harvey ...... 4 William E. Wecker Associates, Inc. Analysis of Written Direct Testimony of Jeffrey S. Gray, Ph.D...... 5 Susan Nathan ...... 6 Allan Singer ...... 7 Daniel M. Hartman ...... 8 Jonda K. Martin ...... 9 VOLUME II: Exhibits of the Joint Sports Claimants TAB

Testimony of Stanley Besen Docket No. 94-3 CARP CD 1990-1992 (August 15, 1995)...... 1

Testimony of Edwin Desser Proceeding, Docket No. 2007-3 CARP CD 2004-2005 (December 11, 2009) ...... 2

Testimony of Richard Ducey Docket No. 94-3 CARP CD 1990-1992 (August 17, 1995)...... 3

Testimony of Richard Ducey Docket No. 94-3 CARP CD 1990-1992 (February 13, 1996)...... 4

Testimony of Richard Ducey Docket No. 2001-8 CARP CD 1998-1999 (December 2, 2002)...... 5

Testimony of Richard Ducey Docket No. 2001-8 CARP CD 1998-1999 (June 20, 2003) ...... 6

Testimony of William Fairley Docket No. 94-3 CARP CD 1990-1992 (August 16, 1995)...... 7

Testimony of William Fairley Docket No. 94-3 CARP CD 1990-1992 (February 13, 1996)...... 8

Testimony of John Fuller Docket No. 94-3 CARP CD 1990-1992 (August 18, 1995)...... 9

i Testimony of John Fuller Docket No. 94-3 CARP CD 1990-1992 (February 15, 1996)...... 10

Testimony of John Fuller Docket No. 2001-8 CARP CD 1998-1999 (November 26, 2002)...... 11

Testimony of John Fuller Docket No. 2001-8 CARP CD 1998-1999 (June 19, 2003) ...... 12

Testimony of Michael Salinger Docket No. 94-3 CARP CD 1990-1992 (August 16, 1995)...... 13

Testimony of Michael Salinger Docket No. 94-3 CARP CD 1990-1992 (February 13, 1996)...... 14

Testimony of Marc Schacher Proceeding, Docket No. 2007-3 CARP CD 2004-2005 (December 11, 2009) ...... 15

Testimony of Steven Wildman Docket No. 94-3 CARP CD 1990-1992 (August 15, 1995)...... 16

VOLUME III: Transcripts of Oral Testimony TAB

Testimony of Stanley Besen Docket No. 94-3 CARP CD 1990-1992 (January 5 and 24, 1996) ...... 1

Testimony of Edwin Desser Proceeding, Docket No. 2007-3 CARP CD 2004-2005 (February 1-2, 2010)...... 2

Testimony of Richard Ducey Docket No. 94-3 CARP CD 1990-1992 (December 14-15, 1995)...... 3

Testimony of Richard Ducey Docket No. 94-3 CARP CD 1990-1992 (March 18, 1996)...... 4

Testimony of Richard Ducey Docket No. 2001-8 CARP CD 1998-1999 (May 6-7, 2003)...... 5

Testimony of Richard Ducey Docket No. 2001-8 CARP CD 1998-1999 (July 10, 2003)...... 6

Testimony of William Fairley Docket No. 94-3 CARP CD 1990-1992 (January 19-20, 1996)...... 7

Testimony of William Fairley Docket No. 94-3 CARP CD 1990-1992 (March 7, 1996)...... 8

ii Testimony of John Fuller Docket No. 94-3 CARP CD 1990-1992 (January 18, 1996)...... 9

Testimony of John Fuller Docket No. 2001-8 CARP CD 1998-1999 (May 14, 2003) ...... 10

Testimony of John Fuller Docket No. 2001-8 CARP CD 1998-1999 (July 16, 2003)...... 11

Testimony of Michael Salinger Docket No. 94-3 CARP CD 1990-1992 (January 25, 1996)...... 12

Testimony of Michael Salinger Docket No. 94-3 CARP CD 1990-1992 (March 5, 1996)...... 13

Testimony of Steven Wildman Docket No. 94-3 CARP CD 1990-1992 (December 19, 1995)...... 14

iii JSC Exhibit No. 1 TESTIMONY OF STANLEY M. BESEN

August 15, 1995

JSC WRITTEN REBUTTAL STATEMENT EXECUTIVE SUMMARY

This testimony reports results on the value of distant signal programs to cable operators based on a study of cable operator behavior. The statistical analysis undertaken provides estimates of the values of various types of programs carried on distant signals and, in turn, of the shares of copyright royalty payments that should be assigned to each group of copyright claimants. Lack of data precluded estimation of the share for the public broadcasting claimants, so that the shares for the other claimants are of the available royalty pool excluding payments to public broadcasters.

For the different approaches used in the study, the share for movies and series claimants ranges between 82 percent and 92 percent of royalties, and that for sports claimants ranges between 5 percent and 11 percent. For local broadcasting and devotional claimants, the results are less certain, probably because the programming of these claimants plays a much smaller role in the cable operators' decisions regarding distant signal carriage. Although it is quite possible that the "true" shares for these categories may be lower, we have calculated share ranges between 1 percent and 9 percent for local broadcast programming claimants and between 1.5 percent and 2 percent for devotional programming claimants under assumptions that are very favorable to these

claimants.

Because the estimated shares for movies and series claimants are confined

within a relatively narrow range despite the use of a wide variety of model

.~,

JSC WRITTEN REBUTTAL STATEMENT specifications and data, and because they are based on what cable operators do rather than on what they ~. they should be accorded considerable weight by the

Panel.

JSC WRITTEN REBUTTAL STATEMENT TESTIMONY OF STANLEY M. BESEN

Biographical Information

I received my bachelor's degree in Economics from the City College of New

York (1958) and both master's (1960) and doctoral (1964) degrees in Economics from Yale University. Since 1992, I have been a Vice President with Charles River

Associates, Washington, D.C.

Prior to my employment at Charles River Associates, I was a Senior

Economist with the RAND Corporation (1980-1992). I was previously a member of the Department of Economics at Rice University (1965-1980) where I held the

Allyn R. and Gladys M. Cline Professorship in Economics and Finance. I have served as Visiting Professor of Law and Economics at the Georgetown University

Law Center (1990-1991); the Visiting Henley Professor of Law and Business at

Columbia University (1988-1989); a member of the Office of Technology

Assessment Advisory Panel on Intellectual Property Rights in an Age of

Electronics and Information (1984-1985); a member of the Regional

Telecommunications Planning Advisory Committee of the City of Cincinnati (1985); a Co-Director of the Network Inquiry Special Staff at the Federal Communications

Commission (1978-1980); a member of the Task Force on National

Telecommunications Policy Making of the Aspen Institute Program on

Communications and Society (1977); a Brookings Economic Policy Fellow at the

Office of Telecommunications Policy, Executive Office of the President (1971-

JSC WRITTEN REBUTTAL STATEMENT 1972); an Economist at the Institute for Defense Analyses (1963-1965); and an

Acting Assistant Professor of Economics at the University of California, Santa

Barbara (1962-1963).

I have appeared as a witness before several United States House of

Representatives and Senate committees and subcommittees in hearings regarding the telecommunications industry, cable television, and intellectual property. I have also presented testimony for program suppliers on cable television issues to the

For approximately the past 25 years, my research has focused primarily on the telecommunications industry, both its economics and its regulation. This research has included extensive studies of cable television, and in particular analyses of entry policy, copyright, ownership, and access.

I have written the following published articles that analyze cable television:

"Rate Regulation, Effective Competition, and the Cable Act of 1992," Hastings

Communications and Entertainment Law Journal (1994, co-author); Regulation of

Media Ownership by the Federal Communications Commission (The Rand

Corporation, 1984, co-author); An Economic Analysis of Mandatory Leased

Channel Access for Cable Television (The Rand Corporation, 1982, co-author);

''The Deregulation of Cable Television," Law and Contemporary Problems (1981, co-author); "Copyright Liability for Cable Television: Compulsory Licensing and the Coase Theorem," Journal of Law and Economics (1978, co-author); "Economic

Policy Rese~rch on Cable Television: Assessing the Costs and Benefits of Cable

JSC WRITTEN REBUTTAL STATEMENT Deregulation," prepared for the Office of Telecommunications Policy, Executive

Office of the President (1976) and reprinted in P.W. MacAvoy (editor),

Deregulation of Cable Television, American Enterprise Institute (1977, co-author); and "The Economics of the Cable Television 'Consensus'," Journal of Law and

Economics (1974). A copy of my resume is appended as Attachment 1 to this testimony.

Introduction

This testimony reports results on the value to cable operators of the types of programs on the distant signals they carry. The method used to obtain these results differs from previous studies that have relied exclusively on operator statements about these values.1 Because such statements can provide highly misleading estimates of the true valuations, the analysis reported here is based on the actual behavior of cable operators. Moreover, as described in detail below, this study controls for other factors that may influence the behavior of operators.

Finally, in this study, in contrast to the studies based on cable operator statements, programs are accurately placed in the categories that were used by the Copyright

Royalty Tribunal in its distribution proceedings.2

1 See, e.g., Bortz, JSC Exhibit 1, 1989. Our criticisms of the Bortz study are not limited to its exclusive reliance on operator statements. For detailed criticisms see Besen testimony, 1989. 2 The operators who were interviewed in the Bortz survey were almost certainly unaware of the precise composition of the program categories for royalty distribution as defined by the Tribunal. The 1990 and 1991 surveys did not attempt to provide this information to the respondents and the 1992 survey included only a very minimal description. As a result, operators are likely to have

JSC WRITTEN REBUTTAL STATEMENT The study finds that for the programming categories for which data were available, between 82 percent and 92 percent of royalties should go to movies and series claimants, and between 5 percent and 11 percent should go to sports claimants. The study also calculates, using very favorable assumptions, that between 1 percent and 9 percent of royalties could go to local broadcast programming claimants, and between 1.5 percent and 2 percent could go to devotional programming claimants, although it is quite possible that the "true" shares for these latter two categories are zero. Lack of data precluded estimation of the share for the public broadcasting claimants so that the shares for the other claimants are of the available royalty pool excluding payments to public broadcasters.

Basic Premises

The first premise of this study is that obtaining accurate measures of the value to cable operators of the programs on the distant signals they carry requires an analysis of actual operator behavior. This means that one must measure what operators are willing to pay for programs by observing what they actually choose to pay for them. Previous attempts to measure value by asking operators

misclassified some programs in responding to the surveys. For example, although copyright owners of programs like professional wrestling and stock car racing are among the movies and series claimants, cable operators are likely to have identified these as sports programs.

JSC WRITTEN REBUTTAL STATEMENT hypothetical questions about how they would spend a given amount of money on programming suffer from numerous technical shortcomings.

Among other difficulties, these attempts suffer from the fundamental problem that what people say they will do in given circumstances may be a poor indicator of what they actually will do. Thus, one recent review noted that:

... purchases in the marketplace require the removal of real dollars from one's wallet, whereas responses to a survey do not. Because the survey respcmses do not require the same level of consideration and financial · commitment that real purchases do, the responses may be wafted this way or that by all sorts of conscious or unconscious influences: a wish to get the interview over quickly, a wish to appear reasonable, polite, or knowledgeable in the eyes of the interviewer, and so on.3

The results of surveys that are based solely on cable operator statements cannot be taken at face value. Moreover, no attempt has been made to "calibrate" the responses to these surveys using actual marketplace behavior. The results reported here, which are based on an analysis of actual operator behavior, are intended to overcome these shortcomings.

3 Michael Kemp and Christopher Maxwell, "Exploring A Budget Context for Contingent Valuation Estimates," in Jerry Hausman {editor), Contingent Valuation: A Critical Assessment (1993), p. 219.-These authors also note {p. 221) that ... even for marketplace commodities as familiar to respondents as automobiles and refrigerators, projecting even near-term demand on the basis of purchase intentions requires that we do not accept responses at face value. Rather, the· responses are usually analyzed using empirically based techniques and algorithms that calibrate the survey responses by reference to marketplace experience.

JSC WRITTEN REBUTTAL STATEMENT The second premise of this study is that the value to cable operators of the various kinds of distant signal programming is reflected in the royalty payments that operators must make for that programming. Those payments, in turn, will reflect the additional revenues earned by the operators from carrying an additional program of each type. Thus, for example, the value to the cable operator of another hour of sports programming would be the additional revenue earned by the operator from carrying that additional program, that is, the marginal value of the programming.4 Indeed, in a market unencumbered by the compulsory license, the market-clearing price for an hour of programming in a particular category would be equal to the additional revenues generated by an additional hour of such programming.

Although cable operators do not pay copyright owners directly for the programs on distant signals, the compulsory license fees they pay do depend on the number of signals they carry. Operators will add distant signals only if the increase in revenue that is attributable to the programs on those signals is at least as great as the additional royalty payments the operators must make to carry the signals. A profit-maximizing cable operator will, therefore, continue to add distant signals to its channel lineup until the additional net revenues generated by each distant signal are just equal to the additional royalty payments.5 Changes in

4 See Besen 1989 testimony. It should be understood that subsequent references to the value of an additional signal or program are to marginal, not total, value. 5 As long as the revenues generated by the programming on an additional distant signal exceed the required inqrease in royalty payments, the operator should add the distant signal to the lineup;

JSC WRITTEN REBUTTAL STATEMENT royalty payments will thus accurately reflect the additional revenues earned as a result of the carriage of an additional distant signal and the programs it contains.

Operators are willing to make additional royalty payments to the extent that the carriage of additional signals increases: (1) the rate they can charge for the service on which the signals are carried; (2) the number of subscribers to that service; (3) net revenues from other services that are taken by viewers who are attracted to the cable system by the additional signals;6 and/or (4) advertising revenues.7 Similarly, operators will delete distant signals if the associated reduction in royalty payments is at least as great as the reduction in revenues from these sources. Thus, the decision of an operator to incur additional royalty payments by carrying additional signals reflects the value of the programs on those signals to the operator.

adding such a signal will increase revenues more than costs, thereby increasing profits. If operators could air only some of the programming on a distant signal and incur proportionately smaller royalty costs, they would continue adding distant signals until the condition in the text were satisfied. However, because operators cannot "cherry pick" among distant signal programs in this way, they will continue adding distant signals as long as the increase in revenues is greater than or equal to the increase in royalty payments. 6 Some viewers who become basic cable subscribers when the number and/or identity of distant signals changes will also choose to subscribe to expanded basic and premium services. The per subscriber fees that a cable operator pays for the carriage of other services may also be affected by the number of basic subscribers it serves. The additional revenues from these services, net of any additional costs, will affect the willingness of cable operators to pay for programs on distant signals. 7 Some viewers who are attracted to the basic service by improvements in the complement of distant signals will watch other services on which the cable operator can sell advertising spots. The additional advertising revenues that are generated will affect the willingness of cable operators to pay for the programs that appear on the distant signals.

JSC WRITTEN REBUTTAL STATEMENT When a system adds or drops a distant signal, we can in fact observe changes both in royalty payments and in the mix of distant signal programming that is carried. The statistical problem is to ascribe changes in royalty payments, and therefore additional operator revenues from all sources, to the changes in the kinds of distant signal programming carried by the cable system.

Because not all systems add or delete the same distant signals, because different distant signals contain different mixes of programs, and because the change in royalty payments when a distant signal is added will not be the same for all systems, we can statistically infer the proportions of the increase in royalty payments that are due to the changes in the amounts of programming in each program category. Some systems will choose, say, to add more "expensive" distant signals with programs that generate greater additional revenues than other systems that add less "expensive" distant signals. It is these differences that permit us statistically to allocate the changes in royalty payments among the various programming categories. 8

Instead of analyzing the changes in royalty payments, we might have attempted to analyze the effects of the various types of programming on distant signals on the ~ of royalty payments. Such an analysis would have required us to control foe a large number of other factors that influence these payments,

8 Because changes in royalty payments will depend on the basic revenues of the system, the addition of any given distant signal is likely to result in much larger increases in royalty payments for larger than for smaller systems. To control for these differences, we analyze the percentage changes in royalty payments. We provide a detailed description of our methodology below.

JSC WRITTEN REBUTTAL STATEMENT because these payments depend on the basic revenues of the system. These factors include the number and types of local over-the-air signals and the economic and demographic characteristics of the markets in which cable systems operate, as well as other services offered by cable systems to their subscribers.

To reduce the need for, and thus the difficulty in, controlling for these

"other'' factors, we determined instead to analyze changes in royalty payments between adjacent accounting periods. 9 That is, we attempt to explain how the amount that a cable operator pays for the carriage of distant signals changes when there are changes in the programming on those signals. The primary benefit of this approach is that we do not have to control for the effects of many factors that may affect royalty payments because they are not likely to change significantly between the accounting periods we analyze.10

In our analysis, we examined only those changes in royalty payments that occurred when a cable system added or deleted a distant signal, or replaced one distant signal with another. We could, instead, have assessed changes in royalty payments regardless of whether there were any changes in the distant signal complement because changes in the programming mix can occur even if there is no change in the identity of distant signals that are carried. However, the effects

9 The accounting periods are the semiannual periods for which cable operators make their compulsory license royalty payments. 10 We did, however, analyze whether our results are likely to have been affected by changes in the carriage of other program services by cable systems. That analysis, which concludes that our basic results are largely unaffected, is reported below.

JSC WRITTEN REBUTTAL STATEMENT we wish to identify are likely to be too subtle to detect when the complement of signals carried by a cable operator does not change between accounting periods.

Specifically, these programming changes are likely to be small between accounting periods, so that their influence on royalty payments will also be small.

As a result, it is likely to be difficult to isolate these effects from the surrounding

"noise."

On the other hand, much larger changes in program composition occur when a cable operator adds or deletes a distant signal, or replaces one distant signal with another. In these cases, there are likely to be larger changes in the number of programs in each category than where the complement of signals being carried does not change, so that the effects we seek to measure will be easier to detect. Moreover, the addition or deletion of those programming categories that are most valuable to cable operators will be the easiest to detect, and the effect of changes in those categories that play only a small role in cable operators' carriage decisions will be most difficult to detect.

In sum, what we observe in the real-world choices of cable operators are changes in royalty payments and changes in the distant signal programming mix.

Because the changes in royalty payments reflect how much the signals that are added or deleted are valued by the operator, we are able to assign that value to the various programming categories that are used in the copyright royalty allocation process.

JSC WRITTEN REBUTTAL STATEMENT Statistical Approach

Our basic statistical approach is to relate changes in the program composition of the complement of distant signals carried by a cable system to the changes in royalty payments made by the operator when the system adds, deletes, or swaps distant signals. In this way, we can measure the value of different types of programs to an operator by observing its actual behavior and thus infer the appropriate share of cable compulsory license royalties to be allocated to each copyright owner group.11

When a cable operator changes the complement of distant signals it carries, this generally results in a change in its royalty payments. This change occurs both because basic subscriber revenues may have changed and because, under the compulsory license, royalties depend on the number of distant signals that are carried.

Many outcomes are possible. Basic subscriber revenues may not change, ('. '··· but royalty payments may increase as distant signals are added. Basic subscriber revenues may increase with no accompanying increase in the royalty rate if one

11 This approach is similar to a "hedonic" analysis, a technique used frequently by economists, that relates the prices of different goods and services to the "attributes" of these goods or services. For discussions of this approach see Sherwin Rosen, "Hedonic Prices and Implicit Markets," Journal of Political Economy (January/February 1974), pp. 34-55; and Jack Triplett, "The Economic Interpretation of Hedonic Methods," Survey of Current Business (January 1986), pp. 36-40.

JSC WRITTEN REBUTTAL STATEMENT distant signal is replaced by another.12 Or, finally, both basic subscriber revenues and the royalty rate may be affected when there is a change in the complement of distant signals carried by a cable system.

If there is no change in basic subscriber revenues, the additional royalty fees 13 must at least be matched by additional net revenues from other sources, e.g., advertising revenues, revenues from other tiers, etc.14 If basic revenues increase, any increase in royalty payments must be le~s than or equal to the increase in basic subscriber revenues plus any increase in net revenues from other sources. In all cases, the additional royalty payments must be justified by the increase in net revenues from all sources.

What triggers this increase in net revenues is, of course, the carriage of an additional distant signal, or a "swap" of one distant signal for another. These changes, in turn, change the mix of programming on distant signals that a cable operator offers to its subscribers. Thus, depending on which signals are added, dropped, or swapped, the mix of movies and series, sports, devotional, local, and public broadcasting programs will change.15 An increase in the number of distant signals that are carried will occur only if the programs on the additional signals

12 As noted above, the increase in basic subscriber revenues may reflect an increase in the number of subscribers, an increase in basic service rates, or both. 13 We discuss a change that increases royalty payments, but we could, as well, have considered a - change that reduced those payments. 14 Recall that any changes in the fees paid to carry other program services that result from a change in basic subscriptions are included in this calculation. 15 Recall that the empirical analysis does not take_ public broadcasting programs into account.

JSC WRITTEN REBUTTAL STATEMENT generate additional revenues that more than offset the associated increase in royalty payments, i.e., only if their value is greater than their additional cost.

Cable operators are willing to make large additional royalty payments only if the value to them of the programs on the additional distant signals is large. On the other hand, cable operators are willing to add distant signals with programs of relatively low value only if the associated increase in royalty payments is small.

Thus, we would expect larger royalty payment increases to be associated with increases in the carriage of distant signals that contain especially highly-valued programs.16 By relating statistically the changes in programming that result from changes in distant signal carriage to changes in royalty payments, we are able to measure the value to the cable operator of that programming.

Consider a hypothetical cable operator that makes royalty payments, R0, in period zero, to. During that period, the operator carries distant signals that together

17 provide M0 hours of movies and S0 hours of sports programs. Now suppose that the cable operator carries a different complement of distant signals in the next period, t1, and that, as a result, program hours change to M1 and S11 respectively.

The percentage change between the two periods in the royalty payments made by the operator, (R1 - R0)/R0, is called R'. We call the percentage change in

16 Again, the value of programs to an operator depends on the associated increases in revenues from all sources that those programs generate. 17 We assume that there are two types of programs on the distant signals for notational simplicity. The complete analysis considers local, movies and series, devotional, and sports programs. Below, we consider whether hours alone should be the sole measure of programming inputs.

JSC WRITTEN REBUTTAL STATEMENT the number of hours of programs in the movie and sports categories between these periods S' and M', respectively. 18 The basic equation we estimate is:

R' = aM'+ bS'. 19

Each observation used to estimate this equation is an instance in which a cable operator has either dropped, added, or swapped distant signals. The dependent variable measures the percentage change in royalty payments made by the operator between the period prior to the change in distant signals, to, and the period in which the change occurred, t1• The explanatory variables are th~ percentage changes in the number of hours of movies and sports programming, respectively, on all distant signals that result from the addition, deletion, or swap.20

It is that change in the programming mix that is associated with the change in royalty payments.

As an example, suppose that in ta. the cable operator carried 150 hours of movies and 50 hours of sports on distant signals. If it added a distant signal that resulted in the carriage of 240 hours of movies and 60 hours of sports in t1, M' =

(240-150)/150, or .60, and S' = (60-50)/50, or .20.

18 These percentage changes are calculated in the same manner as is the percentage change in royalties. The use. of percentage changes permits us to control for differences in the size of systems. 19 This is equivalent to treating the logarithm of royalties as a function of the logarithm of program hours. 20 As we discuss below, in estimating our basic equation we weighted these hours by a measure of viewing to account for "quality" differences in the programming carried by any particular distant signal as well as differences in viewing levels across dayparts.

JSC WRITTEN REBUTTAL STATEMENT By estimating statistically the coefficients of each of the explanatory variables in these equations, we can determine the effect on the royalty payment of a given percentage change in hours in each of the program categories, holding constant the percentage change in the number of hours in the other category. The coefficient of M' ("a" in the above equation) measures the percentage change in royalty payments that accompanies a 1 percent change in the number of hours of movies on the distant signals carried by the system, holding constant the number of hours of sports programs. The coefficient of S' ("b" in the above equation) measures the same effect for sports programs.

Since the willingness to make a larger royalty payment reflects the value of the programs on the additional distant signal, the estimated coefficients permit us to measure the value to the operator of the two types of programs and, in turn, to estimate the appropriate shares of the compulsory license payments to be assigned to each.21 Since the entire change in royalty payments must be ascribed to one or another of the programming categories, our estimated shares should sum to one. Otherwise, the changes in the programming either will not explain all of the change in royalties, or will suggest higher (or lower) royalty payments than

21 The empirical analysis is constructed in a such a way that "a" and "b" represent the shares of total royalties for each program category (i.e., the underlying royalty equation is log linear) for each system in each time period. As described below, we tested the sensitivity of this assumption by ascertaining whether the shares varied over time or by system size and found no such sensitivity.

JSC WRITTEN REBUTTAL STATEMENT those that are actually paid.22 In fact, our approach results in estimated coefficients that do not sum precisely to one, so we have adjusted the estimated coefficients to reflect this condition. This is preferable to constraining the sum of the shares to one in the estimation process itself. However, we also tested whether the estimated sum of the shares is significantly different from one, and could reject that hypothesis in every case but one.

Although the basic statistical approach we have taken can be described simply, its implementation was far from simple. We dealt with six major issues:

(1) the period of analysis; (2) identification of distant signals; (3) resolution of data problems that might be associated with any particular observation; (4) measurement of program "inputs"; (5) choice of functional form; and (6) treatment of additional variables. The first four of these issues are discussed in this section.

We have already addressed the choice of functional form by our decision to analyze percentage changes in, rather than levels of, royalty payments. Below, we describe how we considered the possible effect on our estimates of contemporaneous changes in the carriage of other program services. The remaining issues are discussed next.

22 A similar point is made by Roseanne Cole rul, "Quality-Adjusted Price Indexes for Computer Processors and Selected Peripheral Equipment," Survey of Current Business ( January 1986), p. 47.

JSC WRITTEN REBUTTAL STATEMENT The Period of Analysis

As already discussed, we confined our analysis to situations in which a cable operator either added or deleted a distant signal between two accounting periods, including cases in which an operator deleted one signal and replaced it with another. To assure that we had a reasonably large sample of observations, we began our analysis in accounting period 1988-11, the second half of 1988.

Thus, the first changes in the complement of distant signals we examined were those that occurred between 1988-1 and 1988-11. The final changes were those that occurred between 1992-1 and 1992-11. Although we could have gone back somewhat further in time, we were concerned that changes in structure might have rendered earlier observations unrepresentative of later ones. Most importantly, cable rate deregulation was largely completed by the beginning of the period we analyzed and had not yet been reimposed by the end of the period.23

The initial dataset was obtained from Cable Data Corporation. It contained information on any system that had changed its carriage of distant signals between

1987 and 1992 and that was a Form 3 system at any time during this period. It also contained information indicating whether the signal was classified as distant or local for that system during a particular accounting period. Finally, the dataset

23 We should note here that we did not assume that the underlying equation remained unchanged within the period of analysis. Below we report the results of testing the homogeneity of our model throughout the period of analysis.

JSC WRITTEN REBUTTAL STATEMENT provided information about system receipts and royalty payments for each accounting period.

Identification of Distant Signals

The analysis we conducted requires information on whether the complement of distant signals carried by a cable system changed between accounting periods. For many systems, these data can be obtained straightforwardly from reports submitted to the Copyright Office and reported to us by Cable Data Corporation. Thus, if a distant signal appears in the report in one period and is absent in the next, it represents a change between the two periods in the complement of distant signals carried by a cable system. 24 However, the data contain some instances in which a signal is present in consecutive periods but is classified as a local signal in one period and a distant signal in the next, or vice versa. Such observations, in which the only change in reported distant signals

represented a change in reporting status, were not considered in our analysis.25

There were, however, instances in which a distant signal was added or

deleted by a system for which another signal had changed classification during the

accounting period. The question here is how to treat the reclassified signal for the

24 A signal is considered "added" in the first period in which the signal appears. A signal is considered "dropped" in the first period in which it is not carried. Because reports are made semi annually, we cannot determine at what point within a reporting period a change occurred. 25 Other observations were omitted because the programming data on the distant signals that were added or deleted were not available.

JSC WRITTEN REBUTTAL STATEMENT purpose of calculating the percentage changes in programming in various categories. Should, for example, a signal that has been treated as distant in the past be treated as local if it is so classified in the present? We concluded that, for this purpose, we should treat these signals as distant in all periods because their programming affects the additional value of other distant signals that are added or

26 27 deleted. •

Next, we matched the resulting observations with available data on the programming on these signals.28 Program data are available only for signals with significant viewing in cable households.29 After deleting those observations for which complete programming data were unavailable and for which any percentage change calculation was not possible (because of division by zero), we had 423 remaining observations.

26 If a system dropped two distant signals in the same accounting period, this represents a single change. Some observations were deleted prior to this point because of obvious lapses in data collection; e.g., a system reported the carriage of no signals during a period although it reported the carriage of signals both before and after that period, or because the system had started or ceased operation. We also deleted observations for Guam, Puerto Rico, the Virgin Islands, and U.S. territories. 27 Excluding those observations for which a carried broadcast signal changed classification from distant to local (or vice-versa) yields results similar to those reported for our "basic" equation below. 28 These data were obtained from the Household Viewing Hour Analysis, conducted by the AC. Nielsen Company and Cable Data Corporation and supplied to us by the Motion Picture Association of America (MPAA). The data were obtained from three months of station behavior in each accounting period. In those cases where station programming information was obtained for only one or two months of the six-month reporting period, those data were "blown up" to obtain estimates of program hours comparable to those for stations with three months of data. 29 Stations were included in the dataset only if their viewing in distant cable households exceeded some minimum level,- between 80,000 and 100,000 households depending on the year. As a result, all signals with significant cable carriage are included in our analysis.

JSC WRITTEN REBUTTAL STATEMENT Resolving Possible Data Problems

Three issues raised questions about the appropriateness of some of the observations. First, some systems changed form status at the time of a change in distant signal carriage; as a result, the copyright royalty schedule for the cable operator shifted, a shift that could have affected the operator's willingness to add or drop distant signals and that might require an adjustment period longer than an accounting period. To ensure that such changes did not "contaminate" our results, any observations that coincided with a change in form status were excluded from the sample. This resulted in the deletion of 23 additional observations.

Second, the dataset contained a large number of observations for which the

change in basic rates during the accounting periods in which a signal was added

or dropped was very large. Such a change could be the result of the addition (or

deletion) of cable programming services at the same time as the distant signal

change, or it could be the result of retiering at the same time as the distant signal

change. To insure against the possibility that the effects of these changes on

royalty payments would be inappropriately ascribed in the statistical analysis to a

change in distant signal programming, we deleted all observations for which the

basic rate changed by more than $1 per month (December 1993 dollars) at the

time of a change in distant signal carriage. This resulted in the deletion of an

additional 144 observations.

JSC WRITTEN REBUTTAL STATEMENT Finally, a number of observations contained data for basic rates and subscribers that appeared inconsistent with the reported gross receipts data. That is, there were a number of instances in which the basic monthly rate multiplied by the number of subscribers, multiplied by six months yielded estimated gross receipts that were substantially different from the figure provided by the operator.

While it is possible that the basic rate during the accounting period changed before the end of the accounting period, some of the differences were substantial enough to raise doubts about the accuracy of the data. As a result, we deleted an additional 48 observations for which the difference between the calculated gross receipts and the figure provided by the operator was greater than 20 percent

(which we understand is consistent with the criteria used by MPM when assessing the accuracy of reported gross receipts).

The final "clean" dataset consists of 208 observations, for 171 unique cable systems. 30

Measurement of Program "Inputs"

For each observation in which there was a change in the complement of distant signals, we obtained data on the change in the total number of hours for each program category carried by the cable system.31 We adjusted these data to

30 Of these 208 observations, 178 represent distant signal changes by Form 3 systems and 30 represent distant signal changes by Form 2 systems. 31 Actually, the data are reported in quarter-hours, but since we employ percentage changes the difference is immaterial.

JSC WRITTEN REBUTTAL STATEMENT reflect differences in viewing of the programs in particular categories.32 To carry out this adjustment, we weighted the hourly programming data by the viewing hours in cable households for the particular program category on a distant signal divided by the total viewing hours in cable households of that signal. This adjustment permits us to take into account differences in program "quality" - to the extent that viewership is correlated with quality - as well as differences in viewing levels across dayparts. 33

When weighted hours are used in the analysis, a program category that attracts a disproportionately large amount of viewing will be specified as containing a larger proportion of programming "inputs" than its proportion of program hours.

Thus, more popular programming, or programming aired during prime time, is accorded a higher weight than less popular programming or programming aired in the early morning hours. An analysis accounting for "quality" differences across

programming categories within a distant signal is conceptually superior to one that

weights each hour of programming identically.

The effect of this quality adjustment can be quite dramatic. For example, in

1991-1, one of our observations (system ALD200) carried 13,440 quarter-hours of

distant signal programming, 730 of which consisted of sports programming. After

32 The viewing data are from the Household Viewing Hour Analysis for each year. 33 For an early example of the use of "quality" adjustments for inputs, see Zvi Griliches, "Estimates of the Aggregate Agricultural Production Function from Cross-Sectional Data," Journal of Farm Economics, XLV (May 1963), pp. 419-428.

JSC WRITTEN REBUTTAL STATEMENT adjusting the "raw" hours for viewership, we assigned 1,738 of the 13,440 quarter hours to sports. More generally, the viewer-weighted hours of distant signal sports programming are typically more than double the unweighted hours of sports programming. The gains to sports programming from weighting come at the expense of the other three programming categories, primarily local and devotional programming.

Basic Statistical Results

In this section, we report the results of estimating our basic equation. Our basic equation is from an analysis in which: (1) the program categories are defined in terms of weighted program hours; (2) data are contemporaneous, i.e., the change in royalty payments and the change in programming hours occur during the same period;34 (3) the Form change filter, the $1 real monthly rate change filter, and the 20 percent gross receipts difference filter are used to delete observations; and (4) no attempt is made to account for possible differences in the structure of the equation among periods. None of the variants of the basic equation reported below can be viewed as statistically superior to the basic equation.35 In addition, while there are differences between the results from the

34 None of the coefficients were statistically significant in an analysis in which changes in programming were related to changes in royalties in the period subsequent to the drop or add. 35 By "statistically superior' we mean that there is little difference in the ability of the equation to "explain" percer:itage changes in royalty payments.

JSC WRITTEN REBUTTAL STATEMENT basic equation and those obtained using other specifications or data, those differences are typically small.

In Table 1, we present the results for our basic equation in which the

percentage changes in hours in each of the four program categories - local, movies and series, devotional, and sports - are the independent variables, and the percentage change in royalty payments is the dependent variable. 36

The coefficient of the movies/series hours variable, which can be interpreted as the percentage increase in royalty payments in response to a 1. percent increase in weighted movies/series hours, is positive and very significantly different from zero. To understand roughly what "significantly different from zero"

means for this coefficient, assume hypothetically that we had estimated the basic

equation 10,000 times using a different sample each time. Roughly speaking, we would have estimated a coefficient for movies/series hours as large as that

reported in Table 1 less than one time out of the 10,000 if there were no "true"

relationship between movies/series hours and royalty payments. The coefficient

for sports programming is also positive, but falls just short of significance at

conventional levels of statistical "confidence." Roughly speaking, there would be

36 All tables can be found in Attachment 2. All equations in Table 1 were estimated using ordinary least squares. Because the sum of percentage changes is not the percentage change of the sum, one cannot test to determine whether separating total hours into program categories results in a significant reduction in the unexplained variance of the dependent variable, R'. However, in terms of the explanatory power of the analysis, the total hours regression performs no better than a regression in which program hours are separated into categories. For an accessible discussion of the use of statistical analysis in legal proceedings, see Franklin M. Fisher, "Multiple.Regression in . Legal Proceedings," Columbia Law Review, 1980:

JSC WRITTEN REBUTTAL STATEMENT less than a one-in-ten chance that we would have estimated this coefficient if there were no relationship between sports hours and royalty payments. The coefficient of movies/series hours, which is 11.2 times the coefficient of sports hours, is significantly different from that of sports hours. 37

The coefficients of devotional program hours and of local program hours are both negative, but both are very far from statistical significance.38 That is, we cannot reject the possibility that the "true" coefficients of these programming categories are zero. Relative to the size of these coefficients, the "margin of error'' for each is substantial. Roughly speaking, the estimate of the coefficient of sports programming is seven times more precise than that of devotional programming and four times more precise than that of local programming.39 This is not a result one would expect if local and devotional programming played an important role in the cable operator's carriage decisions.

Finally, the sum of all of the coefficients is not significantly different from

one.40 If the coefficients of the explanatory variables in the equation were positive

37 The calculated F value is 25. 75 for 1 and 203 degrees of freedom. The difference between these two coefficients is significant in ID! the equations reported in Table 1. 38 Although a firm would never purchase an input that has a negative marginal product, cable systems must carry distant signals intact and cannot delete local and devotional programs even if their value is negqtive. 39 Technically, the measure of precision used with respect to devotional programming is the ratio of the calculated t-statistic for the coefficient of sports hours to the t-statistic for the devotional programming coefficient. An analogous calculation was performed for the sports-local comparison. Of course, the relative precision of the estimated movies/series coefficient is much higher; indeed, it is nearly four times more precise than that for sports. 40 This result obtained in all but one of the equations reported below.

JSC WRITTEN REBUTTAL STATEMENT and actually summed to one, the respective coefficients would directly measure the shares of the various programs. We could calculate these shares by eliminating all negative coefficients and scaling the remaining coefficients so that they sum to one. In that case, local and devotional programming claimants would be assigned a zero share of the royalties (which would be consistent with our statistical results); movies and series programming claimants would be assigned a

91.8 percent share and sports programming claimants.would be assigned an 8.2 percent share.41

An alternative approach is to assume that, with a very large sample, the coefficients for local and devotional programming would in fact be positive (albeit small). One estimate of such "pseudo-shares" is the estimated coefficient plus the

"margin of error." For example, the margin of error for the coefficient for devotional programming (-.0025) is about .0208,42 so that the "pseudo-share" would be about

.018.

It is important to emphasize that there is no statistical reason to believe that the coefficients for local or devotional programming are in fact positive. The actual

41 Strictly speaking, our statistical results would also be consistent with assigning sports a zero share because the coefficient of sports programming is not significantly different from zero at conventional levels. However, the coefficient is consistently positive (unlike local and devotional programming whose coefficients are almost always negative), is estimated with a degree of precision that far exceeds that for the remaining two coefficients, is not far from significance in the reported equations, and is in fact significant in one of the equations reported below. Thus, there is a reasonable chance that with a larger sample with the same characteristics as that used here, sports would have a positive coefficient. To be conservative, we used the estimated coefficient as the basis for the share calculations. 42 This is typically 1.96 times the standard error of the coefficient. Technically, we will be using the upper bound of the 95 percent confidence interval for the positive estimate of the coefficient.

JSC WRITTEN REBUTTAL STATEMENT carriage decisions in our sample do not indicate that cable operators consider local and devotional programming as valuable to their subscribers. Moreover, the approach we have taken can have the perverse result that, as the imprecision in the coefficients for local and devotional programming increases, i.e., the margin of error grows larger, the pseudo-share of royalties ascribed to the local and devotional programming claimants increases. Put simply, this method is likely to overstate the royalty shares due these two groups.

With these significant caveats, using the basic equation to estimate the shares of the four claimant groups (after scaling to ensure that the coefficients sum to one) yields the following:

Program Category Share

Movies/Series .855

Sports .077

Devotional .018

Local .05043

We should emphasize that our approach allows for the possibility that a program category may obtain a share that is substantially different from its share of weighted or unweighted hours. This will occur if a category's individual programs

43 We also estimated the basic equation using only the 178 Form 3 systems in our sample. The resulting share estimates are generally consistent with the results reported in the text, with two important caveats. First, the coefficient for local programming is negative and statistically significant; we therefore would assign a zero royalty share to the local programming claimants based on this estimation. Second, the coefficient for sports programming is positive and statistically sig11ificant.

JSC WRITTEN REBUTTAL STATEMENT are valued more or less highly than the average of all programs, as is apparently the case for movies/series programs. This point is most apparent for local programming on distant signals. For our sample observations, local programming on distant signals accounted for 9 percent of all hours and about 3 percent of viewing hours, yet our results indicate that, from the perspective of the cable operator, adding local programming to a distant signal may not contribute to the value of the distant signal.44

Additional Statistical Results

The purpose of this section is to report on our analysis of the sensitivity of our basic results to a number of variations in either data or the specification of our equation. We find that none of these variations has more than a small effect on the estimated shares. In some cases they increase the estimated share of movies and series programs above those in our basic equation, and in other cases they reduce it. In no case is the change large enough to affect the basic conclusions of the previous analysis.45

44 One might also note that the fact that sports programming has a relatively small share of total royalties does not necessarily mean that the value per sports program is small. It may only mean that the number of sports programs is relatively small. The value of each sports program may substantially exceed that of each movie or series, but sports would still be entitled to only a small share. of the royalty fees. 45 The statistical results are reported in Table 1.

JSC WRITTEN REBUTTAL STATEMENT Time Effects

In estimating our preferred equation, we implicitly assumed that the

equation was the same in all periods we analyzed. Here, we report the results of

estimating a version of our equation in which we allowed for differences in the

equation across periods. In particular, we included binary variables in the equation to indicate the year from which the observation was drawn.46 None of the binary

variables had a significant coefficient; nor were the variables significant as a

group.47 However, in this equation, the coefficient for sports programming was

statistically significant at conventional levels.

Despite the lack of significance of any of the time variables, we have,

nonetheless, estimated shares for this equation; these are broadly similar to the

shares we obtained using the basic equation. While the share of movies and

series declines, that of sports programming increases, and those of local and

devotional programming are virtually unchanged.

46 See, e.g., P. Rao and R.L Miller, Applied Econometrics, Belmont, CA: Wadsworth Publishing Company, 1971, pp. 88-93, for a discussion of this technique. 47 We also used the analysis to test whether any of the coefficients of the programming categories changed over time by allowing each programming category to have a different coefficient in every year. The results indicated that permitting the coefficients to vary across years did contribute to the explanatory power of the regression. However, the interrelationships among the additional variables (as well as the addition of those variables themselves) that permit estimation of the year specific coefficients substantially reduced the ability of the regression to estimate any of the coefficients with precision. To determine if this same apparent coefficient instability existed during the 1990-92 period, i.e., the period for which the royalties will be allocated, we re-estimated the basic regression for just those observations, again permitting the coefficients of the programming categories to vary on an annual basis. In this case, we could reject the hypothesis that these coefficients varied across time. The results for the basic equation estimated just for this sub- period (but with~ut the time-specific effects) are reported below.

JSC WRITTEN REBUTTAL STATEMENT The estimated shares are:

Program Category Share

Movies/Series .821

Sports .111

Devotional .017

Local .051

These results show clearly that the inclusion of time effects has relatively small effects on the estimated shares.48

Filter Sensitivity

We also assessed the extent to which our results were sensitive to the data filters chosen. First, we estimated the shares by increasing the level of tolerance for the difference between calculated and reported gross receipts. Instead of eliminating any observation for which the difference exceeded 20 percent, we deleted only those for which the difference exceeded 30 percent. The resulting share estimates are as follows:

48 In addition to a;sessing the sensitivity of the analysis to the time period of the observation, we also tested its sensitivity to system size. Specifically, we permitted the coefficients of the programming hours to be different for systems with more than 10,000 subscribers. The addition of variables in the regression equation to permit these varying coefficients did not improve the explanatory power of the regression in a statistically significant way. We repeated this analysis for systems with more than 25,000 subscribers and then for systems with more than 50,000 subscribers with similar results.

JSC WRITTEN REBUTTAL STATEMENT Program Category Share

Movies/Series .860

Sports .071

Devotional .017

Local .052

The shares are virtually identical to those obtained from our basic equation.

We then eliminated both the gross receipts filterand the basic rate filter.

This change resulted in a near-doubling of the number of observations, to 400. As compared to the basic equation, the estimated shares display only small changes:

Program Category Share

Movies/Series .892

Sports .046

Devotional .022

Local .040

The estimated share for the movies/series claimants increases, largely at the

expense of the sports claimants. Again, however, the results are generally similar

to those in the basic equation.

The 1990-92 Regression

The royalties to be distributed in this proceeding do not cover all of those

collected between 1988-1 and 1992-11, but only those collected between 1990-1 and

JSC WRITTEN REBUTTAL STATEMENT 1992-11. To assess whether our results would change in any substantial way if we had conducted our analysis only for this period, we estimated the basic equation for this period alone. One difficulty with considering only this subset of observations is a substantial loss in observations (78) and, therefore, a potential loss in the precision of the estimates.

The most significant difference between the share estimates here and those from the basic equation is that movies and series gain at the expense of local programming. There is little change in the estimated shares due the sports and devotional claimants. The estimated shares are:

Program Category Share

Movies/Series .915

Sports .064

Devotional .015

Local .007

Of the analyses reported in Table 1, this equation has the greatest degree of explanatory power, albeit by a relatively small margin.

The Effect of Changes in Other Program Services

As we indicated in our previous discussion, one of our primary motivations for analyzing changes in royalties and program hours rather than their absolute levels was to reduce the need to control for factors that might be expected to affect

JSC WRITTEN REBUTTAL STATEMENT the level of royalties but not changes in them. Thus, slowly-changing variables, such as market demographics, or the number and types of broadcast stations in a market, can safely be ignored because they are unlikely to change significantly during the brief periods in which there is a change in the complement of distant signals carried by a cable system. Consequently, by analyzing changes in royalties, we effectively control for such variables.

One factor that could be a concern, however, is the possibility of significant changes in the number of non-broadcast cable program services that occurred contemporaneously with changes in the carriage of distant signals. Our concern here is that a system might have added a distant signal at the same time as it began carrying a particular cable program service, say TNT or ESPN. If adding a distant signal tended to be accompanied by the carriage of a particular cable program service, we could erroneously ascribe to a distant signal programming category an increase in royalty payments that is really due to higher basic revenues because of the addition of a new cable programming service.49

As already noted, one way in which the analysis reported here guards against such spurious correlation is to delete all observations for which the basic rate increased by more than one dollar. That is, any substantial change in the offering of cable programming services is likely to be accompanied by a substantial

49 Note that the omission of this factor would be important for our purposes·only if it affected the relative values of the coefficients in our equation.

JSC WRITTEN REBUTTAL STATEMENT change in the basic rate or by retiering. Such observations have been excluded from this analysis.

Nonetheless, we asked MPAA to identify changes in the other program services that a cable system carried for each of the observations in the sample used here drawing data from the Television/Cable Factbook for the years 1987-

1993. MPAA's effort to satisfy our request was greatly hampered by the fact that the Factbook data on the service lineups of cable systems were not always available for the periods we wished to examine. For example, we might have an observation on a change in distant signal carriage in the first half of 1989, but have the service lineup for that system in the 1989 F actbook be for 1987.

In attempting to overcome this difficulty, we directed MPAA to identify the closest Factbook dates prior to and subsequent to the beginning date of the accounting period in which the change in distant signals occurred. 50 We then discarded an observation if both dates were not within 8 months (240 days) of the beginning of the accounting period in which the change occurred. This screening procedure, which was intended to insure that the changes in the carriage of other program services were (very) roughly contemporaneous with the changes in distant signals, resulted in 35 usable observations.

50 The Factbook entries usually provide the date on which the observation of the reported cable system lineup was made. We employed these dates, which we call the Factbook dates, and not the dates of the Factbook issues.

JSC WRITTEN REBUTTAL STATEMENT Next, we chose a set of cable program services for which we wished to

identify changes that might have affected our estimated coefficients. These

services, which included all of the major cable program services, were AMC, A&E,

BET, CNN, Encore, Nostalgia, ESPN, other sports channels, the Family Channel,

CNN-Headline News, Lifetime, MlV, Nickelodeon, TNN, TNT, the Weather

Channel, Univision, USA, VH-1, home shopping channels, the Disney Channel,

and other (non-sports) pay services.

Using the data compiled by MPAA, we determined whether there was a

relationship between the percentage changes in each of our programming

categories, the explanatory variables in our equation, and percentage changes in

the number of cable program services offered by each sampled system. If no

correlation existed, we could be fairly certain that our estimated coefficients were

unaffected by changes in the carriage of other program services.

We examined the relationships between the percentage changes in hours

carried for each of our programming categories and percentage changes in: (a) the

total number of major non-broadcast cable services; (b) the total number of USA,

A&E, American Movie Classics, TNT, and the various premium movie services;

and (c) the number of sports services.51 There was no relationship at the five

percent level of significance, or significance levels considerably higher, for three of

51 None of the observations involved a change in the carriage of ESPN. Category (b) is intended • to be a representative collection of cable services that primarily carry movies and series programs.

JSC WRITTEN REBUTTAL STATEMENT the four programming categories (movies/series, sports, and devotional programming). 52

However, we did find a significant relationship between percentage changes in local programming and (a) and (c) above. This raises the possibility that the estimated coefficient for the percentage change in local programming hours in the previously estimated equations is biased downwards. Determining with any significant degree of confidence how substantial that bias might be is difficult because only a small fraction of our observations could be matched with the Factbook entries.

Nonetheless, to determine whether there was any evidence of substantial bias, the basic equation for these 35 observations was estimated with variables representing (a) and (c) included as explanatory variables. The results appear in the bottom row of Table 1. As with the other estimated equations, the coefficient for movies/series is positive and statistically significant while that for sports is positive but insignificant at conventional levels of confidence. Unlike the other equations, however, both local and devotional programming now have positive coefficients, but like the other equations, both coefficients are highly insignificant.

That is, it is quite possible that the "true" coefficients (and therefore the royalty

52 We also tested the sensitivity of our analysis to the length of the data screen used in collecting data from the Factbook by using ten-month (300 days) and twelve-month (365 days) screens. Our results were virtually unchanged when these screens were used. The analysis with the ten month screen is based on 43 observations; that with th~ o.ne-year screen is based on 57 observations.

JSC WRITTEN REBUTTAL STATEMENT shares due these claimants) are zero, or some other very small number. Thus, even after accounting for contemporaneous changes in cable programming services, there is still no evidence that cable operators regard the carriage of local and devotional distant signal programming as valuable either to them or to their subscribers.

Nonetheless, we used the coefficients from this equation to estimate the shares due each of the claimants. The results are as follows:

Program Category Share

Movies/Series .822

Sports .070

Devotional .020

Local .089

Only the estimated share that is due to local programming claimants is higher than any of the previous estimates of their share. Nonetheless, as noted above, the coefficient of local programming is still measured with such imprecision that the

"true" share could be considerably less than that estimated here. 53 Moreover, it should be emphasized that these results are obtained using only 35 observations.

53 The results reported in the text are sensitive to the use of the ten-month or twelve-month screens in compiling the Factbook data. That is, the relationship between the percentage change in local programming hours on the one hand and the percentage change in major non-broadcast programming services and cable sports programming services on the other hand was statistically insignificant for each of these screens, with one exception. In the case of the ten-month screen, there was a significant relationship between the percentage change in local programming hours and the percentage change in the number of major non-broadcast services offered. However, inclusion of this latter variable in the estimation of the basic equation results in share estimates that are within the range of those described in the text.

JSC WRITTEN REBUTTAL STATEMENT Summary

It is convenient to summarize the results of this section by comparing the estimated shares from the various alternatives to the shares that are estimated from our preferred equation. Table 2 provides this comparison. As is apparent, the results are highly consistent across the various alternatives. The share of movie/series programs ranges between 82 percent and 92 percent; the range for sports programs is between 5 percent and 11 percent; that for devotional programs ranges between 1.5 and 2 percent; and that for local programming ranges between 1 percent and 9 percent.

Sample Representatives

Finally, we examined the possibility that systems that changed their distant signal complement are different from the universe of Form 3 systems that account for virtually all of the copyright royalties. Table 3 reports the means of four characteristics of cable systems, the basic rate (adjusted for inflation}, the number of subscribers, the total number of broadcast signals carried, and the number of distant signals carried. The differences between our sample and the universe of

Form 3 systems appear so small that the results of our statistical analysis are likely to be applicable to all Form 3 systems. 54

54 Counsel for MPAA provided us the universe averages by accounting period for each of the four characteristics _based on Cable Data Corporation data. Using these data, we calculated the

JSC WRITTEN REBUTTAL STATEMENT Conclusion

The results reported in this testimony, in which estimates of the value to cable operators of the programming on distant signals are based on the behavior of those operators, are remarkably consistent. Using a wide variety of approaches, the share of royalty payments to movies and series claimants ranges between 82 percent and 92 percent and the share for the sports claimants ranges between 5 percent and 11 percent. The calculated share for devotional programming ranges between 1.5 percent and 2 percent while that for local programming ranges between 1 percent and 9 percent under assumptions that are very favorable to these claimants. The "true" shares for these claimants are likely to be considerably below those estimated here, and may even be zero.

This relatively narrow range of outcomes results despite different specifications of the underlying equation and different datasets. The fact that the shares are relatively insensitive to these changes should give the Panel considerable confidence in their validity.

weighted average for each characteristic across accounting periods, where the weights are the number of reporting systems as a percent of the number reporting in all the accounting periods, 1988-1 through 1992-11.

JSC WRITTEN REBUTTAL STATEMENT I declare under penalty of perjury that my testimony is true and correct and of my

personal knowledge.

Executed on August 15, 1995. )kt,. (f.e~ 8

JSC WRITTEN REBUTTAL STATEMENT JSC Exhibit No. 2 Before the COPYRIGHT ROYALTY JUDGES Washington, D.C.

) In the Matter of ) ) Docket No. 2007-3 CRB CD 2004-2005 Distribution of the ) 2004 and 2005 ) Cable Royalty Funds ) ______)

REBUTTAL TESTIMONY OF EDWIN S. DESSER

December 11, 2009

JSC WRITTEN REBUTTAL STATEMENT CORRECTED

REBUTTAL TESTIMONY OF EDWIN S. DESSER

1. I am submitting this testimony to the Copyright Royalty Judges on behalf of the Joint Sports Claimants (JSC). My testimony is in response to testimony provided by Dr. George S. Ford in connection with the 2004-2005 Cable Royalty Distribution

Proceedings.

Qualifications

2. I am the founder and President ofDesser Sports Media, Inc (DSM). My curriculum vitae is attached as Appendix A. DSM specializes in consulting for the sports media community. Since 2005, DSM has provided numerous valuation analyses of media rights, and participated in the negotiation of billions of dollars in media rights agreements. Clients include major league teams, leagues, federations and associations, as well as distributors, start-up, and technology companies. DSM has created business plans for new networks, assessed the ability of sports programming to drive adoption of new technology platforms, valued cable networks, advised potential purchasers of networks and teams, and has provided litigation/arbitration support.

3. Prior to starting DSM, I spent 23 years in senior management positions in the Commissioner's Office at the National Basketball Association in New York City. . .

Positions included President, NBA Television & New Media Ventures, EVP, Strategic

Planning .and Business Development, VP/General Manager, NBA Entertainment, Inc., and Director of Broadcasting & Executive Producer. I was primarily responsible for the valuation and negotiation of the league's media rights agreement with various cable and

JSC WRITTEN REBUTTAL STATEMENT broadcast networks, including TNT, as weJI as arrangements with most major cable

MSOs and aJI sateJlite operators (DirecTV, PrimeStar and Echostar).

Discussion

4. I understand that the purpose of these proceedings is to determine the distribution of compulsory licensing royalties that have been paid by cable operators for the right to distribute non-network programming via distant signals during the 2004-2005 time-period. ·

5. I have reviewed the Testimony of Dr. George S. Ford in which he describes a model he created to estimate the relative value of the compensable programming carried on distant signals. I have also reviewed the Rebuttal Testimony of

James Trautman in which, among other things, he .shows how Ford's model woilld apply to the programming actually carried by the cable network TNT. Trautman shows how, if

Ford's model were applied to TNT, it would have very significantly underestimated the relative value of the sports programming on TNT in contrast to the other types of programming TNT purchased. Indeed, Trautman reports that contrary to the 7 to 8 percent of value Ford's approach would attribute to JSC programming on TNT, the actual cost of that programming was at least45 to 46 percent ofTNT's total programming cost.

See Trautman Rebuttal Testimony at 6-7.

6. That JSC programming might have a low share of the overall program time on TNT or of the relative amount of time households spend viewing all the TNT

. . programming -- but nonetheless represent a very high relative cost compared to other

TNT programming -- is consistent with my experience in the sports media business.

Indeed, I was responsible for negotiating the NBA's contract in effect at that time with

JSC WRITTEN REBUTTAL STATEMENT TNT. I know from personal experience that applying Ford's model to TNT would show, as Trautman illustrates, that Ford's model significantly underestimates the relative value of sports programming in the real world.

7. Ford's model is based on a measure ofrelative advertising cost that he has created for this proceeding. While advertising is certainly a part of the economics of cable programming, it represents only a minority of the revenue picture and therefore of potential programming expenditures. Cable systems generate the bulk of their revenue through subscriptions -- something for which Dr. Ford's model does not account.

8. In addition, Ford's model does not accourit for other types of value attributable to sports programming in my experience. These additional "elements of value" include promotional value, halo effect/prestige, packaging, audience flow, risk, differentiation, driving distribution, and the unique differentiated characteristics of sports programming, among others. This is why sports are often a "loss leader'' for a network.

9. Sports are highly promotable. Sports leagues and teams are well known, much beloved brands, and "household names," which have been built over generations.

The names and logo are instantly recognizable, and thereby efficient to use to promote tune-in and association, because they stand out and grab attention.

10. There is considerable prestige that comes from a sports association. This is sometimes known as the "halo effect." It is experienced by networks, sponsors, and distributors. Sports fans' affection for their sports can rnb off on those who are associated. This branding is an important element of the value of sports television, and is ignored in the Ford. analysis.

JSC WRITTEN REBUTTAL STATEMENT 11. Even though the Ford analysis purports to measure a program's advertising value, it fails to account for the fact that sports programming is frequently used by networks and distributors as a "hook" to help to sell packages of advertising in multiple programs. Networks might package commercial time in a sports event, with advertising in adjacent programming, and other programming on the network or cable system. Even if the allocated portion of the package price of the sports programming is higher than the entertainment programming or news programming that might be in the package, this does not account for the fact that absent the sports element, that particular spot or series of spots in the entertainment programming might not have sold at all, or might have to be sold for a lower price if not included in such a package. Thus, the true financial value of sports advertising is typically understated.

12. Sports is often used by progranuners as a schedule "tent pole" to attract viewers, and then to cycle them into other programs that are either promoted in the sports event, or which preceded or follow it. In this way, value created by the presence of the sports progranuning is reflected in the sales of other programming.

13. Like most other businesses, risk is an element of the TV programming business equation. Many shows are developed, yet most fail. A handful survive, and fewer still become hits. Sports is different. Even though a particular team's success ebbs an_d flows over time, sports TV progranuning overall is remarkably consistent and predictable in performance. As a result, there is less risk associated with sports than many other forms of entertainment programming. This track record for success enhances its relative value compared with alternative progranuning, even though this fact is not reflected in the Ford model.

JSC WRITTEN REBUTTAL STATEMENT 14. One of the biggest sports programming value stores is in the leverage key

sports programming networks can exert in support of the carriage of new non-sports

. programming networks. Major entertainment companies that control the distribution of

key sports programming networks are able to leverage the affiliation negotiation of the

sports network into the new or improved carriage of a sister or unrelated, co-owned cable

network. This process obscures the true value of the sports network and its

programming, concealing it as the creation of new or increased enterprise value for the

alternate network.

15. Sports packages are also used to drive penetration of programming

networks. The Fox Television Network was launched harnessing the NFL Sunday

afternoon package. The NFL and NBA were used to successfully launch TNT, widely

considered one of the most successful network launches in cable TV history.

Superstation penetration was driven by the presence of the MLB Atlanta Braves and

NBA Hawks games on WTBS and the Chicago Cubs, White Sox and Bulls on WGN.

16. Finally, some sports packages are able to influence the selection of

particular multi-video providers by consumers, utterly unrelated to any advertising that

might be contained. The NFL's Sunday Ticket package, long a fixture on DIRECTV has

aided the growth of this platform against cable. The same is true of the NCAA's Mega

March Madness package. The cable industry was recently outbid by DIRECTV for the

NASCAR multi-car camera package 'in order to further improve its competitive position.

Each of these are examples of the unique power and value of sports programming in the

cable industry, completely ignored by the Ford analysis.

JSC WRITTEN REBUTTAL STATEMENT 17. Unlike entertainment, which is often exhibited in multiple windows over an extended period, often all at the same time (e.g., syndicated and off-network episodes all run while first run episodes air on broadcast networks), sports is typically shown on an exclusive basis. A particular game or feed is only seen on one channel, typically on a live basis, and then never again. While it is true that some games are shown on dual networks ( e.g., regionally and nationally) and are also sometimes repeated, the vast majority of games are exclusive to one network and air only once. This makes each one that much more compelling.

18. Because it is compelling and topical, sports is typically consumed live, and not TIVO' ed, or downloaded to be seen later. In contrast, entertainment programming is not only available on a first run basis, but then also in re-runs, syndication, cable network runs, and via web site streaming, iTunes downloads, and

DVDs. Because such programming is often viewed on a delayed or recorded basis, subscribers can "fast forward" through the commercials without stopping to watch the ads. Ford's analysis in no way addresses this growing phenomenon which disproportionately affects the programming offered by the Program Suppliers.

19. Sports is often viewed in groups, such as in bars, restaurants, airports, college dorms, health clubs, typically unmeasured by Nielsen, and therefore not truly reflected in the Ford analysis.

Conclusion

As shown in the data offered by Trautman, Ford's analysis does not provide a reliable means of estimating the relative value of sports programming vis-a-vis other types of programming, and that conclusion is particularly true for syndicated

JSC WRITTEN REBUTTAL STATEMENT programming that falls within the claim of the Program Suppliers. My testimony is intended to identify those factors that help explain why that is the case.

JSC WRITTEN REBUTTAL STATEMENT APPENDIX A

EDDESSER

Ed Desser is President of Desser Sports Media, Inc., a consulting firm serving the strategic media business needs of the sports television industry. The company was founded in 2005, following Mr. Desser's more than 30-year career in sports media and radio and television. Its clients include the National Basketball Association, Detroit Pistons, Los Angeles Lakers, Anschutz Entertainment Group (AEG), Houston Astros & Rockets, Minnesota Timberwolves, Manta Hawks & Thrashers, Tampa Bay Lightning, Washington Nationals, Dallas Mavericks, Phoenix Suns, San Antonio Spurs, United Football League, Sacramento Kings and Monarchs, Miami Heat, LA Clippers, Portland Trailblazers, Maple Leaf Sports & Entertainment (Maple Leafs, Raptors, and Toronto FC); McKinsey & Co., Milwaukee Bucks, Oklahoma City Thunder, Qualcomm/Media Flo, Utah Jazz, DIRECTV, Chivas USA, the Professional Rodeo Cowboys Association, and the California Interscholastic Federation.

Mr. Desser's was educated at the University of California, Los Angeles, where he earried a Bachelors' of Arts in Economics. He also earned a Masters of Business Administration degree in Marketing from the University of Southern California.

Mr. Desser's professional career began in Southern California, serving in a variety of functions for several local broadcast stations. In 1977, he became Executive Producer of the Los Angeles Lakers Radio Network, and in 1978, was hired by California Sports, Inc, owner of the Los Angeles Lakers, Kings, and Forum where he became it's Director of Broadcasting and Executive Producer. He was responsible for broadcast operations, scheduling, production, transmission, and negotiating its media relationships.

In 1982, Mr. Desser relocated to New York, beginning a 23-year run wtth the National Basketball Association Commissioner's Office. He first became the NBA's Director of Broadcasting and Executive Producer. Responsibilities included national network contract administration, scheduling, negotiations, policy planning, and development of production and arena standards.

In 1984, he added the responsibilities of VP/General Manager, NBA Entertainment, Inc. the league's TV production and distribution arm. NBAE produces a number of programs for national and international distribution including ABC's NBA Inside Stuff, NBA Action, NBA Match-up, and Vintage NBA. NBAE also produces the nightly highlights and news programming for NBA TV and NBA.com.

In 1987, Mr. Desser was also named VP/Television for NBA International. This division was responsible for growing the distribution of NBA programming to more than 9000 hours in 200 countries worldwide, and production of wortd feeds of NBA and other major international sports events.

In 1990, the NBA began its quest to develop new media opportunities, naming Mr. Desser President of NBA Television and New Media Ventures, later renamed NBA New Media and Strategic Initiatives. Over the ensuing decade, he spearheaded the exploration and business development for the league of a variety of new technologies ranging from High definition TV (first used for the NBA All Star Game in 1991), Direct Broadcast Satellite (1994), the Internet and NBA.com (1995), NBA TV, (1999), and Satellite Radio (2002). Many of these projects established the framework utilized by most major North American sports leagues, including the NBA's agreements with MVPD's to distribute "out of marker game telecasts (NBA League Pass). ( \

JSC WRITTEN REBUTTAL STATEMENT During this period of dramatic technological growth, Mr. Desser was also instrumental in the negotiation of the NBA's landmark national television agreements with NBC, Turner Broadcasting, ABC, and ESPN, which resulted in revenue growth of more than 12 fold, and substantially increased coverage and distribution. He established NBA TV, the first network devoted to a major US sports league, including handling affiliation negotiations with all major MVPDs. He led the NBA's annual business planning process, and was a staff member of the NBA Board of Governor's Planning Committee.

During his NBA career; Mr. Desser also assisted many teams negotiate their local rights agreements. When he returned to California, after the NBA, he formed Desser Sports Media, Inc. in order to continue providing this service, to a vast array of clients across the sports industry. Key projects have. included creation of business plans for new regional TV networks, valuation and negotiations of key media agree.ments, strategic planning, and the balancing of new media with traditional distribution platforms in order to generate maximum current and future revenues. The existence of Comcast Sports Net West, Comcast Sports Net Northwest, and Fox Sports Oklahoma Regional Sports Networks are direct results of this work.

Today, Mr. Desser resides in Santa Monica, California with his wife, Eydie Eisen Desser.

JSC WRITTEN REBUTTAL STATEMENT Executed on: __,._J=:J_+/~/'-f0~(},_,1..,___ _

JSC WRITTEN REBUTTAL STATEMENT JSC Exhibit No. 3 STATEl\IBNT OF DR RICHARD V. DUCEY

TABLE OF CONTENTS

I. BACKGROUND ...... 1

II. OVERVIEW ...... 2

III. SUBSCRIBER PREFERENCES ARE NOT A PROPER MEASURE OF MARKETPLACE VALUE ...... 5

IV. VIEWING DATA DO NOT MEASURE SUBSCRIBER PREFERENCES ...... 6

V. THE EVIDENCE ABOUT SUBSCRIBER PREFERENCES CORROBORATES THE CABLE OPERATORS' VALUATION OF STATION-PRODUCED PROGRAMMING ...... 8

A. The 1983 Cable Subscriber and Cable Operator Surveys Provide Strong Evidence of the Kind of "Viewer Avidity" that the Tribunal Has Said Will Justify an Award Higher than Viewing Share ...... 8

B. News Programming in Particular Has Special Value to Viewers ...... 10

C. Specific Examples Illustrate Why Subscribers and Cable Operators Place a High Value on Station-Produced Programming ...... 16

1. Superstation Programming ...... 17

2. Non-Superstation Programming ...... 21

D. Again in 1990, 1991 and 1992, the Great Majority of Distant Signal Carriage of Non-Superstations Was Clustered Within a Close-in Region ...... 34

VI. THE HARM CRITERION ...... 37

JSC WRITTEN REBUTTAL STATEMENT STATEMENT OF DR RICHARD V. DUCEY

I. BACKGROUND.

I am the Senior Vice President of the NAB 's Research and Information

Group. I participated in Copyright Royalty Tribunal proceedings twice, testifying on behalf of NAB during Phase II of the 1986 cable royalty distribution proceeding and again during Phase I of the 1989 proceeding. My testimony from those proceedings has been incorporated into the record of this proceeding, but for ease of reference I repeat the summary of my qualifications here. My background and qualifications are described further in an attachment to this Statement.

Before joining NAB in September 1983, I was on the faculty of the

Department of Telecommunication at Michigan State University. Prior to my stint.at Michigan State, I worked as a cable system programmer and at radio stations as an announcer. Since coming to Washington, I have served as an adjunct faculty member for the University of Maryland and George Washington

University. I have also done some independent consulting over the years.

I received my Ph.D. from Michigan State University in mass media, specializing in telecommunication marketing and research. I authored or co-authored over forty published research articles and papers in these areas, including work on explaining market segments in the cable industry. I serve on

JSC WRITTEN REBUTTAL STATEMENT the editorial and review boards of several journals and organizations. I have taught both undergraduate and graduate courses and have conducted industry panels and seminars on research methodology, telecommunication technology and strategic marketing.

My work as a cable system programmer was at a system with approximately 13,000 subscribers in upstate New York. I held this position in

1978 and 1979 while the old syndicated exclusivity rules were still in effect. Part of my job was to black out certain syndicated programs on distant signals and to select programming from other distant signals as replacements. This earned me first hand experience in evaluating distant signal programs for the purpose of maximizing the appeal of our cable service to the system's subscribers. My current understanding about what is appealing to cable subscribers comes from talking directly with the system's subscribers and reviewing subscriber surveys, as well as from my later academic research and my general familiarity with other studies.

II. OVERVIEW.

NAB is making the claim for royalties for the "U.S. Commercial Television" category, which covers all of the station-produced programs broadcast by U.S. commercial stations that were carried as distant signals. Station-produced programs are ones produced by or for the station which were not broadcast on any

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JSC WRITTEN REBUTTAL STATEMENT other commercial television station during the year in question. Typical station produced programs include daily newscasts, public affairs talk shows, children's programs, news magazine and interview shows, sports programs, specials, documentaries, and other programs. They are retransmitted along with syndicated shows, movies, sports games, and/or devotional programs when the station is retransmitted by a distant cable system.

In this case, I understand that the Joint Sports Claimants will be submitting the results of cable operator surveys that show that, in 1990 through

1992, the value to cable operators of the news and public affairs programs they retransmitted on distant signals was between 11.9 percent and 14.8 percent of the value of all their non-network distant signal programming, in terms of attracting and retaining subscribers. This cable operator study is a direct measure of the relative value of the distant signal programs cable operators actually purchased in

1990 through 1992.

In the 1989 case, the Tribunal had similar evidence showing that the relative value of news and public affairs programs was 11.8 percent.

Nevertheless, the Tribunal awarded NAB only 5.7 percent of the Basic and 3.75 funds for 1989. The Tribunal's award was not even as high as the level shown in

MPAA's viewing study, as corrected. The Tribunal explained that "in relative terms, we still find that the viewer intensity is higher for the other Phase I

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JSC WRITTEN REBUTTAL STATEMENT claimants than for any that exist for NAB." It said that it awarded shares higher than viewing percentages for claimant groups that had shown "the intensity or avidity of [their] viewers." And it said that it gave greater weight to the cable operator survey results for program categories for which there was "corroborating evidence" of "intense viewership" or "valuable license fees."

My testimony in this case is focused on the Tribunal's reasoning. First, I address some of the reasons why the Panel, when it determines distant signal marketplace value for 1990-1992, should not rely on supposed "viewer intensity" and ignore the results of the cable operator valuation survey. It is, after all, the cable operators who make signal carriage decisions, not the subscribers. Second, even if the role of subscribers should somehow be factored into distant signal marketplace value determinations, a study reporting the gross amounts of viewing done by subscribers would not be the right way to do so. Such a study does not measure viewer avidity or intensity. Ratings are a measure of exposure to or consumption of television, and do not tell us anything about intensity of preference. Third, the evidence clearly shows a higher viewer intensity or preference for station-produced programs than its viewing percentage.

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JSC WRITTEN REBUTTAL STATEMENT ill. SUBSCRIBER PREFERENCES ARE NOT A PROPER MEASURE OF MARKETPIACE VALUE.

The key element for valuation in the cable distant signal marketplace is that it is the cable operator, not the cable subscriber, who is the decisionmaker.

This marketplace has both wholesale (sales of programming channels to cable operators) and retail (sales of channel packages to cable subscribers) elements. As in any whobsale market, the reseller will consider the demand for certain types of services at the retail level. This is reflected, along with other factors, in his or her decisions about what to purchase at the wholesale level of the marketing chain.

But the judgments of cable operators will determine which distant signals they purchase, regardless of the extent to which they have accurately gauged their subscribers' ultimate preferences or have weighed other factors in addition to those preferences. Ignoring the cable operators' judgments and replacing them with supposed evidence about the preferences of subscribers would move the analysis one step further from the wholesale marketplace value the Panel is seeking to measure.

Subscriber preferences are only one factor that cable operators consider in making their decisions about distant signals. To the extent subscriber preferences are relevant, they are like an indicator rather than a final measure. For example, the weather in a farming region is an important indicator of crop yields, and

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JSC WRITTEN REBUTTAL STATEMENT knowing the weather, along with other factors, may allow a relatively good advance estimate of the ultimate yields. But if one is seeking to determine crop yields after the fact, the best measure will always be the direct measure of the actual yields, not a review of the weather patterns. By the same token, a direct measure of the relative values cable operators attach to the distant signal programs they actually carried is the best measure of their relative value, and evidence or beliefs about relative viewer avidity cannot improve on the cable operator survey results.

In the judgment of cable operators actually operating in the distant signal marketplace, station-produced news and public affairs programs do have significant value in terms of attracting and retaining subscribers. The Panel should not reject that essential judgment based on assumed differences in "viewer avidity."

IV. VIEWING DATA DO NOT MEASURE SUBSCRIBER PREFERENCES.

Everi. if subscriber preferences were relevant, viewing studies would be the wrong way to measure that phenomenon. Evidence about subscriber viewing does not even provide evidence of avidity. Ratings may be a direct measure of the relative value of programs in the broadcast marketplace, but the cable distant signal marketplace is fundamentally different. Cable operators have the incentive

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JSC WRITTEN REBUTTAL STATEMENT to purchase distant signals that will maximize their profits or otherwise enhance their business position when they repackage them for sale to cable subscribers.

Since cable operators cannot "sell" distant signal audiences to advertisers, ratings do not measure program value. Cable operators want the greatest number of subscribers on a continuing basis, regardless of how many subscribers watch particular programs or. the channels carrying them.

A station or program with a small audience base would likely prove unattractive to most advertisers, but if it attracted (or helped retain) subscribers and their monthly payments, it would be attractive to cable operators. If adding a new station or channel would help attract even 1 % more subscribers than the next best choice, the rational cable operator would add that service, regardless of its ratings. Cable operators do not profit from higher ratings on distant signals, they profit from adding incremental subscribers to their customer base.

Based on my own experience, cable operators' own surveys typically do not even attempt the kinds of viewing measures produced by Nielsen or Arbitron. (In deciding which programs to insert in my job as a cable programmer, I never read a Nielsen or Arbitron ratings report.) Instead, they more typically focus on subscriber preference or satisfaction measures. And much of the subscriber research conducted by cable operators gauges subscriber interest in channels, not programs. While cable companies could readily attempt to produce household

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JSC WRITTEN REBUTTAL STATEMENT hour viewing estimates, they apparently find a different kind of study more useful. in their determinations about which signals to carry. And even such information about subscriber preferences is only one factor in making their ultimate purchase decisions.

V. TIIE EVIDENCE ABOUT SUBSCRIBER PREFERENCES CORROBORATES THE CABLE OPERATORS' VALUATION OF STATION-PRODUCED PROGRAMMING.

The evidence shows that subscriber preferences for station-produced programs, like cable operators' preferences, is high, and is greater than the viewing share for those programs.

A The 1983 Cable Subscriber and Cable Operator Surveys Provide Strong Evidence ex the Kind cx"Viewer Avidity" that the Tribunal Has Said Will Justify an Award Higher than Viewing Share.

The evidence presented to the Tribunal in the 1983 Distribution Proceeding permits a head-to-head comparison of subscriber viewing and subscriber value measures. In that proceeding, in which the Tribunal had comprehensive quantitative evidence on "viewer avidity" as well as viewership and cable operator valuations, the evidence showed that viewer avidity was even higher for station-produced programs than the cable operator valuations themselves.

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JSC WRITTEN REBUTTAL STATEMENT I have attached as Exhibit 1 a graphic depiction of the relative measures of value and viewing. The specific percentage results, as presented in various parties' exhibits and reported in the Tribunal's 1983 Final Determination, were as follows:

MPAA JSC NAB NAB Viewing Study Operator Operator Subscriber Program Type

Sports 10.01 36.1 35.7 25.4

Movies 24.48 30.2 25.0 26.2

Syndicated Series 51.87 18.6 15.8 17.0

Station-Produced 7.24 12.1 . 13.3 17.1

PBS 4.61 3.1 2.5 5.8

Devotional 0.65 n/a 7.2 7.8

As these percentages show, there is strong consistent evidence, from different independent surveys, that both cable operators and cable subscribers value station produced programs proportionately higher than the viewing share of those programs, and that cable subscribers place an even higher relative value on station-produced programs than the cable operators do. On the other hand, cable subscribers and cable operators place a proportionally much lower value on the syndicated programming fare that forms the vast bulk of distant signal programming time and, hence, viewing.

This clear and consistent pattern of the quantitative evidence strongly supports giving

1 NAB's 1983 summary exhibit and the studies themselves are reproduced as NAB 1990- 1992 Exhibit 2.

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JSC WRITTEN REBUTTAL STATEMENT full credit to the cable operator survey results for station-produced programs, as well as for the other Phase I claimant categories.

These surveys are corroborated by more recent data from academic studies, which I discuss in the next section. In addition, a study presented by a representative of WTBS as part of the Program Suppliers' case to the Tribunal in 1993 reported a similar result. Among a sample of cable subscribers who received WTBS, the programming attributes of "keep you informed through frequent newsbreaks,"

"programs that make you think," and "late night news" ranked higher than many entertainment program attributes. The WTBS witness agreed that these survey results measured the avidity of the respondents for the programming attributes. They showed a relatively high level of avidity for the news, public affairs and other non entertainment programs produced and broadcast by distant signal stations.

B. News Progrannning in Particular Has Special Value to Viewers.

Not all television viewing is equally important to viewers, and viewers tend to have a special relationship with television newscasts. One body of scholarly research, the "uses and gratifications" approach, has long tested and substantiated the theory that viewers actively seek use of television to satisfy different gratifications of varying

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JSC WRITTEN REBUTTAL STATEMENT importance to them.2 As explained in one article published in 1986, motives for watching programs, according to the research,

"... can be grouped into two categories: instrumental motives are more active, goal directed and content oriented; ritualized motives are more passive, habitual and medium-oriented. Instrumental viewing typically means seeking television content to satisfy dreams for exciting entertainment and information. Ritualized viewing typically means watching television out of habit, when there's nothing else to do, or to pass the time."3

In other words, people can engage either in instrumental use or ritualized use of television programming, with important differences in their purpose and experience.

Instrumental use is linked to "content gratification" (i.e., this specific program content is important to me; I will plan to watch it when it is on). Ritualized use is linked to

"process gratification" (i.e., watching anything on television is better than the next best alternative).

The research also shows that the two kinds of television use are related to different kinds of programming and different kinds of viewing patterns:

"Ritualized use is related to watching some entertainment types of programming, and even more to greater exposure to television itself (i.e., higher viewing levels). Instrumental use typically correlates with news, talk, and magazine types of program viewing, but not with higher television viewing levels."4

2 K.E. Rosengren, L.A. Werner and P. Palm.green. (1985). Media Gratifications Research: Current Perspectives. Beverly Hills, CA: Sage. 3 A.M. Rubin, R.A. Powell, E. Perse. (1986). "Television News: The On-Air Family?" BPME Image (November/December 1986), pp. 15-18. 4 A.M. Rubin. (1986). "Uses, Gratifications, and Media Effects Research." In J. Bryant & D. Zillman (Eds), Perspectives on Media Effects, pp. 281-301, Hillsdale, NJ: Lawrence Earlbaum Associates.

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JSC WRITTEN REBUTTAL STATEMENT And the research establishes further that, when a viewer watches a program for ritualized or "pass the time" motives, he or she was less likely to report satisfaction with the program after viewing it, but a more instrumental motive regarding the content of a program was more likely to result in reported satisfaction.5 For our purposes here, it is significant to note that audience ratings cannot be used to distinguish instrumental from ritualized viewing. Therefore, it is inappropriate to use ratings as a measure of content satisfaction. It would be like using a barometer to measure temperature.

Other independent research focuses on the fact that the decision a cable subscriber makes to purchase cable programming is repeated on a monthly basis, and is thus heavily related to the subscriber's assessment of the value of the service and the programming as compared with his or her expectations. Thus, satisfaction with cable programming has been shown to be correlated with the likelihood of retaining a cable subscription, but the amount of viewing of the programming is not.6

Taken together, this research establishes that the instrumental viewing motive most related to news programming is also most related to the development of satisfaction with programming, which in turn is directly related to the likelihood of

6 E.M. Perse & A.M. Rubin. (1988). "Audience Activity and Satisfaction With Favorite Television Soap Opera." Journalism Quarterly (Summer 1988), pp.368-375. 6 R. LaRose & D. Atkin. (1988). "Satisfaction, Demographic, and Media Environment Predictors of Cable Subscription." Journal of Broadcasting and Electronic Media (Fall 1988), pp. 403-441.

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JSC WRITTEN REBUTTAL STATEMENT continuing to subscribe to cable television. These diverse studies by independent media researchers demonstrate that viewers have an "avidity" for news programs that is meaningful for cable operators seeking to maximize their subscriber revenues. It supports giving full credit to the cable operator survey valuations, and awarding a larger share than the news viewing amount.

Beyond content gratification, research also shows that viewers tend to experience another dimension of involvement with television news. This is the formation of special relationships with the presenters in television newscasts. People relate to news anchors, reporters and personalities as their trusted friends. Much of the emotional value and preference for certain stations is premised on the viewer intensity born of this personal link between news programming and the viewers.

Broadcasters are well aware of the viewer intensity with respect to their news programming, as this is documented in countless studies commissioned by stations around the country. Station-produced news programming is in fact a major determinant of the "personality" and general image of a station in the mind of the public.

In the academic literature, this phenomenon of viewers establishing personal relationships with television and mass media in general has been characterized as

"parasocial interaction." It has been observed that station-produced news programs are designed to promote this kind of viewer involvement with newscasters. A 1986

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JSC WRITTEN REBUTTAL STATEMENT article reported finding a relation between instrumental viewing of local television. news programs and the formation of parasocial interaction effects. 7 This is another measure of the "avidity" of news viewers. The same research-supported phenomenon is also illustrated by some of the letters received by WGN in 1990-1992 from distant viewers commenting on their favorite personalities, which I discuss below. While not every viewer of station-produced news programming develops the same degree of involvement with the program, this dimension of the satisfaction viewers obtain from station-produced programs enhances the value of these programs beyond the mere amount of viewing that is done.

Stations know that the viewer avidity with respect to their news operations is important, because this can create a station loyalty effect which carries over into other aspects of station programming. Again, the letters received by KTVU, presented by

Ms. Chang as part of her testimony, clearly illustrate the personal relationship even distant viewers feel with the station's newscasters. In the Mariposa situation she describes, the intensity of the interest of a number of cable subscribers went beyond merely viewing the program, to taking action to prevent its loss.

There have been other similar instances of subscriber action to prevent the loss of or restore distant signal news programming. After the reimposition of the syndicated exclusivity and network non-duplication rules, cable operators in several

7 Rubin, Perse and Powell 1986.

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JSC WRITTEN REBUTTAL STATEMENT communities, including South Lake Tahoe, California, and a number of communities in Western Wisconsin, dropped or threatened to drop distant signals from cities within the same state while continuing to carry local signals from a nearby city in an adjacent state. Cable subscribers and local government officials complained to their

Congressional representatives about the loss of distant but in-state news programming, including newsbreaks, political debates, weather coverage and sports.

Several bills have been introduced, in 1990 and since, to address the problem. In the

Western Wi-,,consin communities, the cable operator arranged to carry the local news programming of the in-state distant signels, which it carried on a channel otherwise devoted to a cable network. Other cable systems (for example, in Washington and

Massachusetts) also carry only the news programming from distant signals that provide coverage from the state's largest city or the state capital. All of these examples demonstrate the special avidity of subscribers for station-produced news programming on distant signals.

Interest in the kinds of stories reported in station news programs was so strong in the late 1980's and early 1990's that it helped spawn a new genre of programming, the "reality" show. As with these new programs, the subject matter of station newscasts is often of the engaging, personally involving type that produces intense viewer interest.

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JSC WRITTEN REBUTTAL STATEMENT The content-specific appeal of station-produced programs (associated with instrumental use) can take several forms. Programs may be appealing because of a focus on a geographical region in which cable audiences live and work. Programs can have appeal because of their genre (e.g., sports, outdoors, news, children's). Programs can also have appeal due to factors like superior production quality, personalities and talent, or specific topics covered in the course of a program. One academic study from

1980 listed the following reasons reported by cable subscribers who viewed the station produced news programs on a distant signal instead of the local station's news: the distant station's news was "more informative"; they were attracted by a weather or sports segment; the distant station's news program was of superior quality; they had a preference for a particular newscaster; and they had a desire for news of the distant city. 8

C. Specific Examples Illustrate Why Subscribers and Cable Operators Place a High Value on Station-Produced Programming.

As in prior years, the 1990, 1991 and 1992 distant signal marketplaces saw the retransmission of hundreds of commercial stations broadcasting thousands of station produced programs. Collectively, U.S. commercial television stations produced and broadcast more than a thousand different news programs, including regularly scheduled live newscasts as well as investigative news specials, news magazine shows,

8 D.B. Hill & J.A. Dyer. (1981). "Extent of Diversion to Newscasts from Distant Stations by Cable Viewers." Journalism Quarterly (Winter 1981), pp. 552-555.

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JSC WRITTEN REBUTTAL STATEMENT documentaries, news analysis and other informational programs. As discussed above,

these programs were of a type for which viewers have an intense interest that goes

beyond passive viewing.

In addition to news programming, stations produced and broadcast other

programs that are similar in type to those represented by other claimant groups that

have received awards in excess of their viewing percentages. For example, stations produced programming about professional and collegiate sports teams, including

coaches shows, pre-game analyses, weekly updates and specials analyzing prospects

for the season. These kinds of programs, like the games themselves, provide special value with which cable operators can attract and retain subscribers.

Similarly, stations in 1990 through 1992 produced children's programs, public

affairs programs, documentaries and other programs similar in type to PBS programs.

Stations also produced local devotional programs, which may be as appealing to certain cable subscribers as the syndicated devotional programs represented by the

Devotional Claimants in this proceeding.

1. Superstati

I have listed some of the station-produced programs broadcast on the five most widely-carried superstations in 1990, 1991, and 1992 on Exhibit 3. On WTBS, for

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JSC WRITTEN REBUTTAL STATEMENT example, there were weekly programs like "U.S. Olympic Gold" and "Network Earth."

The first was a sports information program about Olympic athletes in training, which

included highlights from various qualifying events. "Network Earth" was a news

magazine program featuring stories about environmental issues. WTBS also

broadcast the weekly "Good News" program, featuring national and international news

stories with a positive focus, during 1990 and 1991. Its "Between the Lines" program was a weekly discussion show, in which guests addressed such topics as health, legal issues, and children and education. And the station produced and broadcast a number of newsbreak segments that were broadcast frequently at various time during the day, entitled "News Watch," "Medical Watch" (a news update featuring medical research and medical discoveries), "Kids Beat" (a news update presented by young news anchors featuring news items of interest to kids), and "Sports Watch." WTBS also broadcast a number of programs about sports, including pre-game shows, wrestling programs and others. These programs were all of broad appeal, not limited to matters of interest only in the Atlanta market.

WTBS produced and broadcast these programs expressly to appeal to distant cable subscribers. In the 1990 distribution proceeding that was heard by the Tribunal in 1993, Robert Sieber, Vice President for Audience Development for Turner

Entertainment Networks, testified about a research survey TBS Superstation commissioned in 1991. That study was designed to assist WTBS in programming and scheduling, and involved interviews with over 1,200 cable subscribers who received

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JSC WRITTEN REBUTTAL STATEMENT WTBS and were aware of the station. I have reproduced 1990 exhibits showing methodology and summary results sections of that study as Exhibit 4. Among the results of the survey that were presented in the hearing were tables that showed that programs that "keep you informed through newsbreaks" ranked near the top, as did

"programs that make you think," "late night news," and other nonentertainment programs. "Programs that deal with environmental issues" ranked 21st out of 63 attributes, and "programs that deal with social issues" ranked 26th. These high favorable rankings support the conclusion that WTBS's station-produced newsbreaks, public affairs, environmental and other programs are valued by distant subscribers.

Mr. Sieber agreed that it would be fair to say that the results were a measure of the avidity of interest of the responding cable subscribers.

WGN also produced and broadcast a variety of news, public affairs and other programs during 1990, 1991, and 1992. Its weekday news programs, at noon and 9:00

P.M., were available at earlier times to cable systems in the Rocky Mountain and

Pacific time zones, providing alternatives that were not typically available locally. It presented numerous sports-related programs that would be appealing to fans of the

Cubs, White Sox or Bulls, including the weekly "Instant Replay" program, pre-season specials on all three teams, and pre-game shows before the Cubs and Bulls games. In

1990, it produced a special on the All-Star Game played at Wrigley Field. In 1992, it presented a weekly interview program with Phil Jackson, the coach of the Bulls, as well as specials about the Bulls' playoff and championship series.

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JSC WRITTEN REBUTTAL STATEMENT WGN also broadcast a number of station-produced news specials and

documentaries, interview programs (including one in Spanish), religious programs

(including both talk shows and religious services) and a weekly game show called "The

$100,000 Fortune Hunt." These programs, some of which are listed in Exhibit 3, were

based in Chicago, but were of broader interest. In Exhibit 5, I provide copies of a

small number of the letters WGN received from distant cable subscribers regarding programs broadcast during 1990, 1991, and 1992. These letters illustrate that even

distant subtocribers express strong interest in WGN's news, public affairs and other

station-produced programs. Among the letters presented here are examples that illustrate the strong personal attachment viewers can form with news personalities, the value of newscasts presented at earlier times because of time zone differences, and the value cable operators derive from the presentation of WGN's station-produced programming, including entertainment programs and sports programs. Some of the letters also comment about syndicated series, movies and sports programs.

WWOR and WPIX from New York both broadcast regularly scheduled newscasts. In addition, WPIX aired a weekday talk show called "Best Talk in Town" and a number of news and sports specials. WWOR broadcast a weekday magazine series, "9 Broadcast Plaza," which covered a wide variety of topics of general interest, from cooking to social issues to news. A weekly talk show, "The Joe Franklin Show," featured interviews and live performances. The station also continued to produce

-20-

JSC WRITTEN REBUTTAL STATEMENT "Steampipe Alley," a weekly children's program for 9-14 year olds, which consisted of comedy sketches, games, guests, demonstrations and monologues with a moral.

WSBK, with the fifth highest number of distant Form 3 subscribers in 1990 through 1992, continued to be distributed mostly throughout New England. Its sports programs, including "Sports Beat" and "Sox Talk," were of obvious regional appeal. In addition, its weekly program "Hersey's Hollywood," of which I showed a taped excerpt in the 1989 distribution proceeding hearing, is a well produced program of broad interest and appeal.

2. N oo-Superstation Programming.

In 1990 through 1992, more than 600 other commercial stations were also retransmitted as distant signals. These stations produced and broadcast more than a thousand different news programs. As discussed above, news programming had special value in general because of the intense preference of viewers for news program.

Moreover, as discussed and illustrated later in my testimony, the vast majority of the non-superstations were carried as distant signals in 1990, 1991 and 1992 within a relatively close-in region, where programs about the stations' home markets are more likely to be of special interest.

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JSC WRITTEN REBUTTAL STATEMENT In 1990, 1991 and 1992, stations also produced a wide variety of other programs in addition to newscasts. These included sports programs (such as coaches' shows, pre- and post-game shows, sports news programs, and sports analysis shows), children's programs, religious programs, "magazine"-type shows, documentaries and other specials and series. Following are a few examples of station-produced programs that were retransmitted on distant signals in 1990, 1991 and 1992, which illustrate in some degree the variety of shows stations produced:

"All Outdocrs" A weekly p_rogram produced with the Missouri Department of Conservation, showcasing public wildlife areas in the state of Missouri. (KPLR - St. Louis, Missouri)

"AM Northwest" A daily live entertainment/talk show that includes news, interviews, and current issues segments. Guests include entertainers, inventors, and public figures. (KATU - Portland, Oregon)

"Atlanta Fon.mi' A weekly news program hosted by the station's news anchors, featuring interviews and in-depth discussions of current issues. Subjects discussed include the environment and unemployment and their effect on Atlanta and the surrounding region. (WGNX - Atlanta, Georgia)

"Banmiller On Business" A weekly program with host Brian Banmiller presenting information and news analysis on business and finances. (KTVU - Oakland, California)

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JSC WRITTEN REBUTTAL STATEMENT "Bay Area. Back Roads" A weekly magazine covering topics of interest to the Bay area. The program visits interesting locations in the area and highlights activities and personalities. (KRON - San Francisco, California)

"Championship Preview With Glenn Brenner' A special sports program broadcast in 1990, previewing the NCAA basketball tournament. (WUSA - Washington, D.C.)

"Children's Hrur" A weekly program of entertainment, stories, and educational segments for children, broadcast during 1990 and 1991. (KXAS - Fort Worth, Texas)

"Colorado Getaways" A weekly program that goes on location throughout Colorado to feature the natural beauty, cultural events, and special people and activities that can be enjoyed all around the state. (KCNC - Denver, Colorado)

"Cone And Meet The Music' A special program featuring the Philadelphia Orchestra in concert, in celebration of the orchestra's 90th season. (KYW - Philadelphia, Pennsylvania)

"Daybreak" A one-hour daily news and information program in a magazine format. Segments include news and reports about health and business issues. (KATV - Little Rock, Arkansas)

"DFW Weekly" A weekly program broadcast during 1990 and 1991, which covered social problems, medical, and educational issues. The program

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JSC WRITTEN REBUTTAL STATEMENT included interviews and news and featured a host interviewing a variety of guests. (KXTX - Dallas, Texas)

"Diamond Of The Rockies" A 1990 special showcasing the history and beauty of Rocky Mountain National Park. (KCNC - Denver, Colorado)

"First Baptist Churcli Service"f'First Methodist Churcli Service" A religious service, alternating weekly between two churches. (WSFA - Montgomery, Alabama)

"Front Runners" A twice weekly magazine program geared to general audiences regarding subjects and individuals of interest to people living in the Northwest. The program focuses on highly successful and innovative people -- people following their dreams. (KOMO - Seattle, Washington)

"FYI Pittsburgh" A public affairs program with a guest/interview format, concentrating on issues of concern to the community and the area, including medical reports, political discussion, and book reviews. (WPGH - Pittsburgh, Pennsylvania)

"Good Canpany' A daily talk and interview show hosted by a husband and wife team; featuring well-known personalities and subjects such as parenting, consumer tips, and cooking. (KSTP - Minneapolis/St. Paul, Minnesota)

"Good Day!" A daily talk and variety show broadcast during 1990 and 1991, which included discussions of topics of national and local concern and segments such as cooking and travel. (WCVB - Boston, Massachusetts)

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JSC WRITTEN REBUTTAL STATEMENT "Hcxne Revision" A weekly program broadcast during 1990, which offered remodeling instruction and advice. The program included interviews with experts and a "Tool Box" segment. (WIBW - Topeka, Kansas)

"Later Years" A weekly program featuring a panel and guests, discussing topics of concern to the elderly. (WBAL - Baltimore, Maryland)

"Michiana Repcrt" A weekly program in which regional leaders discuss current topics including crime, health, education, and politics. (WNDU - South Bend, Indiana)

"No Doubt About It" An overview of the Pittsburgh Pirates' 1990 season. (KDKA - Pittsburgh, Pennsylvania)

"Our Planet" A series of informational programs concerning the environment, broadcast in 1990 and 1991. (KCAL - Los Angeles, California)

"Pennsylvania Outdoor Life" A magazine show featuring hunting and fishing segments and focusing on the people and places associated with outdoor activities. (WNEP - Scranton, Pennsylvania)

"Phoenix File" A weekly public affairs program focusing on a single topic, such as politics, the arts, and issues concerning women and the family. (KUTP -Phoenix, Arizona)

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JSC WRITTEN REBUTTAL STATEMENT "Pistons Yearbook"f'Redwings Yearbook'' A series of pre game programs highlighting the players and coaches and discussing the Pistons' and Redwings' seasons. (WKBD - Detroit,. Michigan)

"Popcorn" A weekly program for children presented in a magazine-style format. The anchors and reporters are children, and the show features reports on a variety of subjects, including children's art and activities at individual schools. "Popcorn Covers The Earth" was a special program for children regarding environmental issues. (KA TU - Portland, Oregon)

"Remembering Margd' A 1992 special on violence against women, which grew out of a news story on the murder of a young woman by her estranged husband. (KCNC - Denver, Colorado)

"Sports Extra" A weekly show highlighting the previous week's sports events, including commentary and interviews. (WTTG - Washington, D.C.)

"Sports Talk On T.V. I Nocre Dame Pre-Game Show" Programs preceding Notre Dame games, featuring live audiences, guests, and question and answer segments. (WNDU - South Bend, Indiana)

"Texas Nature Cmservancy: Saving the Best

"Wake Up With Larry Richert" A daily program featuring news and sports segments in a magazine format, which was broadcast in 1990 and 1991. (KDKA - Pittsburgh, Pennsylvania)

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JSC WRITTEN REBUTTAL STATEMENT 'Weekend Scoreboard'' A twice-weekly live show featuring game highlights, scores, and interviews. (WLVI - Cambridge, Massachusetts)

"32 This Wee~' A weekly public affairs program, including interviews. Subjects discussed include caring for aging loved ones, fatherhood in the 90's, racism, and the crisis in education. (WFLD - Chicago, Illinois)

Besides illustrating the variety of program types stations produced in addition to newscasts, this list provides examples of the special regional appeal station produced programs, including news programs, had within the areas in which they were retransmitted as distant signals.

For each program, the following information is provided in Exhibits 7 through

33 (an index to the exhibits, which are arranged alphabetically by station call sign, is also attached to my statement for ease of reference):

a. A distant carriage listing, showing the locations of each of the Form 3 cable systems that carried the station as a distant signal in each accounting period of 1990, 1991 and 1992, according to Cable Data Corporation data. These lists also show whether the station was carried as a partially distant signal (which means that it was "local" to the remainder of the system's subscribers), and, for network affiliates, whether the system also carried a different affiliate of the same network. This latter information provides evidence that the appeal of the station was principally its non-network programming. The lists also show whether the station continued to be carried by the same system during periods when it filed a "Form 1/2" rather than Form 3 Statement of Account, and in such cases, whether the station was a distant or local signal according to an analysis reported in the Cable Data Corporation data.

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JSC WRITTEN REBUTTAL STATEMENT b. A map showing the "ADI" in which the station is located, and the ADI in which each of the Form 3 cable systems that carried the station as a: distant signal in the second half of 1990 is located. The ADI ranks are also indicated. (ADls are mutually exclusive geographic television markets designated by the Arbitron Company so that each includes all counties within which the preponderance of viewing is to "home market" stations. ADis are ranked in descending order by size, with the largest market ranked "l.") The map shows the distance of each distant cable system (by reference to 35-mile and 150-mile circles) from the city in which the station is located.

c. A map showing the extent of subscribership in 1990 to daily newspapers published in the community in which the station is located.

We selected the programs in order to provide good examples of variety in

program type, station type (i.e., both network affiliates and independents), and

geographic location. Each demonstrates that any presumption that station-produced

"local" programs are unlikely to be the subject of high "viewer avidity" among the

distant cable subscribers who actually receive them is incorrect. Rather than go

through them all in detail, let me focus on a few.

"Front Runners." This program is well produced and interesting, and while it

focuses on the lives of residents of the region, their stories will be of interest to cable

subscribers anywhere. Exhibit 6 is a videotape that begins with a brief segment from one of the programs that aired during 1990.

As you will see from looking at the information provided in Exhibit 12, this program is retransmitted to five distant cable systems within a relatively nearby region. All are within 150 miles of Seattle. Although only one is within the Seattle

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JSC WRITTEN REBUTTAL STATEMENT ADI itself, the others are located in immediately adjacent smaller ADis. One cable system, Astoria, reported KOMO as a "partially distant" signal, which means that it was considered a local signal for a portion of the system's subscribers. All of the cable communities in which KOMO is a distant signal are relatively smaller cities, for which

Seattle is a regionally important central city. This can be seen in part through the extent of subscribership, shown on the next page of Exhibit 12, to the Seattle daily newspapers. We have also provided a listing of the other stations carried by the Form

3 cable systems which carried KOMO as a distant signal. It is apparent from the stations carried as "local" signals by those systems that the Seattle stations represent an important source of larger-market, higher production quality programming for their subscribers.

The program was syndicated by KOMO to other stations, beginning in

September 1992. I have a brief segment of a tape of a Front Runners program that was broadcast in that month. As you will see, the general format and appeal of the program did not change when it was syndicated by the station to other markets.

"FYI Pittsburgh." This public affairs program was a talk/interview show that occasionally also went on location for investigative reports. Topics covered by the program during 1990, 1991, and 1992 included how to buy a used car, how to handle the effects of divorce on children, how to go into business for yourself, and a variety of health and medical issues such as arthritis, Alzheimer's Disease, AIDS in the

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JSC WRITTEN REBUTTAL STATEMENT workplace, diet, and organ transplants. As you will see from the map included in

Exhibit 30, WPGH was carried by systems in numerous smaller communities in nearby western Pennsylvania and West Virginia, where Pittsburgh is an important regional center.

"Sports Extra." The focus of WTTG's weekly sports talk program is even more general. As the following video clip shows, it is a well-produced program that provides sports news and analysis that would be of interest to most sports fans.

The Tribunal has recognized the special appeal of sports programming in the cable marketplace. The sports programming produced by many stations is appealing for the same reasons. WTTG, like most other stations, also includes sports news and commentary in its evening newscasts. In the 1989 proceeding, NAB presented a witness who had been the manager of the cable system serving Henrico, Virginia, who testified that WTTG's station-produced news and sports programs were of special interest to his subscribers, both because WTTG offered a 10:00 news program and because its Redskins coverage was appealing to regional fans.

"Michiana Repa.1:/Spcrts Talk m. TV." WNDU in South Bend, Indiana, was carried as a distant signal on systems clustered around the Michigan/Indiana border.

Both its weekly current affairs program and its Notre Dame pre-game shows, to the extent they focus on news stories and sports of substantial interest to people within

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JSC WRITTEN REBUTTAL STATEMENT this region, will obviously be of substantial appeal to distant cable subscribers and

operators.

"Pennsylvania Outdoor Life." While WNEP's carriage is more extensive than

WNDU's, it is again clustered within a region in which shared interests make station produced programs valuable. Many of the distant cable systems are located within the station's ADI. All are located within the mountainous central region of the state in which hunting and fishing are common activities. Although the specific subject matter of a program such as "Pennsylvania Outdoor Life" might be less appealing to cable subscribers in distant states or in other regions of the country, the region in which it is actually retransmitted is one in which it will be of most intense interest.

"Weekend Scxreboard." I would also note the sports news and analysis show on

WLVI from Boston. The loyalty of sports fans throughout New England to the Boston teams is legendary. As you will see from the maps provided as Exhibit 27, much of the distant carriage of WLVI occurs within the Boston ADI itself. The remainder occurs in contiguous smaller ADis within New England. Moreover, you will see from the newspaper subscription map that there is substantial interest throughout the same region in the news of this regionally dominant urban area.

"Popo:rn." The next videotape is an example of a children's program, from station KATU in Portland, Oregon. This opening segment, aired in 1992, shows the

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JSC WRITTEN REBUTTAL STATEMENT humor and appeal of the program for children, and illustrates some of the subject matter the program covers. It has regular segments on such topics as news, safety,

Northwest history, endangered species, geography and karate. In its presentation and subject matter, it would have broad appeal to children in the mostly smaller cable communities in which it is carried as a distant signal.

"Popoorn Covers the Earth." The next videotape segment was a special program produced in 1990 as part of the Popcorn series . As you will see, it is a lively treatment of environmental issues that are of concern to people in the Pacific

Northwest and elsewhere.

Station-produced children's programs, such as "Popcorn," can be both informative and entertaining. Since cable households, on average, have more children than non-cable households, appealing children's programs contribute substantially to the perceived value of the cable service. Especially for educational programs such as

"Popcorn," the parents who make the cable subscription decisions will value the availability of such programs highly.

"Cane and Meet the Music.." The next program of which I have a tape excerpt, a one-time-only special rather than a regularly scheduled program, is a station production of a concert by the Philadelphia Orchestra. KYW in Philadelphia has periodically broadcast concert specials, but this program in March 1990 marked the

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JSC WRITTEN REBUTTAL STATEMENT 90th season of the Philadelphia Orchestra. I have included parts of the opening and ending of the program on the videotape.

Obviously, cable subscribers anywhere can enjoy the performance of this well regarded orchestra. The cable subscribers who actually received the program on a distant signal basis, however, were within a relatively nearby region, close enough to

Philadelphia to be able to attend live performances of the Orchestra themselves.

"Remembering Margo." The next videotape excerpt is of a serious program that addresses a serious issue, violence against women. In its opening, you will see brief excerpts of the grim news footage that set the stage for the broader questions the program investigates. This was an example of a station looking behind the shocking news story, and producing an in-depth program that attempts to help other women before it becomes too late for them. While the news event occurred in Denver, the station's treatment of the issue is of value to viewers anywhere.

"Texas Nature Cmservancy: Saving the Best tt Texas." The next videotape segment is of the opening of a documentary describing the natural beauty and varied wildlife of the state of Texas. Again, while the program is of a quality and subject matter that may be interesting to people anywhere, it is of particular appeal to people within the region in which KXAS is actually carried as a distant signal.

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JSC WRITTEN REBUTTAL STATEMENT While I have not highlighted them, the other examples I have listed, in conjunction with the accompanying exhibits, consistently illustrate the reasons why station-produced programs are especially appealing in the distant cable markets where they are actually carried. Because of the "clustering" of the distant signal carriage, even local news of the station's home market will be of interest to the distant cable subscribers. Where, as is often the case, the station's home community is a larger regionally important center, and the cable systems are located in smaller markets themselves, the importance of station-produced news programs is further enhanced.

D. Again in 1990, 1991 and 1992, the Great Majority ex Distant Signal Carriage ex Non-Superstatioos Was Clustered Within a Close-in Region.

In the 1989 proceeding, we presented detailed analyses of the patterns of distant signal carriage, comparing 1989 with 1983. We showed that more than 86% of all incidents of carriage of non-superstation distant signals were clustered within 150 miles of the community from which the signal was imported. This percentage was up from approximately 82% in 1983. The five most widely-carried superstations, WTBS,

WGN, WWOR, WPIX and WSBK, were omitted from the analysis, since their programming does not present the same issue of "local appeal" about which we understand the Tribunal was concerned. Even for some of the superstations, however, there is a degree of regional concentration of carriage, and the increasing mobility of our society extends communities of interest ever wider.

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JSC WRITTEN REBUTTAL STATEMENT In 1990 through 1992, the non-superstation clustering effect intensified. As

reported in Mr. DeFranco's testimony, the percentage of non-superstation distant

signal carriage within 150 miles continued to increase, from 86.4 in 1990, to 86.8

percent in 1991 and 87.6 percent in 1992. And as shown in the 1989 case testimony

and exhibits of John Elkins, there was a complementary trend of outward growth of

populations around center cities through 1990, which enhanced the probability that

distant cable subscribers would have ties with and interest in news of regionally

important central cities. I have reproduced his summary exhibit showing population

growth trends through 1990 as Exhibit 34.

The Tribunal noted in its 1989 decision that the trend towards regional

clustering of distant signals was offset by a countervailing trend in the mix of signals, which it said "definitely tended to more independent stations and fewer network

stations." This factual assumption was incorrect, however, because the clustering

analysis related only to non-superstations. As is shown in Exhibit 35, the number of

non-superstation distant signal incidents represented by carriage of network affiliates was higher in 1989 than the number of non-superstation independent station distant incidents. (As shown in Exhibit 35, this is also true for non-superstation 3. 75 signals.)

This gap widened somewhat between 1989 and 1992. As our examples show, of course, independent stations broadcast strong station-produced programs as well. For both non-superstation independents and network affiliates, the clustering effect means that station-produced programs were of substantial value in tl:.e distant markets

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JSC WRITTEN REBUTTAL STATEMENT where they were carried. Thus, the Tribunal's reason for discounting NAB's 1989 evidence was unfounded.

For 1990 and 1992, NAB has also analyzed the extent of carriage of distant signals by cable systems within the same ADI as the station or within smaller ADis.

As reported in Exhibit 41, 83 percent of all distant signal incidents in 1990, and 84 percent in 1992, involved carriage of a station within the same ADI or into a smaller

ADI.

Carriage within the same ADI strongly supports the cable operator survey evaluation of station-produced programming, since the distant cable system is in a county in which the preponderance of the viewing is to stations from the same community as the distant signal. Carriage into smaller AD Is also suggests· a high value for station-produced programs, since larger market stations tend to have higher production quality, and thus would produce programs that may be relatively more attractive than programs available locally in the smaller market. This phenomenon is described by ~s. Chang in her testimony, and is illustrated also by the letters WGN has received.

The objective evidence about patterns of carriage thus supports giving full credit to the overall valuation of station-produced programs in the cable operator survey.

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JSC WRITTEN REBUTTAL STATEMENT VI. THE HARM CRITERION.

To the extent there is any harm caused to copyright owners by cable retransmissions, NAB-represented station claimants suffer the same kinds of harm as those represented by other claimant groups.

One kind of claimed harm refers to the effect of audience fragmentation in the local market due to the importation of distant signals from elsewhere. For example,

PBS stations have claimed to be harmed through the loss of member donations when a distant PBS affiliate is imported into the market, and the sports leagues have argued analogous harm because of audience competition from imported games featuring different teams. NAB-represented stations are subject to the same kind of harm as a result of audience diversion to imported distant signals. For advertising-supported stations, lower ratings mean lower revenues.

With respect to program syndicators, any special claim they may previously have made that they should be compensated for harm was eliminated by the reimposition of the FCC's syndicated exclusivity rules in 1990. Since 1990, syndicators have been able to protect their own interest by selling exclusive rights that would enable the stations to require cable systems to delete duplicative programs from distant signals. Because they now have it within their power to prevent head-to head competition with their own program on a cable-imported distant signal,

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JSC WRITTEN REBUTTAL STATEMENT syndicators could not have been harmed any more than other program owners by. distant signal carriage of their programs in 1990 through 1992.

The cable operator surveys provide a measure of the extent of the harm experienced by claimants from what the Tribunal characterized as the deprivation of their "opportunity to receive an adequate economic benefit from the exploitation of

[their] works" through distant retransmission. The cable operators allocated between

11.9 percent and 14.8 percent of the value of the distant signals they actually purchased to the news and public affairs programming on those signals. Stations would suffer harm to the extent they received lesser economic benefit than the value the cable operators allocated. For this reason as well, the Panel should base its allocations on the results of the cable operator surveys.

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JSC WRITTEN REBUTTAL STATEMENT JSC Exhibit No. 4 REBUTTAL STATEMENT OF RICHARD V. DUCEY

I am appearing on behalf of the National Association of Broadcasters. A summary of my educational background and experience was included as part of my direct testimony in this case.

The purposes of my rebuttal testimony are to present an analysis of cable network fees for news programming comparable to that presented by PBS witness

John Fuller, and to provide information about a commercial survey of cable subscribers that refutes the testimony of MPAA witness Robert Sieber about the significance of relative viewing ratings of cable networks.

I. Cable News Network Analysis

I have read the portion of Mr. Fuller's testimony in which he describes the calculation of a PBS royalty share based on an analogy to the licensing fees for the

Arts & Entertainment cable television network. PBS Direct Case, Testimony of

John W. Fuller, pages 17-24. Using the same methodology presented by Mr.

Fuller, I have calculated an estimated royalty share for U.S. commercial television broadcasters based on the licensing fees paid for CNN in the 1990-1992 period.

This kind of analysis is necessarily indirect and imprecise. For example, no cable network programming can be considered a perfect substitute for the programming on distant signals. Moreover, the marketplace negotiations that

JSC WRITTEN REBUTTAL STATEMENT determine the price and other terms under which a cable operator ultimately carries a cable network do not occur in the regulated distant signal marketplace.

And in order to arrive at a comparable share estimate for distant signal programming based on an analysis of data about cable networks, various adjustments and assumptions must be made.

By contrast. the Bortz survey of cable operators, about which I have testified previously, is a direct measure of the relative value of the programming types actually carried on the distant signals the cable operators chose to purchase under the compulsory license. With this direct evidence available, information about analogous marketplaces should not be relied on in lieu of the Bortz survey

results. I am presenting the analogous marketplace analysis that follows only for

the purpose of providing a basis for comparison with the analysis presented by

other parties.

So that this comparison can be made, I have sought to apply the same

methodology Mr. Fuller used, with adjustments only as necessary to account for

the differences between PBS and commercial station signal carriage. First. I have

selected the CNN cable network service as the most appropriate analogue to

station-produced news programming. While not perfectly comparable, I believe

this selection is appropriate because CNN provides news and informational

programming that is similar in nature to station-produced programming, and

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JSC WRITTEN REBUTTAL STATEMENT engenders a similar kind of "avidity" among potential subscribers as that I described in my direct case testimony. In fact. I understand that. as NAB witness

Caroline Chang testified. CNN airs some news footage that was itself originally produced and broadcast by U.S. commercial stations like KTVU that are carried as distant signals.

Like Arts & Entertainment, CNN is sold to cable operators for a monthly per subscriber license fee. During the years 1990, 1991 and 1992. CNN charged cable operators a top-of-the-rate-card fee of 32, 33 and 35 cents per subscriber per month, respectively.

Before a comparable estimated award for U.S. commercial television station produced news programming can be derived, two adjustments must be made to

the license fee per subscriber figure. First, during the 1990-1992 period, Turner

Entertainment Services apparently offered Headline News free when a cable

operator carried CNN. To take into account the fact that two cable channels were

being received for one price, I have divided the per subscriber license fee in half,

resulting in CNN per subscriber fees of 16 cents, 16.5 cents, and 17.5 cents for

1990, 1991, and 1992, respectively.

The second adjustment is to reduce the CNN per subscriber fee to account

for the fact that only a portion of the U.S. commercial television signal is made up

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JSC WRITTEN REBUTTAL STATEMENT of station-produced programming, whereas the CNN license fee is paid for a 24 hour channel of news and information programs. I have based an estimate of the average percentage of time occupied by such programs on distant signals on the reported results of Mr. Lindstrom's viewing study. According to Joint Sports

Claimants Exhibits 36-X. 37-X, and 38-X, these percentages were 11.9% for 1990,

14.1 % for 1991, and 12.8% for 1992. 1 Multiplying these percentages by the per subscriber fee for CNN results in monthly per subscriber fees of 1.904 cents for

1990, 2.3265 cents for 1991, and 2.240 cents for 1992.

Applying these derived license fees to the total subscriber distant instances of carriage for all commercial television signals during each year from 1990 to

1992 leads to estimated "licensing revenues" for commercial television station- produced programming as reported in Table 1. Since the per subscriber fees are monthly fees, they are multiplied by 12 to get the yearly Total Fee Revenue. To arrive at the final estimated royalty percentages, these figures are divided by the total applicable cable royalties, which in this case include all royalties, not just the

Basic Fund to which PBS's analysis was limited, because commercial stations are, unlike PBS stations, subject to the 3.75% fee. The results, with these adjustments

1 I believe that these percentages understate the average amount of station produced programming on distant signals, because the stations in the viewing study overrepresent independent stations, which have a smaller percentage of station produced program time than network affiliates.

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JSC WRITTEN REBUTTAL STATEMENT to reflect the different circumstances of commercial and non-commercial distant signals. can be compared with the results of Mr. Fuller's analysis.

Table 1

Year 1990 1991 1992

License Fees 1.904 2.3265 2.240 Distant 111.692.735 113,843,918 115.305,762 Subscribers Total Fee $25,519,556 $31,782,945 $30,994.189 Revenue Percentage of 15.0% 17.6% 16.4% Royalty Fund

As with Mr. Fuller's Arts & Entertainment analogy, a further adjustment can be made to these figures to take account of the fact that cable operators are unable to generate any advertising revenue on distant signals. Using the same figures presented by Mr. Fuller (3.6% for 1990, 3.6% for 1991, and 4.1 % for 1992), and using the same adjustment methodology presented by Mr. Fuller, the adjusted estimated fee revenues and percentage shares for commercial television 8tation produced programming are as follows:

Table 2

1990 1991 1992 Total Fee $24,600,852 $30,638,759 $29,723,427 Revenue Percentage of 14.5% 17.0% 15.8% Royalty Fund

-5-

JSC WRITTEN REBUTTAL STATEMENT II. Viewing as a Measure of Value for Cable Networks

I have read the portion of Mr. Sieber's testimony in which he discussed the importance of television ratings to the cable industry. I focused specifically on the charts presented ranking selected cable networks by average total day ratings for

1990, 1991, and 1992. and his statement on page 8 of his testimony that "[l]ower ratings equate to a lower subscriber involvement and more limited appeal."

Program Suppliers Direct Case, Testimony of Robert Sieber, pages 8-10.

Contrary to Mr. Sieber's suggestion, the value of a cable network to subscribers and the intensity of subscriber interest in a cable network are not measured by viewing. Even though cable operators may sometimes sell advertising on cable networks, their principal source of revenue is subscriber fees, and, as with distant signals, the programming preferences of their subscribers are more important than the amount of viewing their subscribers might do.

The importance of non-viewing information is demonstrated, for example, by the fact that at least one company, Beta Research Corporation, is in the business of performing periodic survey and market research for numerous cable network and cable operator clients that reports "value" measurements for cable networks.

These studies asked random samples of cable subscribers about the value the subscriber placed on various cable networks, the subscriber's satisfaction with

those cable networks, and the importance of the cable networks to the subscriber.

-6-

JSC WRITTEN REBUTTAL STATEMENT According to Beta Research. the studies are purchased by almost every basic cable network and by five of the top ten cable MSO's.

The results of these studies for 1991 and 1992 are summarized in Exhibits

44-R and 45-R, attached to my testimony. They rank selected cable networks in terms of the importance, value, and satisfaction criteria. As you will see by comparing these rankings to the viewing rankings emphasized by Mr. Sieber in his testimony, news and information cable services, like CNN, ranked consistently higher in subscriber valuation than in total day ratings. In general. the viewing measure presented by Mr. Sieber does not correlate well with the value of these programming services to cable subscribers or, consequently, to their value to cable operators.

-7-

JSC WRITTEN REBUTTAL STATEMENT Before the COPYRIGHT OFF1CE LIBRARY OF CONGRESS Washington, D.C. 20540

In the Matter of

1990, 1991, and 1992 Docket No. 94-3 CARP-CD90-92 Cable Royalty Distribution Proceedings

DECLARATION

I, Richard V. Ducey, declare under penalty of perjury that the Rebuttal

Statement of Richard V. Ducey presented in the 1990-1992 Cable Copyright

Royalty Proceeding is true and correct to the best of my knowledge, information

and belief.

Richard V. Ducey

JSC WRITTEN REBUTTAL STATEMENT JSC Exhibit No. 5 Statement of Dr. Richard V. Ducey

I. Background

I am the president of SpectraRep, a division of the BIA Financial Network

(BIAfn), for which I also serve as executive vice president. SpectraRep specializes in alternative solutions for digital content distribution. BIAfn is a company that offers merchant banking, management consulting and database publishing services and products to the broadcast and telecommunications industries. I joined BIAfn in

March 2000.

Prior to joining BIAfn, I served as senior vice president of the National

Association of Broadcasters' (NAB) Research and Information Group. I joined NAB in September 1983 and over time came to run the research & planning, library & information center, and management information systems divisions of NAB.

I went to NAB after serving on the faculty of Michigan State University in the

Department of Telecommunication. Since coming to the Washington, DC area, I have also worked on the faculties of The George Washington University Graduate

School and the University of Maryland. In these academic assignments, I taught courses and did research in the areas of research, technology and strategic marketing related to the media and computer industries. I have also done independent consulting work in these areas over the years.

I received my Ph.D. from Michigan State University, specializing in telecommunication technology and market research methods. I authored or co authored over sixty published research articles and papers in these areas, including

JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case

work on market segments in the cable television industry. I serve on the editorial and

review boards of several scholarly journals and organizations. I have taught both

undergraduate and graduate courses and have conducted industry panels, seminars

and speeches on research methodology, statistical analysis, telecommunication

technology and strategic marketing.

I had the opportunity in 1978-1979 to work as a cable system programmer at what

was then called Upstate Cablevision in North Syracuse, NY. This system had about

13,000 subscribers. During this period the old syndicated exclusivity rules were still

in effect. Part ofmy job as the program director was to black out certain syndicated

programs on distant signals and to select other non-protected distant signal

programming as replacements. In doing this, I got first-hand experience in evaluating

and selecting programming available on distant signals for the purpose of maximizing

the appeal of our cable service to our subscribers.

My current understanding about the cable marketplace comes from my extensive

academic and industry research as well as my first-hand experience in talking directly

with that system's subscribers, and reviewing subscriber surveys with various cable

operators. For example, Upstate Cablevision conducted its own subscriber surveys

and I regularly handled phone calls and correspondence from subscribers. Later, I

also had access to subscriber surveys as part of my academic research and industry

consulting. And I continued to monitor and study the cable industry, through

reviewing industry trade press, meeting with professional colleagues, and reviewing

academic research as part ofmy job at NAB. As a member of the editorial boards of

the Journal of Broadcasting and Electronic Media, the Journal of Media Economics,

2 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case

and the Communication Research; I have also reviewed research on various aspects

of the cable industry.

I have participated in three prior cable royalty proceedings on behalf of NAB,

twice before the Copyright Royalty Tribunal and most recently before the CARP that

detem1ined the 1990-1992 Phase I royalty allocations. I have testified in one Phase II

proceeding, involving the 1986 royalty funds. My testimony from those proceedings

has been incorporated into the record of this proceeding, but for ease of reference I

have repeated the summary of my qualifications above. My background and

qualifications are described further in an attachment to this Statement.

II. Overview

NAB is making the claim for royalties for the ''U.S. Commercial Television"

category, which covers programs broadcast by U.S. commercial stations that were

carried as distant signals in 1998 and 1999. The U.S. Commercial Television

program category is defined as including all programs produced by or for a station

that were not broadcast on any other commercial television station during the year in

question, and that aren't composed principally of syndicated elements (like cartoon

shows and station-hosted movies). Typical Commercial Television programs include

daily newscasts, public affairs talk shows, children's programs, news magazine and

interview shows, sports programs, specials, documentaries, and other programs.

They are retransmitted along with any syndicated shows, movies, sports games, and

syndicated devotional programs also aired by the station when it is retransmitted by a

distant cable system.

3 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case

In this Statement, I will comment on some significant changes in the cable

industry since 1992, the last year for which the distribution of cable copyright

royalties among Phase I parties was decided by a CARP. These changes have

affected the quantity and nature of programming in the cable distant signal

marketplace. NAB is presenting what I believe is the most comprehensive survey to

date of programming on the television stations carried as distant signals on Form 3

cable systems. This study presents a unique and valuable resource in quantifying the

amounts of the different programming types available to cable subscribers from

distant signals, and allows a quantitative measure of the change in the distant signal

programming marketplace since the 1992 decision.

I will provide interpretations and conclusions about the major findings of this

study. I will present a couple of examples of NAB-represented programming to show

to the Panel as part of my statement. And finally, I will briefly introduce an

econometric study on which NAB believes the Panel should rely in measuring the

relative marketplace values of the distant signal program types.

III. Changes in the Cable Industry Between 1992 and 1998-1999

There have been several significant changes in the cable industry since 1992, the

last year for which the Phase I copyright royalty distribution was litigated. From a

Copyright Arbitration Royalty Panel perspective, the change that most directly and

substantially affected the distant signal marketplace was the conversion of Atlanta

superstation WTBS, as of January 1, 1998, from a distant signal to a basic cable

network. This change resulted in a significant and quantifiable shift in the types of

4 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case

distant signal programming cable operators collectively made available to their

subscribers under the compulsory license in 1998 and 1999, compared with prior

royalty years.

A. Cable Industry Overview

The cable industry's principal revenue source is basic cable subscription fees, and

this has only increased in importance over time. Between 1992 and 1999, cable

increased its subscribership from 61.5% of U.S. television households (57.2 million

households) to 68.0% (68.5 million households), according to Nielsen Media

Research. Between those same two years, basic cable subscription fees grew at an

even greater rate, and also increased as a share of total cable system revenues.

Table 1 below reports data provided on the website of the National Cable and

Telecommunications Association, the largest cable industry association. As shown in

the Table, basic cable revenues increased from $12.433 billion to $23.146 billion

between 1992 andl999. In 1992, subscriber fees for basic cable services accounted

for 58.98% of all revenue, and by 1999 this had increased to 62.69%. The relative

importance of premium service revenue declined over this same period. The

remaining revenue, in the "Other" category, grew from $3.5 billion in 1992,ofwhich

$0.8 billion was local cable system advertising revenue, to $8.8 billion in 1999, of

which approximately $2.5 billion was local advertising revenue. (Cable operators

may sell advertising time on some cable networks, but not on any distant signals.)

5 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case

Table 1. Amount and Source of Cable System Revenue 1992-1999 ($ millions)

Year Basic Premium Other Total Basico;; Premium% Other% 1999 $23, 146 $4,930 $8,843 $36,919 62.69% 13.35% 23.95% 1998 $21,830 $4,857 $6,816 $33,503 65.11;>% 14.50% 20.34% 1997 $20,405 $4,823 $5,265 $30,493 66.92% 15.82% 17.27% 1996 $18,395 $4,757 $4,554 $27,706 66.39% 17.17% 16.44% 1995 $16,860 $4,607 $3,954 $25,421 66.32% 18.12% 15.55% 1994 $15, 170 $4,394 $3,570 $23,134 65.57% 18.99% 15.43% 1993 $13,528 $4,810 $4,505 $22,843 59.22% 21.06% 19.72% 1992 $12,433 $5,108 $3,538 $21,079 58.98% 24.23% 16.78% Source: National Cable and Telecommunications Association

Cable operators continued during 1992-1999 to use more sophisticated techniques

in creating program offerings by arranging channels into bundles sold as differently

priced tiers. A basic tier subscription is the minimum entry point to purchase any

additional tiers of services. But cable operators often offer other tiers containing

bundles of additional programming services, sometimes including distant signals.

The cable operators' objective in bundling and tiering their program offerings is

"yield maximization." In other words, given a finite array of programming services,

the economic problem to be solved by a cable operator is with what groupings and at

what price points will the maximum revenue yield be generated from a group of

subscribers and potential subscribers. As Dr. Wildman testified in the last copyright

distribution litigation:

Statement of Dr. Steven S. Wildman, NAB Phase I Direct Case, 1990-1992 Cable Royalty Distribution Proceeding, at 5.

6 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case

Simply put, if programming a subscriber particularly values is located on a higher

tier, he or she must purchase both the basic (or "enhanced basic") and the higher tier

to get what is most desired. But the basic or enhanced basic tiers themselves must

offer a bundle of programming channels that potential subscribers perceive as being

sufficiently valuable to justify subscribing to the cable service at all, and a significant

number of subscribers continue to subscribe only to these tiers. The selection and

positioning of distant signals is one of the factors that helps a cable operator

maximize its basic revenue.

For "Form 3" cable systems, which pay by far the largest portion of the cable

copyright royalties, success in maximizing their basic revenue also translates into

higher royalty payments. This is because their royalties are calculated as a percentage

of their gross receipts from all tiers of service on which they carry broadcast stations.

B. The Big Change: Conversion of WTBS from Superstation to Basic Cable Network

On January 1, 1998, Turner Broadcasting' s WTBS-TV officially made the conversion from superstation to basic cable network. From 1978 through the end of

1997, cable operators had carried WTBS as a distant signal under the compulsory license, and paid copyright royalties for that carriage into the Copyright Office, which were then distributed to copyright claimants through the Copyright Royalty Tribunal and later through the CARP process. Beginning on January 1, 1998, cable operators that wanted to continue carrying WTBS generally were required to enter license agreements directly with WTBS, and any license fees they paid went directly to WTBS. If any fees were then distributed among copyright owners of programs that appeared on the station, it would

7 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case presumably have been on the basis of private agreements among them. WTBS, which was carried as a distant signal by about 95% of all Form 3 cable systems at the end of

1997, was carried by only about 0.4% of those systems as a distant signal in the first half of 1998. (Most systems apparently continued to carry the station as a direct-licensed cable network, since its overall coverage stayed roughly constant between 1997 and

1998, at about 97% of all U.S. households with multichannel service.)

This conversion had an enormous impact on the cable distant signal marketplace.

First, it reduced the overall amount of royalties paid for distant signals by tens of millions of dollars, as you can see in the chart attached as Exhibit 1. But more specifically, it changed the complexion of the distant signal universe in terms of the incidence of carriage of different types of stations on Form 3 cable systems. As you can see in Exhibit

2, the incidence of carriage of independent stations by Form 3 systems plummeted in ,.. 1998, going from a high of about 5,000 total incidents in 1992 (an "incident" is counted for each case of a cable system carrying each distant signal) to about 2,300 in 1999. In

Exhibits 3 and 4, which break down the independent station carriage among superstations and other stations, and then among specific superstations, it becomes clear that the great majority of this change in the configuration of the distant signal universe was because of the termination of distant signal carriage of WTBS.

The switch was anticipated to generate significantly more in additional revenue to

Turner Broadcasting System (TBS) through subscriber fees collected directly from the cable operators than had been paid for all ofWTBS's carriage through the CARP

8 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case process. 2 According to one source, this resulted in rate hikes of as large as 400% to some cable operators. 3

In themselves, these changes in the mix of station types carried as distant signals might not necessarily require a change in the cable royalty awards. But WTBS's programming was more heavily weighted towards syndicated series, movies, and sports programs and had less station-produced and devotional programming than the rest of the distant signal universe. Moreover, it was the most widely carried distant signal by far, and represented a substantial amount of the total programming purchased by cable operators through the distant signal compulsory license. Thus, when WTBS was removed from the distant signal universe, the overall programming configuration changed significantly.

C. Distant Signal Programming Changes Between 1992 and 1998-1999

NAB is submitting a comprehensive statistical study conducted by BIA Financial

Network ("BIA:fu Study"), "Estimating Program Time on Distantly Carried Broadcast

Stations" in 1992 and the 1998-1999 period. This is a unique and valuable resource for the Panel's determinations because, to the best ofmy knowledge, it provides the most comprehensive empirical record of the programming that was actually on the distant signals carried by Form 3 cable systems, classified by claimant categories for the appropriate time frames.

2 "Turner Broadcasting System (TBS) Said It Will Convert WTBS Atlanta to Cable Network December 31," Communications Daily, August 4, 1997. 3 Federal News Service, October 30, 1997 (Testimony of the Small Cable Business Association Before the House Subcommittee on Telecommunications, Trade and Consumer Protection).

9 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case Corrected February 14, 2003

The scope of the study was enormous, covering millions of programs aired on 126 days across three years by the over 600 U.S. commercial stations carried as distant signals on Form 3 cable systems, in addition to accounting-for the programming time of between 160 and 200 educational, Canadian, Mexican, and low-power stations also carried during 1992, 1998, and 1999.

Table 2 presents the summary results of this BIAfn programming study. In column 1 of the results table, the six claimant categories are represented. The successive columns present the percentages by claimant category of the programming aired on the stations carried as distant signals on Form 3 cable systems for 1992 as compared with

1998/1999.

The percentages in Table 2 represent the relative amount of distant signal program minutes accruing to each category in the Form 3 part of the distant signal universe. The final percentage measures, which take into account both the number of programming minutes and the number of subscribers who had access to the stations that aired the programs, represent the relative amounts of non-network distant signal programming in each category that were actually available to Form 3 cable subscribers.

Table 2. Shares of Different Claimant Categories -1992, 1998 & 1999

Claimant Category 1992 1998-1999 Program Suppliers 77.87% 60.38o/c Commercial TV 8.79% 13.00o/c Public Broadcasting 5.04% 14.87o/c

Sports 4.75% 4.91% Devotional 2.55% 2.94o/c Canadian 1.00% 3.68% Source: BIA Financial Network

10 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case Corrected February 14, 2003

For 1992, 8.8% of all distant signal programming time represented programs in the "Commercial TV" claimant category represented by NAB. In other words, once you sum up all the minutes of programming carried by distant signals (in proportion to their relative availability to subscribers), 8.8% of these minutes are from programs in the NAB category. In 1998/1999, "Commercial TV" distant signal program minutes accounted for

13. 0% of the total number of such minutes. The overall change in the configuration of the distant signal programming universe between 1992 and 1998/1999 is shown in graphic form in Exhibit 5.

Now in terms of assessing the impact of removing WTBS from the distant signal universe, two factors should be considered. First is the overall amount of distant signal programming removed from this copyright distribution proceeding. The second factor is the relative amount of programming remaining in the mix.

In the first case, the removal of WTBS from the pool reduced the copyright payments paid into the distribution fund by cable operators and therefore the total fund is reduced.

The second factor bears more investigation. In 1992, WTBS carried a range of types of programming. But since WTBS was the most widely carried distant signal, its particular mix of programming heavily weighted the overall distribution of program percentages across claimant categories. In other words, to the extent WTBS differed from the programming mix of the average station carried as a distant signal, it heavily influenced the overall program category results.

The difference in the mix of programming in the distant signal marketplace with

and without the presence ofWTBS is a major explanation for the changing configuration

11 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case Corrected February 14, 2003

of the distant signal program category data in Table 2. Exhibit 6 is a graphic that shows

the relative percentages of programs in the relevant categories on WTBS and on all other

stations carried as distant signals in 1992. As you will see, "Commercial TV"

programming was only 6.2% of programming minutes on WTBS, but an average of

10.5% of non-network programming across all the other distant signal stations in 1992.

Taking WTBS almost entirely out of the mix in 1998 and 1999 was thus a major

contributor to the change in the programming configuration in 1998-1999 shown in

Exhibit 5.

Both the Public Television and Canadian programming shares increased between

1992 and 1998-1999, but for a slightly different reason. Because the total size of the

distant signal programming universe decreased when WTBS made its conversion, PBS

and Canadian programming, which stayed at a relatively constant level of carriage

between 1992 and 1998-1999, now represents a larger relative percentage of the

programming universe.

Of course, if some categories increase in their percentage shares, something else

must decline. In these data we see that the "Program Suppliers" category represents

· virtually all of the corresponding drop, from 77.9% in 1992 to 60.4% in 1998-99. This is

again heavily affected by WTBS's being taken out of the programming mix, since, as you

can see from Exhibit 6, 87.5% ofWTBS's programming in 1992 consisted of syndicated

programs and movies, compared with 71.9% of the non-network programming time

across all the other stations carried as distant signals. WTBS was a very significant factor

in the Program Suppliers share for many years, but it essentially falls out of the equation

in 1998 and 1999.

12 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case

In sum, there was a substantial change in the distant signal program marketplace between 1992 and 1998-1999. That change affects different program categories differently. The evidence compels an increase in the royalty share of the Commercial

Television category and a decrease in the Program Suppliers share.

IV. Commercial Station Programming Description and Examples

The range of programming in the "Commercial TV" category is fairly broad. Of course, station-produced news is included, representing the great majority of the

Commercial Television programming time. These include daytime and evening newscasts as well as morning shows on many stations, which mix news with interviews and informational segments. Another significant category is sports-related programs, such as coaches' shows, pre- and post-game shows, and specials about home teams. In my prior testimony, I explained why station-produced news programming and "home team" sports coverage has value to distant cable operators and subscribers in a variety of circumstances, especially given the fact that distant carriage of non-superstations is generally "clustered" within regions around the home city of the distant station. In this case, NAB witness Marcellus Alexander will provide more details about the regional appeal of station news and other programs based on his own experience.

In 1998 and 1999, the "clustering" effect continued to increase. NAB witness

Larry Defranco will present the results of a study that shows that the percentage of Form

3 instances of carriage within 150 miles of the home city of the station being carried rose to 89.2% in 1998 and 1999. This was up from 87.6% in 1992 and 86.5% in 1989.

Moreover, because superstation carriage represented a lower proportion of overall distant

13 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case carriage as a result of the WTBS conversion, the proportion of overall carriage within

150 miles rose substantially. This means that an even larger proportion of the distant carriage in 1998-1999 was within the relatively closer-in region where news programming about the distant station1s home city would be of greatest relative interest.

Exhibit 7 is a graphic depiction of the mileage distribution ofnon-superstation distant signals in 1999.

NAB is providing the Panel with the kind of comprehensive quantitative evidence that is most directly useful in determining the royalty share. It is also helpful however, to look at some of the specific cases of distant signal programming that go into producing the aggregated results of the quantitative studies. In the 1990-1992 case, I presented evidence about 26 stations and 44 different programs to help provide concrete examples about what types of programs were in NAB's category, in addition to newscasts. This year, I would like to provide just a couple more examples of station produced programming on stations carried as distant signals. These are illustrated by short video excerpts of several station programs, contained on Exhibit 8.

My first example, station KOMU-TV in Columbia, Missouri, illustrates a case of a relatively smaller market station that is retransmitted within a relatively close-in area.

KOMU produces a weekday program called "Pepper and Friends," featuring host Paul

Pepper and his sidekick James Mouser. The format of this program is a typical daytime magazine show, often with a daily theme but with several topics covered in each episode.

In the "Pepper and Friends" episode that aired on March 18, 1998, the theme was

"Child and Health Care Week." Pepper and Mouser organized the show elements around this theme. They included a visit to the neonatal intensive care unit at the regional

14 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case hospital and interviews with hospital personnel about various programs and developments in treatment approaches. Mouser conducted the interviews, and the viewers learned about the hospital's activities, programs and services. Any parent in the region might be interested in learning about these things as one day they may need to pursue these services. In another segment of the same show, Pepper interviewed a guest about her recent trip to Ireland.

This station is carried as a distant signal by just a few relatively nearby cable systems. Exhibit 12 is a map prepared by Mr. DeFranco, showing the locations of the

Form 3 cable systems that carried KOMU as a distant signal. Although the show has a folksy feel that may seem strange for people used to watching programs from

Washington or other big-city stations, the program is carried on a distant signal basis in relatively rural Missouri communities, all of them within about 100 miles of Columbia.

The next program excerpt is a documentary produced by a larger market station.

Sacramento station KCRA-TV aired the special program, "Seeing the Elephant -

Sacramento and the Goldrush" on June 1, 1998. As one of the experts on the show commented, "This is a local story with international interest." The documentary follows

Henry William Bigler's diary as he chronicled the goldrush days. Bigler kept what is recognized as the most accurate account to date the first discovery of gold in the

California goldrush (January 24, 1848) and provided the context and fabric that helped historians document and appreciate what those days were like. The program weaves interviews with authors, historians and others along with pictures and reenactments to develop a comprehensive, informative and entertaining treatment of this historical event.

15 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case

The remaining program excerpts I will show are from WGN, the Chicago

superstation that is carried around the country. The first two are from WGN's weekly public affairs program "People to People." In the program~ one ofWGN's news anchors

or reporters presents an intensive look at a story taken from a current event or news story.

The program develops the story in greater depth, focusing on face-to-face interviews with

the people involved. The first excerpt is from a program aired on May 9, 1998, and arises

from the commemoration of the Holocaust that year. The show begins with a taped

background report on the history of the Holocaust, and then continues with an interview

with a Chicago-area Holocaust survivor, who describes her youth in a way that

emphasizes its normality before the tragic events that overtook her family. It is a

program that establishes a people-to-people connection that transcends the geographic

origin of the station or the show.

The second People to People segment, concerning the release of convicted

murderers from Illinois' Death Row after their exoneration through DNA testing, aired

on August 15, 1998. It is an update of Chicago-area news stories that had appeared on

the station years earlier, and the program begins with footage from those earlier stories.

Again, what may have been a "local" news story about a crime, conviction, and later

release, is developed and presented in a way that has interest beyond the City of Chicago

itself.

The final videotape excerpt is from "The Tenth Inning," a WGN sports talk show

following·baseball games aired on the station. The particular program followed a Cubs

loss late in the 1998 season. As you will see, the program begins with a recap of the

game and its significance in the playoff race, as well as a look forward to the next game.

16 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case

For fans of the team anywhere, the brief discussion of the outcome ofthe game and its ramifications by the station's play-by-play announcers has obvious interest. Cubs fans, of course, are something of a special breed, in light of their long history of disappointment and dashed hopes.

Again, these examples are only a few of the programs making up the Commercial

Television category. They illustrate a few parts of the broad range of circumstances in which cable operators purchase distant signals containing unique station programming.

V. Quantitative Analysis of Marketplace Value

Another NAB witness, Dr. Gregory Rosston, will present the results of an econometric analysis that measures the relative marketplace value of the different program types in 1998 and 1999. This analysis addresses the relationship between distant signal programming in the various claimant categories and the royalties paid by cable operators to carry that programming. Key to the analysis is the availability of the comprehensive programming information from the BIAfu study. Such data, which categorizes programs based on the CARP claimant categories, is not readily available from other sources. An econometric analysis of the comprehensive scope of Dr.

Rosston's would not have been possible without the program data.

The results of Dr. Rosston's study provide a substantial new basis for determining the relative marketplace value of the distant signal program categories and for determining royalty shares. A study that analyzes the distant signal purchases made by cable operators in 1998 and 1999 properly focuses on cable operator behavior rather than subscriber viewing. It goes beyond simple measures of program time, which the CARP

17 JSC WRITTEN REBUTTAL STATEMENT Statement of Dr. Richard V. Ducey NAB 1998-1999 Direct Case has called a secondary criterion. It directly addresses the marketplace value criterion on which the CARP places principal reliance. The results of the study establish that the

Commercial Television award for 1998-1999 should be significantly higher than its 1992 share.

18 JSC WRITTEN REBUTTAL STATEMENT RICHARD V. DUCEY

OFFICE ADDRESS

SpectraRep/BIA Financial Network, Inc. 15120 Enterprise Court Chantilly, Virginia 20151 USA +1 (703) 802-2995 tel +1 (703) 803-3299 fax [email protected]

HOME ADDRESS

9117 Kirkdale Road Bethesda, Maryland 20817 USA +1 (301) 530-9580 tel [email protected]

EDUCATION

Doctor of Philosophy in Mass Media. Michigan State University, East Lansing, Ml. Dissertation title: The Adoption and Application of Computer-Based Telecommunication Technologies by Home Consumers. June 1983.

Master of Science in Telecommunication/Film. Syracuse University, Syracuse, NY. August 1979.

Bachelor of Arts in Communication Studies. University of Massachusetts, Amherst, MA. May 1978.

PROFESSIONAL EXPERIENCE

2000-Present President, SpectraRep (division of BIA Financial Network), Chantilly, VA. SpectraRep specializes in digital datacasting solutions via satellite and terrestrial digital television. Responsibilities include determining the company's strategic direction, developing sales & marketing and technology alliances and partnerships, business development and budgeting, raising external capital. Executive Vice President, BIA Financial Network. Responsibilities include developing and managing strategic and operational consulting business.

1991-2000 Senior Vice President, Research and Information Group, National Association of Broadcasters, Washington, D.C. Areas of responsibility included strategic planning, business process and data modeling and design, deploying and maintaining information technology resources, marketing and policy research and developing new publications. The group consisted of two departments: Research & Planning and Marketing & Management Information Systems. This group's mission was to optimize information and technology support for the Association's public policy agenda and member service programs, including the world's largest broadcast convention and exhibition. The group provided integrated research, planning, computing and information technology, advanced telecommunications, library services and both electronic and conventional publications development to the Association and the industry. The group was created based on my proposal to the President & CEO for combining several previously autonomous units (Research & Planning, Library & Information Center, Data Processing) into a single integrated division under my leadership.

1987-1991 Senior Vice President, Research and Planning Department, National Association of Broadcasters, Washington, D.C. Responsible for ten person department which conducted all phases of policy, marketing and product development research; represent

JSC WRITTEN REBUTTAL STATEMENT NAB as industry research expert, staff liaison for NAB and industry audience research committees. Conduct NAB's long-range planning, plan major projects with and supervise outside consultants, plan major convention sessions; representative to industry and academic groups; responsible for NAB product development; offer expert testimony; prepare filings for governmental courts, agencies and legislators.

1989 Adjunct Faculty, George Washington University, Graduate School of Arts & Sciences. Course taught: "Strategic Planning and Market Management in Telecommunication," Master of Arts in Telecommunication Program.

1986-1987 Vice President, Research and Planning Department, National Association of Broadcasters, Washington, D.C.

Adjunct Faculty, Department of Communication Arts and Theatre, Radio and Television Division, University of Maryland, College Park, MD. Courses taught: "Strategic Market Management in Telecommunication" (RTVF 498), and "Broadcast Research Methods" (RTVF 649).

1985-1986 Director of Marketing and Policy Research, National Association of Broadcasters, Washington, D.C.

1983-1985 Director of Audience Measurement and Technology Research, National Association of Broadcasters, Washington, D.C.

1982-1983 Faculty, Department of Telecommunication, Michigan State University, East Lansing, Ml. Courses taught: "Technology and the Information Society" (TC 801 ), "Basic Telecommunication Technology" (TC 230), "Audience Survey and Analysis" (TC 335), and "Telecommunication Computer Applications" (GAS 492). Research interests: Design, applications and effects of telecommunication technologies.

1979-1982 Graduate Research Assistant, Department of Telecommunication, Michigan State University, East Lansing, Ml.

1979 Announcer, WSOQ-AM/WEZG-FM, North Syracuse, NY.

1978-1979 Program Manager, Upstate Cablevision, North Syracuse, NY.

PUBLICATIONS

2002 Ducey, Richard V., "Datacasting," Chapter 15 in John Rice and Brian McKernan (eds.), Creating Digital Content, (New York, NY: McGraw-Hill), 2002, pp. 211-222 ..

2000 Ducey, Richard V., "Broadcasting in the Internet Age: Emerging Business Models for Broadcasting," in Osso, Rafael (ed.), Handbook of Emerging Communications Technologies in the Next Decade, Boca Raton, FL: CRC Press, pp. 297-308 (chapter 14).

1999 Ducey, Richard V., "Internet+ DTV = UnTV," NAB MultiMedia World Journal, April 1999.

1996 Ducey, Rick, "Manager's Corner: Seven Stages of the Change Process," Electronic Media, October 28, 1996, p. 16.

Ducey, Richard V., "An Overview of the American Digital Television Service Program," Asia-Pacific Broadcasting Union Technical Review, July-August, 1996, pp. 14-20. 2

JSC WRITTEN REBUTTAL STATEMENT 1995 Ducey, Richard V., "A New Digital Marketplace in Information and Entertainment Services: Organizing Around Connectivity and Interoperability," Interactive Industry Review.

1994 Ducey, Richard V. and Mark R. Fratrik, Strategic Planning Handbook for Broadcasters, Washington, DC: National Association of Broadcasters, 1994.

Ducey, Richard V., "Building the Information Highway: The Architecture of Convergence," Multimedia Jahrbuch '94: Telekommunikation und Medien (New Technology Conference Proceedings, Stuttgart, Germany), pp. 71-94, December 1994.

1993 Ducey, Richard V., "Riding Radio's Technology Wave," Media Studies Journal, Summer 1993, pp. 151-158.

1989 Ducey, Richard V. and Mark R. Fratrik, "Broadcasting Industry Response to New Technologies: The Complementary Roles of Stations and Consumers," Journal of Media Economics, Fall 1989, pp. 67-86.

Ducey, Richard V. and Teri Lepovitz, "The Role of Market Research in Association Strategic Planning," Association Management, December 1989, pp. 41-44.

1988 Abel, John D., Richard V. Ducey and Mark R. Fratrik, RadiOutlook: Forces Shaping the Radio Industry, (Washington, D.C.: National Association of Broadcasters}.

1987 Abel, John D., Richard V. Ducey and Mark R. Fratrik, Targeting Radio's Future, (Washington, D.C.: National Association of Broadcasters).

1986 Ducey, Richard V. and Julia Portale, "Development of Foreign Language and Ethnic Broadcasting in the U.S. and its Implications for the U.S. Telecommunications Industry," in J. Miller (ed.), Telecommunications and Equity, (New York: Elsevier Science Publishers, 1986).

1985 Barbatsis, Gretchen, Kent Creswell and Richard V. Ducey, "Technology Literacy: A Model for Identifying Abilities in Telecommunication," Telematics and Informatics, vol. 2, no. 3, December 1985.

Reagan, Joey, Richard V. Ducey and James Bernstein, "Local Predictors of Basic and Pay Cable Subscribership," Journalism Quarterly, Summer 1985.

1984 Baldwin, Thomas F., John D. Abel and Richard V. Ducey, The Media Environment: Consumption and Function of Media Under the Different Conditions of Access to Media in Isolated Communities, Small Towns, Medium Cities and Metropolitan Areas, National Science Foundation, Grant No. DAR 79-10614, Michigan State University, East Lansing, Ml.April 1984.

1983 Ducey, Richard V., "Predicting the Adoption of Broadcasting Innovations by Relating Technical Attributes to User Needs: Implications for System Designs," /.E.EE Transactions on Broadcasting, June 1983.

Reagan, Joey and Richard V. Ducey, "Effects of News Measure on Selection of State Government News Sources," Journalism Quarterly, Summer 1983.

JSC WRITTEN REBUTTAL STATEMENT Ducey, Richard V., Dean M. Krugman and Donald Eckrich, "Predicting Market Segments in the Cable Industry," Journal of Broadcasting, Spring 1983.

1982 Reagan, Joey and Richard V. Ducey, "Use of Mass and Non-Mass Information Sources for Polarizing Issues," Michigan Speech Association Journal, vol. 17, no. 1, 1982.

Ducey, Richard V. and Robert E. Yadon, "A Human Factors Research Program for Videotex Technology," I.E.E.E. Transactions on Broadcasting, March 1982.

1981 Ducey, Richard V. and Robert E. Yadon, "Computers in the Media: A New Course in the Curriculum," Feedback, Spring 1981.

1980 Soley, Lawrence, Richard V. Ducey and Bradley S. Greenberg, Lansing's Response to the Princess," Public Telecommunications Review, July/August 1980.

1978 Dorris, William and Richard V. Ducey, "Social Psychology and Sex Roles in Film," Teaching of Psychology, October 1978. PAPERS

1997 Ducey, Richard V., "Digital Terrestrial Broadcasting and the Internet," The Impact of the Internet on Communications Policy Conference, Harvard University, December 3-5, 1997.

1996 Ducey, Richard V., "An Overview of the American Digital Television Program," BroadcastAsia '96, World Trade Center, Singapore, June 5, 1996.

1 Ducey, Richard V., "Multimedia Broadcasting and the Internet," INET '96, 6 h Annual Internet Society Conference, Montreal, Canada, June 26, 1996.

1995 Ducey, Richard V., "How Radio Can Use Multimedia and Interactive Computer Tools Profitably Today," Leipzig Radio Show 1995, Leipzig, Germany, May 31, 1995.

Ducey, Richard V., "Understanding How Consumer Demand Will Drive the Development and Adoption of Digital Television," Managing the Transition to Digital Television Conference, London, England, May 24, 1995.

Ducey, Richard V., "A New Digital Marketplace in Information and Entertainment Services," Partners in Information Conference, Tele-Communcations Association, Oregon Chapter, Portland, OR, May 9, 1995.

1994 Ducey, Richard V., "Interactive TV: Disco Fad or New Age Media?" Cable Television Administration and Marketing Convention, Chicago Hilton, Chicago, IL, July 25-27, 1994.

Ducey, Richard V., "Who Will Deliver the Next Generation of TV to Consumers?" Interactive TV Industry Conference, Park Lane, New York, NY. July 7-8, 1994.

Ducey, Richard V., "Where Does Broadcasting Fit in the World of Convergence? Opportunities in Multimedia Broadcasting," presented to Convergence '94: Interactive Television, Marriott Marquis, New York, NY, March 7, 1994.

1993 Ducey, Richard V., "Negotiating Effective Public Policy for Commercial Broadcasting: A Partnership Between Government and Broadcasting," 1993 Pan Asia Television and Radio Industry Conference, Marina Marin, Singapore, June 28, 1993.

JSC WRITTEN REBUTTAL STATEMENT Ducey, Richard V., "Reengineering Business Systems: Introducing Client-Server Architecture in a National Trade Association," International Communication Assocation, Annual Conference, Washington, DC, May 30, 1993.

1991 Ducey, Richard V., "Challenges and Opportunities in Local Television Audience Measurement: A Personal TV Diary," BBM Broadcast Research Perspectives Conference, Toronto, Canada, December 11, 1991.

1990 Ducey, Richard V., "Today's FM Radio Industry and Important Developments for Its Future," Edwin H. Armstrong: The Man and His Inventions Conference, The Center for Telecommunications and Information Studies, Columbia University, November 1990.

1989 Ducey, Richard V., "The Personal Television Diary Study: Initiatives Towards Better Measurement of Individual Viewing," Electronic Media and Research Technologies VIII, Advertising Research Foundation, New York, NY, December 14-15, 1989.

1989 Ducey, Richard V., "Consumer Responses to Advanced Television Systems," International Electronic Imaging Exposition & Conference, Boston, MA, October 2-5, 1989.

Ducey, Richard V., "Application of Competitor Intelligence and Planning to Non-Profit Sector," Society of Competitive Intelligence Planners/Planning Forum Meeting, Arlington, VA, June 7, 1989.

1988 Ducey, Richard V., "The Role of Market Research in Association Strategic Planning," presented to the 9th Annual Marketing Research Conference, American Marketing Association, Arlington, VA, October 9-12, 1988.

Ducey, Richard V. and Mark R. Fratrik, "Broadcasting Industry Response to New Technologies: The Complementary Roles of Stations and Consumers," presented to the 7th International Conference of the International Telecommunications Society, Massachusetts Institute of Technology, Cambridge, MA, July 1988.

1987 Shepard, Julian L., Ed Cohen and Richard V. Ducey, "The Challenges of Audience Measurement Research ir,i Federal Communications Policy: A Case Study," 15th Annual Telecommunications Policy Research Conference, Airlie, VA, September, 1987.

1986 Ducey, Richard V., "Consumer Applications of Electronic Imaging Technology: A Social Science Perspective of Demand Pull vs. Technology Push," International Electronic Imaging Exposition and Conference, Third Annual Conference, Boston, MA, November 1986.

1986 Ducey, Richard V. and Carrie J. Heeter, "The Use of Telecommunication Technologies in the Prevention of Cancer," National Cancer Institute, Bethesda, MD, June 1986.

Ducey, Richard V., "Relating Communication Needs to the Salience of Computer-Based Telecommunication Services," International Communication Association, Human Communication Technology special interest group, Chicago, IL, May 1986.

Ducey, Richard V., "Alternatives in Local Radio Audience Measurement Systems," American Association for Public Opinion Research, 41 st Annual Conference, St. Petersburg, FL, May 1986.

JSC WRITTEN REBUTTAL STATEMENT Ducey, Richard V. and Robert E. Yadon, "1986 NAB Survey of Television Stations Broadcasting in Multichannel Television Sound (MTS)," National Association of Broadcasters, Annual Convention, Dallas, TX, April 1986.

Ducey, Richard V. and Susan Beringer, "U.S. Broadcast Industry Concerns About Radio Broadcasting to Cuba and Potential Cuban Responses: The Case of Radio Marti," 14th Annual Telecommunications Policy Research Conference, Airlie, VA, April 1986.

1985 Ducey, Richard V., Gretchen S. Barbatsis and Kent W. Creswell, "Defining A Construct of Telecommunication Technology Literacy and Testing for Differences Among Students, Educators and Industry Professionals," International Communication Association, Human Communication Technology special interest group, Honolulu, HI, May 1985.

Ducey, Richard V. and Julia Portale, "Growth and Development of Foreign Language and Ethnic Broadcast Facilities, Programming and Transmissions in the U.S.: Implications and Influence on the U.S. Telecommunications Industry," 13th Annual Telecommunications Policy Research Conference, Airlie, VA, April 1985.

Yadon, Robert E. and Richard V. Ducey, "Managing Multichannel Sound: Problems and Opportunities," National Association of Broadcasters, Annual Convention, Las Vegas, NV, April 1985.

Bernstein, James, Joey Reagan and Richard V. Ducey, "Political Information and Knowledge in Non-Subscriber, Basic and Pay Cable Households," Broadcast Education Association, Annual Conference, Las Vegas, NV, April 1985.

Barbatsis, Gretchen S., Kent W. Creswell and Richard V. Ducey, "Technology Literacy: Industry Demand vs. Academic Supply," Popular Culture Association, 15th Annual Convention, Louisville, KY, April 1985.

1984 Ducey, Richard V., "A Survey of Local Station Involvement in Teletext," International Electronic Imaging Conference and Exposition, First Annual Conference, Boston, MA, September 1984.

1982 Ducey, Richard V., "Innovative Telecommunication Technologies and the Home User: Investigating the Adoption Process," Midwest Association for Public Opinion Research, 8th Annual Conference, Chicago, IL, November 1982.

Ducey, Richard V., "User Preferred Features of Broadcasting Innovations: An Attribute-Based Model of the Adoption Process," I.E.E.E. Group on Broadcasting, 32nd Annual Fall Symposium, Washington, D.C., September 1982.

1981 Ducey, Richard V. and Robert E. Yadon, "A Research Program to Investigate Human Factors in the Application of Videotex/Teletext Technology," I.E.E.E. Group on Broadcasting, 31st Annual Fall Symposium, Washington, D.C., September 1981.

Ducey, Richard V. and Joey Reagan, "Sources for State Government News," Association for Education in Journalism, Radio-TV Journalism Division, East Lansing, Ml, August 1981 (Top 3 paper).

Ducey, Richard V., "Information As A Public Good: The Social Resource of Broadband Communication Networks," International Communication Association, Mass Communication Division, Minneapolis, MN, May 1981.

JSC WRITTEN REBUTTAL STATEMENT 1977 Dorris, William and Richard V. Ducey, "Social Science Matinees: Using American Feature Films in Undergraduate Teaching," American Psychological Association, 85th Annual Convention, San Francisco, CA, August 1977.

OTHER PROFESSIONAL ACTIVITY

Editorial Board, Journal of Broadcasting and Electronic Media Editorial Board, Journal of Media Economics Editorial Board, Journal of Radio Studies

Faculty Tenure Review Committees, Serve as external member on several faculty tenure review committees at major institutions including Michigan State University, University of Georgia, University of Texas and Marquette University.

Fellow, Center for Information and Communication Sciences, Ball State University.

Numerous research studies, articles, reports, guest lectures, presentations, expert witness testimony and filings. These research studies, speeches and writing have been used in industry publications and meetings and to support business development, capital fund raising, legislative lobbying efforts, filings at the FCC and before other official groups such as the courts and the Copyright Royalty Tribunal.

Interviewed as telecommunication research expert by Cable News Network, Voice of America; and numerous broadcast stations and print media.

Invited speaker at a number of international universities, businesses and associations on the topics of information and telecommunication industry research and technology.

AVOCATIONAL INTERESTS

Scuba diving (PADI master scuba diver trainer,), kayaking and canoeing (ACA-trained whitewater instructor), mountain biking, fishing, swimming, running, Girl Scout leader.

October 2002

JSC WRITTEN REBUTTAL STATEMENT Before the COPYRIGHT ARBITRATION ROYALTY PANEL LIBRARY OF CONGRESS Washington, D.C. 20540

) In the Matter of ) ) Docket No. 2001-8 CARP CD 98-99 Distribution of 1998-1999 ) Cable Royalty Funds )

DECLARATION

I, Richard V. Ducey, declare under penalty of perjury that the Statement of

Dr. Richard V. Ducey presented in the 1998-1999 Cable Copyright Royalty

Distribution Proceeding is true and correct to the best of my knowledge, information and belief. tl~JV.J»~ Richard V. Ducey \

Dated: )~l~/od--

JSC WRITTEN REBUTTAL STATEMENT JSC Exhibit No. 6 Statement of Dr. Richard V. Ducey

CARP 1998-1999 Cable Royalty Distribution Rebuttal Proceeding

I. Introduction

My name is Richard V. Ducey. I am presenting this rebuttal testimony on behalf

of the Commercial Television Claimants. My background and experience have already

been presented in this proceeding as part ofmy direct case testimony, and I will not

repeat them here.

II. Purpose of Testimony

I have several purposes for this Statement. First, I want to make several points in

response to Dr. Arthur C. Gruen's testimony regarding his conclusions that (a) the ratings

of 18-49 year old viewers to distant signals are the best measure to determine program l ; value to cable operators; and (b) his "avidity" calculation is a proper basis for the

allocation of royalty shares. Second, I will provide information showing that there were

reductions in the amounts of certain types of sports programming available on WGN and

an increase in sports programs on regional cable sports networks in the relevant period.

III. Gruen Study of Nielsen Ratings Data for 1998-1999

Dr. Gruen's testimony and analysis were meant to support an argument about how ' i copyright payments would supposedly be distributed in a marketplace setting, based on

behaviors of cable operators in supposedly analogous situations. I do not agree with Dr.

JSC WRITTEN REBUTTAL STATEMENT Gruen's approach, either in concept or computation, for the reasons I set forth below. His calculations are certainly not common practice, in the broadcast industry or elsewhere, nor are the types of results he proposes ever used, to my knowledge, in the cable or broadcast industries. The units of measurement he uses are not used by broadcasters or cable operators.

In particular, Dr. Gruen asserts that the same behaviors cable operators exhibit in making purchases of cable network programming will analogously apply to decisions regarding selections of distant signals for carriage. He models these decisions based on the presumed importance of the 18-49 year old demographic to advertisers and thus cable operators. Dr. Gruen also uses Nielsen data to develop a new measure of"avidity" by relating program volume to viewing minutes. In each of these lines of analysis, there are conceptual and computational errors that make his conclusions illogical and unusable.

A. Cable Operators Are Not Motivated Primarily By Ratings in the Selection of Distant Signals for Carriage

I note that Dr. Gruen does not include premium cable networks in his ratings analysis and subsequent estimation of value to operators. Distant signals should also be excluded from his analysis, for the same reason. The reason is quite simple. Premium cable networks and distant television signals share the same characteristic, which is that these services do not generate advertising revenue for cable operators. Ratings are thus not a useful measure of relative value for these services.

Ratings are important to advertisers since they are the marketplace method by which advertising availabilities are priced. Even in the advertising marketplace, of course, the 18-49 demographic on which Dr. Gruen focuses exclusively is not the sole

2 JSC WRITTEN REBUTTAL STATEMENT ·1 i

group in which advertisers and programmers are economically interested. Advertisers

buy on a variety of bases, and particularly in the local cable advertising market where

cable networks come into play, they may be interested in narrower demographics than the

mass-market 18-49 group.

By contrast, since cable operators cannot place advertising in the distant signals

they carry, the only economic value these program services have is to either attract or

retain subscribing households. Given the cable operators' business model, they cannot

and do not ignore subscribers in demographic groups other than 18-49. They maximize

their revenues and profits by including programming that is appealing to.all groups in

their franchise areas.

For cable operators, the household is the relevant unit for purposes of acquiring

subscribers. The decision to subscribe may reflect the interests of all of the residents

within the household, but it seems unlikely in most cases that it would be decided

exclusively on the basis of what is appealing to the 18-49 year old members of the

household. In fact, even if distant signal viewing were a relevant measure for

determining the likelihood of a household's continuing to subscribe to cable, the fact that

Dr. Gruen's methodology begins with discarding 56% of the viewing behavior measured

by the MP AA Nielsen viewing study in cable households would seem to call his analysis

into question.

Dr. Gruen points out that an important economic interest of cable operators was to

sell ancillary services such as digital tiers, broadband Internet access, pay-per-view and

cable telephony. He then argues that it is important for cable operators to provide distant

signal programming appealing to the 18-49 demographic in order to sell such ancillary

..__.) 3 JSC WRITTEN REBUTTAL STATEMENT services. But cable operators already carry numerous cable networks that are attractive to

18-49 viewers, and it makes no sense to assume that the choice of distant signals on that basis would improve the penetration of ancillary services. To whatever extent 18-49 year old viewers are an important target for advertisers, the cable operator would presumably prefer to attract 18-49 year old viewers with basic cable networks in which it can sell advertising rather than with distant signals. Under Dr. Gruen's own theory, the fact that the Nielsen viewing study shows that the majority of viewing of programs on the distant signals they study is outside the 18-49 demographic would tend to show that distant signals are not chosen for their appeal to that demographic.

In 1998-1999 ancillary services represented a very small percentage of cable operator revenues. Revenues for digital tiers, high speed Internet access and residential cable telephony services were projected to constitute only 2.8% of total cable revenues by the end of 1999. Even though in the long run, these services represented a growth opportunity for operators, basic subscriptions remained the largest revenue source as well as the key access point to establish the platform for selling these services. Thus, it continued to be in the cable operator's greatest economic interest to follow a programming strategy that maximized basic subscription penetration among all demographic groups.

But even if it were the case that a cable operator's principal focus would be on selling ancillary services, Dr. Gruen's assertion that cable operators "would have a preference for programs" targeted to the 18-49 demographic is unsupported by the evidence in his testimony. First, Dr. Gruen presented no evidence that cable operators would use distant signal programming as part of their strategy for selling ancillary

4 JSC WRITTEN REBUTTAL STATEMENT services. In any case, there is direct evidence that the 18-49 year old demographic is by

r--. no means the only cable subscriber group to whom cable operators market such services.

I have attached as Exhibit 16-R excerpts from market research that establishes this

point. Beta Research Corp. surveyed cable subscribers to determine their interest in

various emerging cable networks as well as several ancillary services. In its study dated

November 1998, it reported that 24% of cable subscribers in the 50+ demographic

indicated they "would definitely" or "probably would" subscribe to a digital tier offered

at $9.95/month, compared with 23% of subscribers aged 35-49 and 29% of subscribers

aged 18-34. In addition, they reported that 10% of subscribers aged 50+. were "extremely

int~rested" or "very interested" in satellite dish television service compared with 9% of

subscribers aged 35-49 and 12% aged 18-34. (This suggests that in order to retain basic

subscribers who are at risk of defecting to satellite services, cable operators would have

to focus on appealing to their subscribers in the 50+ demographic as well as the other

categories.) Beta Research also reported that the total number of cable subscribers either

"extremely interested" or "very interested" in high speed Internet access service as of late

1998 was only 11 %. While 13 % of subscribers 18-49 fell into these categories, 7% of

subscribers aged 50+ did as well. The point is that in order to maximize their total

revenues, even with respect to advanced or ancillary services, cable operators must target

broader demographics than just the 18-49 group. In determining the relative marketplace

value of distant signal programs carried by cable operators in 1998 and 1999, it would

make no sense to limit consideration to programs viewed by 18-49 year old viewers. l .. ,'

5 JSC WRITTEN REBUTTAL STATEMENT B. Program Avidity Is Properly Considered as a Measure of Viewer Intensity of Preference, Not Audience Size

Ratings measures are relevant in the cable program marketplace only to the extent advertising expenditures are the outcome. For distant signals, the only relevant measure is the extent to which their programming contributes to attracting or retaining subscribers.

In this context, "avidity," as a measure of the intensity of a subscriber's preference for particular programs, can provide useful information.

As Dr. Gruen pointed out, cable operators have the incentive to maximize their economic interests by developing the highest revenue yield among their mix of possible services using the relatively limited channel capacities of their systems. How does a cable operator decide among a range of services for inclusion on a particular system?

From the perspective of attracting or retaining subscribers, programming that adds to a subscriber's perception of value or satisfaction with the cable program offerings is best.

Dr. Gruen's analysis would instead rely completely on distant signal viewing for this analysis.

Dr. Gruen's "avidity" measure is simply the gross amount of viewing divided by the gross amount of time of each programming category. I explain below why his measure is incorrectly calculated. But even if it were correctly calculated, it would only be a measure of average audience size, not the intensity of the viewers' preferences for the programming. Whether 100 or 1,000 people watch a particular program would provide no information about whether those viewers would be more likely to continue their cable subscriptions because of the program.

6 JSC WRITTEN REBUTTAL STATEMENT C. Dr. Gruen's Purported "Program Avidity" Measure is Illogical and Unusable.

In addition to the fact that Dr. Gruen's construction of "program avidity" is conceptually invalid, his "avidity" adjustments are computed incorrectly.

1. Both "Program Popularity" (Viewing Minutes) and "Program Volume" (Quarter Hours) Should Be Weighted for Comparability

The quarter hours of program time used in Dr. Gruen's analysis are unweighted sums across the 180 stations selected for the MPAA/Nielsen study, which makes the measure of"program volume" he uses non-comparable. This is because each quarter hour of programming available on each station has equal (i.e., unweighted) importance while his measure of purported "program popularity" (i.e., viewing minutes) is heavily affected by the number of subscribers to whom the program is available.

For example, in Dr. Gruen's analysis a quarter hour ofWGN programming represents the same program volume as a quarter hour on a station such as WEAO.

However, since WGN was available to well over 30 million cable subscribers as a distant signal versus perhaps 5,000 or 10,000 distant cable subscribers for WEAO, it has far greater opportunity to accumulate viewing minutes. The effect of mixing total viewing with unweighted program time is to disproportionately represent the importance of the particular program types on stations with greater carriage as distant signals. Any proper comparison of viewing and time would need to reflect the potential for viewing as part of the "time" measure. Indeed, that is what the measures of rating, share, and average audience commonly used in the broadcast industry reflect. A rating for a particular program is the percentage of total television households ( or persons) within a designated geography who viewed the program. A share for a particular program is the percentage

7 JSC WRITTEN REBUTTAL STATEMENT J 1

'[ ;

r . of all households (or persons) using television at the particular time who viewed the l program. Average audience is the number of television households (or persons) watching r 1 a particular program on average per quarter hour or other time period. Dr. Gruen's

"avidity" ratio measures none of these. i J

One possible approach to analyze the effect of Dr. Gruen's computational error would be to modify the program volume measure to reflect relative availability to

potential viewers. The procedure to do this would be to calculate the amount of program ' I

r 1 time on each distant station by category, and weight these figures by the number of distant subscribers to whom this programming is available. 1 This would provide a more ' 1 : i, apples-to-apples comparison.

. ' 1

2. Non-Compensable Programming on WGN Should Not Be Included J )

WGN's national feed includes non-compensable programs that should be excluded from the analysis. It is not clear that Dr. Gruen subtracted, from the program volume estimate, the program minutes on WGN accumulating from non-compensable programming. A review ofWGN's Chicago-area versus National feeds to cable systems

(using PTV Exhibits 12-X and 13-X) indicates that over half (54.6%) ofWGN's local schedule was replaced by non-compensable programming. About 45.7% of the programming on the Chicago-area signal was syndicated programming for which I J substitute programs were inserted and 8.9% was local programming. The failure to exclude program time representing these non-compensable programs, given the amount

If the weighting uses the total number of Form 3 subscribers who receive each station as a distant signal, another adjustment will be necessary to reflect the fact that the viewing minutes measure is just the raw numbers of minutes reported in the cable households included in Nielsen's meter sample. This further adjustment is explained in footnote 3 below.

8 JSC WRITTEN REBUTTAL STATEMENT of carriage of WGN, could result in a significant difference in the program volume measure and, consequently, the "avidity" measure.

3. The Proper Measure of "Program Volume" Is Program Minutes, Not Program Quarter Hours

In addition, if Dr. Gruen would rely on a ratio between "program popularity" and

"program volume," a common unit of measure for both viewing and time should be used, to allow a direct comparison. I am told that this procedure has been dubbed the "Stewart

Method" because it was raised in Mr. Stewart's questioning of Dr. Gruen about this alternative approach. The effect of correcting this computational anomaly in Dr. Gruen's method is that all of the program categories would properly be viewed as having less than

"parity," rather than some categories having a "premium" and others a "discount" adjustment, as Dr. Gruen proposes.

4. The Effect of the Computational Errors

Attached as Exhibit 17-R is a spreadsheet showing the results of applying Dr.

Gruen's adjustment methodology while (1) using a corrected approach for weighting the

2 time measure to reflect the different availability of programs on different stations , (2) eliminating the WGN substitute programs from the time measure, and (3) calculating the adjustment ratio on a more comparable minutes-to-minutes basis.3 As you will see, the

2 The weighting calculations were done by National Economic Research Associates (N/E/R/A) based on the program schedule and category data that Program Suppliers provided in discovery in the direct phase of the proceeding, combined with CDC data regarding the number of Form 3 distant signals receiving the stations MPAA selected for the viewing study. The result ofN/E/R/A's analysis is presented in Exhibit 18-R. The weighted program quarter hours, identified as "implied quarter hour value," were used in Exhibit 17-R. 3 The adjustment referred to in footnote 1 above is accomplished by multiplying the program minutes, after they have been weighted by the total number of Form 3 subscribers that received the respective stations as distant signals, by the ratio of the average number of in-tab cable households in the PeopleMeter sample (3,045) to the average number of Form 3 cable households in the U.S. in 1998-1999 (58,944,692).

9 JSC WRITTEN REBUTTAL STATEMENT r i result of correcting Dr. Gruen's methodological errors in computing bis "avidity" measure is to leave the viewing percentages essentially unchanged. This makes perfect sense when you consider the comparison in context and in its realistic scale. The simple C \ fact is that viewing audiences to program categories on distant signals are so extremely i , small that differences in numbers of viewers per minute of programming across categories are lost in the "noise."

In sum, while viewing is not a good measure of relative marketplace value for distant signals, if the Panel were to consider the results of the MP ANNielsen viewing study in this case, it should not rely on the "avidity" adjustments suggested by Dr. Gruen in his testimony, because of the conceptual and computational flaws in his analysis.

IV. Sports Programming on Superstations Has Decreased Since 1992 While Regional Sports Networks Have Increased

A. Baseball on WGN and Regional Cable Networks.

Between 1992 and 1998-1999, the total number of Cubs games licensed for r l broadcast by WGN decreased from 140 in 1992 to 90 in 1998 and 91 in 1999, a reduction of over 35%. At the same time, the number of Cubs games that were licensed to regional cable sports networks in the Chicago area increased, from none in 1992 to 62 in 1998 and

57 in 1999. White Sox games on WGN increased by a few, from 48 in 1992 to 51 in

1998 and 53 in 1999, but most White Sox games were carried on regional cable networks

(107 in 1992 versus 101 in 1998 and 103 in 1999). The shift of Cubs games to regional cable sports networks was part of an overall trend of increased prominence of such networks, which aired many more games and saw huge increases in subscribership (from

10 JSC WRITTEN REBUTTAL STATEMENT just over 43 million subscribers in 1992 to over 75 million in 1998). Major League

Baseball teams went from licensing substantially more of their games to broadcast stations in 1992 to licensing substantially more to regional cable networks in 1998.

B. NBA Basketball on WGN.

The number of Chicago Bulls games on distant signal WGN declined between

1992 and 1998-1999. In the 1991-1992 season, the station telecast 30 games. By the

1997-1998, after the settlement of litigation brought by the Bulls and WGN against the

NBA, the station was permitted to air only 15 games on its national satellite feed. In the

1998-1999 season, as the result of the settlement as well as the NBA lockout, only 13

Bulls games were aired nationally on WGN.

11 JSC WRITTEN REBUTTAL STATEMENT Before the COPYRIGHT ARBITRATION ROYALTY PANEL LIBRARY OF CONGRESS Washington, D.C. 20540

) In the Matter of ) ) Docket No. 2001-8 CARP CD 98-99 Distribution of 1998-1999 ) Cable Royalty Funds )

DECLARATION

I, Richard V. Ducey, declare under penalty of perjury that the Statement of

Dr. Richard V. Ducey presented in the 1998-1999 Cable Copyright Royalty

Distribution Proceeding is true and correct to the best of my knowledge, information

and belief.

Richard V. Ducey

Dated: June 20, 2003

JSC WRITTEN REBUTTAL STATEMENT JSC Exhibit No. 7 Before the COPYRIGHT ARBITRATION ROYALTY PANELS Library of Congress

Copyright Arbitration Royalty Panels t 990- t 992 Cable Royalty Docket No. 94-3 CARP CD 90-92 Distribution Proceeding

TESTIMONY OF WILLIAM B. FAIRLEY

I am the President of Analysis and Inference, Inc., a research and consulting firm formed in t 979 that specializes in statistical analysis and research techniques. ! hold a Ph.D. in Statistics from Harvard University, and have taught statistics and applied statistical techniques at Harvard, New York University,

Swarthmore College, and Temple University. I have written extensively in the field of applied statistics, and have testified as an expert statistician in approximately t 8 different administrative or judicial proceedings. My curriculum vitae and a listing of my prior testimony is appended at PTV Exhibit 37.

In this testimony I will describe a statistical adjustment to the survey prepared on behalf of the Joint Sports Claimants by Boru & Company, entitled

"Cable Operator Valuation of Distant Signal Non-Network Programming. "l' The adjustment is needed to take account of the fact that the Boru survey automatically assigns a zero share value to public television ( or "PTV") programming for any cable

.!/ The Boru survey was included as JSC Exhibit t in the aborted 1990 proceed· ing before the Copyright Royalty Tribunal, and reported survey results for the years · 1990 through t 99 2.

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operator included in the survey that did not actually carry a public television station on a distant signal basis during the survey year.

Overview of the Issue

For each of the years J 990 through J 992, the Bortz survey asked between J 70 and 200 cable systems to state the relative value of the programming categories carried on the television stations that the cable systems retransmitted on a distant signal basis during the survey year. Public television programming was automatically assigned a zero value if the cable system did not actually carry a distant public television signal during the survey year. The Bortz survey results for PBS thus reflect a weighted average of the responses given by those cable systems that did carry a distant public television signal during the survey year and the "automatic zero" responses for those cable systems that did not retransmit a distant public television signalY

In its decision on the J 989 cable royalty distribution, the Copyright

Royalty Tribunal concluded that "the fact that a cable system did not carry a PBS signal only meant that the actual price was too high. There could have been some

P To be more technical, the Bortz study does not rely on a straight average of the survey responses but is instead a "stratified ratio estimator" of the true average share values reported by the survey respondents. (See 1990 Bortz Report, p. 25.)

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lesser price they were willing to spend. Therefore, [the] Bortz practice to accord PBS

an automatic zero underrepresented PBS. nJJ

In its 1989 cable royalty distribution decision, the Tribunal found that an adjustment was necessary to correct for this underrepresentation of PBS in the

Bortz survey results. The Tribunal applied a multiplier of 1.2 to the actual Bortz

results. This was based on a simple ratio of 6 + 5, reflecting the fact that

respondents that carried a distant public television signal were asked to value public

television programming as one among six choices, whereas respondents without a

distant public television signal valued the remaining programming categories among

five alternatives.

The Tribunal was clearly correct in its determination that the "automatic

zero" methodology of the Bortz survey understates the proper value for PBS

programming and that the PBS results therefore must be adjusted. However, the

multiplier of 1.2 is a "back of the envelope" approach that does not adequately correct for the understatement of the value of PBS programming that we observe in

the survey responses. The technique described here is a more rigorous statistical

approach that takes into account the actual survey results and is therefore a far more

accurate and analytically sound adjustment.

11 57 Fed. Reg. at 15299. The Tribunal noted that asking cable operators that did not carry a distant public television signal to value PBS programming "would have caused confusion. Therefore, the design of the survey is not faulted, but an adjustment nonetheless needed to be made." Id. at 15300.

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The Bortz Survey Results for PBS

An important outgrowth of the Bortz survey methodology is that a majority of the respondents for each survey year were automatically assigned a zero value for public television programming. This is shown by the following table:

Respondents Carrying Respondents Assigned Distant PTV Signal Zero Value for PBS Total 1990 27 146 173 1991 45 151 197 1992 38 140 178

Furthermore, the values assigned to public television programming by those respondents that did in fact cany a distant public television signal during the survey year are substantially larger than the Bortz survey results for public television programming:

PBS Share Among PBS Share in Respondents Carrying Bortz Survey Distant PTV Signal 1990 2.7% 15.4% 1991 2.9% 12.5% 1992 3.0% 11.2%

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The bar charts included at PTV Exhibit 38 summarize the distribution of shares reported by respondents carrying a distant signal for the years 1990 through

1992}' PTV Exhibit 40 shows the shares reported for each category for those respondents that carried a distant PTV signal during the three survey years.

The pattern of survey responses among those cable systems that carried a distant public television signal suggests that there is a threshold value that would need to be exceeded before the system would carry a distant ;Jublic television signal.

For example, a threshold could exist if a cable operator had some maximum number of distant signals that it could profitably carry; or if the cable operator could only carry an incremental distant signal by forgoing some other broadcast signal or cable programming. ~1

i' For each survey year, a small number of respondents that actually carried a distant PTV signal assigned a value of zero to the PBS programming category. (There were five such responses for 1990 and 1991, and seven for 1992.) This would appear to be a function of rounding in the survey responses, since a cable operator presumably would not assign a true zero value to public television programming if it elected to carry a distant PTV signal and paid copyright royalties for doing so.

1 ~ The Tribunal made this point in its 1983 cable distribution decision, in discussing an NAB survey of cable operators that had automatically assigned PBS programming a zero value if any given operator did not carry a distant PTV signal: "Supposing a cable operator faces the reality of being able to import only 4 distant signals. [If] his attitude were only on the measure of approximately 5% toward PBS, he or she would not carry a PBS signal. Therefore, we suspect that there are many operators who did not carry a distant PBS signal whose 'attitudes' might be greater than zero but short of acrual behavior, that were ignored in the survey to the detriment of PBS." 51 Fed. Reg. at 12809-10.

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The Tribunal's decision in the 1989 cable distribution proceeding effectively recognizes this threshold effect ·• that a cable system might have chosen not to carry a PBS distant signal because "the actual price was too high" although there "could have been some lesser price they were willing to spend. "9/ In this sense, public television programming is unlike any of the other programming categories included in the Bortz survey (putting aside Canadian programming), because the cable operator can obtain public television programming only by importing an entire distant signal, in contrast to a commercial broadcast signal that will ordinarily include a mix of commercial programming categories. This could reasonably be expected to create a threshold effect for PBS programming that does not apply to commercial programming categories that will be commingled on any given commercial signalP

The conclusion that a threshold value applies to the distant retransmission of public television signals is consistent with the Bortz survey responses for these three years. For example, in the 1991 survey, 29 of the 45 respondents that carried a distant public television signal assigned a share value of I 0% or greater to public television programming. Similarly, in the 1990 survey, 18 of 2 7

57 Fed. Reg. at 15299. zi The Bortz survey design implicitly assumes that any distant commercial signal will include all the commercial programming categories, since cable operators are asked to assign values to all commercial programming categories if they imported any distant commercial signals during the survey year.

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respondents assigned PBS a value of l 0% or more; and in the 1992 survey, the numbers are 22 of 38 respondents. These results suggest that the value allocated to a

PBS distant signal would have to cross the threshold (perhaps, for most operators,

10% or higher) before the operator would decide to retransmit a distant public television signal.

A Technigue for Adiusting the PBS Results

Under specific and plausible assumptions about this threshold effect, the unobserved share values for PBS can be estimated from the observed share values for those cable systems that did in fact carry a distant public television signal during the survey year.

We begin by estimating the average threshold value for carriage of a distant public television signal. The estimate of this average threshold value is the average of the smallest share reported by each cable operator responding to the Bortz survey. In other words, the smallest share reported by each cable operator was identified and these minimum values were then averaged over all operators in the survey to arrive at an estimated threshold value for each year. For PBS for the years

1990-1992, these threshold values were 10.8%, l 0.8%, and 10.7%, respectively.

(Table l, col. 8.)

Using these threshold values, we performed maximum likelihood estima tion to compute the average (mean) PBS share value for those respondents that did not acrually carry a distant public television signal during the survey year (and so were

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assigned an automatic zero value under the Bortz methodology). Maximum likelihood estimation is a statistical technique to determine the value of a parameter that, in a sense that can be made precise through statistical estimation, is the most plausible given the actual survey response data.

The technique is based on determining the probability of the measured values for those cable operators that did provide a value for PBS programming during the survey year under an assumed probability model. Then, from these individual probabilities, we determined the joint probability of obtaining all of these reported values taken as a whole.§.1 This leads us to the estimation of a "maximum likelihood" average PBS share -- meaning an average that maximizes the likelihood of obtaining the results that were actually reported for PBS in the survey.~1 In other words, the method selects as the estimate of the average the value that makes the operators' reported share values for PBS most likely. Thus, although we are making an adjustment to take account of values that would have been assigned by operators who were subject to the "automatic zero" adjustment, the methodology is based on the pattern of responses given by those cable operators that did in fact carry distant PBS signals and did in fact assign a value for PBS programming.

1 §. The pattern of the survey responses for PBS shares suggested that the PBS shares (and the operators' threshold values for determining whether to carry a distant PTV signal) followed a negative binomial (geometric) distribution.

1 ~ PTV Exhibit 39 illustrates geometrically the solution for the average that maximizes the likelihood.

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Given these estimated joint probabilities based on the actual responses for PBS, and given the estimated average threshold values noted above, we can detennine the maximum likelihood estimate of the mean share for PBS programming that would have been reported by all cable operators in the Boru survey, if PBS programming had not automatically been assigned a zero value among those operators that did not carry a distant PTV signal. And based upon that estimated mean share for all survey respondents, as a matter of simple mathematics we can derive the mean share for those respondents who were assigned an "automatic zero" for PBS, since we know the mean share among those operators that did in fact assign a value for PBS programming.

The Results of the Adjustment Methodology

The results are set forth in Table 1. Column 1 shows the estimated share values for PBS, as reported by Boru & Company. Column 2 shows the average reported share among those survey respondents that carried one or more public television stations on a distant signal basis during the survey year (these are the figures discussed above at page 4). Column 4 shows the estimated average PBS share for cable operators that did not carry a distant PTV signal during the survey year. This value is derived from the values set forth in Columns 2 and 3.

Column 3 shows the estimated average share for all cable operators

(including those that did not cany a distant PTV signal during the survey year), based on the maximum likelihood estimation technique described above and the actual

JSC WRITTEN REBUTTAL STATEMENT Tahlc I Estimated PBS Shan• for All Rrspondrnts to Bortz Survrys, 1990 - 1992

2 4 6 7 8 Total Hor-1:r. Surv<'y PBS Avera~<' Reporlcrl PBS Adjuslc,1 PIJS Avcra~e Estimated PBS Conlidmcc Numher Queried and E~timated Y,·ar Sharl' Edimak, Sha re of Queried Average Sh:ire Share of Non-Queried lnkrval (95%) Queried . Non-Queried Thre~hold .. is ,i - . . -·;i ,j . ... - l')')(l 2.7 (, I . 4.7 - 8.5 27 173 10.8 1')'11 2 <) 125 (, 3 4 .3 5.2-7.9 45 197 10.8 I ')'12 .1.0 II .2 5.7 4.3 4.7 - 7.4 38 178 10.7

I >elin1tions < 'oh11nn I WeirJ1tcd average Pns shares reported in Bortz surveys f I, p.54 I. weighted hy lntal royalties in each stratum, in which non-queried respondents sh,ut·s arc taken to he zero. l'oh111111 2 I Jnwt·ighll'd average reported share of systems queried. Cnl11111n .1 Estimated average PIJS share for all systems had they all heen queried, using a negative binomial (geometric) distribution for the shares, and PBS sh:1rcs reported by queried systems. Col11111n 4 /\ vcrnge sl1:1re of systems non-queried implied by the reported shares (Column 2) and the adjusted average PBS shares for all systems (Column 3). Column 5 95% Confidence Interval for the mean estimates given in Column 3. ·111is is calculated as the mean estimate (Column 3) plus and minus 1.9(, times the standard error of the mean estimate. Column (, Number of respondents queried about PBS. Column 7 Total number queried about slrnres. Column 8 Average oft he minimums of the shares reported by each system for the program categories to which they responded. Zeroes included (5, 5, and 7 for 1990-1992, respectively).

Sources lixccpt where noted, llortz & Company ( 1993) "Cable operator valuation of distant signal 11011-nctwork programming," August 1993, and .l:1111cs M T1a11tnwn, Vice-president, personal communication.

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survey results as reported by Boru. I call this the "adjusted PBS share." This column, in other words, shows the estimated PBS share if all survey respondents -- and not simply those that actually carried a distant public television signal during the survey year -- had been asked to assign a value to public television programming. For the three survey years, the adjusted PBS shares are as follows:

1990 6.1% 1991 6.3% 1992 5.7%

Finally, any statistical technique must take into account the confidence intervals for the estimated results. These confidence intervals are shown in Column 5, and they signify, based on the statistical techniques applied here, that 95% of the time these intervals will encompass the "true" average PBS shares for these three years. This is colloquially translated to mean that we have a 95% confidence in the adjusted PBS shares noted above.

CONCLUSION

By assigning an "automatic zero" value to PBS programming for any cable operator that did not actually cany a distant PTV signal during the survey year, the Boru srudy necessarily understates the value of public television programming to cable operators. This is what the Copyright Royalty Tribunal determined in the 1989 cable royalty distribution proceeding.

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The above analysis sets forth a statistical method for adjusting PBS's share, based upon the pattern of responses given by those cable operators that actually did cany a distant PTV signal during the survey year, and based further on the plausible assumption that there is a "threshold effect" such that cable operators will not import a distant PTV signal unless that programming exceeds a threshold value. The adjusted PBS shares shown in Table l are, at the 95% level of confidence, a proper estimation of the true average value for PBS among those cable operators who were included in the Bortz survey.

* * *

JSC WRITTEN REBUTTAL STATEMENT I declare under penalty of perjury that the foregoing is true and correct

to the best of my knowledge, infonnation and belief.

hl~r1(1-~ wtiifam B. Fairley

Executed this / 6f?,, day of August, 1995.

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WILLL.\...\t BISHOP FAIRLEY

.-\nalysis and Inference, lnc. P 0. Box 294 Swanhmore, Pennsylvania 19081

Finn (610) 566-0260 Direct Dial: (610) 566-7451 Fax (610) 566-7167 E-Mail: 733 [email protected]

Anal vs is and Inference. Inc ( l 979-present), President.

.-\nalysis and Inference, Inc , 1s a research and consulting firm with professional skills in statistics, economics. and finance. Clients and sponsors of research include corporations, government agencies, law firms and non-profit organizations

~ew York Universitv ( l 990-9 l ), Leonard N. Stern School of Business, Department of Statistics and Operations Research, Visiting Professor of Statistics and Operations Research.

Swanhmore College ( 1990), Department of Mathematics. Visiting Professor.

Temple L'niversitv (1987-89), Department of Statistics. Adjunct Lecturer.

Commonwealth of Massachusetts ( 1976 - 1979), Division of Insurance, State Rating Bureau. Economist and Statistician.

\tember of a special rating and regulatory analysis group (the State Rating Bureau) created by thf.! \tassachusetts Legislature in 1975 and appointed by the Commissioner of Insurance. Responsible for introducing modern tools of economics, finance, and statistics in rate reviews, research, and testimony of the State Rating Bureau for the major property-liability insurance lines.

Cniversitv of Karachi (Spring 1976) Visiting Professor, and consultant, Applied Economics Research Center, Ford Foundation and Government of Pakistan.

Harvard Universitv ( 1970-1976), Kennedy School of Government, Public Policy Program. Associate Professor (1973-1976) and Assistant Professor (1970-1973).

Graduate teaching and research focused on the uses of statistics in government, law and analyses of policy. Taught courses on statistics at the Harvard Law School (with Michael Finkelstein, Frederick Mosteller, and Lloyd Weinreb). At various times Chainnan of the Ph.D. Committee, Second Year Committee, \todules Committee, and the Committee on Information Services of the Kennedy School.

JSC WRITTEN REBUTTAL STATEMENT New York L'niversitv (l 969-1970), Graduate School of Business. Assistant Professor. Graduate teaching and research in applied statistics. Organized and chaired Conference on Quantitative .-\nalys1s m Crban Affairs, \lay 1970, \!ember of the Corruninee on Crban Problems

:\e\\ York Citv Rand Institute ( l 968- l 969). Statistician.

Co-direcror of study on crime in the public housing projects of New York City for the Mayor's Criminal Justice Coordinating Council and with the New York City Housing Authority and New York City Police Department.

First National Citv Bank of~ew York (Citicom) (1967-1968), Management Sciences Department. Research Specialist.

Consulting within Management Science and Economics Departments; participated m operations research projects on asset management and the prediction of interest rates.

EDUCATION

Harvard Universitv (l 96 l-l 967), Ph.D., Department of Statistics, 1968; M.A., 1965; Woodrow Wilson and National Science Foundation Fellowships.

London School of Economics ( 1960-1961), Fulbright Fellowship.

Swarthmore Colleize ( 195 7-1960), 8.A. with High Honors and Phi Beta Kappa, 1960. Major m Economics, l\1inors in History and Philosophy.

Harvard College ( 1956-195 7), Harvard Detur Book Prize.

SELECTED PUBLICATIONS

Improving Public Safetv in Urban Apartment Dwellings: Security Concepts and Experimental Design for New York Citv Housing Authoritv Buildings New York City Rand Institute, 1977 (with Michael· Liechenstein).

ECONOMICS FINANCE AND INSURANCE

"Pricing Automobile Insurance under a Cross-Classification of Risks: Evidence from New Jersey," Journal of Risk and Insurance, September 1981 (with T. Jerome Tomberlin and Herbert I. Weisberg). Winner of 1982 Journal of Risk and Insurance, Articles Award of the National Association of Independent Insurers.

"Investment Income and Profit Margins in Property-Liability Insurance Theory and Empincal Results," Bell Journal of Economics, Spring 1979 Re-published in J David Cummins and Scan A. Harrington, Editors, Fair Rate of Return in Property-Liability Insurance, Kluwer-Nijhoff, 1987.

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JSC WRITTEN REBUTTAL STATEMENT ,, Pricing Automobile Insurance under Multivanate Classification of Risks: Additive versus ~fultiplicatin:." Journal of Risk and Insurance, March l 979 (with Lena Chang). Winner of the Journal of Risk and Insurance, Clifford D. Spangler Award of the Alpha Kappa Psi Foundation, 1989.

"An Estunation Model for Multivariate Insurance Rate Classification," in Automobile Insurance Risk Classification: Eguitv and Accuracy, Massachusetts Division of Insurance, 1978 (\\ith Lena Chang.)

"Automobile Insurance: Additive versus Multiplicative Pricing," 1978 Proceedings of the Business and Economic Section, American Statistical Association, Washington, D.C. (with Lena Chang).

"Capacity and Solvency-- The Outside Influence," Societv of Actuaries Record, Vol. 4, No 1, 190-196, 1978.

"Investment Analysis Using the Probability Distribution of the Internal Rate of Return," Management Science, August 1975 {with Henry D Jacoby).

"Statistical faidence of Racial Disparities in Death Sentencing: A Critical Analysis of McCleskev v. Kemp," in Human Rights and Statistics: Getting the Record Straight, Richard P. Claude and Thomas B. Jabine, Editors, University of Pennsylvania Press, 1992 (with Glenn Dickinson).

''A Question of Theft," in '.'vfaurice DeGroot, Stephen Fienberg and Joseph Kadane, Editors, Statist'ics and the Law, Wiley, 1986.

"The Many Uses of Forensic Economics and Statistics," The Practical Lawver, Vol. 31, No. 4, pp. 25-36, 1985 (\\ith P. Eden, C. Aller, C. Vencill, M. Meyer, and P. Chernick). ·

"Evaluation of Structured Settlements," Am. Jur. Trials, Vol. 31, pp. 595-632, 1984 (with P. Eden, C. ..\Iler, M. Meyer, L. Schroeter, and C. Vencill).

" ..\ Case of Unexamined Assumptions: The Use and Misuse of the Statistical Analysis of Casteneda/Hazelwood in Discrimination Litigation," Boston College Law Review, July 1983 (with Thomas J Sugrue)

"Statistics in Law," in the Encyclopedia of the Statistical Sciences, Vol. IV, Samuel Kotz and Norman L. Johnson, Editors, Wiley, 1983.

Discussion of "Statistics in the Law," American Statistical Association, Proceedings of the Social Statistics Section, Part I, 1976.

"A Conversation about Collins," University of Chicago Law Review, Vol. 41, No. 2, Winter 1974 (with Frederick Mosteller).

"Probabilistic Analysis of Identification Evidence," The Journal of Legal Studies. Vol. II, June 1973. Also in Dirk Wendt and Charles Vlek, Editors, Utilitv Probability and Human Decision Making, D Reidel, 1975

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JSC WRITTEN REBUTTAL STATEMENT ''The Continuing Debate over Mathematics in the Law of Evidence," Harvard Lav.: Re1,iew Vol. 84, :--.:o. 8 June 1971 (\\ith Michael Fmkelstein).

"A Bayesian Approach to Identification Evidence," Harvard La\v Review, Vol. 83, No. 3, January 1970 (\\Ith :V11chael Finkelstein)

PROBABILITY THEORY

"The Number of Real Roots of Random Pol1nomials of Small Degree," Sankhva The Indian Journal of Statistics, Series B, Pt. 2, pp. 144-152, 1976.

Roots of Random Pol\nomials PhD Thesis, Department of Statistics, Harvard University, June 1968.

PL13LIC POLICY

Contributor to Fienberg, Stephen E, Hoaglin, David, Kruskal, William H. and Tanur, Judith M., Editors, A Statistical Model: Frederick Mosteller's Contributions to Statistics Science and Public Policy. Spnnger-Verlag, 1990.

"Comment on Statistical Defensibility," American Statistician, August 1982.

"Public Policy and Statistics," in the International Encyclopedia of Statistics Vol. 2, William H. Kruskal and Judith M. Tanur, Editors, Macmillan and Free Press, 1978.

Statistics and Public Policv, Editor, with Frederick Mosteller, Addison-Wesley, 1977. Japanese Translation, Shojin Sha Ltd., 1990.

"Trial of an Adversary Hearing: Public Policy in Weather Modification," International Journal of \fathematical Education in Science and Technology, Vol. 3, pp. 375-383, 1972 (with Frederick Mosteller).

QUALITY CONTROL AND IMPROVEMENT

"Inference for Welfare Quality Control Programs," Journal of the American Statistical Association, September 1990 (with Alan I. Izenman and Partha Bagchi).

"Welfare Quality Control Programs : How Much is Misspent by the Welfare System?" Chance, Sununer 1989 (v,ith Alan J. Izenman)

"Estimated Public Welfare Quality Control Error Rates and Penalties," in Bayesian Statistics 3, Oxford University Press. 1988 (with David Fairley).

"A Probabilitv Model for Brittle Fracture Turbine Reliabilitv," in Chris Whipple and Vincent T. Covello, Editors, Risk-Analvsis in the Private Sector, Plenum Press, i985 (with Edward M. Caulfield, Michael T. Cronin, and Nancy R. Rallis).

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JSC WRITTEN REBUTTAL STATEMENT R1SK ANALYSIS

"Bncks, Buildings, and the Bronx", Chance, 1994, (with Alan J. Izenman and A. Rhen Whitlock).

"Establishing Quantity Estimates and Levels of Certainty in Predicting Structural Damage: A Masonry Case Study", Proceedines of the Bnt1sh Mason!"\ Societv, No. 6, March 1994, (with Alan J. lzenman and A. Rhett \Vh1tlock).

"Quantification of Masonry Deterioration Through Statistical Modeling-- A Case Study", Masonrv: Design and Construction Problems and Repairs, John M. Melander and Lynn R. Lauersdorf, Eds., American Society for Testing and Materials, 1993 (with A. Rhett Whitlock and Alan J. Izenman).

"Estimating Mine Equipment Injury Rates" in B. J. Garrick and W. C. Gekler, Editors, The Analvsis Communication and Perception of Risk, Plenum Press, 1991 (with Tian-Tzer Jeng).

"Insurance Market Assessment of Technological Risk," in Risk Analvsis in the Private Sector, Plenum Press, l 985 (with Paul L. Chernick and Michael B. Meyer).

"Market Risk Assessment of Catastrophic Risks," in The Risk Analysis Controversy: An Institutional Perspective, Howard C. Kunreuther and Eryl V. Ley, Editors, Springer-Verlag, 1982.

"Design, Costs, and Acceptability of an Electric Utility Self-Insurance Pool for Assuring the Adequacy of Funds for Nuclear Power Plant Deconunissioning Expense," NUREG/CR-2370, U.S. Nuclear Regulatory Commission, Washington, D.C., November 1981 (with Paul L. Chernick, Michael B. Meyer and Linda C. Scharff)

"Assessment for Catastrophic Risks," Risk Analvsis, Vol. 1, No. 3, September 1981.

"Evaluating the · Small' Probability of a Catastrophic Accident from the Marine Transportation of Liquefied Natural Gas," in Proceedings of the Engineering Foundation Conference on Risk Benefit \!Iethodology and Application, David Okrent, Editor, Asilomar, California, 1975. Re-published in Fairley & Mosteller, Statistics and Public Policv, Addison-Wesley, 1977.

"Accidents on Route 2: Two-Way Structures for Data," in Fairley & Mosteller, Statistics and Public Policv, Addison-Wesley, 1977.

Discussion of Lester B. Lave and Eugene P. Seskin, "Does Air Pollution Shorten Lives," In John W. Pratt, Editor, Statistical and Mathematical Aspects of Pollution Problems, Marcel Dekker, 1975.

PROFESSIONAL ACTMTIES

:\1ember of the American Association for the Advancement of Science, American Economic Association, American Management Association, American Society for Quality Control, American Statistical Association, Society for Risk Analysis.

Speaker, "A Case Study of Masonry Deterioration and Civil Damages: Calibration and Poisson Regression," Second International Conference on Forensic Statistics, Tempe, Arizona March 1993.

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JSC WRITTEN REBUTTAL STATEMENT Paper. "Quant1ficat1on of ~fasonry Deterioration Through Statistical Modelling-- A Case Study", American Society for Testing and Materials, S:mposium on Masonry, Miami, December 1992 (with A. Rhett \Vh.itlock and Alan J. Izenman).

Paper. "Establishing Quantity Estimates and Levels of Certainty in Predicting Structural Damage: A \fasonry Case Study," Third International Masonry Conference, London, October 1992 (with Alan J. Izenman and A. Rhett Whitlock).

Paper," 'Random' Subsamples That Are Not Random," American Statistical Association, Annual Meeting, Boston, August 1992 (\\ith Alan J. Izenman).

Paper, "Construction Damage, Quality Control, and Legal Liability," American Statistical Association, Annual Meeting, Atlanta, August 1991 (with Alan J. Izenman).

Paper, "A Case Study in the Statistical Modelling of Construction Damage," Institute of Mathematical Statistics, Special Topics Meeting on Statistics in Industry, Philadelphia, June 1991 (with Alan J. lzenman).

Speaker, "Welfare Quality Control and Improvement: Issues of Information and Management," Making Statistics More Effective m Schools of Business, Wharton School, Philadelphia, June 1991.

Speaker, "Quality of Services: A Case Study," NYU-Columbia Joint Workshop on Operations \1anagement, March 1991.

Participant, Research Workshop, "Creating and Implementing Quality in Organizations", SEI Center for Advanced Studies in Management, Wharton School, University of Pennsylvania, March, 1990.

Winner, Journal of Risk and Insurance Clifford D. Spangler Award of the Alpha Kappa Psi Foundation, 1989.

Paper, "Estimating Mine Equipment Injury Rates," Society for Risk Analysis Annual Meeting, San Francisco, October 1989.

Speaker, "Empirical Bayes Procedures for Welfare Quality Control," American Statistical Association Annual Meeting, Washington D.C., 1989.

Imited Lecture Series, "Statistics in Law and Public Policy: How to Bet If You Must", Temple University, Department of Statistics, April 1989.

Chair, "Estimation for Welfare Quality Control," American Statistical Association Annual Meeting, New Orleans, 1988.

Speaker, "Error Rate and Penalty Inference for Quality Control in Public Welfare Programs," American Statistical Association Annual Meeting, San Francisco, August 1987.

Speaker, "Estimated Public Welfare Quality Control Error Rates and Penalties," Third Valencia International Meeting on Bayesian Statistics, Altea., Spain, June, 1987.

Speaker, "Quantitative Risk Assessment: A Study of DDT," Temple Environmental Forum, Philadelphia, Fall 1986

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JSC WRITTEN REBUTTAL STATEMENT Speaker, "Decision Uses of Quantitative Risk Assessment," Gordon Research Conference Seminar on S tat1st1cs in Chemistry and Chemical Engineering, New Hampton School, New Hampshire, July 198 5.

Participant, "The City of New Amsterdam vs. Armored Coin Collection Company," mock trial presented by The Panel on Statistical Assessments in the Courts, National Academy of Sciences, at American Statistical Association Annual Meeting, Las Vegas, 1985.

Speaker, "A Question of Theft," .A.merican Statistical Association Annual Meeting, Philadelphia, August 1984.

Chairman, "Insurance and Risk Management" session, Society of Risk Analysis, Annual Meeting, New York City, August 1983.

Speaker, "A Probability Model for Brittle Fracture Turbine Reliability," Society for Risk Analysis, Annual Meeting, New York City, August 1983.

Paper, "Insurance Market Assessment of Technological Risks," Annual Meeting, American Association for the Advancement of Science, Detroit, May 1983 (with Michael B. Meyer and Paul L. Chernick).

\1ember. American Statistical Association, Ad Hoc Committee on Insurance for Members ( I 982-1983) and Ad Hoc Committee on Law and Criminal Justice Statistics (1977-1980).

Winner, Journal of Risk and Insurance Articles Award, 1982.

Member and Speaker, Advisory Committee to the National Association of Insurance Commissioners' Task Force on Profitability and Investment Income, 1982-83.

Discussant, "The Use of Statistics in Litigation," American Statistical Association, Annual Meeting, Detroit, August I 981.

Speaker, "Market Risk Assessment of Catastrophic Risk," Summer Study in Decision Processes and Institutional Aspects for Risks, International Institute of Applied Systems Analysis, Vienna, June 1981.

Speaker, "Catastrophic Risks: Case of Zero Occurrences of Accidents," Annual Meeting of the American Statistical Society, Session on "Statistics, Reliability and Risks," Houston, Texas, August 13, 1980.

Chairman of Session "Equitable Risk Classification in Competitive Insurance Markets," American Economic Association and Association of Property and Casualty Insurance Economists, Annual Meeting, Atlanta, Georgia, December 28, 1979.

Speaker, "Regulatory Rate Setting Decisions in Automobile Insurance: Massachusetts Experience," Public Policy Research Conference, University of Chicago, October 19, 1979.

Panelist, "Accident Risk Assessments," S)-mposium/Workshop on "Nuclear and Nonnuclear Energy Systems: Risk Assessment and Governmental Decision Making," Washington, D.C., February 1979, Mitre Corporation.

Chair and Speaker, Session "Is Automobile Insurance Priced Fairly? Equity and Statistical Validity in Risk Classification," American Statistical Association Annual Meeting, San Diego, August 1978.

Panelist of Session "Capacity and Solvency," Society of Actuaries and Casualty Actuarial Society Annual \1eeting, New York City, April 1978. - 7 -

JSC WRITTEN REBUTTAL STATEMENT Speaker, "Profits and Rates of Return in Property-Liability Insurance," National Association of Commissioners Zone 1 (Northeast) Meeting, Boston, September 1977.

Speaker, "Profits and Rates of Return in Property-Liability Insurance," Society of Actuaries Research Conference on Modeling Financial Markets, New York University, September 1977.

Discussant, "Statistics in the Law," American Statistical Association, Annual Meeting, Boston, August 1976.

Speaker, "Statistics and Public Policy," Institute of Mathematical Statistics Meeting, Yale University, August 1976.

Speaker, "Catastrophic Risk Analysis and Federal Power Commission Regulation of Liquefied Natural Gas (LNG)," Boston Chapter, American Statistical Association, February 1976.

Speaker, "Problems in the Estimation of' Small' Probabilities," Engineering Foundation Conference on Risk Benefit Methodology and Application, Asilomar, California, September 197 5.

Chairman of Session on "Teaching Statistics to Public Policy Students," American Statistical Association, Annual Meeting, Atlanta, August 1975.

\foderator, Regional Public Meeting on Planning for the 1980 Census, sponsored by U.S. Bureau of the Census and Boston Chapter, American Statistical Association, Boston, April 1975.

CMC ACTMTIES

Vice-President, Greater Boston Chamber of Commerce, 1986-87

Chairman, Small Business Comrrunee, Greater Boston Chamber of Commerce, 1985-87.

Panelist, "Liability Insurance: A Right or a Privilege?" Symposium of the Greater Boston Chamber of Commerce, Boston, March 1986.

\1oderator, "Doing Business with Japan and the Quality Revolution," Television Seminar, Greater Boston Chamber ofConunerce, Boston, November 1985.

Participant, White House Conference on Small Business, New England Meeting, Boston, November 1985.

~ember, Governor's Commission on the Status of Court Buildings, Commonwealth of Massachusens, 1980

\,1ember, Board of Directors and Treasurer (2 years), Massachusetts Council for Public Justice, 1974-1985

- 8 -

JSC WRITTEN REBUTTAL STATEMENT JSC Exhibit No. 8 Before the COPYRIGHT ARBITRATION ROYALTY PANEL Library of Congress

1990-1992 Cable Royalty ) ) Docket No. 94-3 CARP CD 90-92 Distribution Proceeding )

REBUTTAL TESTIMONY OF DR. WILLIAM B. FAIRLEY

JSC WRITTEN REBUTTAL STATEMENT TABLE OF CONTENTS

I. Aims of the Nielsen Survey ...... 1

II. Judgment as a Basis for Estimating Cable Shares ...... 3

III. Nonresponse and Other Nonsampling Error in the Nielsen Survey ...... 5

A. Nonresponse Problems in the Nielsen Survey ...... 6

B. Surveys Should Control for and Measure All Kinds of Error ...... 8

C. The Nielsen Survey Has a High Rate of Nonresponse ...... 9

D. A Model of the Recruitment of the Nonrandom Nielsen Sample ...... 9

E. The Risk of Bias in the Nielsen Survey ...... 14

F. Nonresponse Problems in the Nielsen Survey Undermine Its Projectibility to the Population of All Cable Households ...... 16

JSC WRITTEN REBUTTAL STATEMENT Before the COPYRIGHT ARBITRATION ROYALTY PANEL Library of Congress

1990-1992 Cable Royalty ) ) Docket No. 94-3 CARP CD 90-92 Distribution Proceeding )

REBUTTAL TESTIMONY OF DR. WILLIAM B. FAIRLEY

I am the President and founder of Analysis and Inference, Inc., a research and consulting firm specializing in statistical analysis and research techniques. My principal expertise is in statistics and applied statistical techniques.

I previously submitted testimony as part of the direct case of the Public Television

Claimants in this proceeding, and my background and qualifications are fully described in that earlier testimony.

In this rebuttal testimony I will address various matters of statistics; methodology and design related to the Nielsen people-meter studies for the years

1990-92, which MP AA has submitted in its direct case through the testimony of

Mr. Paul Lindstrom of A.C. Nielsen Company.

I. Aims of the Nielsen Survey

I assume and understand that the Panel's principal objective is to decide upon the relative marketplace values and benefits to cable operators of six categories of distant signal programming in terms of attracting and retaining

JSC WRITTEN REBUTTAL STATEMENT -2-

subscribers. In the discussion that follows I will refer to these relative values as

"Cable Shares."

The Nielsen survey discussed below is a survey of 180 stations

selected as a stratified random sample from among all broadcast stations in the

United States. For each station, the survey compiles the number of minutes that

TV sets of distant cable subscribers included in the national people-meter sample were tuned to any of the six program categories. The stated objective of the survey is to provide estimates of shares of distant signal viewing minutes for the program categories (hereafter "Viewing Shares"). Notably, Mr. Lindstrom made no claim that there was any relationship between the shares of "viewing," as measured by the survey, and the Panel's objective of determining Cable Shares as I have defined them aboveY

It is also important to distinguish the stated objective of the survey from its de facto objective, which is to estimate shares of minutes that TV sets were tuned in to different program categories (hereafter "Tuning Shares").Y The

Nielsen survey measures the minutes a TV set is tuned to different programs. It

l! Note, for instance, that there is a vast divergence between viewing shares as measured by the Nielsen survey, and the shares of value reported by cable operators in the Bortz survey. Shares of some categories differ in the range of 100 percent to 500 percent in the two studies.

Y Some of the internal Nielsen documentation does refer accurately to "tuning" minutes. For instance, see the "MPAA Formulas For Use With NPM Data," where notations are defined for calculating standard errors of the "proportion of tuning."

JSC WRITTEN REBUTTAL STATEMENT -3-

does not measure "viewing" minutes as such. Since there may or may not be

anyone watching or listening to the set, the relation of tuning minutes to the

measurement of viewing minutes is problematic.

What is known is that a set must be tuned in to a channel to be

viewed, but not vice versa. Thus, viewing minutes are necessarily less than or

equal to tuning minutes. If tuning minutes are taken to be an estimate of, or a

proxy for, viewing minutes, it follows that the estimate must be upwardly biased

and overstates the amount of viewing minutes.

No data has been provided to gauge the extent to which this upward

bias in viewing minutes, as compared to tuning minutes, is in the same proportion

for all categories. Without this information, we cannot know whether the reliance

on tuning data distorts the results in favor of certain categories at the expense of

othersY

II. Judgment as a Basis for Estimating Cable Shares

We can imagine econometric or market research models that would

estimate the value of different programming to cable operators based on a

complicated dynamic function involving a variety of factors and considerations.

Ji This is one of a number of respects in which the ordinary industry usage of the national people-meter sample would not be expected to address the specific problems presented by the special Nielsen survey presented in this case. People-meter readings are not used by the television industry to generate gross viewing numbers by broad program categories -- and there could well be biases in the methodology employed here that simply do not arise in the same way when the people-meters are instead being used to collect information on viewing ( or tuning) for particular day-parts or programs.

JSC WRITTEN REBUTTAL STATEMENT -4-

Such models are apparently not at hand. But it is quite plausible to conclude that this complex interaction of factors -- by which cable operators seek to attract and retain the most subscribers with the most attractive mix of programming -- may well be understood and modeled based upon cable operators' judgment and experience in the cable industry. In this event, asking people in the industry about their judgment on Cable Shares could be a better predictor of these shares than would various other kinds of models.

Asking cable operators for their judgment and evaluation of different programming categories in effect recognizes that the respondent takes into account the many factors affecting programming value, including information about the types of programs, program diversity, and viewing and programming "popularity" to the extent that is of relevance to the cable operator. When we approximate the decisionmaking of the cable operator, we are able to take account of the multifaceted considerations that give rise to programming "value" -- in ways that may be difficult to estimate through econometric studies or market research models.

The Nielsen survey, in striving to be a "passive," "automatic,"

"objective" tool measuring a clearly defined quantity (minutes), misses the measurement of all the other dimensions of value that attract subscribers through a cable system's menu of channels. While cable operators' judgments and decisionrnaking processes are not as objectively measurable as time or the tuning

JSC WRITTEN REBUTTAL STATEMENT -5-

of television sets, it seems essential to take account of a variety of other factors in

any realistic assessment of Cable Shares. This simply illustrates the proposition

that, in statistical research and survey design, as elsewhere, it is better to be

vaguely right than precisely wrong.

III. Nonresponse and Other Nonsampling Error in the Nielsen Survey

"Nonresponse" refers to the failure to include within the sample being

analyzed a sample unit that was originally selected as a member of the "random

sample." Nonresponse is one kind of "nonsampling" error. "Sampling" error, on

the other hand, refers to those errors that arise because the survey technique is

based on a finite sample out of a larger population, rather than a census of the population. And a "nonsampling" error is any kind of error or uncertainty in the

estimation of a quantity from a sample survey that is not a sampling error.

Examples of nonsampling error, besides nonresponse, are errors in measuring the variable under study, errors in the coverage of the sample frame as compared to the target population under study, and errors in the processing of data.

Nonsampling errors are just as important, and often more important, than sampling error in determining the accuracy of estimates from a sample survey. Three of the most prominent researchers in the methods and theory of sample surveys have this to say about nonsampling error: "the nonsampling errors

JSC WRITTEN REBUTTAL STATEMENT -6-

in a survey involving original collection of data may often be a more serious

problem than the sampling errors. 111'

In his important article on nonsampling errors, Frederick Mosteller

begins with the following:

"The view has sometimes been expressed that statisticians have laid such great emphasis on the study of sampling errors (the differences between the observed values of a variable and the long-run average of the observed values in repetitions of the measurement) that they have neglected ... other, frequently more important kinds of error, called nonsampling errors.

Errors in conception, logic, statistics, and arithmetic, or failures in execution and reporting, can reduce a study's value below zero. The roster of possible troubles seems only to grow with increasing knowledge. 11 'i/

A. Nonresponse Problems in the Nielsen Survey

Nonresponse is the most serious nonsampling error presented by the

Nielsen people-meter survey. It arises in the Nielsen survey in two principal ways.

First, over half of the households originally selected for placement of people

meters refuse to participate. Second, some percentage of households with installed

people-meters do not participate in the survey at any given time, due to

malfunctioning meters, erroneous use of meters, or other factors.

1./ Hansen, Hurwitz & Matlow, Sample Survey Methods and Theory (Vol. II, 1953), p. 280.

'JJ Mosteller, Errors: Nonsampling, in Kruskal & Tanur, International Encylopedia of Statistics (1978), p. 208.

JSC WRITTEN REBUTTAL STATEMENT -7-

In 1989, a comprehensive report on methodological problems with

Nielsen people-meter surveys was issued by the Committee on Nationwide

Television Audience Measurement (or "CONTAM").§1 The CONTAM report estimated that the total nonresponse in the Nielsen people-meter samples, due to the two circumstances noted immediately above, was about 65 percent. 'l! This corresponds quite closely with Mr. Lindstrom's testimony (Tr. at 8223) that about

55 percent of households chosen in the initial sample refuse to participate in the survey, and another 12 percent of people-meter households are unavailable for tabulation at any given time. In other words, this means that, from among those households selected by random sample to participate in the people-meter survey, less than 40 percent do in fact participate at any given time.

Strictly speaking, any loss of sampled units from a random sample converts it into a nonrandom sample, unless the lost units are themselves a random sample.& Since the calculation of confidence intervals having a specific probability level, or "confidence," for estimates of quantities purportedly measured on random samples (such as Tuning Shares) depends on the randomness of the drawing, one consequence of having a nonrandom sample is that confidence

§! The report, published in October 1989, and authored by Statistical Research, Inc., was entitled "Review of Nielsen People Meter: Final Report."

'I! CONT AM report, p. 90.

~ For the various reasons discussed below, the lost units in this study are not a random sample.

JSC WRITTEN REBUTTAL STATEMENT -8- intervals can no longer be quoted with assurance that they are describing the full uncertainty in the value of the quantity estimated.

A second consequence of the loss of a random sample is often of even greater importance. That is the risk, as discussed in more detail below, that the nonrandom sample will produce biased estimates of the quantities of interest.

B. Surveys Should Control for and Measure All Kinds of Error

Users of survey results are interested in how accurate they are likely to be, and not simply the magnitude of one type of error (such as sampling error).

It has been recognized that survey procedure should take account of all sources of error:

"Ideally, the practice of total survey design operates in a comprehensive and integrated fashion. Surveys are carefully planned with consideration given to all known sources of error. . .. During analysis an attempt is made to determine the likely total error of the estimates, and an assessment of probable total error is included in survey reports. 11 '1!

This practice is often less than perfect, however:

"In many cases researchers are simply reluctant to face the problems that may be present in the survey. An 'ignorance is bliss' attitude seems to prevail and gratuitous assumptions are made about the quality of the data ([e.g.,] the 7000 respondents are adequately represented by the 3000 respondents)." 101

2! Lessler & Kalsbeck, Nonsampling Errors in Surveys (1992), p. 7 .

.!QI Id.

JSC WRITTEN REBUTTAL STATEMENT -9-

C. The Nielsen Survey Has a High Rate of Nonresponse

Any real survey involving people will face some amount of

nonresponse error. But, to avoid risk of serious bias, high rates of response may

be necessary. In discussing voluntary surveys that are dependent on the

cooperation of prospective respondents, three leading researchers in sample surveys

have this to say: "it is necessary to have substantially complete coverage if confidence is to be placed in such methods. "111 "The importance of obtaining the

desired measurements or responses for all or virtually all units designated for

inclusion in the sample, without making substitutions of other units, has been emphasized .... However, often it is necessary to proceed with some small amount of nonresponse." 121

While there is no bright line dividing a valid from an invalid rate of nonresponse, the Nielsen survey nonresponse is high by almost any standard ..!11

Clearly, a 35-percent response rate is far from complete coverage.

D. A Model of the Recruitment of the Nonrandom Nielsen Sample

A simplified model of recruitment of Nielsen people-meter

households explains the risk of bias presented by Nielsen's low response rate. In

11! Hansen, Hurwitz & Matlow, supra, p. 70. lY Id., p. 109 .

.!li The CONTAM report (p. 90) on the Nielsen methodology stated: "The current 35 percent net rate of response for the people meter is below all industry or government standards for high quality operations."

JSC WRITTEN REBUTTAL STATEMENT -10-

Figure 1, each oval is meant to signify the universe of U.S. television households.

The top oval depicts the results of the first wave of recruitment of metered households, based on a random sample of U.S. households, in an attempt ultimately to form a people-meter household base of some 2400 cable households

(for simplicity, we can ignore the non-cable part of the sample).

In this first wave, we know that 45 percent of the selected sample volunteers to take people-meters, and 55 percent refuse. We can assume that the percentage rates of refusal experienced by Nielsen in recruiting its sample are reflective of the likely reactions of all U.S. households (and not simply those contacted by Nielsen). Thus, the Figure illustrates the fact that an estimated 55 percent of U.S. cable households would not volunteer to take a people-meter in a first-wave recruitment effort, despite Nielsen's intensive efforts to recruit participants in this wave.

In order to fill out the remaining target sample size of 2400 cable households, Nielsen must select substitute ( or "Alternate") households for those that have refused to participate during the first wave of selection. Nielsen does this by undertaking to choose Alternate households that are believed to have some similar demographic characteristics to those that have refused to participate. 141

H/ We can be sure that there is no exact equivalency between those refusing and the Alternates on the most crucial variable of all: television viewing patterns. It stands to reason that those who refuse to participate in the people-meter study might have significantly different television viewing habits than those who volunteer.

JSC WRITTEN REBUTTAL STATEMENT -11-

However, as the CONTAM report has noted, the process of recruiting Alternate households "is remarkably different than that followed for the predesignated

[random] sample, and it is questionable in light of the importance of the national ratings system." 151 Specifically, Nielsen puts much less intensive effort into attempting to recruit specific "second wave" households than it does in attempting to recruit those households on the "first wave" that were included in the original random sample.

For purposes of exposition, we will designate the first wave (those households included in the original random sample) as the "intense recruitment" group. We will call the second wave the "non-intense recruitment" group. The second wave also includes households recruited on the third, fourth or higher pass to fill in the gaps in the target sample. These further efforts are of course necessary because some proportion of prospective replacement households also refuses to participate.

Since recruitment in the second wave is less intense, a smaller proportion of first-time volunteers will be recruited than in the first wave. Say, for instance, that the volunteer proportion is 20 percent of the households approached in the second wave (instead of the higher proportion of 45 percent recruited in the first wave). This is depicted in the second oval on Figure 1 -- which shows that

111 CONTAM report, p. 64.

JSC WRITTEN REBUTTAL STATEMENT -12- some 80% of U.S. households would refuse to participate in the people-meter study in response to the "non-intensive" recruitment of the second wave.

Now, what kind of household will volunteer, on this second wave, even with less intensive recruitment than in the first wave? These must be households included among the 45 percent of the population depicted on the left hand side of the top oval, because the 55 percent of U.S. households on the right hand side of the top oval would refuse even if the recruitment were intense.

Finally, we can describe the results of the recruitment process completely. The bottom oval depicts, on the far left, that the sample finally arrived at will be taken in part from those U.S. households (assumed here to be 20 percent) that would agree to participate in the people-meter survey with non intense, or "second wave," recruitment. Since we also found that 45 percent of

U.S. households are recruitable under intense recruitment, the 20 percent must be drawn from the same segment of U.S. households that would also supply the 45 percent group in response to the first wave of recruitment. Thus, we infer that 25 percent (the difference between 45 and 20) of U.S. households are recruitable only under intense recruitment.

Under this example, then, the resulting sample, after recruitment of the full complement of 2400 households, consists of about 44% (20+45) of households recruitable under non-intense recruitment, and about 56% (25+45) of households recruitable only under intense recruitment. Therefore, the entire

JSC WRITTEN REBUTTAL STATEMENT -13- sample is ultimately drawn from that segment of the population -- consisting in the aggregate of some 45 percent of U.S. households -- that will volunteer for people meters under intense or non-intense recruitment. It is not drawn at all from the 55 percent of U.S. households that, for one reason or another, refuse to volunteer under any circumstance.

In a similar way, we can understand the problems of the data that are not useable in the survey (what Nielsen refers to as data not "intab"). The data that can be used on an ongoing basis will tend to come from a certain segment of the people-meter households; and, conversely, it can be expected that certain households are more likely to present problems of unuseable data. Thus, in this respect -- as well as due to nonresponse in selecting the people-meter households - the data actually used to make the viewing estimates are no longer based on a random sample of all the people-meter households, but instead will be skewed toward those households that tend to provide useable data, for whatever reasons.

In the same vein, data actually used in the estimates are weighted toward households that tend to stay in the sample, rather than those many households that tend to drop out prematurely. Again, the sample actually used is, for yet another reason, no longer a random sample. I could go on to cite other phenomena of this kind, which alter the original random sample selected from all

U.S. households -- to a sample that is weighted toward this or that characteristic of

JSC WRITTEN REBUTTAL STATEMENT -14-

the households that have agreed to participate, that continue to participate, and that

provide useable data through their participation.

E. The Risk of Bias in the Nielsen Survey

The risk of bias in the Nielsen survey is that the population in the 35

percent group (for ease of discussion, I use in this section the CONTAM figures

on nonresponse) does not have identical tuning characteristics to the population in

the 65 percent group. Nonresponse bias includes this sort of problem: That there

could be a meaningful difference in the quantity under study (here, share of tuning

minutes) between the population from which the sample is actually drawn (the 35

percent group) and the population as a whole (the 35 percent and 65 percent

groups combined). If there is such a difference, the actual sample estimate from

the first (35 percent) group will, on average, differ from the true value for the

whole population, which is the object of interest.!§!

The problems arising from substitution as a cure for nonresponse

have been recognized:

"Substitution [of alternate respondents for the original sampled respondents] reduces nonresponse bias to the extent that the substitutes are collectively identical in every respect to the sample members for whom the substitutions are made .... Unfortunately, as

~ See, for instance, footnote 14 above.

JSC WRITTEN REBUTTAL STATEMENT -15-

with most remedies for nonresponse, substitution does not completely eliminate its biasing effects." 171

In the Nielsen survey, Alternates are matched on some demographic

factors but, to my knowledge, no evidence has been presented that these factors

provide a strong explanation of Cable Shares or Viewing Shares for these

households. Unless this is true, the Alternates will be different from the original

households, and will reflect the Viewing Shares only of the 35 percent group from

which they are chosen.

It has been recognized that substitution as a cure for nonresponse is

not a satisfactory solution when the nonresponse rate is high (as it is here):

"Schedules for the households [in the Current Population Survey] which were noninterviewed are replaced by other schedules for interviewed households of similar residence (farm or nonfarm) and race, selected at random from the same sample area. This mechanical procedure of imputing information for a noninterview household is a poor substitute for the information about the household itself. However, this procedure ... leads to satisfactory results so long as the noninterview rate is kept low."W

Levy and Lemeshow give a basic illustration of the sources of nonresponse bias ..121 In a simple random sample, with no special procedure for sampling nonrespondents, the size of bias in estimating the true mean of a quantity

JJ! Lessler & Kalsbeek, supra, pp. 177-78.

11' Hansen, Hurwitz & Matlow, supra, p. 569 ( emphasis added).

!2' Levy & Lemeshow, Sampling of Populations: Methods and Applications (1991), p. 305.

JSC WRITTEN REBUTTAL STATEMENT -16-

that arises from nonresponse is directly proportional to the nonresponse rate and to

the difference in the true values of the quantity of interest in the respondent ( our

35 percent group) and nonrespondent (our 65 percent group) populations. Thus, a

high nonresponse rate will enlarge any difference in the mean values between two populations.

F. Nonresponse Problems in the Nielsen Survey Undermine Its Projectibility to the Population of All Cable Households

The projectibility of the results of a survey to a larger population

depends on the absence of bias. Bias, in tum, is a product of the use of nonrandom samples that arise from nonresponse in the original random sample.

Little information, to my knowledge, has been presented about the nature of units lost from the Nielsen sample, or of the sizes of effects that the loss of such units might be expected to have.

Once again, Hansen, Hurwitz & Madow (1953, p. 7) state the problem succintly:

"It cannot be assumed, at least without continual testing, that nonrespondents will have characteristics similar to those of respondents. Nonrespondents may be of various kinds -- not at home, unwilling to answer, or otherwise different from respondents. When the nonrespondents are an appreciable portion of the total, one cannot place much confidence in the results unless by some means he obtains information about the nonrespondents." (Emphasis added.)

In the aftermath of the CONTAM report's highly critical review of nonresponse and various quality problems, apparently no public response has been

JSC WRITTEN REBUTTAL STATEMENT -17- made by Nielsen to address the serious shortcomings found. J. Ronald Milavsky of NBC wrote that, as of 1992, no study of nonresponse error had been completed by Nielsen, despite the fact that Nielsen had announced its plans to pay grave attention to the CONTAM findings. 201

Freedman and Kaye, writing about the criteria for the use of surveys in legal proceedings, observe:

"It remains possible, however, that despite every precaution, the sample, being less than exhaustive, is not representative; proper statistical analysis helps address the magnitude of this risk, at least for probability samples. Of course, surveys may be useful even if they fail to meet all of the criteria given above [including that "study may establish that the nonrespondents do not differ systematically from respondents with respect to the characteristics of interest or may permit the missing data to be imputed"]; but then, additional arguments are needed to justify the inferences. "w

With the paucity of information about the effects of a very substantial rate of nonresponse in the Nielsen survey -- despite a number of years of comment on its critical importance -- I draw the following conclusions:

1. The Nielsen survey appears to be without support in a major dimension -- nonresponse.

2. The problem cannot be money or resources, because Nielsen customers would surely support the costs of a serious research program.

'!:21 Milavsky, How Good Is the A.C. Nielsen People Meter System? (1992), p. 112.

W "Freedman & Kaye, Reference Guide on Statistics, in Federal Judicial Center, Reference Manual on Scientific Evidence (1994), p. 346 (emphasis added).

JSC WRITTEN REBUTTAL STATEMENT -18-

3. The problem is apparently one of long-standing and, at least as of 1989, is increasing.

4. Given this fundamental problem of nonresponse, my conclusion is that the Nielsen study cannot be used with any confidence in the results, for the reasons discussed above.

JSC WRITTEN REBUTTAL STATEMENT Figure 1 Wave I: Sample with Intense Recruitment

45%

Intense Recruitment

Wave II: Sample with Intense Recruitment

20%

Non Intense Recruitment

Final Sample Composition

20% 25%

JSC WRITTEN REBUTTAL STATEMENT I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge, information and belief.

Executed this }J!:' day of February, 1996.

JSC WRITTEN REBUTTAL STATEMENT JSC Exhibit No. 9 Before the COPYRIGHT ARBITRATION ROYALTY PANELS Library of Congress

Copyright Arbitration Royalty Panels ) 1990-1992 Cable Royalty ) Docket No. 94-3 CARP CD 90-92 Distribution Proceeding )

TESTIMONY OF JOHN W. FULLER

JSC WRITTEN REBUTTAL STATEMENT TABLE OF CONTENTS

1. The Bortz Survey, as Adjusted, Shows the Value of the Distant Retransmission of Public Television ...... 3

2. The Actual Behavior of Cable Operators Confirms the Benefit to Them of Distantly Retransmitting Public Television Signals ...... 8

3. The Number of Cable Households That Receive Their Only Access to Public Television Via Distant Retransmission Supports the Results of the Bortz Survey ...... 1O

4. Distant Retransmission Is a Particular Benefit for Cable Operators Who Have No Local Public Television Signals or Who Gain Significant Benefits from Programming and Schedule Diversity ...... 1 I

5. Public Television's Unique Slate of Children's Programming Is a Particular Benefit for Cable Operators in Attracting Subscribers ...... 14

6. The Specialty Cable Channels Illustrate the Value and Benefit of Public Television Programming to Cable Operators ...... 17

A. Programming Similarities ...... 17

B. Licensing Fees ...... 20

7. An Industry Estimate of the License Fees for Public Television Confirms the Value of this Programming to Cable Operators ...... 24

8. The Program Suppliers' Special Nielsen Study Should Not Be Given Significant Weight In this Case ...... 28

9. Duplication of Programming Among Distantly Retransmitted Public Television Signals ...... 34

JSC WRITTEN REBUTTAL STATEMENT Before the COPYRIGHT ARBITRATION ROYALTY PANELS Library of Congress

Copyright Arbitration Royalty Panels 1990-1992 Cable Royalty Docket No. 94-3 CARP CD 90-92 Distribution Proceeding

TESTIMONY OF JOHN W. FULLER

I am the Director of Research for the Public Broadcasting Service ( or

"PBS"). I have held this position since March 1985; and I was the Associate Director of

Research beginning in 1980. I am the person within PBS principally responsible for the analysis and interpretation of audience data and viewing trends for PBS and its member public television stations. My responsibilities include research on program scheduling and audience trends, and the interpretation of audience data for program underwriters and the news media.

Before joining PBS, l had extensive experience in television research and other aspects of the television business. In particular, between 1976 and 1980 I worked with Arbitron Ratings Co., where I was involved in various research projects and field studies on television viewing. I also worked for a decade with commercial television stations in Jacksonville, Florida, first as a director and promotion manager, and later as research director and program manager.

In this testimony, I will discuss a variety of matters pertinent to the division of the 1990-1992 cable royalty fund. The following is a brief summary of the principal points I will make below:

JSC WRITTEN REBUTTAL STATEMENT - 2 -

• The adjusted Bortz Study provides the best available method to measure the benefits to cable operators and the marketplace value of public television programming over the 1990-1992 period. When the appropriate fact@rs are taken into account, public television's share of 6% of all funds under the Bortz Study is equivalent to 8% of the Basic fund. This figure is corroborated by data on the distant signal carriage of public television, which measure cable operators' actual behavior during the 1990-1992 period.

• Public television offers cable operators an exciting diversity of programming that helps them to attract and maintain viewers in different market "niches" as cable subscribers.

• Cable operators receive the greatest benefit from distant retransmission of a public television signal where no local public television signal is available. Over 2.1 million cable households, or roughly 4.5% of total cable households in the United States, receive their only public tetevision signal via distant retransmission. In addition, another 2.6 million cable households, or another 5.6% of U.S. cable househo~ds, receive their second public television signal through distant retransmission, and thereby receive significant benefits of programming diversity and scheduling alternatives for their public televisicm viewing.

• Cable operators receive particular benefit from the tremendous value of children's programming on public television. More than a third of U.S. housefu.olds have children under the age of 12, and for such households in particular the availability of public television's renowned children's programming is an obvious reason to subscribe to cable television. Cable operators unquestionably benefit from the ability to offer this programming via distant retransmission.

• The value and benefit of public television programming to cable operators and subscribers are shown by analogy to specialty cable channels such as Arts & Entertainment and Discovery, for which cable operators are ~illing to pay a significant amount per subscriber. Through comparison to these specialty channels, it is

JSC WRITTEN REBUTTAL STATEMENT .., - .) -

possible to estimate license fees for public television. which confirm the validity of the Bortz results as to public television.

An industry estimate has been prepared of the appropriate license fees for public television, based on a survey of the preferences of cable subscribers. That survey also confirms the Bortz survey results for public television.

The Program Suppliers' special Nielsen study is not a valid measure of the value of distant signal programming because household viewing hours are essentially irrelevant to cable operators. The overwhelming evidence of the value of public television to cable operators shows that the Nielsen study is not an appropriate basis for allocating cable royalties.

1. The Bortz Survey, as Adjusted, Shows the Value of the Distant Retransmission of Public Television

I recognize that an essential part of the task before the Arbitration Panel is to quantify the benefits to cable operators and the marketplace value associated \Vith the distant retransmission of public television programming and other programming types.

The Bortz study presented by the Joint Sports claimants provides the most reliable source of information available on the benefits to cable operators from the distant signal retransmission of different programming types and should be given controlling weight in the Panel's determination. Unlike the reliance of the Program Suppliers on household viewing hours, which provide virtually no insight into the benefits to cable operators flowing from distant signal retransmission, the Bortz study is a well-conceived effort to

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measure the benefits and value to cable operators from different types of programming available via distant retransmission.!

The Bortz study results must be refined to provide accurate results for public television, as discussed immediately below. However, even before the Bortz results are revised, it bears emphasis that public television's share in the Bortz study steadily increased during the 1989 to 1992 time period -- from 1.3% in 1989, to 2. 7% in

1990, to 2.9% in 1991 and finally to 3.0% in 1992. Thus, cable operators attributed a substantially higher value to the distant retransmission of public television programming in the 1990-1992 studies than they did in 1989. I believe that this is a direct reflection of the substantial new programming and promotional initiatives undertaken by PBS. beginning in 1990 and continuing throughout the relevant time period ( as discussed in detail in Jennifer Lawson's testimony), which significantly improved the visibility and stature of public television programming and consequently created substantially greater benefit for cable operators from the distant retransmission of public television programming.

As discussed in the testimony of Dr. William Fairley, the Bortz results must be adjusted to take account of the fact that PBS progranuning was automatically

.!.' On the other hand, the methodology of the Bortz study does not measure the harm to copyright owners flowing from distant signal retransmission. Considerations of harm to public television from distant retransmission are discussed at length in the testimony of Peter Downey.

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assigned a zero value if a cable operator did not carry a distant public television signal

during the survey year. That adjustment, which was accepted in principle by the

Copyright Royalty Tribunal in the 1989 cable royalty distribution decision, is necessary to

correct for the underrepresentation of public television programming in the Bortz survey.

The adjusted Bortz results for PBS, as described by Dr. Fairley, are as follows:

1990 6.1% 1991 6.3% 1992 5.7%

In applying these adjusted survey results to the distribution of cable royalties, it is necessary to take account of the fact that public television only receives royalties from the Basic fund and does not participate in the 3.75 fund, which accounts for about one-quarter of cable royalties for each year at issue. In contrast, every other programming category included in the Bortz study participates in both the Basic and 3.75 funds.

Because PBS only participates in about three-quarters of the total royalty funds, it can be readily seen that its share of the Basic fund must be higher than the adjusted Bortz figures shown above if PBS is to receive the proper share of overall royalties contemplated by the Bortz results. For instance, PBS's adjusted Bortz share in

1990 is 6.1 %. If PBS received 6.1 % of the Basic fund, but the Basic fund was only three-quarters of total royalties in 1990, PBS would end up receiving only 4.6%

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(6.1 x .75) of total royalties -- substantially less than the total share contemplated by the

Bonz results as adjusted.

This point does not involve a correction to the methodology of the Bortz study. Rather. it is an adjustment in the manner that the survey results are applied, to take account of the fact that PBS does not participate in all parts of the total royalty pool.

PBS will not receive its full share of the total royalty pool unless its share of the Basic fund is increased to reflect that the Basic fund is about three-quarters of the total royalty pool.

This refinement in the application of the survey results involves a simple algebraic adjustment. If PBS's share of the Basic fund is divided by the percentage of total cable royalties that are in the Basic fund, then PBS's share of total royalties would be equivalent to the adjusted Bortz survey results. Again, taking 1990 as an example, the

Basic fund is 75.442% of total royalties. If PBS's adjusted Bortz share for 1990 (6.1 %) is divided by .75442, PBS's share of the Basic fund would be 8.1%. This is identical to saying -- as the adjusted Bortz results contemplate -- that PBS's share of total royalties should be 6.1 %.

The same methodology can be applied to the 1991 and 1992 royalty funds.

The Basic fund accounts for 75.743% of total royalties in 1991, and 75.651% in 1992.Y

f.' The figures on the percentage of total royalties represented by the Basic fund are from data supplied by the Licensing Division of the Copyright Office.

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Dividing the adjusted Bortz results by these percentages leads to the following shares for

PBS for the Basic fund:

1990 8.1% 1991 8.3% 1992 7.5%

It is necessary to make pro rata adjustments in the Bortz shares for other program categories, to take account of the adjusted PBS shares as derived by Dr. Fairley.

(This is the same approach that the Copyright Royalty Tribunal followed in its 1989 decision, when it made pro rata downward adjustments in the shares for other program categories when it made various upward adjustments in PBS's Bortz share.) These pro rata adjustments are shown at PTV Exhibit 20. They reflect a simple mathematical adjustment that deflates all other program categories to take account of the adjusted PBS shares.

Finally, once these adjusted shares are derived for each program category, they must then be allocated between the Basic and 3. 7 5 funds to take account of the fact that PBS participates only in the Basic fund. PBS' s share of the Basic fund, as discussed above, is higher than its adjusted Bortz share for total royalties; and PBS's share of the

3.75 fund is zero. Correspondingly, the share of 3.75 funds for all other program categories is slightly higher than their overall Bortz shares, as adjusted; and the share of

Basic funds for each category is slightly lower than its overall Bortz share. These shares

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for the Basic and 3. 75 funds are shown in PTV Exhibit 21. \Vhen these shares of the

Basic and 3. 75 funds are combined, as a matter of mathematics they produce the adjusted

Bortz shares for each program category set forth in PTV Exhibit 21.

2. The Actual Behavior of Cable Operators Confirms the Benefit to Them of Distantlv Retransmitting Public Television Signals

The Bortz study results find important confirmation in the evidence of what cable operators actually did during the 1990-92 period. During that time, public television signals accounted for on average 7.2% of all full-time distant signals retransmitted by cable operators, and 8.0% of full-time basic signals. In direct confirmation of the Bortz survey results -- which show an increase between 1989 and

1992 for public television, as discussed above -- the instances of carriage for public television also increased between 1989 and 1992 (from 6. 7% to 7.3% of all distant signals, and from 7.4% to 8.0% of basic signals). See PTV Exhibit 22.

While these instances of carriage data are not precisely identical to the

Bortz survey results for public television, they are quite close to the range of adjusted shares -- 7.5% to 8.3% -- presented above for 1990-1992, and they are within the confidence intervals for the Bortz results as derived by Dr. Fairley.l' The essential point, however, is that the instances of carriage data -- which measure what cable operators actually did during the· relevant 1990-1992 time period with respect to public

1 ~ See Table 1 of Dr. Fairley's testimony.

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television progranuning -- correspond quite closely with the Bortz measurements of how cable operators valued distant public television signals. This is a strong confinnation of the validity of the Bortz study.

As the Copyright Royalty Tribunal previously recognized. instances of carriage data can provide an important insight into the way that cable operators value public television programming. When a cable operator makes a decision to import a public television signal it is acting affinnatively to import an entire programming category, while a decision to import any other type of distant signal results in the importation of a variety of different program categories. The Tribunal made the point in these tenns: "[B]ecause PBS occupies the entire broadcast signal[, each] time a cable operator chooses to import a PBS signal, even if it is already carried locally, the operator has made his or her desire known." (1983 Cable Decision, 51 Fed. Reg. at 12811.)

Thus, as the Tribunal noted, for most programming categories "cable operators do not obtain distant signal programming on a program-by-program basis. The operator 'purchases' by the compulsory license entire broadcast signals consisting of a variety of program types. Operators must take the distant signal as is or not at all."

( 1989 Cable Decision, 5 7 Fed. Reg. at 15288.) The situation is entirely different as to public television -- where the cable operator "votes with its feet" for an entire programming category when it elects to import the distant signal. Here, the data in fact show a convergence -- the Bortz survey results based on cable operators' rankings of

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relative value confirm what the instances of carriage data show about how cable operators

actually valued distant public television signals in making decisions to import distant

signals during 1990-1992.

3. The Number of Cable Ho~seholds That Receive Their Only Access to Public Television Via Distant Retransmission Supports the Results of the Bortz Survey

The value of distant signal public television to cable programmers is also

shown by the number of cable households, that receive their only public television signal via distant retransmission. During the 1990-1992 time period, on average more than

2.1 million cable households, or 4.5% of ~able subscribers, received their first public television station as a distant signal. This number shows an obvious and important value for cable operators serving this portion of the cable-viewing public. In addition, on average another 2.6 million cable househdlds, or 5.6% of cable subscribers, received what was only their second public television station by distant signal. See PTV Exhibit 23.

Cable operators almost always choose to carry PBS. On average, over

99% of all Form 3 cable systems carried ~t least one public television signal in each year between 1990 and 1992, and on average Q>ver that same period 21 % of all cable systems chose to retransmit a distant public television signal.

Given the benefits to haviD!g access to multiple public television channels, as discussed by Jennifer Lawson in her t~stimony, the availability of public television via

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distant retransmission gave cable operators real value in their efforts to attract and maintain subscribers. This benefit to cable operators is accompanied by a corresponding hann to public television copyright holders. During the 1990-1992 period, nearly half

( 4 7%) of the retransmitted public television signals overlapped with a local public television signal. PTV Exhibit 24. As Peter Downey will discuss, these overlapping signals create situations in which local stations, and ultimately copyright owners of public television programming, suffer harm from distant retransmission.

4. Distant Retransmission Is a Particular Benefit for Cable Operators Who Have No Local Public Television Signals or Who Gain Significant Benefits from Programming and Schedule Diversitv

The most obvious and significant benefit to a cable operator from the distant retransmission of a public television signal is where the operator does not have a local public television signal to offer to its subscribers. See PTV Exhibit 25. A cable operator that failed to provide fil1Y public television signal would have a slate of programming lacking in diversity by almost any standard. This point was made, for instance, during the 1983 case by Richard Loftus, who had worked in the cable television business for some 25 years. The Tribunal summarized his testimony in this way:

"Loftus considered PBS stations a necessary distant signal if the local market does not have a PBS station as a must-carry." (51 Fed. Reg. at 12796.)

Distant retransmission is vital to cable operators that need to include a public television station within their programming slate. From 1990 through 1992, over

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half of the cable systems that imported a distant public television signal did not carry a

local signal. See PTV Exhibit 24.

If a local public television station is not available to the cable operator. a

distant public television signal brings to the cable subscriber (and cable operator) a unique

set of programs that are different in kind from what is generally available in the local

commercial television market. Programs running the gamut from SESAME STREET to

READING RAINBOW to MASTERPIECE THEATER to the MacNEIL/LEHRER

NEWSHOUR to the CIVIL WAR are simply not available in any comparable form on

any commercial station. In contrast, the Saturday morning cartoons or Hollywood re-runs

found frequently on many of the distantly retransmitted independent stations are of a type

comparable, if not identical, to the programs invariably available within the local market on commercial television. This is not to say that the distant retransmission of

independent stations lacks value to the cable operator. Rather, my point is that there is a special value to the cable operator in being able to gain access to public television programming via distant retransmission if it is not available locally. See PTV Exhibit 25.

In addition, cable operators can also receive significant benefits from each additional distant retransmission of a public television station that complements offerings available in the local market. These additional public television stations can add significant benefits of programming diversity, since oftentimes the mix and content of

programming on different public television stations will differ substantially. (For

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instance, additional signals can add public television programming aimed at a minority

group, or providing an instructional focus.) See PTV Exhibit 26. In addition, a second

or third public television station can add t© scheduling diversity, even when similar

programs are found on the different statioiil.S. This also can be a significant benefit to

cable operators who are thereby able to offer subscribers different time options for public television programming. (For instance, there can be real benefit in having different

children's programming available on different channels at different times of the day.)

As noted above, during the 1990-1992 time period, on average more than

2.1 million cable households, or 4.5% of G:able subscribers, received their first public television station as a distant signal. In aqldition, on average another 2.6 million cable households, or 5.6% of cable subscribers, ,received only their second public television station by distant signal. See PTV ExhibiJt 23. The cable operators who serve these groups of subscribers -- representing near~y 5 million cable households, and over 10% of total cable subscribers -- clearly receive direct and substantial benefits from the distant retransmission of public television signals. While these figures cannot necessarily be directly correlated to the Bortz study results, they confirm -- as do the Bortz results - that distant retransmission of public television programming has significant benefit and value for a sizeable number of cable operators and the subscribers they are trying to attract to their systems.

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5. Public Television's Unique Slate of Children's Programming Is a Particular Benefit for Cable Operators in Attracting Shbscribers

One of the particular benefits of public television programming is its

unique and unparalleled children's programming. (See PTV Exhibit 9.) Public television

shows such as SESAME STREET and READING RAINBOW have long been recognized

by parents as programs that they want thejr children to watch. New additions to the PBS

childrens' programming lineup, such as B~EY & FRIENDS, SHINING TIME

STATION and LAMB CROP'S PLAY ALONG, have continued and built on this fine

tradition. Thus, cable operators who are able to offer such programming via distant

signal retransmission -- or who are able t0 offer such programming at different times of

day by importing distant signals to compl¢ment their local public television offerings -

gain a real and identifiable benefit in attr~cting subscribers to their systems. Over one

third of all households in the United States have children under the age of 12; and nearly

one in six households have children under six years of age.ii That is an obvious target

group for cable operators -- and the abiliey to offer children's programming of value and

interest to parents can therefore be a substantial benefit flowing from the distant

retransmission of a public television signal.

i' U.S. Department of Commerce, Bureau of the Census, Current Population Reports, Household and Family Characteristics, T~ble 18, March 1990 (Series P-20-447); March 1991 (Series P-20-458); March 1992 (Se~ies P-20-467).

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An example helps illustrate the point. NFO Research. Inc .. a firm specializing in research about families, conducted a national mail survey in July 1990 of parents of children aged 5 through 8. The parents to whom the questionnaire was sent were selected to match the U.S. Census profile of households with children in that age group. Responses to the survey were received from 707 households. Here are some of the key results which illustrate PBS progranuning's positive effect on children and their parents:

70% of the parents were familiar with READING RAINBOW

72% of the parents familiar with READING RAINBOW encouraged their children to watch the program.

55% of all parents familiar with READING RAINBOW said that their child asks for books he or she has heard about on the program.

Indeed, during the hearings on the 1990 Children's Television Act, substantial concern was expressed by Members of Congress and many witnesses about the over-exposure of children to advertising on commercial television. (A number of these comments and excerpts from the Senate report are summarized at PTV Exhibits 10 and 11.) This

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concern is reflected in the intense interest that many parents have in the commercial-free children· s programming available on public television.

In my testimony in the 1989 case, I provided substantial information comparing the intensive advertising on commercial television \\1th the lack of commercial interruptions on public television, and I explained the benefits of being able to watch a program without the imposition of commercial interruptions. I hereby reincorporate that testimony by reference for purposes of this case. Whether it be a three-year-old child watching SESAME STREET or an adult eager to watch a full hour of news on the

MacNEIL/LEHRER NEWSHOUR -- rather than 12 minutes of advertisements within a supposed hour of commercial television news programming -- there can be little question about the pleasures to cable subscribers (and therefore the benefits to cable operators) of watching television that is essentially commercial-freeY

21 By way of example, in 1990 networks had an average of 12.46 minutes of advertisements per hour of progranuning. Thus, 20.8% of each programming hour was devoted to commercials, and a viewer of the local news plus the half-hour evening news would only see 4 7 minutes of news coverage --as compared to the virtually uninterrupted MacNEIL/LEHRER NEWSHOUR available on public television. The same pattern was reflected in commercial television programming in 1991 and 1992. Public television stations do run pledge weeks during certain times of the year, but even during those weeks much of the programming is uninterrupted. On an annualized basis, the pledge drives account for only 0.4% of the total air time for public television.

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6. The Specialty Cable Channels Illustrate the Value and Benefit of Public Television Programming to Cable Operators

In recent years, a number of special cable channels have been launched that feature programming with many similarities to the programming found on public television. The very names of some of these specialty channels -- such as "Discovery

Channel," "Arts & Entertainment," "The Learning Channel," and "Bravo" -- reflect an intention to compete in a number of the programming niches traditionally occupied by public television. And that is precisely what these channels have tried to do.

A. Programming Similarities

A 1990 study prepared by John Carey of Greystone Communications contains a comparative analysis of the general subject matters of programming on public television and on several of these public television look-alikes.2 The study examined programming offered in February 1990 by Arts & Entertainment, Bravo, Discovery, The

Learning Channel, and Nickelodeon, each of which offered a particular emphasis in at least one area of progranuning that corresponded to public television's areas of emphasis.

The Carey study found significant overlaps in the programming offered by public television and each of these specialty channels. Although public television offers

2· While the Carey study was conducted in 1990, its conclusions about the similarities between PBS and these look-alike channels are fully applicable for 1991 and 1992.

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more overall diversity than any of these channels, each is nonetheless anempting to play to certain niche audiences within the PBS field. Some of these similarities can be briefly summarized:

The Carey study found that both PBS and The Learning Channel have a relatively high percentage of "Instructional" programming. which occupied 38% and 37% of their schedules, respectively, during February 1990.

Arts & Entertainment has significant programming in public affairs. dance and music, nature, and drama -- all programming categories that have been a consistent emphasis of public television.

Bravo features a large number of musical performances, such as jazz or classical concerts, as well as dance and opera programs. These, again, are well-known staples of public television's progranuning.

The Discovery Channel has a large volume of nature programming as well as significant blocks of instructional programming, especially cooking shows. These, also, are areas strongly featured within public television's mix of programming.

Much of the Nickelodeon program day consists of cartoons and aging Hollywood syndicated programming aimed at children. While this programming is different in content and approach from the children's programming on public television, it is notable that an entire specialty channel has been built around its appeal to children. In addition, several hours of Nickelodeon's programming day during the 1990 -1992 period had a more educational flavor: MR. WIZARD is a well-known science show similar to several public television programs, and THE ELEPHANT SHOW is a sing along program for pre-school children. In fact, in early 1994, Nickelodeon recognized the preeminence of PBS in children's progranuning when it unveiled a $30 million dollar programming

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effort designed to compete with PBS's dominant slate of pre-school programming.

For examples comparing the daily listings of PBS and the other channels, see PTV

Exhibit 29.

In addition, and as a reflection of the overlap in programming between these look-alikes and public television, during 1990 and in subsequent years we have seen an increasing effort by these channels to compete against public television in the acquisition of the types of programming that have for many years been a cornerstone of public television. For instance, during the 1989/90 program season, public television purchased a large volume -- some 37% -- of the programming produced by

BBC/Lionheart, while Arts & Entertainment accounted for 17.5% of BBC/Lionheart sales.2' This head-to-head competition for new programming is certainly a reflection of the efforts being made by these look-alikes to mimic the programming of public television.

Despite these similarities in programming types, public television in fact offers a richer programming schedule that is likely to be of greater attraction to cable subscribers than any of these specialty channels. This is the result, first of all, of the diversity of programming found on public television in contrast to these specialty channels. Also, most if not all of these specialty channels offer at least some amount of

7:· This figure is from the Carey study.

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second-run programming -- and some rely on programming that in fact had previously appeared on public television. In addition, experience has shovm that local or regional programming available on most public television stations is a real attraction to many viewers; yet these specialty channels, produced for a nationwide audience. are completely lacking in such local content.

A notable comparison is with Arts & Entertainment. In February 1990. the month surveyed by the Carey study, Arts & Entertainment featured a number of dramas and nature programs that had previously appeared on public television. including BLEAK

HOUSE, CHARTERS AND CALDICOTT, THE LIVING PLANET, and LIFE ON

EARTH. As another example, in 1990, approximately 95% of PBS programming was exclusive to PBS in the U.S. market. By contrast, 40% of the Learning Channel's instructional programming was second-run public television material.

B. Licensing Fees

These PBS look-alike specialty channels are sold to cable operators for a licensing fee per subscriber. During the 1990-1992 period, these channels charged cable operators monthly licensing fees of between 7 cents and 26 cents per subscriber per month (based on top-of-the-rate-card rates).~

~' The yearly listings of license fees charged are presented in PTV Exhibit 30. The source for these and the other licensing fees discussed in text is Paul Kagan Associates, Cable TV Programming (May 22, 1995).

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These fees compare favorably to fees paid by cable operators for the most popular cable channels. (An illustrative table is set forth at PTV Exhibit 3 I.) For instance, the fee for Nickelodeon is similar to that for MTV, and the only monthly cable channel fees that exceed Nickelodeon's are those of CNN and ESPN. The fee for .'\J1s &

Entertainment is on the high end of the next pricing tier, and is comparable to the fee for

Lifetime. The somewhat lower fees for Discovery and The Leaming Channel are comparable to superstation fees and fees for channels such as BET, Family Channel. and the Weather Channel.

In 1990 alone, cable operators paid an estimated $45 million in license fees for Arts & Entertainment, $32 million for The Discovery Channel, $68 million for

Nickelodeon, and $6.2 million for The Leaming Channel. From 1990 to 1992, these license fee revenues were increasing at an average rate of 15 percent per year. See PTV

Exhibit 32. Thus, cable operators are willing to pay significant amounts of money to carry specialty channels that are in many senses pale imitations of what they are able to acquire via the distant retransmission of public television. And cable operators have clearly made the judgment that the programming of these public television look-alikes is a significant means for attracting subscribers.2' This is an illustration, again, of why public television programming is a significant benefit to cable operators.

~· The attributes sought by subscribers were the subject of a study submitted by Program Suppliers in the unfinished 1990 proceeding before the Tribunal. This study showed that the attributes subscribers seek in a television station or cable network are those offered by PBS. See PTV Exhibit 19.

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It is possible to derive an estimated award for public television in this case based on the licensing fees charged for these specialty cable channels. A conservative assumption is to apply the license fee for Arts & Entertainment, which is reported as 12.

13 and 15 cents per subscriber per month for the respective years 1990, 199 l, and 1992.

(This is conservative because, for the reasons noted above, public television programming has significantly more appeal than Arts & Entertainment and is therefore more likely to be of benefit to cable operators in attracting subscribers who are interested in this sort of programming. Thus,.a license fee based on Arts & Entertainment may, if any1hing. be too low as a proxy for public television.)

If one applies the noted license fees to the subscriber instances of carriage of public television signals during each year from 1990 to 1992, this leads to estimated

"licensing revenues" for public television as reported below. From 1990-1992, these fees would result in awards from the Basic fund ranging from 6.8% to 8.0%.

Year 1990 1991 1992

License Fees .12 .13 .15

Distant Subscribers 6,370,825 6,410,178 6,591,336 Total Fee Revenue $9,173,988 $9,999,878 $11,864,405

Percentage of Basic Fund 6.8% 7.0% 8.0%

It may also be appropriate to add one further adjustment to these estimated licensing fees for public television. One attraction of the specialty channels for cable

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operators is that, to some extent, they allow cable systems to generate advertising revenues. While it is quite unlikely that cable systems feature these specialty channels because of their advertising time, this is nonetheless a source of incremental revenue to the cable system. Thus (assuming an equivalence in program content), a cable operator might be willing to pay somewhat less in license fees for public television than the specialty channels because it would lose revenues from spot advertising.

A reasonable way to adjust for this point is to deflate the estimated "license revenues" for public television, as computed above, according to the percentage of cable system revenues attributable to advertising. The percentage of the revenue earned by local cable operators from the sale of advertising time is shown in the following table ..!.Q

Year Percentage of Revenue from Sale of Local Advertising Time 1990 3.6% 1991 3.6% 1992 4.1%

Thus, it is appropriate to deflate the above estimates to reflect that a cable operator that

"licensed" public television distant signals would be losing 3.6% of its revenue base and would therefore presumably insist on a commensurate reduction in licensing payments .

.!.Qr Cable Television Developments (Spring 1995) at 8 and 9. A quite similar adjustment was developed by John Woodbury, one of the witnesses for Program Suppliers during his testimony in the 1989 proceeding. (See page 19, note 28 of his rebuttal testimony.)

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When this adjustment is applied, it leads to estimated "licensing revenues" for public television for the 1990-1992 period as presented below.

1990 1991 1992 Total Fee Revenue $8,843,724 $9,639,882 $ I 1.3 77. 964 Percentage of Basic Fund 6.6% 6.8% 7.7%

Of course, these percentages are simply illustrative, but the values computed by these license fee analogies are similar to the adjusted Bortz results for public television. In other words, these estimates provide a powerful confirmation that the Bortz study is in fact producing an accurate measurement of the benefits and marketplace value for cable operators from the distant retransmission of public television.

7. An Industry Estimate of the License Fees for Public Television Confirms the Value of this Programming to Cable Operators

When the compulsory license law was changed by the Cable Act of 1992 to allow broadcasters to seek compensation from cable operators for the retransmission of over-the-air signals, both cable operators and broadcasters actively engaged in efforts to determine the potential license fees that broadcast stations could realistically expect from cable operators. One study of particular interest on this issue was prepared in April 1993 by Norman Hecht Research, Inc., on behalf of the National Association of Broadcasters

("NAB").

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The Hecht study involved a survey of cable subscribers to two large

Form 3 cable systems in a single (unidentified) "top ten" market. The cable subscribers were asked to allocate a portion of their monthly cable bill to the categories of broadcast programming included on those cable systems. In total, 385 subscribers were interviewed for the study.

The cable subscribers placed a value of $2.28 on the first public television signal, $1.01 on the second public television signal, and $0. 71 on the third public television signal. The total value attributed by those subscribers to the three public television stations exceeded the total for any other type of broadcast station.

While these figures measure the value placed on different programming types by cable subscribers, they did not themselves purport to establish the license fees · that broadcast stations could charge cable operators for the retransmission of the different types of stations included within the survey. In April 1993, Paul Kagan Associates, Inc., a respected consultant to the cable industry, attempted to translate the figures developed by the Hecht survey into estimated "license fees" that broadcasters could be expected to charge based on the preferences as expressed by cable subscribers. These results were published in Cable TV Programming, April 30, 1993.

The Kagan study estimated that the first public television signal on a cable system could garner a monthly license fee of 24 cents per subscriber. While the Kagan study did not derive the comparable figures for the second and third signals, the same

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methodology developed by Kagan in deriving the 24-cent estimate can also be applied to

these other signals. This produces an estimated monthly license fee for the second public

television signal of 11 cents per subscriber, and 8 cents per subscriber for the third signal.

I recognize, of course, that the Kagan study and the underlying Hecht

survey were conducted in l 993, and not during the years directly at issue in this

proceeding. Nonetheless, in. my judgment the estimated license fees have clear relevance

to the award of 1990-1992 cable royalties -- because they are derived ultimately from the

preferences of cable subscribers for public television programming, and those preferences are not likely to have changed significantly between the 1990-1992 period and 1993.

The estimated license fees from the Kagan study can be used to derive an award for public television in this proceeding. In general terms, this entails determining the number of subscribers who received their first, second, or third or more public television signal on a distant signal, and multiplying those numbers by the estimated license fees.

At the outset, however, it is necessary to deflate the 1993 estimates to take account of the increases in cable licensing fees that have been experienced in the marketplace between 1990 and 1993. During that period, the over:all level of license fees for the specialty cable channels most comparable to public television -- Arts &

Entertainment, The Discovery Channel, The Learning Channel, and Nickelodeon -- has increased on average approximately 14.21 % per year. Thus, it is appropriate to deflate

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,J\ :.',t - 27 - REVISED

the 1993 estimated licensing fee estimates to tak.J into account the fact that licensing fees have increased generally between 1990 and 1993. Th~s results in estimated monthly license fees per subscriber for each year between 1990 and 1992 /as listed below:

' I 1990! 1991 1992 1993 I First PBS Distant Signal Fee 17.5¢: 18.9 21.0 I 24 ' Second PBS Distant Signal Fee 8.0¢1 8.6 9.6 11 I Third (+) PBS Distant Signal Fee 5.8¢1 6.3 7.0 8

These estimated license fees can t~en be multiplied by the number of cable subscribers who received their first, second, or third(+) pubJic television signal via distant signal retransmission.

See PTV Exhibit 23. The total license fees for public television, based on these calculations, are presented below:

I 199q 1991 1992 I Revenue From First Station $4,537,p44 $4,780,824 $5,271,870 Revenue From Second Station $2,558,658 $2,661,212 $3,017,074 I Revenue From Third Station $1,138,r82 $1,354,448 $1,624,153 (+) Total License Fee Revenue $8,234,~84 $8,796,484 $9,913,097 I Percentage of Basic Fund 6.l~o 6.2% 6.7%

These figures again are close to tlie adjusted Bortz results for public television. This I is another and independent confirmation of the ~stimated values for public television as reflected in the

JSC WRITTEN REBUTTAL STATEMENT - 28 -

Bortz study. Moreover, it provides a further validation of the overall reliability of the

Bortz study. While I am of course constrained to acknowledge the many variables involved in the Hecht and Kagan estimates, it is nonetheless striking that computations from the industry trade press can provide a substantial corroboration of the Bortz results as to public television.

8. The Program Suppliers' Special Nielsen Study Should Not Be Given Significant Weight In this Case

As in years past, it can be anticipated that the Program Suppliers will seek to place essentially dispositive weight on their special Nielsen study of distant signal viewing. But it is clear to me that the Nielsen study does not address the criteria of relevance to the Panel because it fails to measure either the benefits to cable operators from distant signal retransmission or the marketplace value of the retransmitted programming ..!ll

Cable operators are primarily in the business of attracting subscribers to their systems. A program with relatively limited viewership (e.g, SESAME STREET or

MASTERPIECE THEATER) may be of substantial importance in attracting viewers to subscribe to a cable system; and, conversely, a program with widespread viewership (e.g.,

THE BEYERL Y HILLBILLIES or GILLIGAN'S ISLAND) may have virtually nothing

.!ll A videotape of a NOVA program providing a more extensive analysis and critique of Nielsen ratings is included as PTV Exhibit 6.

JSC WRITTEN REBUTTAL STATEMENT - 29 -

to do v.,ith why viewers subscribe to cable systems because it is recognized as essentially generic programming of no particular interest. These sorts of nuances are entirely lost in the Nielsen numbers -- as the Tribunal recognized when it observed that "cable operators are interested in selling subscriptions and that viewership is of limited relevance to cable operators." (1983 Cable Decision, 51 Fed. Reg. at 12808.)

The point has special relevance in relation to cable operators' distant retransmission of public television programming. As the Tribunal previously concluded.

"commercial factors, such as the size of the viewing audience, cannot provide an appropriate measure of the value of public television signals to cable operators." ( 1979

Cable Decision, 47 Fed. Reg. at 9893.) Although some public television programs achieve relatively high Nielsen ratings, public television is not designed to attract the largest possible audience for each program. Rather, the very essence of public television is the diversity of programming options, and the availability of programming types simply not found on commercial television. This may not generate viewers in large quantities for particular programs, but it may well be of substantial benefit to cable operators in attracting subscribers who are drawn to the special attributes of public television programming. See PTV Exhibit 27.

In the 1989 decision, the Tribunal reemphasized the advantages to cable operators from the specialized, focused programming· available on public television:

"cable's goal is to attract and retain subscribers, and [cable operators] will often offer

JSC WRITTEN REBUTTAL STATEMENT - 30 -

·niche· services ... to induce segments of the population to subscribe." (57 Fed. Reg. at 15301.) The Tribunal also recognized that "viewing ~ se did not necessarily correspond to marketplace value," that "[e]ven in the broadcast industry, which relies heavily on viewing data, ratings do not precisely predict value," and that "in the cable industry, viewing is even a lesser predictor of value." (57 Fed. Reg. at 15301.) Those conclusions are fully consistent with my views on the reasons why the Nielsen study should be given very limited weight in this proceeding.

Public television's programming for children provides a perfect illustration of niche programming that can be of very substantial value to cable subscribers (and hence of substantial benefit to cable operators) even though it generates relatively lov,: numbers under the literalistic viewing numbers of the Nielsen study. As an example, a great many parents want SESAME STREET or BARNEY & FRIENDS to be available to their children -- and thus will place significant value on distant public television signals that may make such programming available to them via a cable system. (I have already noted above the large portion of U.S. households with young children who are likely to be particularly attracted to this type of programming.) But the appeal of SESAME

STREET derives in large part from the very fact that it is targeted for preschool children aged two through five -- and therefore, by its nature, it will not generate large viewership figures.

While childrens' programming on PBS represents a very successful programming effort, it is difficult for SESAME STREET or READING RAINBOW or

JSC WRITTEN REBUTTAL STATEMENT - 31 -

BARNEY & FRIENDS or a host of other children's programs to rack up huge viewing hours as relied upon by the Program Suppliers. But anyone who has been exposed to children watching these shows can have little doubt of the value of this type of programming; and parents clearly will be attracted to such programming as one basis for subscribing to a cable system.

Cable operators are particularly eager to attract families with small children as subscribers. Once such families become cable subscribers, they are likely to continue subscribing for a long period of time. In addition, demographic studies have shown that households with younger viewers are eager to have access to movies, and are more likely to pay for the more expensive premium movie channels in order to obtain such access.

Cable operators, in tum, benefit from generating more subscriber fees among households that are inclined to add premium channels to their cable packages, since these channels are more profitable for operators than the basic channels.

None of these subtleties is measured by the Nielsen study. But these are the nuances that bear directly on the benefits of distant signal retransmission for cable operators. The Bortz study is far better suited to address the real-world considerations underlying a cable operators' valuation of distant retransmission -- because through an allocation of value among distant signals the cable operator takes into account a host of factors beyond simple viewing data that may affect its assessment of the benefits of particular distant signal programming.

JSC WRITTEN REBUTTAL STATEMENT - 32 -

The point is illustrated by the fact that the Nielsen ratings are extraordinarily low for the specialty channels offered throughout the nation by cable systems as part of their basic package of cable services. As set forth in PTV Exhibit 34. cable channels such as CNN, Headline News, Discovery, and Arts & Entertainment all receive very small Nielsen ratings (and ratings far below those for public television). But cable systems pay substantial license fees for this programming -- and there carmot be a serious question that cable operators benefit from these specialty channels, as a way to attract subscribers, even though the Nielsen ratings are tiny. The value to subscribers and the benefit to cable operators from these specialty channels is simply not measured by the

Nielsen approach.

Finally, I would add that the corroborating evidence I have discussed above in my testimony is yet a further reason why the panel should give lesser weight to the

Nielsen study in this case than it has in the past. This corroborating evidence -- for instance, the instances of carriage data, and the computations based on license fees derived from the Hecht survey of cable subscribers -- provides important, independent verification of the general results reached by the Bortz study.

In contrast, if the past is any guide, I presume that the Nielsen numbers for public television will show a share of viewership far below the numbers suggested by the

Bortz survey of cable operators, the instances of carriage data, and the Hecht survey of cable subscribers (not to mention the other evidence of marketplace value and benefits to

JSC WRITTEN REBUTTAL STATEMENT - 33 -

cable operators discussed above). From this, the Program Suppliers will presumably

argue, as they have in the past, that their Nielsen study should be given dispositive weight

in assessing the value of public television programming to cable operators -- and that all

this other evidence, pointing to a much higher value for public television. should be discounted as essentially irrelevant because the viewing data must control.

That has the analysis completely backward. Where the other evidence shows, unquestionably, that public television has a significantlv higher value than is shown by the Nielsen viewing data, the appropriate conclusion is that the Nielsen data can no longer be considered accurate as a reflection of how cable operators value public television. In other words, there is a convergence of factors showing a value for public television much higher than the Nielsen viewing studies -- all of which support the general framework of the Bortz study as superior to an approach based on viewing data.

The appropriate conclusion is that the Nielsen study can no longer be considered a reliable benchmark for the allocation of cable royalties, at least as to public television.

For example, the actual behavior of cable operators in the distant signal marketplace, as reflected in the instances of carriage data for public television, utterly contradicts the implicit suggestion of the Nielsen study that cable operators place a very low value on public television programming. Cable operators have said what they value, through the Bortz survey; and through their conduct, they have provided concrete corroboration of the Bortz survey results as to public television. Tired Hollywood re-

JSC WRITTEN REBUTTAL STATEMENT - 34 -

treads such as LITTLE HOUSE ON THE PRAIRIE, ANDY GRIFFITH, or PERRY

MASON -- the types of programs that consistently head up the Nielsen study -- cannot plausibly be the driving reason that viewers want to subscribe to cable systems or that cable operators import distant signals. See PTV Exhibit 27. The evidence recited above provides a far more discerning and reliable means for allocating cable royalties than do the Nielsen viewership numbers.

9. Duplication of Programming Among Distantly Retransmitted Public Television Signals

As I have noted earlier, cable systems will in many instances import a distant public television signal even though they also carry a local public television signal on their system. Throughout 1990-1992, approximately 4 7% of Farm 3 cable systems made this decision to carry one or more distant public television signals in addition to a local signal. See PTV Exhibit 24.

In the 1989 proceeding, I offered a detailed study on the extent to which the programming of different public television signals overlap when more than one is being transmitted by a cable operator. My conclusion was that any duplication in scheduling was quite limited; on average, head-to-head duplication among the public television stations surveyed averaged only about 7% of total programming.il' Thus,

Jll The study was conducted as a random survey of 30 cable systems from among those Form 3 systems that carried at least one distant public television signal and also (continued ... )

JSC WRITTEN REBUTTAL STATEMENT - 35 -

cable subscribers who flipped back and forth between different public television signals would have seen different programs on the different channels more than 90% of the time.Ji: Consistent with these findings, in the 1989 case the Tribunal found that "[t]here is very little direct duplication of programs when a cable system carries more than one

PBS station." (57 Fed. Reg. at 15297.) See also PTV Exhibit 29.

I am confident that the same basic results would be achieved for the 1990-

1992 period as in 1989, and I hereby incorporate my earlier study by reference for purposes of this case. (The results of the study appear in PTV Exhibit 35.) An informal evaluation of the program duplication in 30 markets during a one week period in 1993 revealed an average duplication by program of approximately 12%. See PTV Exhibit 35.

The reason that duplication is limited is described in more detail in the testimony of Peter

Do\\,Tiey: public television stations have substantial flexibility in scheduling different programs and in deciding on the programming they will carry; and when more than one signal is available in a given market, the stations of their 0\\,11 accord will invariably take steps to distinguish their programming mix and schedule from those of other stations.

This can of course be a significant benefit to cable subscribers (and operators), who gain

11!( ... continued) carried at least two public television stations in 1989. The program schedules for public television stations carried by those systems were then examined systematically to identify programming duplication during six weeks spread across 1989 .

.!11 Moreover, even this figure tends to overstate the amount of duplication, since different episodes of the same series were treated as "duplicative" for purposes of my study. ·

JSC WRITTEN REBUTTAL STATEMENT - 36 -

the advantages of a diverse mix of public television programming and the benefits of time

diversity in the program schedule. On the other hand, as Peter Dov..ney describes. this has potentially adverse effects on the costs of public television programming and,

ultimately, harms copyright owners.

* * * * *

JSC WRITTEN REBUTTAL STATEMENT I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge, information and belief.

Executed this ..!..§__ day of August, 1995.

JSC WRITTEN REBUTTAL STATEMENT JSC Exhibit No. 10 Before the COPYRIGHT ARBITRATION ROYAL TY PANEL Library of Congress

1990-1992 Cable Royalty ) ) Docket No. 94-3 CARP CD 90-92 Distribution Proceeding )

REBUTTAL TESTIMONY OF JOHN W. FULLER

JSC WRITTEN REBUTTAL STATEMENT Before the COPYRIGHT ARBITRATION ROY ALTY PANELS Library of Congress

1990-1992 Cable Royalty ) ) Docket No. 94-3 CARP CD 90-92 Distribution Proceeding )

REBUTTAL TESTIMONY OF JOHN W. FULLER

On behalf of the Public Television Claimants, I am submitting several

exhibits in response to points that were raised during the direct case hearing relating

to a) local and regional programming broadcast on public television stations and b)

the age and other attributes of various syndicated series that have received high

rankings in the MP AA' s Nielsen studies.

(A) PTV Exhibits R-1 through R-5 are a series of charts that provide

illustrative listings of the locally produced and regionally distributed programming

that was broadcast on public television during the years 1990-92. During Jennifer

Lawson's testimony in the direct case, she described the sources and general types of

local and regional programming found on public television stations across the

country, but she did not have extensive listings of specific local and regional public television programming. These listings are now provided in PTV Exhibits R-1 through R-5.

The listing of local programs (PTV Exhibit R-1) provides a selection

of programs produced by individual public television stations during the years

1990-92. Because of limitations on our source materials, this does not include every

locally produced public television program -- but it is an extensive sample that

JSC WRITTEN REBUTTAL STATEMENT - 2 -

reflects the variety and diversity of these local productions above and beyond PBS' s

national programming. The list reflects a substantial portion of all locally produced

programs from this three-year period.

The listings of regional programs are arranged with respect to the four

major regional suppliers of public television programming: the American Program

Service, the Central Educational Network, the Pacific Mountain Network, and the

Southern Educational Communications Association (PTV Exhibits R-2 through R-5).

For each of these four suppliers, we have separately listed the programs that were

licensed for broadcast by public television stations during the years 1990-92. All, or virtually all, of these programs were in fact carried by a number of public television

stations.

(B) Included at PTV Exhibit R-6 is a table that lists, for each of the years 1990 through 1992, the 50 syndicated series included within the MP AA claim that were measured by the Nielsen people-meter studies as having the highest number of distant signal viewing minutesY In the aggregate, these top 50 series account for about 42% of the total viewing minutes of the MP AA claim in each of the three years at issue in this proceeding.

For each of these series, the exhibit provides information on its total distant viewing minutes, the percentage of those distant viewing minutes that are

attributable to viewing on WTBS, the year that it went into syndication, the number

l 1 More precisely, these are minutes of tuning, not necessarily viewing.

JSC WRITTEN REBUTTAL STATEMENT - 3 -

of years it was in syndication, the number of years it was on network television,

whether it is a black-and-white or color program, and the percentage of households in

the country that could receive that program (during the year in question) through

local over-the-air broadcasts.

Finally, PTV Exhibit R-7 summarizes the distribution of viewing

minutes between movies and syndicated series for the top 1000 programs in the

MPAA category (ranked according to viewing minutes), for each year 1990-92.

*****

I declare under penalty of perjury that the foregoing is true and correct

to the best of my knowledge, information and belief.

. Fuller

Executed this 15th day of February, 1996.

JSC WRITTEN REBUTTAL STATEMENT JSC Exhibit No. 11 Before the COPYRIGHT ARBITRATION ROYALTY PANEL Library of Congress

In the Matter of ) ) Distribution of the 1998-1999 ) Docket No. 2001-8 CARP CD 98-99 Cable Royalty Funds )

TESTIMONY OF JOHN W. FULLER

JSC WRITTEN REBUTTAL STATEMENT TABLE OF CONTENTS

1. Distant Retransmission Is Of Particular Benefit To Cable Operators Without Access To A Local Public Television Signal...... 3

2. Cable Operators Who Have Access To A Local Public Television Signal Still Gain Significant Benefits From The Programming And Schedule Diversity Provided By The Retransmission Of One Or More Distant Public Television Signals ...... 4

3. Low Levels Of Duplication Of Programming Among Retransmitted Distant Public Television Signals And Local Signals Benefit Cable Operators ...... 7

4. Public Television's Unique Slate Of Children's Programming Is Highly Valuable To Cable Operators In Attracting Subscribers ...... 8

5. The Specialty Cable Channels Illustrate The Value And Benefit Of Distant Public Television Programming To Cable Operators ...... 13

a. Programming Similarities ...... 14

b. Licensing Fees ...... 17

6. The Attributes That Subscribers Seek In A Television Station Or Cable Network Are Precisely Those Offered By Public Television ...... 19

7. The Program Suppliers' Special Nielsen Study Should Not Be Given Significant Weight In This Case ...... 20

JSC WRITTEN REBUTTAL STATEMENT Before the COPYRIGHT ARBITRATION ROYALTY PANEL Library of Congress

In the Matter of ) ) Distribution of the 1998-1999 ) Docket No. 2001-8 CARP CD 98-99 Cable Royalty Funds )

TESTIMONY OF JOHN W. FULLER

I am the Senior Director of Research for the Public Broadcasting Service (PBS), a position I have held since 1999. Before that I was Director of Research (1985-1999) and

Associate Director of Research (1980-1985). I am and for the past many years have been the person within PBS principally responsible for the analysis and interpretation of programming data for PBS and its member public television stations. My responsibilities include research on program scheduling and audience trends, and the interpretation of audience data for program underwriters and the news media.

Before joining PBS, I had extensive experience in television research and other

aspects of the.television business. In particular, between 1976 and 1980 I worked with Arbitron

Ratings Co., where I was involved in various research projects and field studies on television

viewing. I also worked for a decade with commercial television stations in Jacksonville, Florida,

first as a director and promotion manager, and later as research director and program manager.

In this testimony, I discuss a variety of matters pertinent to the division of the

1998-1999 cable royalty fund. The following is a brief summary of the principal points I will

make below:

JSC WRITTEN REBUTTAL STATEMENT • Cable operators receive the greatest benefit from distant retransmission of a public television signal where no local public television signal is available. Of the 23% of Form 3 cable systems that retransmitted distant public television signals in 1998 and 1999, half did not carry a local signal. In 1998 and 1999, over 2.5 million cable households, or roughly 4.4% of total U.S. cable households, received their first public television signal via distant retransmission.

• Cable operators also receive significant benefits from retransmission of distant public television signals that complement offerings available in the local market. Additional public television channels provide additional types of attractive programming and schedule diversity. In 1998 and 1999, 3.5 million cable households, or another 6.0% of U.S. cable households, received their second public television signal through distant retransmission, and their cable operators accordingly received significant benefit from the retransmission of those distant public television signals.

• Cable operators receive particular benefit from the tremendous value of children's programming on public television. About 28% of U.S. households have children under the age of 12, and for such households in particular the availability of public television's renowned children's programming is an obvious reason to subscribe to cable television. Cable operators unquestionably benefit from the ability to offer this programming via distant retransmission.

• The value and benefit of public television programming to cable operators and subscribers are shown by analogy to specialty cable channels such as Arts & Entertainment and Discovery, for which cable operators are willing to pay a significant amount per subscriber. Comparison to these specialty channels illustrates the value to cable operators of the types of programming carried by public television stations.

• The attributes that subscribers seek in cable television programming - such as high quality programs, limited commercial interruptions, programs that the whole family can watch, a wide variety of programming, programs that make you think, a program line-up that has something for everyone, news programs, and educational programs for children - are precisely those offered by public television.

• Nielsen viewing data are not a meaningful measure of the value of distant signal programming to cable operators. The overwhelming evidence of the value of public television to cable operators shows that the Nielsen study is not an appropriate basis for allocating cable royalties. The Nielsen study does not address the criteria of relevance to the Panel because it fails to measure the value of the retransmitted programming in terms of its ability to attract and retain subscribers.

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JSC WRITTEN REBUTTAL STATEMENT 1. Distant Retransmission Is Of Particular Benefit To Cable Operators Without Access To A Local Public Television Signal.

The retransmission of a distant public television signal is vitally important to cable operators that do not have a local public television signal to offer to their subscribers. A cable operator that failed to provide any public television signal would have a slate of programming lacking an essential element by almost any standard. A distant public television signal brings to the cable subscriber (and cable operator) a unique set of diverse programs that are different in kind from what is available in the local commercial television market. Programs running the gamut from SESAME STREET to READING RAINBOW to ZOOM to THE

NEWSHOUR WITH JIM LEHRER to the documentary FRANK LLOYD WRIGHT simply are not available in any comparable form on any commercial station. In contrast, the Saturday morning cartoons or Hollywood re-runs found frequently on many of the retransmitted distant independent stations are of a type comparable, if not identical, to the programs invariably available within the local market on commercial television. This is not to say that the retransmission of distant independent stations lacks value to the cable operator. Rather, my point is that there is a special value to the cable operator in being able to gain access to public

television programming via distant retransmission, particularly if it is not available locally. See

PTV Exhibit 14 (citing cable executives' statements that public television is a necessity).

Clearly, distant retransmission is vital to cable operators that need to include a

public television station within their programming slate. In 1998 and 1999, 23% of all cable

systems chose to retransmit a distant public television signal, and half of those systems that

retransmitted a distant public television signal did not carry a local signal. See PTV Exhibit 15.

Another way of looking at it is to note that in 1998 and 1999, on average more than 2.5 million

cable households, or 4.4% of total cable subscribers, received their first public television station

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JSC WRITTEN REBUTTAL STATEMENT as a distant signal. See PTV Exhibit 16. These numbers show an obvious and important value for cable operators serving this significant portion of the cable-viewing public. Because cable operators virtually always want to carry a public television station - over 98% of all Form 3 cable systems carried at least one public television signal each year in 1998 and 1999 - distant retransmission of public television signals has perhaps its greatest value for cable operators that otherwise would not be able to carry a public television station.

While it is clear that cable operators receive substantial value from retransmitting a distant public television signal when that signal is their first or only public television station, it is also clear that cable operators receive significant value from retransmission of additional distant public television signals. Second and third public television stations complement offerings available from local public television stations. Additional public television stations carried on a cable system add significant benefits of programming diversity because often the mix and content of programming on different public television stations will differ substantially.

For example, additional signals could add public television programming aimed at a minority group or could provide an instructional focus. See PTV Exhibit 17 (citing cable executives' statements regarding the value of diverse programming).

Public television stations have access to an abundance of public television programming, which enables them to diversify or differentiate their program schedules in

response to the schedules of other public television stations in the same market. PBS, for

example, offers stations a variety of programming services in addition to the National Program

-4-

JSC WRITTEN REBUTTAL STATEMENT Service, 1 including two fully packaged, 24-hour channels (PBS Kids and PBS YOU), and PBS

Plus and PBS Select, program services that provide stations access to a wide variety of additional

PBS programming. In addition to programming available from PBS, public television stations can and do obtain substantial portions of their programming from third-party suppliers (such as

American Public Television, a major public television supplier located in Boston, Massachusetts) that are in the business of acquiring, producing, and supplying programming to public television stations. For public television stations that produce their own programs, local productions are another potential source of programming. This rich diversity of program sources enables stations whose signals reach the same audience to "counterprogram" and differentiate their program offerings.

In addition, a second or third public television station could add to scheduling diversity, even when similar programs are found on the different stations. This also can be a significant benefit to cable operators who are thereby able to offer subscribers different time options for public television programming. For example, there may be real benefit in having different children's programming- such as SESAME STREET or ARTHUR- available on different channels at different times of the day. My own experience and research suggests that repeat telecasts on public television are largely additive - in other words, two telecasts shown on different days, weeks, or seasons, have only minor overlap between their audiences and thus have even greater value to cable operators. My colleague John Wilson further discusses the benefits of scheduling diversity to cable operators in his testimony.

The National Program Service (NPS) is the primary source of programming for member stations. It provides a full variety of public television programming, including informational, fictional, performance, and children's programming.

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JSC WRITTEN REBUTTAL STATEMENT Another benefit provided by distant public television signals is that they can provide programming of regional interest that smaller local stations are unable to produce. A review of the list of Form 3 cable systems that in 1998 and 1999 carried distant public television signals in addition to local public television signals shows that virtually all carried a signal from a nearby city in the same general region ( as opposed to the signal of one of the powerhouse public television stations such as WGBH in Boston). For example, when the Montesano,

Washington cable system carried the local public television station KCKA in Centralia as well as retransmitted the distant KCTS signal froni Seattle, it was able to carry not only two typically differentiated schedules of national public television programming but also additional local programming on KCTS that was of regional interest. Similarly, when the cable system in Bryan,

Texas retransmitted both the local public television station KAMU and the distant station KUHT

from Houston, it was able to provide subscribers with a broader mix of both national programming and regional programming from Houston.

This evidence of value is confirmed by the fact that in 1998 and 1999, half of all

Form 3 systems carrying at least one distant public television signal also carried a local public

television signal. And an average of3.5 million cable households, or 6.0% of cable subscribers,

received one or more distant public television stations in addition to a local station. See PTV

Exhibit 16. The cable operators who serve these millions of subscribers clearly received direct

and substantial benefits from the distant retransmission of public television signals. These

numbers demonstrate that retransmission of distant public television programming has

significant benefit and value for a sizeable number of cable operators and the subscribers they

are trying to attract to their systems, even when a local public television station is already

available in the market.

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JSC WRITTEN REBUTTAL STATEMENT 3. Low Levels Of Duplication Of Programming Among Retransmitted Distant Public Television Signals And Local Signals Benefit Cable Operators.

As noted above, fully 50% of Form 3 cable systems that retransmit a distant public television signal do so even though they also carry a local public television service on their system. These systems retransmit additional public television services because the additional services provide different programming at different times and thus are attractive to cable viewers.

In my testimony in the 1989 proceeding, I explained that cable subscribers who flipped back and forth between different public television signals would have seen different programs on the different channels more than 90% of the time.2 I am confident that similar low rates of duplication would be achieved for the 1998-1999 period ifl were to duplicate the complete study, and I hereby incorporate my earlier study by reference. Consistent with these findings, in the 1989 proceeding the Tribunal found that "[t]here is very little direct duplication of programs when a cable system carries more than one PBS station.',3

In the 1990-1992 proceeding, I confirmed my 1989 findings with an informal evaluation of the program duplication in 30 markets during a one-week period in 1993, which revealed an average duplication by program of approximately 12%. See PTV Exhibit 18. In

2 See PTV Exhibit 18. In the 1989 proceeding, I offered a detailed study on the extent to which the programming of different public television signals overlap when more than one is being transmitted by a cable operator. My conclusion was that any duplication in scheduling was quite limited; on average, head-to-head duplication among the public television stations surveyed averaged only about 7% of total programming. The study was conducted as a random survey of 30 cable systems from among those Form 3 systems that carried at least one distant public television signal and also carried at least two public television stations in 1989. The program schedules for public television stations carried by those systems were then examined systematically to identify programming duplication during six weeks spread across 1989. Moreover, even the 7% figure tends to overstate the amount of duplication because different episodes of the same series were treated as "duplicative" for purposes of my study. 3 1989 Cable Royalty Distribution Proceeding, 57 Fed. Reg. 15286, 15297 (1992).

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JSC WRITTEN REBUTTAL STATEMENT other words, 88% of the time, a cable subscriber had a choice of different programming between two public television stations. For this proceeding, I also informally evaluated the program duplication during a one-week period in 1999 in 15 markets in which the cable system carried at

least one distant public television signal. I found an average duplication by program of

approximately 9%. Again, this means that 91 % of the time, a cable subscriber could watch

different programming on a retransmitted distant signal. See PTV Exhibit 18. My informal

surveys of program duplication in 1993 and 1999 confirm the low levels of duplication found in

the more comprehensive 1989 survey and confirm my judgment that there is very little

duplication of public television programming when distant signals are carried.

The reason that duplication is limited is described in more detail in the testimony

of John Wilson: public television stations have substantial flexibility in scheduling different

programs and in deciding on the programming they will carry. And when more than one signal

is available in a given market, the stations of their own accord will invariably take steps to

distinguish their programming mix and schedule from those of other stations. This can of course

be a significant benefit to cable subscribers (and operators), who gain the advantages of a diverse

mix of public television programming and the benefits of time diversity in the program schedule.

4. Public Television's Unique Slate Of Children's Programming Is Highly Valuable To Cable Operators In Attracting Subscribers.

One of the particular benefits of public television is its unique and unparalleled

children's programming. See PTV Exhibit 12. Public television shows such as SESAME

STREET, ARTHUR, and BARNEY & FRIENDS have long been recognized by parents as

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JSC WRITTEN REBUTTAL STATEMENT programs that they want their children to watch.4 Indeed, a recent Newsweek article declared,

"When it comes to the right shows [for young children], 'Sesame Street' remains the gold standard."5 New additions to the PBS children's programming lineup in 1998 and 1999, such as

TELETUBBIES, ZOOM, and DRAGON TALES, continued and built on this fine tradition.

Approximately 28% of all households in the United States had children under the age of 12 in 1999.6 These households are an obvious target group for cable operators, and the ability to offer children's programming of value and interest to parents was therefore a substantial benefit flowing from the retransmission of distant public television signals. Cable operators that are able to offer public television's unparalleled children's programming only by retransmitting a distant signal gain a tremendous benefit in attracting subscribers to their systems. Cable operators that are able to offer children's programming at different times of day by imp~~ing distant signals to complement their local public television offerings also gain a substantial and identifiable benefit in attracting subscribers. Time-pressed parents appreciate the option of having ARTHUR available during both the morning and later in the day or SESAME

STREET available at different times in the morning. See PTV Exhibit 7 ( comparing schedules of public television stations available on cable in the Washington, DC area).

Surveys by the Annenberg Public Policy Center of the University of Pennsylvania in 1998 and 1999 confirm that PBS children's programming is of great value to cable operators.

4 See Media in the Home 1999, Annenberg Public Policy Center, University of Pennsylvania, at 18 (1999) (showing SESAME STREET and BARNEY & FRIENDS as perennial two best shows for kids). 5 Daniel McGinn, Guilt Free TV, Newsweek (Nov. 11, 2002) at 52, 55. 6 Nielsen Media Research, 1999 NAD (National Average Demographics) universe estimates of the U.S. (99.4 million total U.S. TV households; 28.19 million households with children under 12).

-9-

JSC WRITTEN REBUTTAL STATEMENT Those surveys, titled "Television in the Home 1998" and "Media in the Home 1999," polled more than 1,000 parents of2-17 year-olds, weighted by race, education, and geographic region.

The surveys found that more than 44% of parents believed that public television is the most likely to offer the best programs for children, compared to 38% for all of cable and 10% for commercial broadcast television.7 Public television programs BARNEY & FRIENDS, SESAME

STREET, ARTHUR, THE MAGIC SCHOOL BUS, BILL NYE, THE SCIENCE GUY,

TELETUBBIES, and the PBS Network were listed among the top 12 Best Shows for Kids in either or both years. In both years, BARNEY and SESAME STREET were the top two programs identified. 8

Not only are these shows considered to be the best for children, but parents know that children are avid viewers of them as well. In 1998-1999, PBS pre-school programming was the most popular children's programming in all of television. Parents -who make cable subscription decisions - are very aware of their children's enthusiasm for PBS programming.

In my experience, many parents are insistent about the value and necessity of children's programming on public television. As just one example, Newsweek recently quoted parent Colleen Breitbord of Framingham, Massachusetts on how she sees these children's programs as vital to the development of her children, 2 and 7. The article notes that she recently

installed a television in the kitchen so that they can watch the PBS shows ARTIDJR and

7 Television in the Home 1998, Annenberg Public Policy Center, University of Pennsylvania, at 15 (1998) (48% of parents believed public television is most likely to offer best programs for children compared to 37.7% for cable and 8.8% for commercial broadcast television); Media in the Home 1999, Annenberg Public Policy Center, University of Pennsylvania, at 14 (1999) (44.3% of parents believed public television is most likely to offer best programs for children compared to 38.4% for cable and 10.6% for commercial broadcast television). 8 Media in the Home 1999 at 18.

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JSC WRITTEN REBUTTAL STATEMENT CLIFFORD while they eat. "They learn so much," Breitbord said. "I think children who don't have the opportunity to watch some of this excellent programming miss out."9 Similarly, a recent Parenting magazine poll found that parents thought PBS offered the best children's programming on television (with Nickelodeon and the Disney Channel a distant second and third).10 And a 1998 Bruskin Goldring Research poll found that 85% of adults agree that PBS is

"a safe place for children to watch TV."

Another example from my direct testimony in the 1990-1992 proceeding, which I hereby incorporate by reference, helps illustrate the value of children's programming on public television. NFO Research, Inc., a firm specializing in research about families, conducted a national mail survey in July 1990 of parents of children aged 5 through 8. Responses to the survey were received from 707 households. Here are some of the key results, which illustrate

PBS programming's positive effect on children and their parents:

• 70% of the parents were familiar with READING RAINBOW.

• 72% of the parents familiar with READING RAINBOW encouraged their children to watch the program.

• 55% of all parents familiar with READING RAINBOW said that their child asks for books he or she has heard about on the program.

Although this NFO study has not been updated, in my judgment, nothing has changed in the

intervening years that would significantly alter its results-PBS continues to air READING

RAINBOW and parents continue to be interested in their children's education. Similarly,

9 Daniel McGinn, Guilt Free TV, Newsweek (Nov. 11, 2002) at 52, 57. 10 Anne Reeks, A Get-Real Guide, How Much TV Should You Let Your Children Watch, Parenting (Apr. 2002) at 110.

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JSC WRITTEN REBUTTAL STATEMENT nothing has changed to alter my conclusion that parents perceive PBS children's programming to be educational and helpful.

It also bears emphasis that a particular benefit of the children's programming on public television is the lack of commercial interruptions. This can be a real value of the programming, particularly in the eyes of parents who make the decisions about whether subscribing to cable television is advantageous for their children. A 1999 poll of 400 parents found that four out of five parents believe marketing efforts pressure youths to buy items that are bad for them or too pricey, and two out of three parents want television programmers to be forced to limit youth-targeted ads. I I Clearly, parents are going to be attracted to the commercial free atmosphere of public television and to cable systems that make it available. This is another reason that it is essential for a cable operator that does not have a local public television station

available to retransmit a distant public television signal. Cable systems that provide multiple

public television services via distant retransmission also benefit by offering multiple

commercial-free channels with different scheduling and programming options.

Furthermore, during the hearings on the 1990 Children's Television Act,

Members of Congress and many witnesses expressed substantial concern about the over

exposure of children to advertising on commercial television. A number of these comments and

excerpts from the Senate report are summarized at PTV Exhibits 19 and 20. This concern is

reflected in the intense interest that many parents have in the commercial-free children's

programming available on public television.

11 Nancy Wride, Children Learn to Say, 'Buy, Buy', Los Angeles Times (Aug. 9, 1999) at E 1 (reporting on study by EDK Associates of New York for Center for a New American Dream).

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JSC WRITTEN REBUTTAL STATEMENT In my testimony in the 1989 case, I provided substantial information comparing the intensive advertising on commercial television with the lack of commercial interruptions on public television, and I explained the benefits of being able to watch a program without the imposition of commercial interruptions. I showed that even accounting for public television membership drives, public television programming is virtually uninterrupted compared to ubiquitous commercials on the rest of television. I also explained how commercial-free television conveys more information to the viewer and is much more enjoyable to watch. I hereby reincorporate that testimony by reference for purposes of this case. Whether it be a three year-old child watching SESAME STREET or an adult eager to watch a full hour of news on the

NEWSHOUR WITH JIM LEHRER, there can be little question about the pleasures to cable subscribers (and therefore the benefits to cable operators) of watching television that is essentially commercial-free. 12

5. The Specialty Cable Channels Illustrate The Value And Benefit Of Distant Public Television Programming To Cable Operators.

A number of special cable channels feature programming with many similarities to the programming found on public television. The very names of some of these specialty channels - such as "Discovery Channel," "Arts & Entertainment," "The Leaming Channel,"

"Animal Planet," and "The History Channel" - reflect an intention to compete in a number of

12 By way of example, in 1999 networks had an average of 14.25 minutes of advertisements per hour of news programming. See 1999 Television Commercial Monitor, American Association of Advertising Agencies and the Association of National Advertisers. Thus, 23.75% of each programming hour was devoted to commercials, and a viewer of the local news plus the half-hour evening news would see less than 46 minutes of news coverage, compared to the virtually uninterrupted THE NEWSHOUR WITH JIM LEHRER available on public television. Public television stations do run pledge weeks during certain times of the year, but even during those weeks much of the programming is uninterrupted. On an annualized basis, the pledge drives account for only 1.8% of the total airtime for public television.

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JSC WRITTEN REBUTTAL STATEMENT the programming niches traditionally occupied by public television. And that is precisely what these channels have tried to do. Yet in the 1990-1992 proceeding, the CARP recognized that

"[t]he increased entry of 'look-alike' cable networks, rather than eroding PTV's share of the distant signal marketplace, with at least equal likelihood reflects perception of a valuable niche market established by PTV with potential for yet further expansion."13

Despite increased competition from look-alike cable channels since that observation, PBS has retained its preeminent position in the eyes of viewers. A 1999 study found that viewers thought PBS was the most "trustworthy," "unique," "enlightening,"

"intelligent," "informative," and "educational" channel when compared to the look-alikes.14

Contrary to the expectation of the study's authors, the popularity of cable networks such as

A&E, Discovery, and Nickelodeon has not diluted viewers' positive perceptions of public

television, and it has not changed significantly the perceived importance of public television and

self-assessed viewing behavior.15 When cable subscribers perceive public television as more

trustworthy and as having higher quality than cable look-alikes, this illustrates the value of

public television to cable operators that are nonetheless willing to pay substantial license fees for

the look-alikes.

a. Programming Similarities

My direct testimony in the 1990-1992 proceeding examined a 1990 study

prepared by John Carey of Greystone Communications that contained a comparative analysis of

13 1990-92 CARP Report (May 31, 1996) at 123. 14 Sylvia M. Chan-Olmsted and Yungwook Kim, The PBS Brand Versus Cable Brands: Assessing the Brand Image of Public Television in a Multichannel Environment, Journal of Broadcasting & Electronic Media, 300, 309-310 (June 2002) (providing results of March 1999 study comparing PBS to Discovery, The Learning Channel, A&E, Nickelodeon, and Disney). 15 Id. at 315.

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JSC WRITTEN REBUTTAL STATEMENT the general subject matters of programming on public television and on several of these public television look-alikes. The study showed that the look-alike cable channels carried various niche programming that in every case overlapped with some programming on public television. While the Carey study was conducted in 1990, in my judgment, it is fully applicable to the 1998-1999 period. The look-alike channels examined in the Carey study have maintained their general subject matters, while additional channels with programming similar to various types of PBS programming have also been launched.

The study examined programming offered in February 1990 by Arts &

Entertainment, Bravo, Discovery, The Leaming Channel, and Nickelodeon, each of which offered a particular emphasis in at least one area of programming that corresponded to public television's areas of emphasis. The Carey study found significant overlaps in the programming offered by public television and each of these specialty channels. Although public television offers more overall diversity than any of these channels, each is nonetheless attempting to play to

certain niche audiences within the PBS field. Some of these similarities can be briefly

summarized as follows:

• The Carey study found that both PBS and The Learning Channel had a relatively high percentage of"Instructional" programming, which occupied 38% and 37% of their schedules, respectively, during February 1990.

• Arts & Entertainment had significant programming in public affairs, dance and music, nature, and drama - all programming categories that have been a consistent emphasis of public television.

• The Discovery Channel had a large volume of nature programming as well as significant blocks of instructional programming, especially cooking shows. These, also, are areas strongly featured within public television's mix of programming.

• Much of the Nickelodeon program day consisted of cartoons and aging Hollywood syndicated programming aimed at children. While this programming is different in content and approach from the children's programming on public television, it is notable that an entire specialty channel has been built around its

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JSC WRITTEN REBUTTAL STATEMENT appeal to children. In addition, several hours of Nickelodeon's programming day during the 1990-1992 period had a more educational flavor: MR. WIZARD was a well-known science show similar to several public television programs, and THE ELEPHANT SHOW was a sing-along program for pre-school children. In fact, in early 1994, Nickelodeon recognized the preeminence of PBS in children's programming when it unveiled a $30 million dollar programming effort designed to compete with PBS' s dominant slate of pre-school programming.16

For examples comparing the daily listings of PBS and these other channels during 1998 and

1999, see PTV Exhibit 7.

In addition, and as a reflection of the overlap in programming between these look alikes and public television, in 1998 and 1999 we have seen an increasing effort by these channels to compete against public television in the acquisition of the types of programming that have for many years been a cornerstone of public television. For example, PBS's THE MAGIC

SCHOOLBUS began airing on Fox in 1998, and in 1999, HGTV was showing reruns of THIS

OLD HOUSE. Other examples of various programs that originated on public television but then were rerun on cable look-alikes during 1998 and 1999 include how-to shows such as GREAT

CHEFS and HOMETIME (rerun on the Discovery Channel and The Leaming Channel), kids' shows SKINNAMARINK and P APPYLAND (rerun on The Learning Channel), and the mystery drama POIROT (rerun on Arts & Entertainment). This head-to-head competition for programming that originated on PBS is certainly a reflection of the efforts being made by these look-alikes to mimic the programming of public television.

16 Nickelodeon further recognized the value of PBS programming when in 1998 it joined with Children's Television Workshop, a long-time producer of public television programming, to create a new children's channel, Noggin.

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JSC WRITTEN REBUTTAL STATEMENT programming found on public television in contrast to these more narrowly focused specialty channels. Public television provides programming from many different genres, from science and nature to history to news to children's programming, among others. Also, PBS offers a large amount of original, first-run programming. Most if not all of these specialty channels offer at least some amount of second-run programming - and some rely on programming that in fact previously appeared on public television. As John Wilson explains in his testimony, public television offers in one channel the "best of the best" of all of the programming genres carried by the numerous specialty cable channels. Public television does not have to fill its schedule with programming of a single type, so it is able to skim the cream of each of the various types of programming it offers. In addition, experience has shown that local or regional programming available on most public television stations is appealing to viewers, and yet these specialty channels, produced for a nationwide audience, are completely lacking in such local content.

b. Licensing Fees

While public television stations obviously do not charge licensing fees to cable

operators, a sense of their value may be gained by examining the license fees charged by PBS

look-alike specialty channels. In 1998, these channels charged cable operators monthly licensing

fees of between 16 cents and 55 cents per subscriber per month (based on top-of-the-rate-card

rates). 17 These fees compare favorably to fees paid by cable operators for the most popular cable

channels. (An illustrative table is set forth at PTV Exhibit 21.) For instance, the fee for

Nickelodeon is greater than that for MTV, and the only monthly cable channel fees that exceed

Nickelodeon's are those of TNT and ESPN. Nickelodeon's license fee also is higher than that of

17 The yearly listings oflicense fees charged are presented in PTV Exhibit 21. The source for these and the other licensing fees discussed in text is Paul Kagan Associates, Cable Program Investor (June 16, 1999), available at http://www.kagan.com.

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JSC WRITTEN REBUTTAL STATEMENT fxM (Movies from Fox), which predominantly shows Hollywood reruns. The fees for Arts &

Entertainment and Discovery are on the high end of the next pricing tier and are greater than the fee for Lifetime. The somewhat lower fee for The Learning Channel is comparable to fees for channels such as superstation WGN, BET, and The Weather Channel.

In 1999 alone, cable operators paid an estimated $135.7 million in license fees for

Arts & Entertainment, $198 million for The Discovery Channel, $233 million for Nickelodeon, and $95 million for The Leaming Channel. See PTV Exhibit 22. Such fees demonstrate that cable operators are willing to pay significant amounts of money to carry specialty channels that subscribers perceive as inferior to public television. Given that cable operators have clearly made the judgment that the programming of these public television look-alikes is a significant means for attracting subscribers, it necessarily follows that the retransmission of public television signals is of even greater value to cable operators in attracting and retaining subscribers.

Of course, comparisons to license fees are simply illustrative, but what they illustrate is significant. License fees for all cable channels increased an average of 17% per year from 1989 to 1998.18 From 1992 to 1998, license fees for Nickelodeon, Discovery, A&E, and

The Learning Channel more than doubled. See PTV Exhibit 21. If cable operators are willing to pay these increasing license fees to more and more cable channels that attempt to imitate public television, then that is a benchmark of the value of public television. Cable operators' willingness to pay increasing license fees for look-alikes suggests that the value of public

18 See Paul Kagan Associates, Cable Program Investor (June 16, 1999).

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JSC WRITTEN REBUTTAL STATEMENT television to cable operators as reflected by public television's share of the royalty fund should increase in the same way that license fees for the look-alikes have increased.

6. The Attributes That Subscribers Seek In A Television Station Or Cable Network Are Precisely Those Offered By Public Television.

The classes and attributes of programming that are most important to cable subscribers are precisely the classes and attributes of programming offered by public television.

A study conducted by superstation (now cable channel) WTBS in the ordinary course of its business and presented in the 1990-1992 proceeding shows high viewer preferences for the types of programming found on public television.19 The study of over 1,200 cable subscribers was intended to measure the appeal of different kinds of programming to cable subscribers and to establish the classes and attributes of programming that are most important to them. It was also intended to identify gaps between subscribers' preferences and the programming actually being provided by WTBS. The survey was not limited to programming on WTBS or to subscribers receiving WTBS.

The WTBS survey reflects viewers' avidity or intensity of preference for various programming types and attributes. As it turns out, public television offers cable operators and subscribers all of the following top eight ranked attributes:

1. High quality programs;

2. Limited commercial interruptions;

3. Programs that the whole family can watch;

19 In my judgment, viewer preferences have not significantly changed since the WTBS study was conducted, and the study still accurately reflects those preferences. Robert Sieber, Vice President of Audience Development for Turner Networks, presented the study in the 1990- 1992 proceeding for the Motion Picture Association of America, Inc. (MP AA). Excerpts from Mr. Sieber' s testimony in that proceeding and related exhibits are attached as PTV Exhibit 11.

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JSC WRITTEN REBUTTAL STATEMENT 4. A wide variety of programming;

5. Programs that make you think;

6. A program line-up that has something for everyone;

7. Information through newsbreaks; and

8. Educational programs for children.

In addition, public television provides programs not available on the broadcast networks ABC,

CBS, NBC, and Fox (ranked 1O); programs about animals and wildlife (13); documentary programs (14); mystery shows (15); and children-oriented programs (16).

It is somewhat ironic that a study conducted by a commercial station provides

such strong evidence of the value of non-commercial, public television. It is also striking, that if one were to attempt to create a cable channel based solely upon the results of the WTBS study,

the result would be a virtual duplicate of public television as it already exists. Moreover, as my

colleague John Wilson points out in his testimony, because public television offers a diverse mix

of programming rather than just a single class of programming (such as history or nature) it can

focus its resources on providing "the best of the best" programs from each genre. The fact that

public television offers in one channel virtually all of the attributes that cable subscribers seek in

their programming provides strong, independent confirmation of the value of distant public

television signals to cable operators.

7. The Program Suppliers' Special Nielsen Study Should Not Be Given Significant Weight In This Case.

As in years past, it can be anticipated that the Program Suppliers will seek to

place essentially dispositive weight on their special Nielsen study of distant signal viewing. But

it is clear to me that the Nielsen study does not address the criteria of relevance to the Panel

because it fails to measure the value of the retransmitted programming in terms of its ability to

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JSC WRITTEN REBUTTAL STATEMENT attract and retain subscribers. Cable operators' ability to attract and retain subscribers is a function of viewer avidity and intensity of preference for particular types of programming - not

mere viewing hours.20 The Nielsen studies reveal only what viewers eventually tuned in to but

nothing about why they chose those programs or whether those programs motivated them to

subscribe or remain subscribed to cable.

Cable operators are primarily in the business of attracting and retaining

subscribers in order to maximize cable subscription revenues. See, ~' PTV Exhibit 23 ( citing

Tribunal conclusions that cable operators seek to attract and retain subscribers). A program with

relatively limited viewership (~, SESAME STREET or MASTERPIECE THEATER) may be

of substantial importance in attracting viewers to subscribe to a cable system. Conversely, a

generic program with widespread viewership ~' THE BEYERLY HILLBILLIES or THE

ANDY GRIFFITH SHOW) may have virtually nothing to do with the subscription decision.

The programming on public television historically has relatively lower viewership but also a

very loyal following among the viewers who do watch it. The availability of public television

programming or the opportunity to view it at different times very well could motivate an avid

viewer to subscribe to or remain subscribed to a cable system. Syndicated re-runs and old

movies, on the other hand, might be what a weary parent turns to at 3 a.m. when rocking her

baby, but they are not the types of programming that encouraged her to subscribe to cable in the

first place. Reruns of old, syndicated television series cannot plausibly be the driving reason that

viewers want to subscribe to cable systems or that cable operators retransmit distant signals.

These sorts of nuances are entirely lost in the Nielsen numbers.

20 A videotape of a NOVA program providing a more extensive analysis and critique of Nielsen ratings was included as Exhibit 6 in PTV' s direct case in the 1990-1992 proceeding. I hereby incorporate that videotape by reference.

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JSC WRITTEN REBUTTAL STATEMENT Because cable operators must pay for distant signals without the opportunity to derive advertising revenue, they will carry distant signals only ifthere is something on those signals that attracts subscribers to the system or adds to the value of the programming mix. The cable operator's carriage of a distant signal thus reflects a judgment that the distant signal contributes to the overall programming mix of the cable operator, and to its efforts to attract and retain subscribers.

The value of programming to cable operators cannot be measured by the number of hours of programming, or by the viewing levels achieved by that programming. See,~.

PTV Exhibit 24 (citing Tribunal conclusions and cable operator and witness statements that viewing data is not used in choosing cable programming). The level of viewing is not a measure of the value of programming in terms of whether it attracts and retains subscribers to pay a monthly subscription fee. Viewing data do not measure a viewer's intensity of preference for particular programs, or a viewer's intensity of interest in having access to a particular channel of programming. One cannot look at viewing hours to determine cable subscribers' intensity of interest among different programming categories.

There are distinctions between what cable subscribers watch and what would motivate them to subscribe to cable television. There could be a program or set of programs that would play an important role in the reasons that a household subscribes to cable, even though it spends more time watching other programming on cable that is not significant to its decision to subscribe. Viewing data do not measure the reasons that households subscribe to cable television. Viewing numbers do not measure the programming that is most attractive to cable subscribers. One could not look at differences among the viewing of particular programs on a distant signal to decide what has caused people to subscribe to cable.

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JSC WRITTEN REBUTTAL STATEMENT Certain programs with smaller audiences can be intensely popular with cable subscribers or can generate a high degree of loyalty. This loyalty or intensity of interest is not necessarily reflected in viewing data. There is no necessary relationship between the value that viewers attribute to a program and the size of the audience that a program attracts.

Although some public television programs achieve relatively high Nielsen ratings, public television is not designed to attract the largest possible audience for each program.

Rather, the very essence of public television is the diversity of programming options, and the availability of programming types simply not found on commercial television. This may not generate viewers in large quantities for particular programs, but it is of substantial benefit to cable operators in attracting subscribers who are drawn to the special attributes of public television programming. See,~. PTV Exhibits 14 and 17 (citing cable executives' statements regarding public television as a necessity and the need for programming diversity).

BARNEY & FRIENDS to be available to their children, and thus will place significant value on distant public television signals that may make such programming available to them via a cable

system. (I have already noted above the significant portion of U.S. households with young

children who are likely to be particularly attracted to this type of programming.) But the appeal

of SESAME STREET derives in large part from the very fact that it is targeted for preschool

children aged two through five and therefore, by its nature, it will not generate large viewership

figures. While children's programming on PBS represents a very successful programming effort,

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JSC WRITTEN REBUTTAL STATEMENT it is difficult for SESAME STREET, TELETUBBIES, READING RAINBOW, ARTHUR, or a host of other children's programs to rack up huge viewing hours as relied upon by the Program

Suppliers. But anyone who has been exposed to children watching these shows can have little doubt of the value of this type of programming, and parents clearly will be attracted to such programming as one basis for subscribing to a cable system.

Even though the viewership numbers for public television's children's programming are relatively low, no cable system would want to be without a public television station and its children's programming. Thus, for cable systems without access to a local public television station, retransmission of a distant public television signal is essential. Similarly, the ability to offer parents and their children the option of viewing SESAME STREET, ARTHUR, and other programs before and/or after school, and at different times of day, is a significant value to cable operators. Such flexibility can only be attained through the retransmission of multiple public television signals.21

It also is important to note that the Nielsen ratings are low for the specialty

channels offered by cable systems as part of their basic package of cable services. As set forth in

PTV Exhibit 25, cable channels such as CNN, Headline News, Discovery, and Arts &

Entertainment all receive small Nielsen ratings ( and ratings below those for public television).

But cable systems pay substantial license fees for this programming, license fees that have

21 One reason that cable operators are particularly eager to attract families with small children as subscribers is that once such families become cable subscribers, they are likely to continue subscribing for a long period of time. In addition, demographic studies have shown that households with younger viewers are eager to have access to movies and are more likely to pay for the more expensive premium movie channels in order to obtain such access. Cable operators, in tum, benefit from generating more subscriber fees among households that are inclined to add premium channels to their cable packages, since these channels are more profitable for operators than the basic channels.

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JSC WRITTEN REBUTTAL STATEMENT increased greatly between 1992 and 1998-1999. See PTV Exhibits 21 and 22. There cannot be a serious question that cable operators benefit from these specialty channels as a way to attract subscribers, even though the Nielsen ratings are small. The fact that cable operators are willing to pay substantial sums for niche channels shows that avidity for a particular type of programming is far more important to cable operators than overall viewership.

In sum, the factors most relevant to this proceeding are not measured by the

Nielsen study. Loyalty to or avidity for programming is what motivates television viewers to subscribe to or remain subscribed to cable. And attracting and retaining subscribers is what is of paramount interest to cable operators. Nielsen viewership data does not tell us what value a cable operator places on particular programming. Focusing on the real-world considerations underlying a cable operators' valuation of retransmitted distant signals - as I have done in this testimony- is a much better method of allocating value among those distant signals.

* * *

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JSC WRITTEN REBUTTAL STATEMENT DECLARATION

I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge, information and belief.

John W. Fuller

Executed this Zkth day of November 2002.

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JSC WRITTEN REBUTTAL STATEMENT JSC Exhibit No. 12 Before the COPYRIGHT ARBITRATION ROYALTY PANEL Library of Congress

In the Matter of ) ) Distribution of the 1998-1999 ) Docket No. 2001-8 CARP CD 98-99 Cable Royalty Funds )

REBUTTAL TESTIMONY OF JOHN W. FULLER

JSC WRITTEN REBUTTAL STATEMENT TABLE OF CONTENTS

1. PROGRAM SUPPLIERS' AVIDITY ADmSTMENTS TO VIEWING MINUTES ARE NOT SOUND ...... 2

A. Dr. Gruen's "avidity'' calculation does not measure avidity...... 2

B. Evaluative surveys, not Nielsen ratings, measure avidity...... 3

2. THE MARKETS FOR SYNDICATED PROGRAMMING, MOVIES, AND SPORTS PROGRAMMING ARE SATURATED ...... 5

3. FACTUAL CLARIFICATIONS ...... 7

JSC WRITTEN REBUTTAL STATEMENT Before the COPYRIGHT ARBITRATION ROYALTY PANEL Library of Congress

In the Matter of ) ) Distribution of the 1998-1999 ) Docket No. 2001-8 CARP CD 98-99 Cable Royalty Funds )

REBUTTAL TESTIMONY OF JOHN W. FULLER

I am the Senior Director of Research for the Public Broadcasting Service (PBS), a position I have held since 1999. My initial testimony in this proceeding provides additional background information.

In this rebuttal testimony, I discuss several matters pertinent to the division of the

1998-1999 cable royalty fund. The following is a brief summary of the principal points I will make below:

• The Program Suppliers' attempt to adjust the viewing minutes in their study for "avidity'' is not sound. The "avidity'' calculation does not measure true avidity or intensity of viewing but rather simply standardizes the viewing statistic, and it even fails to standardize the statistic because viewing minutes are weighted while the available quarter hours are not. Evaluative surveys measure avidity, and they show that avidity does not correlate to ratings.

• In 1998 and 1999 cable channels provided large amounts of programming that was similar to the syndicated programming, movies, and sports programming carried on retransmitted distant broadcast signals. Look-alike cable channels, such as TBS and USA, and specialty cable channels provided viewers with many options for these types of programming.

• I conclude with several factual clarifications.

JSC WRITTEN REBUTTAL STATEMENT 1. PROGRAM SUPPLIERS' AVIDITY ADJUSTMENTS TO VIEWING MINUTES ARE NOT SOUND.

A. Dr. Gruen's "avidity" calculation does not measure avidity.

In the direct written testimony of Dr. Arthur C. Gruen for the Program Suppliers,

Dr. Gruen purports to measure the "avidity'' of viewers based on Nielsen viewing numbers by dividing viewing minutes in the Program Suppliers' viewing study by the available quarter hours. In all my years of work with viewing measures, I never have heard of using Nielsen viewing numbers to measure avidity. Avidity means an intensity of interest, and Nielsen does not measure the intensity of viewing. The viewing minutes in the Program Suppliers' study simply show the volume of viewing. Dividing the viewing minutes by the available quarter hours just standardizes the statistic; it tells you average minutes per quarter hour. Moreover, the viewing minutes in the study are weighted to account for all stations that are retransmitted as distant signals, but the available quarter hours are not, so the ratio that Dr. Gruen calculates does not even accurately standardize the statistic. Even if Dr. Gruen's calculations had provided an accurate measurement, the fact that some programming is watched more minutes per quarter hour than other programming does not tell you anything about viewers' intensity of interest in or feelings for the programming.

My colleague John Wilson already has discussed how the willingness of public television viewers across the country to voluntarily contribute hundreds of millions of dollars each year to public television is powerful evidence of their avidity for our programming. The

WTBS study that I discussed in my direct testimony (at 19-20) also reveals viewer avidity for the particular types and attributes of programming that PTV carries. The study makes clear that viewers highly value-are avid for-family programming, programming that makes you think, educational programming, a variety of programming, and programming with a lack of

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JSC WRITTEN REBUTTAL STATEMENT commercial interruptions: all of them types and attributes of programming on PTV. Direct viewer responses, such as letters, telephone calls, and e-mail, also give us an indication of the avidity for-the intensity of interest in-PTV' s programming. Mr. Wilson in oral testimony observed that PTV measures programming success by a number of criteria, including viewer response. Tr. 3079 (Wilson). The thousands of viewer letters, calls, and e-mail received by PBS headquarters and PTV stations each month are tangible evidence of the impact of PTV's shows.

Finally, "evaluative" surveys-evaluative measures other than nose-counting-tell us about viewer avidity for PTV programming.

B. Evaluative surveys, not Nielsen ratings, measure-avidity.

Evaluative surveys measure actual viewer response to shows. When viewer response, not tuning, is measured, it becomes clear that avidity does not correlate with Nielsen ratings. Programming that generates a great intensity of interest among its viewers, such as PTV programming, is not necessarily the highest rated programming according to Nielsen.

For example, PBS and Television Audience Assessment, Inc. (TAA) in 1987 conducted a nationwide survey of adult viewers to arrive at an evaluative measure of audience response in an effort to better understand viewer appreciation for PBS programs in addition to audience size. As I wrote in the introduction to the survey, "[p]ublic television has many missions not always related to the 'bottom line,' and thus absolute audience size is not the only standard by which PTV efforts should be measured."

The survey asked 2,005 adults (18+) 1 to complete diaries for 135 shows that were .. \'lo available on PBS, ABC, NBC, CBS, and Fox over 14 days in late April and early May 1987.

The total sample of 2,005 adults consisted of two sections: (1) a random sample of adults who claimed to have watched ~nafter 6 p.m. in the last seven days (1,503 (continued ... )

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JSC WRITTEN REBUTTAL STATEMENT The diaries went beyond Nielsen ratings by providing scales for respondents to "grade" each program watched. Of the 28,070 daily diaries mailed out (2,005 respondents x 14 days), 18,075 usable diaries were returned, a response rate of 64%. This was well above Nielsen's usual response rate ofless than 50%.

PBS programs accounted for nine of the top ten programs that were rated for

"appeal," a Oto 10 personal rating of the programs. When the appeal of types of programs was examined, the types with the lowest appeal (police drama, variety, game shows, fantasy, and comedy) represented the most-watched shows on television. The "impact" of various categories of programming (measured by responses to "I learned something from this program" and "this program touched my feelings") likewise showed that PBS programming had the most impact, while the most-watched types of programs (serials, police drama, game shows, fantasy, and comedy) had the lowest impact. In sum, the survey showed that there was no correlation between the appeal or impact of programs and their Nielsen ratings.

In the monograph "Audience Attitudes and Alternative Program Ratings: A

Preliminary Study'' by Elizabeth Roberts and Peter Lemieux (TAA, 1981 ), the authors stated their reasoning for pursuing "qualitative" ( or evaluative) ratings:

It is ironic, however, that the ratings are not really ratings at all. Nielsen and Arbitron count the house, pure and simple: How big is the audience; who is in it by age and sex; and, how is it divided among the available channels? Whether viewers like what they see, whether they find a program entertaining, informative, dull, qualified for participation), and (2) a purely random sample of adults ( 502 qualified for participation). The larger section who claimed to have recently viewed a PTV program was used "to enhance the incidence of viewership of PBS programs and hence the ability to report qualitative ratings for those PBS programs." This screening was done simply to elevate the incidence of people capable of evaluating a PBS program, a sample size consideration. Ultimately, the survey's ratings were computed only among those who had actually watched a program.

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JSC WRITTEN REBUTTAL STATEMENT provocative, stimulating, silly, captivating or anything else has been immaterial. In the absence of knowing how a viewer "rates" a program, compared to other fare, the assumption that a large audience means a satisfied audience underlies most industry decisions. As many network executives note, "if they watch it, they like it." As a result of this belief, most television programs live or die on the basis of one measure of success-the size of their audiences. It is implicitly assumed that all audiences are equally satisfied and by implication equally attentive and receptive to the advertising message. In these terms, then, the larger the audience, the more successful the show-both creatively and commercially. The television audience is not, however, the universally satisfied mass of attentive viewers that traditional market structure and ratings practices assume it to be."

The study that T AA performed with PBS confirmed that Nielsen "ratings are not really ratings at all" and showed that viewers may be deeply affected by and interested in programs that are not the most-watched programs on television.

2. THE MARKETS FOR S~l£-A-l'EJ:l,!ROGRAMMING, MOVIES, AND SPORTS PROGRAMMING .ARE:SATURATED.

Basic cable channels TBS and USA, among others, carried in 1998 and 1999 exactly the same types of syndicated programming, movies, and sports that were carried on retransmitted distant broadcast signals. In 1998 and 1999, the cable channels A&E and Lifetime also carried syndicated programming and movies of the types that were available on broadcast signals. In addition to TBS, USA, A&E, and Lifetime, Nickelodeon (Nick at Nite) and ABC

Family (formerly Fox Family) carried significant syndicated programming. The 1990s also saw the launch of specialized cable channels carrying syndicated programming, including TVLand, which shows syndicated re-runs 24 hours per day, and the Game Show Network, which as its name implies carries only game shows. 2

2 See PTV Exhibit 2-R (Kagan document showing launch dates for cable channels, including TVLand ji-April 1996 and the Game Show Network in December 1994).

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JSC WRITTEN REBUTTAL STATEMENT Movies of the type generally carried on retransmitted distant broadcast signals

were available on such basic cable channels as American Movie Classics, Bravo, Turner Classic

Movies, the Lifetime Movie Network, and We. In addition, movies were available on the

Independent Film Channel and premium movie channels such as HBO, Showtime, Cinemax, and

Starz!.

Sports programming also wa.s[widelv..axailablel'to cable viewers. The 1999 PBS

Cable Audience Report (PTV 000904-918, entered as PS Ex. 34-X) states that 99 of the 100

highest-rated PPID~::tim!;:programs on cable in 1998-1999 were sports programmin2. This

statistic was based on a measurement of programming on strictly cable channels; none of the

programs measured was shown on retransmitted distant broadcast signals. In 1998 and 1999,

ESPN and ESPN2 provided around-the-clock national sports programming. ESPN was the

· venue for many of the most-watched prime-time cable programs in the 1998-1999 season. Other

cable channels such as TBS, USA, and TNT carried national sports programming as well. The

four networks ABC, CBS, NBC, anid Fox also provided national sports programming that is not

compensable in this proceeding. 3

Regional sports networks-led by Fox Sports Net's nationwide network of eight

owned and operated regional sports networks-provided yet another venue for sports

programming. Today, "[a]ll of the top 50 television markets in the United States are served by at

least one regional sports network, with some markets, such as New York and New England

3 I understand that in this proceeding, none of the national sports programming on ABC, CBS, or NBC is compensable. Sports programming on a local Fox station retransmitted by a cable company also is not compensable. Only in the relatively rare instance that a Fox station was retransmitted as a distant signal is its national sports programming compensable in this proceeding.

-6-

JSC WRITTEN REBUTTAL STATEMENT having several regionals.',4 Moreover, because regional sports networks are the "home of the home team" they are often viewers' first choice when looking for sports programming.5 Finally, pay ~at~llle serYice§Jsuch as NBA League Pass and NFL Sunday Ticket provided near total coverage of their respective league's games. "Through the combination of NBA League Pass and the NBA' s network and cable partners, NBA League Pass subscribers had access to 96% of all NBA regular season games in 1997-98," as "NBA games included in NBA League Pass complement[ed] the national games available on NBC, TNT, TBS and the subscriber's local outlets.',6

In short, sports may be popular with viewers, but, except for those relatively few cable systems that retransmit Fox as a distant signal, the most widely yiewed sports programming is not necessarily the sports programming on retransmitted distant broadcast signals. Cable subscribers have many, many sources for sports programming in addition to the sports programming on retransmitted distant signals.

3. FACTUAL CLARIFICATIONS.

• During my oral testimony, it was discussed that in my testimony in the proceeding to distribute the 1990-1992 cable royalties, I had said that more than one-third of households had children under 12 in 1990-1992. Tr. 3522-54, 3613-22 (Fuller). The "more than one-third" figure had been wrongly calculated from U.S. Census data. Based on the same type of information that we obtained through Nielsen and used to calculate the 1998-1999 figure of28%, the total of U.S. TV households in 1992 with children under 12 also was 28% (26.19 million households with children under 12 divided by 92.10 million total U.S. TV households). Thus, the percentage of TV households with children under 12 did not decrease but held constant during the 1990s.

4 Gould Media, The Business of Regional Sports, at 13 (2002 ed.). 5 Id. at 65. 6 Gould Media, TV Sports File, "NBA, WNBA Announce Agreements With DirecTV, Primestar" (June 24, 1998).

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JSC WRITTEN REBUTTAL STATEMENT • The prime time audience ratings for PBS minimally declined over the course of the 1990s. In the 91-92 season, PBS's prime time rating was 2.2, and that fell slightly to 1.9 in the 98-99 season, a 14% decline. Over the same period, the total primetime ratings of the broadcast networks (ABC, CBS, NBC, and Fox) fell 29% (from 41.2 in 91-92 to 29.4 in 98-99).

• Outside of prime time, PBS's ratings actually increased. For example, from the 90-91 season to the 98-99 season, PBS' s daytime ratings for kids 2-5 increased from 2.2 in 90-91 and 2.9 in 91-92 to 4.0 in 98-99.

• During the oral testimony ofmy colleague John Wilson, he was asked how many total hours of programming did PBS distribute to its members in 1998 and 1999. Tr. 3174-75 (Wilson). PBS provided a total of more than 4,600 hours of programming to its member stations in each of 1998 and 1999 through its various programming services.7 That figure includes the more than 2,000 hours of original, first-run programming each year that Mr. Wilson described in his testimony.

• In 1998-1999, Public Television had an average of 5:56 non-program minutes per hour. In comparison, syndicated programming averaged 17:48 non-program minutes per hour in 1998-1999 and local news programming averaged 16:19 non program minutes per hour.

* * *

7 In 1998, PBS distributed 4,663 hours of programming and in 1999, it distributed 4,694 hours.

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JSC WRITTEN REBUTTAL STATEMENT DECLARATION

I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge, information and belief.

Executed this \9~y of June 2003.

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JSC WRITTEN REBUTTAL STATEMENT JSC Exhibit No. 13 TESTIMONY OF DR. MICHAEL A. SALINGER

I. Qualifications

I am an Associate Professor of Economics in the School of Management at Boston University and a Special Consultant to the National Economic Research Associates.. a firm specializing in microeconomic analysis for litigation, regulatory proceedings, and strategic planning. I received a B.A. Magna Cum Laude with Distinction in Economics from Yale

University and a Ph.D. in economics from the Massachusetts Institute of Technology, where I was a National Science Foundation Doctoral Fellow. From 1982 to 1990, I was fust an Assistant

Professor and then an Associate Professor at Columbia University. From June 1985, through

August 1986, I took a leave of absence from Columbia to work as an economist at the United

States Federal Trade Commission, where I worked on antitrust enforcement.

My primary area of expertise in economics is the field of industrial organization. One of the industries I have studied is the cable television industry. In 1988, I wrote a paper about vertical integration between cable operators and pay cable networks, such as Home Box Office and Showtime. In May 1989, I testified before the Communications Subcommittee of the Senate

Commerce Committee about that research. Three times, I have been retained by the Federal

Trade Commission to give economic advice and, if appropriate, expert testimony concerning mergers in the cable industry. (In all three cases, the Commission chose not to challenge the mergers, so no testimony was required.) In 1994,.. I analyzed alternative treatments of "affiliate transactions" in the Federal Communications Commission's cable price regulations. Turner

Broadcasting submitted these analyses as appendices to their comments on those regulations.

JSC WRITTEN REBUTTAL STATEMENT -2-

II. Background

I have been retained by counsel to Devotional Claimants to identify the appropriate method for the Distribution of the 1990, 1991, and 1992 Cable Royalty Funds. 1 My analysis considers two alternative procedures for allocating copyright fees paid by cable systems for retransmitted

broadcast signals: the Bortz survey and the Nielsen study. 2

The two studies identify completely different benchmarks for the distribution of copyright

royalty fees. The Bortz survey, submitted on behalf of the Joint Sports Claimants, identifies the

relative value, in terms of attracting and retaining subscribers, of different categories of distant

signal programming. A telephone survey was conducted to determine how cable operators would

allocate a fixed budget among the alternative classes of programming that are available on the

distant broadcast channels that they carry. 3 -Once the survey results were compiled, the Bortz

survey identified the percentage of a fixed budget that would be allocated to each of the

160 Federal Register 14971 (1995).

'While 1 am aware that an alternative methodology has been suggested in the past, I will reserve judgment on any new studies until they are filed, if at all, in this newly consolidated proceeding.

3Cable Operator Valuation of Distant Signal Non-Network Programming, 1989, Bortz & Company, Inc., August 1991. .In particular, question 4 of the survey asks the following: Finally. I would like you to estimate the ~ value to your cable system of each type of programming carrier on the stations I mentioned, other than any national network programming from ABC, CBS and NBC. That is, how much do you think each such type of programming is worth, if anything, on a comparative basis, in terms of anracting and retaining subscribers. The stations we are interested in are, again ...

Assume you have a fixed dollar amount to spend on the non-network programming carried on these stations; in other words, a programming budget. Please think in terms of what percentage, if any. of the fixed dollar amount you would spend for each type of programming ...

JSC WRITTEN REBUTTAL STATEMENT -3-

"'!!--_. programming categories.• Thus, the Bortz survey offers a measure to distribute the copyright royalties based on a relative value for each type of programming to the cable operators, the same population which pays the royalty fees.

The Nielsen study, which was submitted on behalf of the Program Suppliers, however,

v· attempts to measure how many viewers watch each show on distant signal channels. The Program

Suppliers offered a viewing-to-time ratio that purports to indicate a program category's relative popularity and value. While the Nielsen study measures-to some degree-the viewing audience,5 it is not a reliable surrogate for the determination of the value of programming to attract and retain subscribers to cable television systems.

My analysis of the problem of detennining the appropriate allocation of copyright royalties among the programmers also considers the testimony filed by economists in the 1989 Cable

Royalty Proceeding. Specifically, I have read the written testimony of Dr. Robert Crandall

(August 1991) and the written rebuttal testimony of Dr. Stanley Besen (November 1991).

'I have not addressed purely technical issues associated with the Bortz study such as whether the stratification was appropriate and so on. Rather, I have simply addressed the conceptual question of the relative value of viewershlp ratings and the answer to question 4 in the Bortz srudy to allocate the copyright royalties.

'Although I am aware from reading the Copyright Royalty Tribunal's ("CRT's") decision in the 1989 Cable Royalty Proceeding (57 Federal Register 15286 (1992)) that there are technical questions about whether the Nielsen srudy measures viewershlp accurately, I will assume that it docs so.

JSC WRITTEN REBUTTAL STATEMENT -4- m. Nielsen Ratings as a Measure of Market Valuation

The CRT articulated a number of reasons for using the viewership results of the Nielsen study only as a starting point in the 1989 Cable Royalty Proceeding. The final determination acknowledges that "viewing per se did not necessarily correspond to marketplace value" and that

"cable's goal is to attract and retain subscribers, and [cable operators] will offer 'niche' services, often unrelated to the volume of viewing, to induce segments of the population to subscribe. "6

1n particular, I believe measures of audience sbares are a poor gauge of either the benefit to cable television systems of programming or the marketplace value of programming to be shown on cable television systems. Therefore, the Nielsen study results are an inadequate measure of market valuation for the purposes of allocating copyright royalties to distant broadcast programmers.

There are three fundamental aspects of the economics of cable television that support this conclusion. First, cable television systems make most of their money from subscriber fees, not from advertising. Unlike advertisers, which rely on the results of viewership studies to target its audiences, cable operators are motivated to invest in programming that attracts subscribers to the system regardless of subscribers' actual number of viewing hours. Indeed, since cable systems are not allowed to insert their own advertising into distant signals, none of the value of programming on these signals arises from advertising revenues. Thus, the value of distant broadcast programming to a cable system is that it attracts and retains more subscribers to cable television at a given price. Alternatively, the addetl value of the distant broadcast programming to a cable system is that it increases the monthly price that a cable system can cbarge if the

'57 Federal Register 15301 (1992). 0

JSC WRITTEN REBUTTAL STATEMENT -5-

"!"-: number of subscribers remained unchanged, or were held constant.

Second, even if cable operators did make most of their money from advertising, the value of a particular distant broadcast show to a cable system would be its ability to increase the audience for the entire cable system. A program's audience share might be quite different from

its contribution to the total cable-viewing audience. A show with a large audience share might

contribute very little to the total cable-viewing audience if, were it not available, most of its

viewers would have watched another show instead.

Third, cable television service is sold as a bundle rather than as a set of channels that can

be purchased separately. A show with a small but loyal following might increase the number of

subscribers more than some other shows with larger shares. The CRT recognized the relevance

of an avid viewership when it increased allocations to certain claimants in the 1989 proceeding.7

Simply by observing the offerings of cable systems, it is plain that audience shares do not

accurately measure the value of distant channels (and, in tum, the programming on that channel)

to a system. Indeed, the most commonly viewed programs on cable systems tend to be network

programs on local broadcast channels. In areas with good television reception, viewers do not

need to subscribe to a cable system to receive these signals; they are free. Even if these channels

account for most of the viewing time on a cable system, they are not the reason that people

subscribe to cable. On the other hand, there are channels (e.g., The Weather Channel) that have

extremely low audience ratings but are offered on many cable systems (and for which cable .. systems pay subscriber fees). Therefore, viewership, while a convenient measure (because such

757 Federal Register 15301 (1992). Toe CRT seemingly endorsed this view in its actions and words: "The Tribunal has made these allocations upon a showing by a claimant group of the intensity or avidity of its viewers that drive cable systems to respond to them out of proponion to their actual viewing."

JSC WRITTEN REBUTTAL STATEMENT -6- data are necessary for the networks and advertisers to determine their respective strategies), is an inadequate indicator of the value of specific distant broadcast programming.

IV. The Bortz Survey

The Bortz survey was conducted to offer a solution to the problems associated with using the Nielsen study's viewership information to determine the value of programming to cable systems. Instead of relying on the behavior of viewers once they subscribe to a cable system, the

Bortz survey offers insight into the behavior of the cable operators-the entities making the decisions on which distant broadcast programming will be offered and paying the copyright royalty fees. To determine to relative value of the categories of distant broadcast programming, the cable operators were asked to allocate a fixed budget to the different classes of programming.

A. The "Ideal" Question

In evaluating the Bortz survey, it is important to begin with the basic problem confronting

the Copyright Arbitration Royalty Panel ("CARP") in this matter. Cable operators have paid a

fixed amount of copyright royalties into a fund, and the CARP must allocate these royalties among

the copyright owners of the programs that were carried.

Dr. Besen, on behalf the Program Suppliers, presented two central criticisms of the Bortz ' survey as a means of solving this problem. One of Dr. Besen's criticisms is that the key question

of the survey (question 4, see footnote 3, infra.), which asks cable operators to allocate a fixed

JSC WRITTEN REBUTTAL STATEMENT -7- budget among types of programs, is not a well-posed economic question. Dr. Besen argued that it makes no sense to ask respondents to budget among categories without giving them the prices associated with each type of programming.

Dr. Besen is correct that the problem posed is not what might be termed a "classic budget problem," which is to choose quantities given a budget and prices. The answer to a classic budget problem would not, however, be relevant for this proceeding. The CARP does not need to determine quantities in its quest to determine the value of distant broadcast programming and to allocate royalties accordingly. 8 What needs to be determined are the prices. The following question is most relevant for solving the problem that the CARP faces in this case: "What prices of different types of programs would induce a cable system to purchase the programming mix that it actually showed?" This question is not a "classic budget problem," but it is nonetheless a well formulated economic question. 9 These prices do represent the benefit of each type of programming.

The Bortz study asked respondents to choose budget shares, not prices. It is important to recognize, though, that the Bortz survey had to pose the problem in a way that made sense to the respondents. The question of what prices would induce operators to purchase what they actually aired makes sense to people with formal training in economics, but undoubtedly sounds odd, confusing, and difficult to answer to most people without such training. Given that the quantities are fixed, however, the budget shares imply the prices. I believe that question 4 in the Bortz ,

'In this case, the "quantities" are the programming that was on distant broadcast signals that cable systems carried in from 1990 through 1992.

, 'This question is closely related to what is known as the "dual problem" in linear programming.

JSC WRITTEN REBUTTAL STATEMENT -8- survey was a reasonable way to ask for the prices that would have induced cable operators to

purchase the programming they carry in a way that would make sense to the respondents.

The Bortz survey suggests that the value of the Devotional Claimants' programming to

cable systems is greater than its viewership might suggest. An additional piece of evidence

supports this finding. Devotional broadcasters sometimes pay television stations to broadcast their

shows. These broadcasters have an incentive to do so because viewers contribute money to the

programmers to support the programming, much as viewers of Public Broadcasting Stations

contribute to support the programming. The fact that viewers are willing to make contributions

to support this programming suggests that they would be willing to make payments to subscribe

to cable systems which offer the programming.

B. Average vs. Marginal Values

Dr. Besen' s second criticism of the Bortz survey is that it measures the average value of

a class of programming to cable systems, not the marginal value of each individual program.

Given the interpretation of the Bortz survey given above, this criticism is not correct. If the

responses to the question 4 in the survey are interpreted as reflecting the prices (using budget

shares divided by quantities as the surrogate for prices) at which cable operators would purchase

the quantities that they actually offered subscribers, then the answers represent the marginal value

to the cable system, not the average value. .•

One might argue that, notwithstanding the interpretation of question 4 in the Bortz survey

given above, at least some respondents interpreted it to ask for the total value of different types

JSC WRITTEN REBUTTAL STATEMENT -9- of programming. Dr. Besen' s criticism is based on this interpretation. For that criticism to support the position that the Bortz survey understates the marginal value of movies and syndicated television shows, Dr. Besen would have to show that the ratio of the marginal to the average value of movies and syndicated reruns was greater than for sports, devotional and religious broadcasts, and other classes of programming. I have no reason to believe that to be the case, and no party has presented evidence needed to support Dr. Besen' s interpretation.

Dr. Besen' s only support for the argument that the Bortz survey understates the marginal

value of shows provided by the Program Suppliers is that the survey placed movies and syndicated

television shows into separate classes, but kept sports as a single class. Dr. Besen's logic goes

as follows. To place a value on movies, a cable operator would have to contemplate the effect

on its profits of offering all of its existing programming except for the movies on retransmitted

broadcast stations (but including the syndicated shows on those stations). Similarly, to place a

value on syndicated shows, it would have to contemplate the effect of offering all of its existing

programming except for the syndicated shows (but including the movies on those stations). If,

instead, the two classes of programming were combined in the survey, the cable operator would

have to consider the effect of offering all of its existing programming except for both the movies

and syndicated shows on retransmitted broadcast stations. To the extent that there are households

that would subscribe when at least one of those groups of programming is offered but would not

subscribe if neither was offered, then the effect of eliminating both would exceed the sum of the

effects of eliminating just one.

While this line of reasoning might come naturally to people with formal training in

economics, I question whether the questionnaire respondents picked up on this subtlety. I find

JSC WRITTEN REBUTTAL STATEMENT -10-

~':. Dr. Besen's assenion that combining movies and syndicated shows would have increased their combined percentage to be highly speculative. Indeed, as a matter of common sense, splitting movies and syndicated shows into two categories might well have increased their combined percentage.

Finally, for whatever merit this criticism may have had more than ten years ago, its force is now greatly diminished. Since 1983, there has been substantial growth in the number of satellite signals carried by cable systems. A substantial ponion of the programming on these signals is the same sort of programming that is on the distant broadcast signals carried by cable systems. Question 4 of the Bortz survey asks cable operators to allocate a budget to pay for the non-network programming on the distant broadcast sjima,Is that they carry. It does not ask them to allocate a budget among categories of programming on an the sj~na!s that they carry. The amount that a cable operator would willingly pay for the devotional and religious programming on distant broadcast stations depends- on whether he considers the devotional and religious programming available on satellite networks and local broadcast signals to be sufficient. This amount reflects, therefore, the marginal value of devotional and religious programming on distant broadcast signals over the devotional and religious programming on satellite signals and local broadcast signals. At most, therefore, Dr. Besen's criticism is that the marginal value of all the devotional and· religious programming on distant broadcast signals is different from the marginal value of a single devotional or religious program. The magnitude of this distinction is directly ., related to the distant broadcast signals' share of all devotional and religious programming available on a cable system.

JSC WRITTEN REBUTTAL STATEMENT -11-

V. Payments for Air Time

The implications, if any, of payments made for air time is another point to consider in the analysis of the value of programming. Devotional and religious broadcasters, which do not allow advertising during its programs, pay for air time. I do not believe that these payments have any /' implication for the marginal value which cable systems receive from devotional and religious programming on distant broadcast signals that they carry.

Unlike television stations that make money by selling advertising, devotional and religious programs do not interrupt their programs for commercials. Since television stations do not receive payments from advertisers during devotional and religious shows, the only way for television stations to make money during those broadcasts is to receive payment for the air time from the programmers. The National Football League would have to pay to get the Super Bowl on the air if it banned advertising during the broadcast. These payments made by, in this case, devotional and religious programs for air time reflect the peculiar economics of broadcast television rather than consumer demand for the product-devotional and religious programming.

To assess whether payments for air time have any implications for the "marketplace value" of the programming, it is important to be specific about the market setting in which the value would be established. I can think of two distinct market possibilities. The first possibility is that

cable systems would have been required to purchase the programming on distant broadcast signals

that they actually carried in a given year, such as 1~89. The marketplace value would then refer

to the prices that would have induced the cable systems to purchase those programs. Under this

interpretation, the responses to the Bortz study measure the marketplace value of programming,

JSC WRITTEN REBUTTAL STATEMENT -12- ~-: An alternative setting is a market in which the distant broadcast stations could charge for retransmission consent. While this interpretation might seem natural given that the copyright royalty fund exists because of mandatory licensing, it poses several conceptual problems. Most important, if distant broadcast stations were free to set prices for retransmission, then both the stations cable systems carry and the programming available on different stations might be different. The CARP must, however, allocate funds to the programs that were carried, not the ones that would have been carried under different rules.

VI. Conclusion

To assess the value of each program to a cable system and the marketplace value of programming, the CARP should want to know the prices for programs that would have induced cable systems to offer the mix of programming that they actually offered in each of the years under review, 1990, 1991, and 1992. The cable operators' responses to the Bortz survey can be used to infer that information. That information, however, cannot be inferred from the Nielsen study's measures of audience viewing. Thus, there is a stronger economic foundation for using the Bortz survey to allocate copyright royalties to programmers than for using Nielsen measures of audience shares.

JSC WRITTEN REBUTTAL STATEMENT Declaration

I, Michael A. Salinger, declare under penalty of perjury that the foregoing testimony is true and correct to the best of my knowledge and belief.

f11:_1}) ~~ Michael A. Salinger

Date: August 16, 1995

JSC WRITTEN REBUTTAL STATEMENT MICHAEL A. S~GER

BUSINESS ADDRESS:

Boston University School of Management 704 Commonwealth Avenue Boston, MA 02215 (617) 353-4408

National Econotnic Research Associates, Inc. One Main Strec:t Cambridge, MA 02142 (617) 621-0444

EDUCATION:

Massachusetts Institute of Technology Ph.D., Econotnics, 1982

Yale University B.A., magna cum laude and with Honors in Econotnics, 1978

EMPLOYMENT:

1994- NATIONAL ECONOMIC RESEARCH ASSOCIATES Special Consultant

July 1990- BOSTON UNIVERSITY SCHOOL OF MANAGEMENT Associate Professor of Econotnics

1982-1990 COLUMBIA UNIVERSITY GRADUATE SCHOOL OF BUSINESS Associate Professor of Econotnics and Finance (Assistant Professor 7 /82-6/87).

1985-1986 UNITED STATES FEDERAL TRADE COMMISSION Economist, Bureau of Econotnics, AnJjtrust Division (while on leave from Columbia)

JSC WRITTEN REBUTTAL STATEMENT Michael A. Salinger Appendix Pagel of 4

PUBLICATIONS:

"Do New Theories of Vertical Foreclosure Provide Sound Guidance for Consent Agreements in Vertical Merger Cases?" (with M. Klass), Antitrust Bulletin, forthcoming this fall.

Zipf Plots and the Size Distribution of Firms" (with M. Stanley, S. Buldyrev, S. Havlin, R. Mantegna, and G. Stanley), Economics Leners, forthcoming.

"A Graphical Analysis of Bundling," The Joumal ofBusiness, January 1995.

"Value Event Studies," Review ofEconomics and Statistics, Vol. 74, November 1992, pp. 671-677.

"Standard Errors in Event Studies," Journal of Financial and Quantitative Analysis, Vol. 27, March 1992, pp. 39-53.

"Vertical Mergers in Multi-Product Industries and Edgeworth's Paradox of Taxation," Joumal of Industrial Economics, Vol. 40, September 1991, pp. 545-556.

"The Concentration-Margins Relationship Reconsidered," Micro-Brookings Papers on Economic Activity, 1990, pp. 287-321.

"Stock Market Margin Requirements and Volatility: Implications for Regulation of Stock Index Futures," Joumal of Financial Services Research, Vol. 3, December 1989, pp. 121-138.

"The Meaning of 'Upstream' and 'Downstream' and the Implications for Modeling Vertical Mergers," Journal of Industrial Economics, Vol. 37, June 1989, pp. 373-387.

"Vertical Mergers and Market Foreclosure," Quarterly Joumal of Economics, Vol. 103, May 1988, pp. 345-356.

"Tobin's q, Unioniz.ation, and the Concentration-Profits Relationship," Rand Joumal of Economics, Vol. 15, Summer 1984, pp. 159-170.

"Tax Reform and Corporate Investtnent: A Microeconometric Simulation Study," (with L. Summers) in M. Feldstein, ed .• .Behavioral Simulation Methods in Tax Policy Analysis, University of Chicago Press, 1984, pp. 247-281.

"Testimony of Michael A. Salinger before the Senate Commerce, Science, and Transportation Committee, Subcommittee on Communications," Media Ownership: Diversity and Concentration, U.S. Senate Hearings 101-357, 1989, pp. 97-107.

JSC WRITTEN REBUTTAL STATEMENT Michael A. Salinger Appendix Page3 of 4

"Commentary," The Review of Futures Markets, Vol. 10, No. 2, 1991, pp. 398-402.

"Comment," in J. Coffee, L. Lowenstein, and S. Rose-Ackerman, eds., Knights, Raiders, and Targets: The Impact of Hostile TakeOlll!rs, Oxford University Press, 1988, pp. 71-73.

MAJOR CONSULTING ACTIVITIES:

Analysis of treatment of affiliate transactions in cable price regulations for Turner Broadcasting. 1994.

Written testimony on behalf of Devotional Claimants before the Copyright Royalty Tribunal. Testimony concerned appropriate procedures for allocating royalties paid by cable operators among different classes of programs on retransmitted broadcast signals. 1993.

Deposition testimony for Long Lake Energy Corp. in monopolization suit against Niagara Mohawk Corporation. Testimony concerned appropriate market definition. 1991.

Affidavit concerning class certification in a class action suit against bottlers of Coke and Pepsi. Affidavit argued that a conspiracy to raise the price of colas sold on promotion to grocery stores affected soft drink prices in general. 1989.

Testified as to damages on behalf of Record Club of America in a breach of contract suit against United Artists. Testimony concerned distinction between marginal and average cost and econometric projection of sales. 1988.

Retained by Federal Trade Commission three times as potential expen in merger cases in the cable television industry.

JSC WRITTEN REBUTTAL STATEMENT Michael A. Salinger Appendix Page 4 of 4

OTHER PROFESSIONAL ACTIVITIES: ~,

Co-Director, Boston University Telecommunications Policy Project.

Paper presentations (last five years): CREST Conference on Wireless Communication, Charles River Associates Conference on Antitrust in Today's Economy; Winter Meetings of the Econometric Society (1992); Telecommunications Policy Research Conference (1991, 1992); American Enterprise Instirute Conference on Regulation of Network Industries; Boston University; Chicago; Columbia; Connecticut; Darnnouth; GTE Labs; Harvard; MIT; NBER; and New York University.

Referee.for American Economic Review, Economic Development and Cultural Change, Economic Inquiry, International Economic Review, International Journal of Industrial Organization, .Journal of the American Statistical Association, Journal of Business, Journal of Empirical Finance, Journal of Financial and Quantitative Analysis, Journal of Futures Markets, Journal of Industrial Economics, Journal of Law and Economics, Journal ofLaw, Economics, and Organization, Journal of Money, Credit, and Banking, Journal of Public Economics, National Science Foundation, Quanerly Journal of Economics, Quanerly Revitrn' of Economics and Business, The Rand Journal of Economics, The Review of Economic Studies, and The Review of Economics and Statistics.

PROFESSIONAL MEMBERSHIPS:

American Economic Association

August 1995

JSC WRITTEN REBUTTAL STATEMENT JSC Exhibit No. 14 REBUTTAL TESTIMONY OF DR. MICHAEL A. SALINGER

I. INTRODUCTION

I am an Associate Professor of Economics in the School of Management at Boston

University and a Special Consultant to National Economic Research Associates. My general qualifications are described in an updated version of my vitae, which is attached as Appendix 2.

Given the nature of the following testimony, it is relevant to add that I teach regression analysis both to undergraduate and Masters of Business Administration students at Boston University and that roughly half of my publications contain regression analysis.

Dr. Stanley Besen's testimony (dated August 15, 1995) in this proceeding reports the result of a multiple regression analysis whic::h, according to Dr. Besen, infers the value cable operators place on different classes of programming from observed market behavior. At the request of counsel to Devotional Broadcasters, I have evaluated that study. I conclude that Dr.

Besen has misinterpreted his results. Despite what he alleges, taking account of the different classes of programming does not help explain the variation in the prices paid for distant broadcast signals. As a result, his regression coefficients tum out to be no more than estimates of each program category's share of viewer weighted hours. I conclude further that Dr. Besen's

study yields no insight into the market place value of different classes of programming on

retransmitted broadcast signals or into the value that cable operators place on different classes of

programming. I recommend that the Copyright Arbitration Royalty Panel (CARP) simply

dismiss Dr. Besen's study and adopt the best method presented during these proceedings, the

Bortz survey.

JSC WRITTEN REBUTTAL STATEMENT - 2 -

II. THE MIX OF PROGRAMMING DOES NOT HELP EXPLAIN VARIATIONS IN ROYALTY PAYMENTS

Dr. Besen' s general approach is to infer the values of different classes of programming by seeing whether differences in the mix of programrr ing on different signals is associated with differences in the prices paid for those signals. As he puts it,

Cable operators are willing to make large additional royalty payments only if the value to them of the programs on the additional signals is large. On the other hand, cable operators are willing to add distant signals with programs of relatively low value only if the associated increase in royalty payments is small. Thus, we would expect larger royalty payment increases to be associated with increases in the carriage of distant signals that contain especially highly-valued programming. (Testimony of Stanley M. Besen, August 15, 1995, pg. 8.)

A study like Dr. Besen's would be evidence of the value cable operators place on different types of programming if taking account of the programming mix helped explain the difference in the prices paid for different signals. However, this is not the case in Dr. Besen's

study.

In his study, Dr. Besen states, "one cannot test to determine whether separating total

hours into program categories results in a significant reduction in the unexplained variance of the

1 [percentage change in royalties]." · This statement is not correct. Table 1 contains three

regressions that demonstrate why it is not correct. The first is Dr. Besen's regression, which I

have been able to reproduce by using data supplied by Dr. Besen in discovery.

1 Testimony of Stanley M. Besen, pg. 24.

JSC WRITTEN REBUTTAL STATEMENT - 3 -

Table 1. Comparison of Alternate Forms of Regressions with Change in Total Royalties as the Dependent Variable Besen Basic Total Houn Total and Equation Regression Categories Regression (1) (2) (3)

Constant 0.039 0.045 0.040 (0.86) ( 1.15) (0.85) Total 0.881 0.033 (9.53) (0.034) Movies 0.863 0.833 (6.45) (0.93) Sports 0.077 0.076 (1.67) (1.19) Devotional -0.003 -0.003 (-0.24) (-0.24) Local -0.014 -0.014 (-0.42) (-0.40)

R2 0.313 0.306 0.313 Adjusted R2 0.300 0.302 0.296 SSE 58.41 59.04 58.41 Number of Observations 208 208 208

Regressions are based on data set entitled "BASEDATA" provided by Dr. Besen. Dependent variable is the percentage change in royalties from time -1 to time 0. Values in parentheses are t-statistics. "Total" is the percentage change in total programming hours. Other independent variables are percentage change in viewer weighted hours for the relevant category.

The second column of Table 1 reports my calculation (again, with data provided by Dr.

Besen) of what Dr. Besen apparently refers to as the "total hours regression." The coefficient on the percentage change in hours is 0.881, which means that a 100% increase in total hours is associated with an 88. 1% increase in royalties. Since the percentage change in hours is equal to

JSC WRITTEN REBUTTAL STATEMENT -4-

( or very nearly equal to) the percentage change in the number of signals, the regression indicates that a 100% increase in the number of signals is associated with an 88.1% increase in royalties. 2

The equation in column (2) is an econometric approximation of the formula for calculating royalties. If a system goes from one retransmitted broadcast signal to two, it roughly doubles its royalties. If it goes from three retransmitted broadcast signals to two, then it roughly cuts its royalties by 1/3. The actual fonnula is more complex than this because there is a slightly different percentage paid for the first signal than for the second, because there are 3. 7 5% royalties, and because some signals count as only 1/4 of a Distant Signal Equivalent (DSE).

This regression largely abstracts away from those complications by imposing the restriction that there be a linear relationship between the percentage change in royalties and the percentage change in hours. 3

The objective of the Besen analysis is to do better than column (2). In column (2), the only variable used to predict the percentage change in royalties is the percentage change in the total quantity of programming, which does not account in any way for the composition of

programming on distant broadcast signals. Such a result is of absolutely no value to the CARP

in allocating the royalty fund. The regression in column (2) provides evidence about what cable

operators pay for the entire bundle of programming on distant broadcast signals, but it provides

no insight into how to place a value on the individual components. Dr. Besen sought to infer

values of the different components of a distant broadcast signal by seeing whether the

2 The coefficient on the percentage change in hours in column (2) is not statistically significantly different from I, so we cannot reject the hypothesis that the percentage change in revenues is simply proportional to the percentage change in signals. 3 2 From the relatively low value ofR , one might suspect that the approximation is rather poor. It is important to recognize, however, that there would be variation in changes in royalty payments due to changes in receipts even if there were no change in the carriage of distant broadcast signals.

JSC WRITTEN REBUTTAL STATEMENT - 5 - composition of signals helps explain variation in the amount cable systems pay for them. While one might take issue with some details of the study, this general approach is valid. In this case, however, it did not work. Simply put, the composition of the signals does not help explain variation in the prices paid for them.

The proper procedure to detennine whether separating hours into categories is statistically useful is to detennine whether adding the programming category variables to the hours regression results in a statistically significant reduction in the sum of the squared errors

(SSE). Column (3) contains the regression of the percentage change in royalties on the percentage change in total hours and the percentage change in viewer-weighted hours for each of the four categories (Movies and Series, Sports, Devotional, and Local). The appropriate statistical procedure is to test the null hypothesis that the composition of programming is of r.o help in explaining the percentage change in royalties once one controls for the percentage change in signals, i.e., that the coefficients on the four category variables are all 0. As is described in Appendix 1, it is not possible to reject this hypothesis. Based on this result, I conclude that taking account of the mix of programming does not help explain the variation in

royalty payments. 4 This statistical test settles the question of whether the CARP should rely in

any way on Dr. Besen's results. It should not.

• Note that the coefficient on the percentage change in total hours in column (3) is very small and statistically insignificant. Also, the coefficients in column (3) more closely resemble those in column (1) than those in column (2). Both of these results are completely consistent with the above arguments. To be statistically significant, a variable must add explanatory power to a regression over and above the explanatory power that can be achieved with the remaining variables. As will be discussed below, the regressions in column (l) and (2) are essentially the same regression. Thus, none of the variables is statistically significant because any one of the them can be excluded and nearly the same explanatory power can be achieved with those that remain. It is neither surprising nor particularly important that the percentage change in total hours adds no explanatory power once one controls for the percentage change in each of the categories. What is important is that once the percentage change in total hours is controlled for, there is no additional explanatory power to be gained from taking account of the composition of the variables. As for similarity between the coefficients in columns (I) and (3 ), the least squares estimates are those that give the minimum sum of squared errors (SSE). As can be seen from columns (I) and (2), the SSE is slightly lower in the Besen regression than in the total hours

JSC WRITTEN REBUTTAL STATEMENT - 6 -

Ill. DR. BESEN'S REGRESSION COEFFICIENTS SIMPLY l\1EASURE SHARES

Dr. Besen emphasizes in his report that the coefficient on Movies and Series is statistically significantly different from the coefficient on Sports. It is this result that apparently convinced Dr.

Besen to conclude that one gets "a lot of mileage" from considering the separate categories of programming. 5 Dr. Besen also seems to believe that there is no relationship between his coefficient estimates and each category's share of viewer-weighted hours. 6 As I demonstrated in the previous section, Dr. Besen is wrong in the first of those beliefs. In this section, I will show that he is wrong in the second and that these two errors are closely related. It is precisely because there is no "mileage" in trucing account of the categories of programming that the coefficients are merely proportional to the shares of viewer-weighted hours.

While I will present the argument more rigorously below, there is an intuitive way to see the main point of this section. Suppose that cable operators did in fact view all programming as being identical. It would of course still be the case that, because of the formula for calculating royalties, a

regression. Thus, an equation that is virtually identical to the Besen regression gives the best fit. However, that superior fit is achieved with four explanatory variables rather than the one in the total hours regression. Adding variables. even those that are completely unrelated to the dependent variable, typically improves the fit of the equation. Thus, what is important about colwnn (3) is not that the coefficients resemble those in column (1). Rather, it is that the improvement in the fit from colwnn (2) to colwnn (3) is not sufficient for the category variables to be deemed statistically significant. 5 Dr. Besen had the following exchange with Mr. Gottfried in his oral testimony (Testimony of Dr. Stanley Besen before the Copyright Arbitration Royalty Panel, January 24, 1996, pg. 6497). Q. But it's your testimony, to Judge Wertheim, that your regression shows that, by breaking things into categories, you get a lot of mileage? A. That's because there seems to be, when one does that, one gets substantial differences in the weights to be applied to the various categories, and those differences are statistically significant. A. ... [T]here is no necessary relationship between the viewing hours for any category of program, and the number I get as its value, the share equation. It may, coincidentally, turn out to be similar, but, in fact, it seems to me that one wants to use actual operator behavior to uy to determine whether or not those viewing hours ought to have the same weights. Which is, in effect, what would happen, if you gave them, assigned people shares by viewing hours. Or whether some of the viewing hour categories ought to get greater weights, and others ought to get lower weights. Testimony of Dr. Stanley Besen before the Copyright Arbitration Royalty Panel, January 24, I 996, pp. 6490-1.

JSC WRITTEN REBUTTAL STATEMENT -7-

1% increase in hours would be associated "With a 0.881% increue in royalties. Under such circumstances, what would be expected from Dr. Besen's regression? To answer th.al question, it is imponant to know the proper interpretation of a single coefficient in a multiple regression. In general, the coefficient on one variable is the effect on the dependent variable of increasing that variable ~y 1 while holding all the other variables in the regression equation constant In Dr.

Bcsen's regression. therefore, the coefficient on Movies and Series represents the effect of increasing

Movies and Series viewer-weighted hours by I% while holding constant the remaining classes of

programming. As is shown in Table 2, Movies and Series account for 85. lo/o of viewer-weighted

hours. A 1o/o increase in viewer-weighted hours holding constant all other classes of programming

causes total hours to increase by 0.851%. !fa 1% increase in programming causes royalties to go up

0.881%, then a 1% increase in Movies and Series viewer-weighted hours would cause royalties to

increase by 0.85 I% x 0.881 = 0.750%. Since Devotional programming is only 0.3% of viC'n'.er

weighted hours in Dr. Besen's data set, a 1% increase in devotional viev.-er-weighted hours holding

constant the viewer-weighted hours of all other classes of programming would cause royalties to

increase by 0.003% x 0.881 • 0.003%, which of course is much smaller than the predicted coefficient

on Movies and Series.

More formally, Dr. Besen's results reflect two underlying relationships. The first is the "total

hours regression," which approximates the formula for calculating royalties. The 5CCOnd is a purely

mathematical relationship between the percentage change in hours (which is identical or nearly

identical to the percentage change in signals) and the percentage change in viewer weighted hours. A

numerical example will illustrate this relationship.

JSC WRITTEN REBUTTAL STATEMENT • 8.

Suppose a system has 80 viewer-weighted hours of movies and 20 viewer-weighted hours of

sports for a total of 100 hours. 7 Suppose it then adds 40 viewer-weighted hours of movies and 60 viewer-weighted hours of sporu for a total of 120 viewer-wt:ighted hours of movies, 80 viewer weighted hours of sports, and 200 total hours. The percentage change in movie viewer-weighted hours is 50% and the percentage change in sports viewer-weighted hours is 300%. The percentage change in total hours is a weighted average of these two, with weights equal to the initial shares of

800/o for movies and 20% for sports. That is, 100% = .8 • 500/o + .2 • 3000/o. This relationship is neither a coincidence nor a special fearure of this example. Following Dr. Besen' s notation, let M',

S', D', and L' be the percentage change in Movies, Sporu, Devotional Broadcasters, and Local broadcasters viewer-weighted hours, H' be the percentage change in total hours, and s.... Ss. so. and SL be each program category's share of viewer-weighted hours in the base period. For each system. the following equation holds exactly:

H' • 5w,M' + Ss S' + so D' + SLL' (1)

Because the weights vary across systems, a single equation docs not hold exactly for the entire sample. However, using the average shares provides a good approximation for the entire sample.

H' ._ 0.851 M' + 0.0&3 S' -t- 0.003 D' + 0.063 L' (2)

The hours regression, which simply reflects the fonnula. for calculating royalties, is:

R' = 0.045 + 0.881 H' (3)

Combining (2) and (3) yields:

R' = 0.045 + 0.750 M' + 0.073 S' + 0.003 D' + 0.056L' (4)

' As Dr. Besen defines them, iota! viewer-weighted hours for a signal equal total hour,.

JSC WRITTEN REBUTTAL STATEMENT • 9.

Equation (4) i, what would be expected in Dr. Besen's equation if taking account of the composition of programming literally had no additional explanatory value over and above the percentage change in total hours. It caprures the above argument that the expected coefficients in the Besen regression arc proponional to each category's share of viewer-weighted hours.

Equation (4) is what would be predicted if taking account of the category of programing had literally no additional explanatory power over just the percentage change in hours. In practice, the

"freedom" to select four slope coefficients rather than just one yields a small although statistically insignificant amount of additional explanatory power. As a result, the coefficients in Dr. Besen's regressions are somewhat different from those predicted by equation (4). As Table 2 shows, however, the estimates are quite close once one accounts for the standard errors in estimating the coefficients. Column (1) reporu the average base period shares of each category and column (2) reproduces the calculation of equation (4). Column (3) shows Dr. Bescn's estimated coefficients.

Table 2. Explanation for Dr. Besen's Regressions 95% Average Share Predicted Confidence of Viewer- Coefficient Interval for Category weighted hours (0.881 x Column 1) Coefficients Coefficients (1) (2) (3) (4)

Movies 0.&51 0.750 0.863 (0.599, 1.126) Sports 0.083 0.073 0.077 (-0.014, 0.169) Devotional 0.003 0.003 -0.003 (·0.023, 0.0) 8) Local 0.063 0.056 -0.014 (-0.079, 0.051)

Rau.Its arc based on data set entitled "BASED A TA" provided by Dr. Besen. Colwnn ( 1) is avera~ value at time ·l of category vicwcr•Mightcd ho1.tts divided by total viewer-weighted hours. Column (3) contains rqression coefficients from Dr. Besen 's "Basic Equation" 11S reponcd in Table 1, Colwnn 1. ·

JSC WRITTEN REBUTTAL STATEMENT - 10 -

Because regression coefficients are estimated with data that have random variation, each regression coefficient has associated with it a standard error. Based on these standard errors, it is pos!;ible to construct confidence intervals for the coefficients. Column (4) of Table 2 contains the 95% confidence intervals for each of the regression coefficients. Comparing Columns (2) and (4), it is evident the predicted coefficients for Movies, Sports, and Devotional are well within the 95% confidence intervals of the estimated coefficients. It is true that the predicted coefficient for Local is slightly outside the 95% confidence interval. However, the difference is very small, and it is not surprising that one of the predicted coefficients lies outside the confidence interval. 8

The primary result of the previous sec.ti on is that once one controls for the percentage

change in total hours, the composition of programming does not add any significant explanatory

power to the regressions. The results in this section are simply another way of stating the same

result. The coefficients in Column (2) are the ones that would be expected on the percentage

change in the category viewer-weighted hours if the only determinant of the change in royalties was

the percentage change in hours. Given the imprecision with which the coefficients are estimated,

the actual coefficients are very close to the predictions in column (2).

IV. HOURS VS. VIEWER-WEIGHTED HOURS

Dr. Besen uses viewer-weighted hours rather than plain hours to measure the

composition of programming. He argues that viewer-weighting is a type of quality adjustment

8 A 95% Confidence interval is constructed so that there is a 5% chance that the "true" coefficient lies outside the confidence interval. If there is a 5% chance that each confidence interval will fail to include the "true" coefficient, there is a greater than 5% chance that at least one of the four fails to contain the "true" coefficient. In any event, it is not possible to reject the hypothesis that the coefficients are those in equation (4).

JSC WRITTEN REBUTTAL STATEMENT - 11 - and is, therefore, conceptually superior to hours. Note, however, that he does not claim that using viewer-weighted hours is statistically superior, as would be expected if viewer-weighting created truly superior measures of what is important to cable operators. The following is a regression of the per.::entage change in royalties on the percentage change in the hours of each class of programming. (Based on this regression and column I of Table I, I sponsor

Devotional Exhibit sx.) This regression actually has slightly more explanatory power than the one Dr. Besen uses, although the difference is small.

% .1. Royalties = 0.040 + 0.902 %.1. Movie Hrs. (0.84) (4.82)

-0.008 %.1. Sports Hrs + 0.031 % Dev. Hrs. (-0.08) (0.82)

-0. O14 % .1. Local Hrs. (-0.27)

R2 =0.3I4 adjusted R2 = 0.300 N=208 (t-values in parentheses)

Because Dr. Besen' s variables are the percentage change in viewer-weighted hours, the expected coefficients in his regression are proportional to shares of viewer-weighted hours. As was shown in the previous section, the actual estimates are completely consistent with this hypothesis. Similarly, since the variables in the above regression are the percentage change in hours, the expected coefficients are proportional to shares of hours .. Table 3 demonstrates this point.

JSC WRITTEN REBUTTAL STATEMENT - 12 -

Table 3. Predicted vs. Actual Coefficients in Hours Regression Predicted 95% Coefficient Estimated Confidence Category Share of Hours (0.881 i: Column 1) Coefficient Interval (1) (2) (3) (4)

Movies 0.846 0.745 0.902 ( 0.533, 1.270) Sports 0.041 0.036 -0.008 (-0.201, 0.186) Devotional 0.022 0.019 0.031 (-0.043, 0.105) Local 0.089 0.078 -0.014 (-0.116, 0.088)

Results are based on data set entitled "BASEDATA" provided by Dr. Besen. Column (l) is average value at time -1 of category hours divided by total hours. Column (3) contains regression coefficients from regression of percentage change in royalties on the percentage change in program category hours as reported on previous page.

The structure of Table 3 is identical to Table 2. Column (I) contains the average of each category's share of hours. Comparing Column (l) of Table 3 with Column (1) of Table 2, one can see that Sports' share of hours is only about half its share of viewer-weighted hours. Local has a somewhat larger share of hours than viewer-weighted hours. Devotional's share of hour~ is more than 7 times its share of viewer-weighted hours, although the absolute difference is not large.

As with viewer-weighted hours, we can estimate predicted coefficients in the hours regression by multiplying each category's share of programming by 0.881, which is the percentage effect of a 1% increase in total hours on royalties. Column (2) contains those

results. Comparing Column (2) of Table 3 with Column (2) of Table 2, Sports is predicted to

have a smaller coefficient in the hours regression than in the viewer-weighted hours regression.

Devotional and Local are predicted to have larger coefficients, and the coefficient on Movies

and Series is expected to be about the same. Column (3) contains the actual regression

coefficients; and Column (4) contains the 95% confidence intervals. All of the predicted

JSC WRITTEN REBUTTAL STATEMENT - 13 - coefficients in Column (2) are well within the confidence intervals in Column (4). Note also, that the lower coefficient on Sports relative to the Besen regression and the higher coefficient on

Devotional is consistent with the qualitative predictions. 9

Dr. Besen contends that the use of viewer-weighted hours is conceptually superior to the use of hours because viewer-weighting measures quality. If that were really the case, we would expect viewer-weighting to yield statistically superior results, which it does not. In reality, the use of viewer-weighted hours and hours are conceptually the same. Both Dr. Besen's regression and the regression reported in this section are variants of the "total hours regression." The only real difference is that Dr. Besen's coefficients are estimates of shares of viewer-weighted hours whereas the coefficients in the regression rel)orted in this section measure shares of hours.

V. DR. BESEN'S RESULTS DO NOT IMPLY THAT CABLE OPERATORS VALUE ALL HOURS OR ALL VIEWER-WEIGHTED HOURS EQUALLY

In response to the above arguments, one or more parties in this proceeding might make the following counterargument:

It is true that taking account of the composition of viewer-weighted hours does not explain the percentage change in royalties. However, this result was not fore-ordained. The data could have shown that some viewer-weighted hours are more valuable than others. What these results show, though, is that cable operators view all viewer-weighted hours as being identical. As a result, the copyright royalties should be allocated according to viewer-weighted hours.

Such a conclusion would be inappropriate, however. It would be an example of a well

known statistical fallacy of taking the failure to reject a null hypothesis as evidence for the null

9 To be sure, the difference in the regression coefficients on Sports in the two regressions is greater than the difference in Sports' shares of hours and viewer-weighted hours. Also, the coefficient on Local is the same (rounded to the nearest 0.001) even though Local has a higher share of hours than viewer-weighted hours. It is imponant to recognize, however, that the predicted differences in the coefficients in the two regressions is small relative to the standard errors of the coefficients.

JSC WRITTEN REBUTTAL STATEMENT - 14 - hypothesis. M Lindgren puts it, "To accept an hypothesis does not mean the same thing to all investigators or in all situations. It does not mean, in a statistical experiment, that the hypothesis is 'proved' in any rigorous sense, because the data in a sample give only incomplete information about a population and can easily be misleading." 10 To put this quotation in the context of the problem at hand, the data are consistent with the hypothesis that cable operators view all viewer-weighted hours as the same. However, the data are also consistent with the hypothesis that cable operators view all hours as the same. Indeed, one could divide up a signal in any number of ways and get results with the same explanatory power as Dr. Besen's and coefficients proponional to shares. For example, one could run a regression of the percentage change in royalties on the percentage changes in the four Sunday morning category hours and estimate coefficients that reflect the shares of Sunday morning programming. Such a regression would likely do no worse statistically than Dr. Besen's.

Like all regression analyses, Dr. Besen's has various implicit assumptions built into it. A possible explanation for his failure to detect any effect of the composition of programming on the value of distant broadcast signals is that these assumptions are not true. Before drawing affirmative conclusions from Dr. Besen's negative results, one would have to have a strong

reason to believe that the underlying assumptions of his model are correct. First, his use of

viewer-weighted hours rather than hours reflects an assumption that value is determined by

viewership. His statistical analysis could have provided evidence of the validity of the

assumption, but it did not. Second, he asssumes a very specific "constant elasticity" functional

form for the value function. Third, and probably most important, Dr. Besen's analysis is based

10 See Bernard W. Lindgren, Statistical Theory, Third Edition, (New York: MacMillan) 1976, pp. 276-7.

JSC WRITTEN REBUTTAL STATEMENT - 15 - on the assumption that the programs within categories are homogeneous or indistinguishable from each other. In other words, while cable operators might care about the composition of programming between categories, they do not care at all about the composition of programming within categories. They care about the total amount of sports ( or sports viewership) without

regard to whether the signal consists entirely of baseball rather than a mix of baseball, basketball,

and hockey, much less the details of what teams are playing. They care about the total amount

of viewing of movies and series without regard to the mix between movies and series or between

comedy, drama, and action, much less the details of precisely which programs are shown. These

assumptions are highly questionable. The programming is not homogeneous and the true

measures of what cable operators find valuable in distant broadcast signals are likely to be more

detailed. 11 It is common in econometric studies to use cruder measures than one would ideally

like, and sometimes one can obtain useful results even with imperfect measures. In this case,

however, a plausible explanation for Dr. Besen's failure to find any effect of the composition of

programming is that these measures are simply too crude. 12

11 Dr. Besen might argue that the use of viewer-weighted hours captures the mix of programming. If the use of viewer-weighted hours substantially improved the explanatory power of the regression, this claim might have some merit. (Even then, it would be debatable.) As was explained above, though, the use of viewer-weighted hours does not improve the explanatory power of the regression. 12 Even though the Bortz survey uses similar categories, it is not subject to the same criticism. The problem in Dr. Besen's study is not that it tries to place a value on a basket of goods. Rather, the problem is that it imposes strong conditions on how the marginal value of each program in the basket is affected by what else is in the basket. To sec this point, consider the following hypothetical. Suppose someone is given a basket with three pi~ of fruit, (which correspond to three programs in the same program category). Suppose furthermore that he would be willing to pay S1. 00 for one apple, S1.50 for two apples, S l. 7 5 for three apples, and nothing for any quantity of oranges or bananas (or for the basket itself). The Besen model imposes the restriction that the person value the basket with three apples the same as a basket with one apple, on'e orange, and one banana. The Bonz approach would be simply to ask the person how much he valued the basket. The proper answer to that question (and the one that would be expected from a respondent) depends on precisely what fruit is in the basket.

JSC WRITTEN REBUTTAL STATEMENT - 16 -

VI. CONCLUSION

Dr. Besen's regressions measure the audience shares of different classes of

programming. If he had based his regressions on hours instead of weighted hours, his

regressions would have been a way of measuring the fraction of programming hours accounted

for by each class of programming. It would have been simpler to have used direct measures of

audience shares or hours. If he had done that, however, the CARP would likely have dismissed

his study as being conceptually flawed; and it would have been right to .do so.

Like most economists, I would find compelling evidence from market behavior to be

more persuasive than survey results. In this case, however, the market evidence presented by

Dr. Besen is completely uninformative. Thus, I continue to believe that the Bortz 5urvey is the

best of the methods I have evaluated for allocating the Copyright Royalty Fund.

JSC WRITTEN REBUTTAL STATEMENT - 17 -

Appendix 1

Hypothesis Test

A key issue in evaluating econometric results is whether they are statistically significant.

While the details of determining statistical significance can be complicated, the concept itself is relatively simple. In regression analysis, the computer estimates the equation that provides the best possible fit to the data. The quality of the fit is measured by the "sum of the squared errors" (SSE), where a lower SSE constitutes a better fit. The coefficient on a variable is statistically significant if the inclusion of that variable results in a substantially better fit to the data. The improvement in the fit can be measured by the percentage reduction in the SSE. The

improvement has to be substantial for a coefficient to be deemed significant because adding even a completely random variable to a regression typically results in some improvement in fit.

Statistical theory provides standards for what constitutes a "substantial" improvement.

The most common way of ascertaining the significance of a single variable is with a "t-test."

Statistical packages routinely report a "t-statistic" for every estimated regression coefficient, and

a rough rule of thumb is that a coefficient is statistically significant if the absolute value of its

associated "t-statistic" is greater than 2.

Just as it is possible to ascertain the statistical significance of the coefficient on a single

variable, it is also possible to determine the statistical significance of the coefficients on a group

of variables. As with a single variable, the coefficients on a group of variables are statistically

significant if including them in the analysis substantially improves the fit of the data. Obviously,

the standard for a group of variables to be statistically significant is higher than the standard for

a single variable. The most commonly used procedure to determine whether a group of

JSC WRITTEN REBUTTAL STATEMENT - 18 - variables is statistically significant is to perform what is called an "F-test." Suppose N observations are available to test for whether a group of k variables is statistically significant.

Suppose also that another group of k' variables are.to be included in the regression. The F-test is based on the results of two regressions. In one, both sets of variables are included. In the other, the set of variables which is being tested for significance is excluded (but the other k' variables are included). Let SSE.. represent the sum of squared errors when the test group is included and SSE...o represent the sum of squared errors when the test group is excluded. [The

subscripts "w" and "wo" stand for "with" and "without"]. The F statistic is:

SSE,.. 0 -SSE,..

F,.N-·-··-1 = __s_s_:_w __ (Al)

N-k-k°-1

This formula looks complicated, but it has a simple interpretation. The numerator in the

fraction is the percentage increase in the SSE from excluding the group of k variables being

tested. The denominator is the percentage change in what is known as the "degrees of

freedom," which is the number of observations minus the number of estimated coefficients.

Thus, the F test is high when the percentage increase in the SSE from excluding the variables is

much larger than the percentage increase in the degrees of freedom.

Whether or not an F statistic is deemed significant or not significant depends on three

factors. The first is the number of coefficients in the group being tested for significanance. The

first subscript on the F refers to this number, which is known as the "numerator degrees of

freedom." The second is the number of degrees of freedom in the regression when all the

variables are included. The second subscript refers to this number, which is known as the

denominator degrees of freedom. The third is the "significance level," which is the probability of

JSC WRITTEN REBUTTAL STATEMENT - 19 -

obtaining such a high value off as a matter of pure chance. The most commonly used

· significance levels are 5% and 1%.

Whether a group of variables is statistically significant can depend on what other

variables are included in the regression. This point is absolutely crucial for understanding what

is wrong with Dr. Besen's analysis. Dr. Besen does indeed report F statistics for his equations.

For his "Basic Equation," he reports a "Model" F-statistic of 23.150, which is significant at the

I% level. 13 This F statistic means Dr. Besen's variables substantially lower the SSE in the

regression (and thereby improve the fit). However, this improvement is relative to a particular

benchmark. In this case, the benchmark is the SSE that results when it is assumed that all

systems would, except for purely random variation, have the same percentage change in royalty

payments.

This benchmark is simply the wrong benchmark for assessing the statistical significance

of Dr. Besen's results. A fundamental premise of Dr. Besen's approach is that the composition

of programming on a broadcast signal helps explain the percentage change in royalties. The

natural way to test that premise is to see whether the fit of the regression with Dr. Besen's

variables is substantially better than when one simply considers the change in the total quantity

of programming regardless of its composition.

Table I reports the regressions to perform this test as well as Dr. Besen's regression.

Column (I) of Table 1 is what Dr. Besen's terms his "Basic Equation." The dependent variable

is the percentage change in royalties and the independent variables are the percentage change in

13 By virtue of being significant at the 1% level, it is also significant at the 5% level. While Dr. Besen's claims that his results are significant at the 99% and 95% levels are technically correct, he presumably meant 1% and 5%. His terminology "significant at the 95% confidence level" reflects a confusion between significance and confidence levels. In fairness to Dr. Besen, this error is common.

JSC WRITTEN REBUTTAL STATEMENT - 20 - each class of programming. Column (2) reports the results of the regression of the percentage change in royalties on just the percentage change in total programming hours. The estimated coefficient of O. 8 81 means that a 1% increase in the amount of programming is associated with a

0.881% increase in royalties. In comparing Columns (1) and (2) an important point to note is that the sum of squared errors is only about 1% higher in Column (2) as in Column (1). In other words, using Dr. Besen' s four variables create only a slightly better fit then using just the percentage change in total hours. To be sure, the fit of Dr. Besen's regression is somewhat better than Column (2), but the standard of statistical significance means that the results must be substantially better. They are not.

The technically correct procedure to test whether the composition of programming is statistically significant is to run a regression in which both the percentage change in hours and the percentage change in the viewer-hours of each class of programming are included. Column

(3) reports the results of this regression. The appropriate test statistic is based on equation (Al)

with Column (2) being the "without" regression and Column (3) being the "with" regression.

Substituting the sum of squared errors from Column (3) for SSE,., the sum of squared errors in

column 2 for SSE,.°' 208 for N, 4 for le, and 1 for k' gives:

59.04-58.41 58.41 4 - 0.545 (A2) 202

To be deemed significant at the 5% level in this case, the F statistic would have to be 2.42. The

actual F statistic is not significant by any conventional standard.

JSC WRITTEN REBUTTAL STATEMENT - 21 -

Appendix 2

Curriculum Vitae of Dr. Michael A. Salinger

JSC WRITTEN REBUTTAL STATEMENT MICHAEL A. SALINGER

BUSINESS ADDRESS:

Boston University School of Management 704 Commonwealth Avenue Boston, MA 02215 (617) 353-4408

National Economic Research Associates, Inc. One Main Street Cambridge,MA 02142 (617) 621-0444

EDUCATION:

Massachusetts Institute of Technology Ph.D., Economics, 1982

Yale University B.A., magna cum laude and with Honors in Economics, 1978

EMPLOYMENT:

July 1990 - BOSTON UNIVERSITY SCHOOL OF MANAGEMENT Associate Professor of Economics

1982-1990 COLUMBIA UNIVERSITY GRADUATE SCHOOL OF BUSINESS Associate Professor of Economics and Finance (Assistant Professor 7/82 - 6/87)

1985-1986 UNITED STATES FEDERAL TRADE COMMISSION Economist, Bureau of Economics. Antitrust Division (while on leave from Columbia)

JSC WRITTEN REBUTTAL STATEMENT MICHAEL A. SALINGER - 2 -

PUBLICATIONS:

"Scaling Behaviour of Firm Growth," (with M.H.R. Stanley, L.A.N. Amaral, S.V. Buldyrev, S. Havlin, H. Leschhom, P. Maass and H.E. Stanley), Nature, Forthcoming, 1996.

"Do New Theories of Vertical Foreclosure Provide Sound Guidance for Consent Agreements in Vertical Merger Cases," (with M. Klass) Antitrust Bulletin, Vol. 40, Fall, 1995, pp. 667-698

"Zipf Plots and the Size Distribution of Firms," (with M.H.R. Stanley, S.V. Buldyrev, S. Havlin, R. Mantegna, and H.E. Stanley) Economics Letters, September, 1995, pp. 453-457.

"A Graphical Analysis of Bundling," The Journal of Business, January, 1995, pp. 85-98.

"Value Event Studies," Review of Eco11omics and Statistics, Vol. 74, November, 1992, pp. 671-677.

"Standard Errors in Event Studies," Journal of Financial and Quantitative Analysis, Vol. 27, March, 1992, pp. 39-53.

"Vertical Mergers in Multi-Product Industries and Edgeworth's Paradox of Taxation," Journal of Industrial Eco11omics, Vol. 40, September, 1991, pp. 545-556.

"The Concentration-Margins Relationship Reconsidered," Micro-Brookings Papers on Economic Activity, 1990, pp. 287-32 I.

"Stock Market Margin Requirements and Volatility: Implications for Regulation of Stock Index Futures," Journal of Financial Services Research, Vol. 3, December, 1989, pp. 121-138.

"The Meaning of' Upstream' and 'Downstream' and the Implications for Modeling Vertical Mergers," Journal of Industrial Economics, Vol. 37, June, 1989, pp. 373-387.

"Vertical Mergers and Market Foreclosure," Quarterly Journal of Economics, Vol. 103, May, 1988, pp. 345-356.

"Tobin's q, Unionization, and the Concentration-Profits Relationship," Rand Journal ofEconomics, Vol. 15, Summer, 1984, pp. 159-170.

JSC WRITTEN REBUTTAL STATEMENT MICHAEL A. SALrNGER - 3 -

"Tax Refonn and Corporate Investment: A microeconometric Stimulation Study," (with L. Summers) in M. Feldstein, ed., Behavioral Stimulation Methods in Tax Policy Analysis, University of Chicago Press, I 984, pp. 247-281.

"Testimony of Michael A. Salinger before the Senate Commerce, Science, and Transportation Committee, Subcommittee on communications," Media Ownership: DiversityandConcell/ration, U.S. Senate Hearings 101-357, 1989, pp. 97-107.

"Commentary," The Review of Futures Markets, Vol. IO, No. 2, 1991, pp. 398- 402.

"Comment," in J. Coffee, L. Lowenstein, and S. Rose-Ackennan, eds., Knights, Raiders, and Targets: The Impact of Hostile Takeovers, Oxford University Press, I 988, pp. 71-73.

MAJOR CONSULTING ACTIVITIES:

Reports for Turner Broadcasting on the treatment of affiliate transactions in cable television price regulations.

Testified as to damages on behalfof Record Club of America in a breach of contract suit against United Artists. Testimony concerned distinction between marginal and average cost and econometric project of sales. I 988.

Written testimony on behalf of Devotional Claimants before the Copyright royalty Tribunal. Testimony concerned appropriate procedures for allocating royalties paid by cable operators among different classes of programs on retransmitted broadcast signals. 1993.

Deposition testimony for Long Lake Energy Corp. in monopolization suit against Niagara Mohawk Corporation. Testimony concerned appropriate market definition. 1991.

Twice retained by Federal Trade Commission as potential expert in merger cases in the cable television industry.

JSC WRITTEN REBUTTAL STATEMENT MICHAEL A. SAUNGER - 4 -

OTHER PROFESSIONAL ACTIVITIES:

Associate Editor, Journal oflndustrial Economics

Co-Director, Boston University Telecommunications Policy Project.

Paper presentations (last five years): Charles River Associates Conference on Antitrust in Today's Economy; Winter Meetings of the Econometric Society (1989, 1990, and 1992); Telecommunications Policy Research Conference (1989, 1991, and 1992); American Enterprise Institute Conference on Regulation of Network Industries; Boston University; Chicago; Columbia; Connecticut; Dartmouth; Federal Trade Commission; GTE Labs; Harvard; MIT NBER: New York University; and Northwestern.

Referee for American Economic Review, Economic Development and Cultural Change, Economic Inquiry, International Economic Review, International Journal of Industrial Organization, Journal of the American Statistical Association, Journal of Business, Journal of Empirical Finance, Journal of Financial and Quamitative Analysis, Journal of Futures Markets, Journal of Industrial Economics, Journal of Law and Economics, Journal of Law, Economics, and Organization, Journal ofMoney, Credit, and Banking, Journal of Public Economics, National Science Foundation, Quarterly Journal of Economics, Quarterly Review of Economics and Business, The Rand Journal of Economics, The Review of Economic Studies, and The Review of Economics and Statistics.

PROFESSIONAL MEMBERSHIPS:

American Economic Association

December, 1995

JSC WRITTEN REBUTTAL STATEMENT Appendix 3C

DEVOTIONAL EXHIBIT Sx

JSC WRITTEN REBUTTAL STATEMENT DEVOTIONAL EXHIBIT 5x

Hours By Categories Regression

Movies/Series Sports Devotional Local

0.902 -0.008 0.031 -0.014

Viewer-Weighted Hours By Categories Regression

Movies/Series Sports Devotional Local

0.8628 0.0774 -0.0025 -0.0138

JSC WRITTEN REBUTTAL STATEMENT Declaration

I, Michael A. Salinger, declare under penalty of perjury that the foregoing testimony is true and correct to the best of my knowledge and belief.

Signature

JSC WRITTEN REBUTTAL STATEMENT JSC Exhibit No. 15 Before the COPYRIGHT ROYALTY JUDGES Washington, D.C.

) In the Matter of ) ) Docket No. 2007-3 CRB CD 2004-2005 Distribution of the ) 2004 and 2005 ) Cable Royalty Funds ) )

REBUTTAL TESTIMONY OF MARC SCHACHER

December II, 2009

JSC WRITTEN REBUTTALREBUTTAL STATEMENT REBUTTAL TESTIMONY OF MARC SCHACHER

I am submitting this testimony on behalf of the Joint Sports Claimants in response to testimony provided by John Mansell and Dr. Arthur Gruen, each of whom testified for the

Program Suppliers in this proceeding.

I. QUALIFICATIONS

During the period 1988-2008, I was Senior Vice President of Programming for Tribune

Broadcasting. My responsibilities included the development, acquisition, and scheduling of programming for WGN-TV (Chicago, Illinois) ("WGN") -- as well as more than twenty additional television stations in major markets located across the United States, including WPIX-

TV (New York, New York) ("WPIX"), KWGN-TV (Denver, Colorado) ("KWGN") and KTLA-

TV (Los Angeles, California) ("KTLA").

Prior to 1988, I served as Program Director of WGN (1986-88); Program Director at

KWGN (1982-86); and Research Director at KTLA (1979-82). I also held positions as VP

Research at Katz Television, a national television station advertising sales representative (1972-

79), and as national spot television advertising time buyer (1970-72). I have been a member of the board of directors of The National Association Of Television Programming Executives, and have also sat on The Television Rating Guidelines Council. I received a B.A. in Speech with a concentration in Radio/TV/Film from the University of Wisconsin in 1970.

IL DISCUSSION

Before discussing the testimony of the Program Suppliers' witnesses that relates to

WGN, I believe it is helpful to provide some general background concerning the manner in which WGN offered programming.

JSC WRITTEN REBUTTAL STATEMENT Since February 1948, WGN has been transmitting programming via its over-the-air signal available on channel 9 to viewers in the Chicago-area market. I refer to this signal as "WGN

Chicago." Beginning in 1978, a third-party (United Video) made the WGN signal available via satellite to cable systems located around the country, resulting in WGN becoming one of a handful of "superstations." I refer to this signal as "Superstation WGN" or, as it subsequently was named, "WGN America." Tribune ultimately purchased a portion of the United Video business in 2000 and assumed responsibility for retransmitting Superstation WGN via satellite.

Initially, the programming on WGN Chicago and Superstation WGN was identical. In

1990, however, the FCC reinstated its cable syndicated exclusivity rules, which generally require cable systems in a market to black out a syndicated program on a distant signal it carries if a broadcaster in that market has the exclusive right to televise that syndicated program. United

Video asked the station to cooperate in making the Superstation WGN signal "syndex proof," which meant that it would not include any syndicated program material that had been sold on an exclusive basis in another television market in the United States. Thus, beginning in 1990, WGN provided substitute programs for some of the programs broadcast over WGN Chicago. I refer to programs on Superstation WGN that were not substitute programs (those transmitted over both

WGN Chicago and Superstation WGN at the same time) as "full signal" programs. I have been advised by JSC counsel that the only WGN programming entitled to receive the compulsory licensing royalties at issue in this proceeding is programming that WGN transmitted full signal in

2004 and 2005.

Cable systems carried several other Tribune-owned television stations as distant signals in 2004-05. Some stations (such as WPIX, KWGN and KTLA) reached a significant number of

JSC WRITTEN REBUTTAL STATEMENT cable subscribers -- although no station (Tribune or otherwise) came close to matching the distribution of WGN.1

A. Testimony of John Mansell

Mr. Mansell testified that the total number of Cubs and White Sox telecasts on WGN declined from 150 in 1999 to 94 in 2004 and 99 in 2005 (and that the number of Bulls telecasts remained relatively constant).2 While WGN did televise fewer Cubs and White Sox games in

2004-05 than in 1998-99, the value of those sports telecasts to WGN and its status as a nationally-delivered "superstation" was unchanged. In 2004-05, as in 1998-99, the availability of unique MLB and NBA telecasts on WGN was the single most important reason driving

WGN's distribution on cable systems around the country.3 The Cubs, White Sox and Bulls telecasts were the signature programming of WGN Superstation.

Furthermore, in 2004-05 WGN televised a greater number of MLB and NBA games

(combined) than any other broadcast television station in the country, more than 100 per year.

The WGN management would have preferred to televise even more Cubs, White Sox and Bulls games than they did in 2004-05 because of the appeal of those programs to Chicago area viewers as well as the perceived importance of those telecasts to Superstation WGN's cable distribution.

However, many of those games were available only during the prime time hours when WGN was

1 In 2004-05, nearly half of the Form 3 cable systems that carried a distant commercial signal carried WGN as their only distant signal, while approximately 70% of all Form 3 cable systems carried WGN as one of their distant signals. Source: Cable Data Corporation. 2 Mansell Written Direct Testimony (PS Ex. ) at 19 & 3 2004 and 2005 were particularly significant years for the Cubs, White Sox and Bulls. In 2004, the Cubs were coming off a season in which they won their division and were within five outs of going to the World Series for the first time since 1945. During the 2004-05 season, the Chicago Bulls returned to the post-season for the first time since the retirement of the legendary Michael Jordan. And in 2005, the Chicago White Sox won the World Series. These events only added to the already significant value of the professional sports team programming on WGN.

JSC WRITTEN REBUTTAL STATEMENT committed to televising the WB Network programs. The WB Network was a joint venture between Warner Brothers and Tribune, in which Tribune had a minority interest. Warner

Bothers resisted any preemption of the WB programming for sports telecasts. The amount of

MLB/NBA telecasts actually offered over WGN reflected a compromise between the station and the WB Network.

Finally, the decline in sports telecasts should be viewed in context. Between 1998-99 and

2004-05, the total amount of compensable programming on Superstation WGN decreased, not just sports. In 1998, approximately half of the WGN programming was broadcast full signal; by

2004-05, only about 30% of WGN's programming was full signal. Among other things, there was no WB programming televised full signal in 2004-05, while such programming was televised full signal in 1998 and most of 1999. WB programming aired in Chicago was not transmitted on Superstation WGN because WB granted exclusivity protection to its affiliates in other parts of the country, and the programming would have been subject to deletion on

Superstation WGN. Likewise, the number of movies aired on WGN Chicago that were shown on Superstation WGN decreased by about one-half over that period of time because syndicators were insisting on exclusivity protection for more of their movies.

B. Testimony of Dr. Arthur Gruen

I have reviewed the written testimony of Dr. Arthur Gruen and the use of program examples in his cable subscriber surveys. I offer the following comments.

First, none of the Series examples used in the surveys (Seinfeld, Star Trek: Enterprise,

American Idol, Oprah, Jeopardy) were telecast on WGN Chicago or Superstation WGN in either

2004 or 2005. Furthermore, these programs would be considered among the "marquee" programs offered in syndication during the years 2004-05. For the most part, the syndicated

JSC WRITTEN REBUTTAL STATEMENT programs televised on Superstation WGN did not have the same value. Syndicators were simply not willing to license WGN Superstation the rights to transmit such valuable programs via satellite around the country, believing that it would be more lucrative to license those programs on a market-by-market basis.

During 2004-05 WGN transmitted full signal the following syndicated series on a daily or weekly basis:

Will & Grace Street Smarts Home Improvement Matlock Beastmaster Soul Train Fresh Prince Mutant X Andromeda Maximum Exposure

WGN also televised various paid programs full signal -- typically during the early morning hours, such as infomercials and the Babe Winkelman Show. In the Fall of 2005 WGN began airing full signal, at 10 PM during the week, episodes of the series "Sex and the City" (TBS also televised "Sex and the City" around the same time). WGN did not broadcast any of the series and programs identified above during the prime time hours. Indeed, virtually the only programming aired full signal during prime time were telecasts of the Cubs, Bulls and Sox and the nightly WGN Prime News at 9 PM.

Second, the Gruen subscriber surveys provided as examples of "Non-team Sports"

"professional wrestling, NASCAR auto racing, and, pre- and post- game shows surrounding live team sports broadcasts." Neither WGN Chicago nor WGN Superstation aired any NASCAR or wrestling programming during 2004-05. Tribune did transmit full signal in 2004 and 2005 (as in other years) "Lead-Off Man" (which aired immediately before Cubs and White Sax broadcasts);

JSC WRITTEN REBUTTAL STATEMENT "The Tenth Inning Show" (which aired immediately after Cubs and White Sox broadcasts); and

"Bulls Eye" (which aired immediately before Bulls' broadcasts). Those pre-game and post-game shows, however, were produced by WGN and did not air on any other broadcast station; thus, as

I understand it, they come within the Commercial Television category, not the Program

Suppliers category, in this proceeding.

JSC WRITTEN REBUTTAL STATEMENT declare under penalty of perjury that the foregoing is true and cor ect.

AA//i /oq Executed on: Atv Marc Schacher

JSC WRITTEN REBUTTAL STATEMENT JSC Exhibit No. 16 statement of Dr. Stevens. Wildman

I am Director of the Program in Telecommunications

Science, Management and Policy and am an Associate Professor in the Department of Communication Studies at Northwestern

University. I received'my Masters and Doctorate in Economics from Stanford University and hold a B.A. in economics from

Wabash College. Following completion of my graduate work, I was an Assistant Professor in the Department of Economics at the University of California at Los Angeles from 1979 to 1983 and served as a consultant to the Rand Corporation from 1981 to 1983. I was a Senior Economist with Economists

Incorporated from 1983 to 1988, and since 1988 I have been at

Northwestern University. I have continued to consult since returning to academia and since 1994 I have been a principal in the Law and Economics Consulting Group, Inc. Additional information about my professional background and qualifications is presented in my curriculum vitae, which is attached to this Statement.

I testified before the Copyright Royalty Tribunal in

1985 as part of the 1983 Cable Royalty Distribution

Proceeding. In general, my research, publications, and consulting work have focused on the analysis of markets for various communication services. I have authored and co authored numerous articles and book chapters on communication

industries and I have co-authored two books dealing with

JSC WRITTEN REBUTTAL STATEMENT -2- various economic and policy issues that arise in markets for video products, such as television programs and motion pictures. My most recent book is Video Economics, which I

co-authored with Bruce M. Owen. This book provides an

extensive analysis of the cable and broadcast markets for

television programs.

I. CABLE OPERATORS, NOT SUBSCRIBERS, ARE THE RELEVANT ACI'ORS rn THE CABirE DISTANT SIGNAL MARKETPLACE,

In determining how a competitive market for cable

retransmission of distant broadcast signals would work, it is

important to recognize that cable systems, not viewers, would be the buyers in this market. Viewers do not make direct payments to program owners for the programs they receive by

cable. Rather, cable systems purchase retransmission rights

to program services, such as cable networks and distant

broadcast stations, which in turn contract with program

suppliers for the right to put together organized and

systematic schedules of programs for viewers. Therefore, it

is the demands of cable systems for programs and program

services that would directly determine the earnings of

copyright holders. Of course, subscriber preferences are

reflected in cable systems' demands for programs supplied by

program services; but subscriber demand is relevant to the

determination of appropriate payments for programs on distant

JSC WRITTEN REBUTTAL STATEMENT -3- signals only as it is filtered through the profit-maximizing

calculus of cable system operators (CSOs).

For reasons explained below in Section II, there is no reason to expect measures of viewer preferences among different types of programs to be a good proxy for cable system operators' demands for these programs. The best evidence of the prices that likely would be paid for programs on distant signals in the absence of a compulsory license is a measure of what CS0s would be willing to pay for the programs on those signals. Such willingness to pay is a reflection of the amounts CSOs expect those signals to contribute to their own net revenues.

All market transactions are based on just such subjective evaluations by marketplace actors. Therefore, even if CSOs are, by some external measure, mistaken to some degree in their assessments of subscriber demand, their experience-based evaluations will still determine how much

they are willing to pay for programs. Furthermore, these experience-based evaluations often reflect factors that, due

to common measurement and data problems, cannot be captured

in statistical models. At any rate, it is these evaluations

that would determine the earnings the suppliers of these

programs would receive in the hypothetical competitive

marketplace.

JSC WRITTEN REBUTTAL STATEMENT -4-

II. MEASURES OF SUBSCRIBER DEMAND, EVEN IF PROPERLY REFLECTING PERCEIVED VALUE TO SUBSCRIBERS, ARE NOT THEORETICALLY SOUND lNDICES OF HOW MUCH CABLE OPERATORS WOULD BE WILLING TO PAY FOR SUCH PROGRAMS,

Because a CSO's demand for programming is a derived demand based on the demands of potential subscribers, measures of subscriber demand are necessarily a step removed from the operator demands reflected in transactions with program services. As a result, attempts to measure the demands of viewers and subscribers cannot provide as accurate an assessment of what cable systems would be willing to pay for programs as measures that directly assess CS0s' valuations of these programs.

The extent to which otherwise equally accurate measures of viewer preferences among programs will differ from measures of cable systems' demands for these programs is a

function of the manner in which viewer demands are aggregated by CSOs and program services such as over-the-air television stations and cable networks. It is important to recognize

that cable system operators contract with program services

for the supply of pre-programmed channels. Distant signal programs are components of program bundles (broadcast station

schedules) that CSOs then incorporate in larger bundles of

channels that are sold as service packages to subscribers. A

consequence of this bundling process is that it is unlikely

that information about subscriber willingness to pay for

JSC WRITTEN REBUTTAL STATEMENT -5- various types of programs individually on distant signals would accurately reflect the value of those programs to cable systems.

Cable system operators create bundles of channels to aggregate the demands of viewers with very different preferences among the bundled channels in such a way that more of what individual subscribers would be willing to pay for the channels (and programs) provided can be collected than would be possible if the components were priced and sold individually. As the following example shows, the way in which subscriber demands are aggregated through bundling makes viewer "avidity" measures inherently unreliable as guides to the relative market values of different types of programs.

Consider a cable system serving two types of subscribers, type l's and type 2's, that must fill two vacant channels with two of three types of programming -- Sports,

News, and Weather. Type 1 subscribers are serious sports fans with a moderate interest in weather and only slight interest in news. Type 2 subscribers are less avid sports fans who value news nearly as much as sports and have only a slight interest in weather. The amount each subscriber would be willing to pay for a channel with each type of program if it were sold by itself is shown in Table 1.

JSC WRITTEN REBUTTAL STATEMENT -6- TabJe 1 SUBSCRIBERS' WILLINGNESS TO PAY FOR INDIVIDUAL PROGRAMS

Programming Twe 1 Subscriber Twe 2 Subscriber

Sports 14 8

News 4 7

Weather 7 4

For the sake of simplicity, assume there is one of each

twe of subscriber and the system offers Sports and News. It

is easy to see that the system's revenues are higher if it

sells Sports and News as a bundle for a single price than if

it prices and sells individually any two of the three program

services. If News and Sports are sold individually, the system can produce revenue of at most 24, by selling Sports

for 8 and News for 4. At these prices, each subscriber would

purchase both channels. 1 However, if the system packages News

with Sports and sells the two as a bundle for 15, both

subscribers will again buy the package, but revenue is

increased to 30. Similarly, the cable system could earn 24

by selling Sports and Weather individually if it priced

Sports at 8 and Weather at 4. On the other hand, selling

Sports and Weather as a bundle would not increase system

1 If the system were to price the channels at their respective maximum values, it would sell one Sports channel to Subscriber 1 for 14, and one News channel to Subscriber 2 for 8, for a total revenue of 22.

JSC WRITTEN REBUTTAL STATEMENT -7- revenues because the maximum price for the bundle is

Subscriber 2's aggregate valuation of 12.

While simple, this example illustrates the analytical points made above regarding the pitfalls of measuring viewers' preferences for programs to gauge how much cable system operators would be willing to pay for them. If measured by viewer valuations, News and Weather would appear to be equally valuable to the cable system because each is worth 4 to one of the viewers and 7 to the other. Yet their contrioutions to the revenue the system can earn are vastly different because News bundled with Sports is worth much more than Weather bundled with Sports, and the News-Sports bundle substantially increases the revenue the system can earn relative to what is possible with two channels sold independently. Measures of viewer "avidity" can pick up neither the synergies realized through bundling nor the possibility that programs with similar avidity ratings may make dramatically different contributions to the bundles of programs and channels sold by cable systems.

While it is the case that CSO and cable subscriber surveys presented to the Copyright Royalty Tribunal in the past showed somewhat similar overall rank-order value assignments by CSOs and subscribers, the two types of surveys do produce different allocations of value among different

JSC WRITTEN REBUTTAL STATEMENT -8- types of programs. Therefore, in comparing the two types of surveys it is important to remember that from an analytical perspective, the two approaches are not close substitutes for each other. Because CSOs are the purchasers in the relevant marketplace and subscriber demands are filtered through them, the CSO survey results must be considered more primary and as more directly relevant to the determination of appropriate compensation than the subscriber surveys.

III. MEASURES OF SUBSCRIBER VIEW!NG SHARES HAVE LITI'LE, IF .ANY, VALUE AS nIDICATORS OF PROGRAM VALUE m THE DISTANT SIGNAL MARKETPLACE,

Apart from measuring the activities of a group - subscribers -- that does not directly participate in the cable distant signal marketplace, cable viewing share studies say nothing about preference intensity (or viewer willingness to pay for programs), which must be considered by CSOs in assessing the demand for cable services. Audience measures were developed to meet the needs of advertiser-supported broadcast services. For services relying primarily on advertiser support, audience size is a useful gauge of a program's contribution to revenue and profits. But cable systems do not benefit from advertising on distant signal stations. Hence, viewing measures are irrelevant to the value of distant signal programming to CSOs.

JSC WRITTEN REBUTTAL STATEMENT -9-

Moreover, studies measuring gross amounts of viewing say nothing about the value of a program to cable subscribers.

This fact is illustrated by situations where cable operators cancel programming services with low viewing overall, but receive intense complaints from cable subscribers for whom the programming service was important.

Finally, viewing studies say nothing about the values of different types of programs as components of the program bundles cable systems sell to viewers. If anything, as discussed below, we would expect that the types of programs accounting for the largest fraction of the viewing audience on distant signals to have the least value to cable systems at the margin. Thus, a viewing measure based on gross percentage shares of household viewing hours would tend to provide results that are inversely correlated with the appropriate measures of the relative values of distant signal programs. rv. LARGE-AUDIENCE PROGRAMS m PLENTIFUL SUPPLY m THE BROADCASI' MARKETPLACE WILL TEND TO BE LF.SS HIGHLY VALUED IN THE CABI:E W+BKETPI:M'E I

The nature of competition among over-the-air broadcasters is such that the types of programs that draw the largest audiences are likely to be oversupplied relative to the benefits they provide viewers. The theoretical explanation for why advertiser-supported broadcasters tend to

JSC WRITTEN REBUTTAL STATEMENT -10-

oversupply the types of programs that appeal to the broadest

segments of the mass audience is well known and has been

understood at least since Peter 0. Steiner wrote about it in

1952. 2 Steiner developed his economic model of programming

strategy to explain the common observations that competing

ad-supported broadcasters all seemed to provide the same

types of programs and had very little diversity in their

schedules, leaving audience demands for differentiated fare

unfulfilled. Steiner's insight, which subsequent writers

have built on, 3 was that dependence on advertiser support

biased broadcasters toward the supply of the types of

programs that attract large audiences, even when other types

of programs were valued more by viewers.

This bias in favor of mass appeal programs exists

because advertisers pay broadcasters for the audiences they

deliver, but not for the value viewers place on their

programs. As a result, competing broadcasters may find it

more profitable to carve up a large audience of, say, one

million viewers for situation comedies by providing more and

more indistinguishable look-alike comedies that do little to

2 P.O. Steiner (1952), "Program Patterns and Preferences, and the Workability of Competition in Radio Broadcasting." Quarterly Journal of Economics 55: 194-223.

3 This literature is reviewed and extended in Chapters 3 and 4 of my book with Bruce M. Owen, Video Economics, Harvard University Press, 1992.

JSC WRITTEN REBUTTAL STATEMENT -11-

increase viewer satisfaction, than to provide opera for an

audience of fifty thousand viewers who want to see opera very badly. New situation comedies will be provided instead of operas as long as their shares of the mass audience for

sitcoms is larger than the audience for an opera -- even

though the new comedies just cannibalize the existing sitcom audience and to viewers seem little different from situation comedies already available.

Elaborations on Steiner's model have shown that if there are enough competing broadcasters, eventually the audience

for an additional mass appeal program will be so small that

it will be just as profitable to provide the types of programs·preferred by smaller, minority taste audiences; but

the duplication of mass appeal programs will still occur.

However, if the number of advertiser-supported broadcasters

is too small, programs addressing minority preferences will

not be provided.

The growth of cable networks has demonstrated that the

number of over-the-air broadcasters is severely limited

relative to the number of channels most viewers would like to

have. The result is an over-the-air broadcast service

dominated by mass appeal programs, while minority taste

audiences don't get the programs they want, even though, if

it were possible, they would bid some of the channels devoted

JSC WRITTEN REBUTTAL STATEMENT -12-

to mass appeal programs away from mass audience viewers who get little value from the marginal mass appeal programs.

Cable operators respond to this willingness to pay for minority taste programming, which can't be expressed in the ad-supported television marketplace, by charging for and supplying the types of programs that are relatively undersupplied by over-the-air broadcasters.

In addition to its bias against the types of programs that small segments of the viewing population may value highly, advertiser-supported television is also biased against certain types of programs that most viewers may spend relatively little time watching, but still value highly.

News is probably the best example of this type of program.

News programs are valued for their regular coverage of

the common run of news events that most people want to know about. But viewers also value news programs as sources of

information of vital interest during emergencies, times of

crisis, and other unpredictable events of general interest.

Viewers value highly the assurance that news sources will be

available with in-depth coverage during such periods. This value is reflected, for example, in what CS0s are willing to

pay to include CNN in their basic cable packages. On a

regional level, broadcast station news can be a critical and

highly valued source of information during severe weather,

JSC WRITTEN REBUTTAL STATEMENT -13-

during important legislative debates, and state and local

elections. But this source of value to viewers cannot

possibly be reflected in viewing levels during normal

periods.

News audiences skyrocketed during the Gulf War, and then

returned to pre-war levels when the war ended. A similar

pattern, though more prolonged, was observed during the early

days of the Simpson trial and the arrest and legal

maneuvering that preceded it. When viewers value program

services such as news for their avaiJability as sources of

information about infrequent and unpredictable events of

great interest, it makes no more sense to use audience size

to measure their values to viewers than to measure the

benefits of fire insurance policies to home owners by how

frequently they make claims, while ignoring the value of the

property insured. 4

Cable importation of distant signals enhances the

availability value of news coverage to cable viewers by

making available broadcast news organizations in distant

markets for which coverage otherwise would not be available

4 The fact that some goods and services have a significant "option value" over and above the benefits consumers realize from using them was first pointed out by Burton Weisbrod (1964), "Collective-Consumption Services of Individual Consumption Goods," ouarterJy JournaJ of Economics, Vol. 78, 471- 477. See also, A. Kahn, The Economics of Regulation, Vol. II, Cambridge: MIT Press, 1988, pp. 236-241.

JSC WRITTEN REBUTTAL STATEMENT -14- or would be much less complete. Networks have traditionally relied on bureaus in major markets to increase their ability to cover news events where and when they break. With increased use of satellite technology by stations as well as networks, the broadcast networks' news organizations and news networks like CNN have come increasingly to rely on newsfeed sharing arrangements with local stations to provide the types of coverage once provided by network news bureaus. Cable carriage of distant signals allows viewers to access these distant sources of news directly and in their most complete form.

The importance of factors other than audience size in determining the value of program services to cable systems is reflected by the fact that the amounts cable systems pay in per-subscriber fees for basic cable networks is not closely correlated with audience size for those networks. For example, the 1990, 1991, and 1992 average license fees per subscriber for ESPN and CNN were substantially higher than

USA Network's license fee even though USA Network had higher average prime time ratings and, except for CNN's higher number in the Gulf War year of 1991, higher average 24 hour

ratings than either ESPN or CNN.

In sum, economic theory predicts and the behavior of

cable system operators demonstrates that the syndicated

JSC WRITTEN REBUTTAL STATEMENT -15- series which are supplied in great quantities in the advertising-supported marketplace and account for the largest share of time spent viewing distant signals would likely receive a share of the total compensation in a free distant signal marketplace that is much smaller than their share of viewing audience. Conversely, one would expect the news programs on distant signals to have much greater value to cable system operators than would be reflected in their viewing shares.

JSC WRITTEN REBUTTAL STATEMENT STEVENS. WILDMAN CURRICULUM VITAE

Office: (708) 491-4262 Home: (708) 673-7006

Department of Communication Studies 52 Williamsburg Road Harris Hall Evanston, IL 60203 Northwestern University 1881 Sheridan Road Evanston, IL 60208

BACKGROUND

Born on December 27, 1948 Married

EDUCATION

B.A. Economics Wabash College 1971 M.A. Economics Stanford University 1977 Ph.D. Economics Stanford University 1980

CURRENT POSITIONS

Associate Professor, Department of Communication Studies, Northwestern University

Director, Program in Telecommunications Science, Management and Policy, Northwestern University

PREVIOUS EXPERIENCE

Senior Economist, Economists Incorporated 1983-88 Assistant Professor, Department of Economics, UCLA 1979-83 Consultant to Rand corporation 1981-83

FELLOWSHIPS and AWARDS

National Science Foundation Fellowship 1974-1977

Ameritech Research Professorship, 1989-90, Northwestern University

Ameritech Research Fellow, 1990-91, Northwestern University

JSC WRITTEN REBUTTAL STATEMENT McGannon Award for Social and Ethical Relevance in Communication Policy Research for 1992.

BOOKS

INTERNATIONAL TRADE IN FILMS AND TELEVISION PROGRAMS, with Stephen E. Siwek, Ballinger, 1988. 1

VIDEO ECONOMICS, with Bruce M. Owen, Harvard University Press, 1992. 2 ELECTRONIC SERVICES NETWORKS: A BUSINESS AND PUBLIC POLICY CHALLENGE, co-edited with Margaret E. Guerin-Calvert, 1991, Praeger Publishers. 2

JOURNAL ARTICLES

1. "A Note on Measuring Surplus Attributable to Differentiated Products," Journal of Industrial Economics, September, 1984.

2. "Economic Consequences of the Informational Characteristics of Mass Media," The American Economist, Spring 1981. 3. "Selecting Advanced Television Standards for the United States: Implications for Trade in Programs and Motion Pictures," Journal of Broadcasting and Electronic Media, Spring, 1991.

4. "The Privatization of European Television: Effects on International Markets for Programs," Columbia Journal of World Business, December 1987. 1

5. "Toward a New Analytical Framework for Media Policy: Reconciling Economic and Non-Economic Perspectives," with R. Entman, Journal of Communication, Winter 1992. 2 Reprinted in part in Taking Sides: Clashing Views on Controversial Issues In Mass Media and Society, A. Alexander and J. Hanson, eds., The Duskin Publishing Group, Inc., 1993.

6. "Funding the Public Telecommunications Infrastructure," with B. Egan. Telematics and Informatics, Fall 1994. 2

1 senior author.

2 Equal joint author.

JSC WRITTEN REBUTTAL STATEMENT 7. "Network Programming and Off-Network Syndication Profits: Strateg_ic Links and Implications for Television Policy," with K. Robinson. Forthcoming in the Journal of Media Economics. 1

8. "Trade Liberalization and Policy for Media Industries," forthcoming in the Canadian Journal of Communication.

9. "Network Competition and the Provision of Universal Service," with John C. Panzar, forthcoming in Industrial and Corporate Change. 2

BOOK CHAPTERS

1. "Electronic Services Networks: Functions, Structures, and Public Policy," with Margaret E. Guerin-Calvert, Forthcoming in Electronic Services Networks: A Business and Public Policy Challenge, Margaret E. Guerin-Calvert and Steven s. Wildman, eds., Praeger Publishers, 1991. 1 2. "Program Competition and Diversity in the New Video Industry," with Bruce M. Owen in Video Media Competition: Regulation. Economics. and Technology, Eli M. Noam, ed., Columbia University Press, 1985. 1

3. "The Economics of Industry-Sponsored Search Facilitation" in Electronic Services Networks: A Business and Public Policy Challenge, Margaret E. Guerin-Calvert and Steven S. Wildman, eds., Praeger Publishers, 1991. 1

4. "The Economics of Trade in Recorded Media Products in a Multilingual World: Implications for National Media Policies," with Stephen E. Siwek, in The International Market in Film and Television Programs, Eli M. Noam ed., Ablex, 1993. 1

5. "Investing in the Telecommunications Infrastructure: Economics and Policy Considerations" with Bruce L. Egan. Forthcoming in the 1992 Annual Review of the Institute for Information Studies. 2

6. "One-Way Flows and the Economics of Audiencemaking," in Audiencemaking: How the Media Create the Audience, J.S. Etterna and o.c. Whitney eds., Sage, 1994. 1

7. "Information Technology, Private Networks, and Productivity," Forthcoming in Private Networks and Public Objectives, E. Noam, ed.,

JSC WRITTEN REBUTTAL STATEMENT PAPERS IN PUBLISHED CONFERENCE PROCEEDINGS

1. "Controlling Occupational Radiation: Alternatives to Regulation," with Sagan, L.A. and Squitieri, R. Presented at the International Symposium on Occupational Radiation Exposure in Nuclear Fuel Cycle Facilities, Los Angeles, CA, June 18-22. Published in proceedings of same conference. 2

2. "Economic Issues in Mass Communication Industries," with Rosse, J.N., Dertouzos, J.N. and Robinson, M. Presented at the FTC Symposium on Media Concentration, Washington D.C., December 14, 15, 1978. Published in the proceedings of same conference. 3

3. "Vertical Integration in Broadcasting: A Study of Network Owned-and-Operated TV Stations," S.I.E. no.97, Department of Economics, Stanford University, also published in the Proceedings of the FTC Symposium on Media Concentration, Washington, D.C., December 14, 15, 1978.

4. "Communication Technology and Productivity: The Role of Education," in the Annual Review of Communication, National Engineering Consortium, Vol.XXXXVII (1993-94).

OTHER PUBLICATIONS AND WORKING PAPERS

1. "A Model of Supply and Demand for Information in a Competitive Market," October 1989. 2. "A Spatial Model of Entry Deterrence," S.I.E. No 103, Department of Economics, Stanford University, November 1978, revised December 1980.

3. "Advertising, Consumer Learning, and Competitive Strategies," Dissertation filed January 1980. Also published as S.I.E. paper No. 110 by Department of Economics, Stanford University, December 1979. 4. "An Empirical Study of Broadcast Competition to Cable," with James N. Dertouzos, July 1990. 2

5. "Anticipated Preemption and the Determination of Initial structure in a Growing Market," UCLA Working Paper No. 267, September 1982.

3 Joint author credited as a "with."

JSC WRITTEN REBUTTAL STATEMENT 6. "ATV Standards and Trade in Recorded Video Entertainment,11 paper presented at the Sixteenth Annual Telecommunications Policy Research Conference, October 30-November 1, 1988, Airlie, VA. Revised April, 1989.

7. "Competition, Regulation and Sources of Market Power in the Radio Industry," with Duncan J. Cameron, May 1982, revised October 1989. 1

8. "Competition in the Local Exchange: Appropriate Policies to Maintain Universal Service in Rural Areas", with John c. Panzar, September 1993. 9. "Program Choice in a Broadband Environment," with Nancy Y. Lee. Working paper, Center for Telecommunications and Information Studies, Columbia University, May 1989. 1

10. "Recruiter Incentives: Effects on Performance," Rand Corporation Working Draft, April 1983.

11. Review of The World Television Industry: An Economic Analysis, by Peter Dunnett in the Journal of Communication, Winter 1992.

12. Review of Oligopoly Theory, by James Friedman in the Journal of Economic Literature, March, 1985.

13. "Trade in Films and Television Programming," with Stephen E. Siwek. Presented at Trade in Services and Uruguay Round Negotiations, London, England, July 8, 1987 and Geneva, Switzerland, July 18, 1987. 1

14. Review of Television in Europe by Eli Noam, Journal of Economic Literature, December, 1993.

OTHER PROFESSIONAL ACTIVITIES

Co-convener, day-long Washington, D.C. conference on electronic services networks sponsored by the Annenberg Washington Program, February 23, 1990.

Convener, half-day conference on electronic services networks at Northwestern University, April 9, 1990. co-convener, conference on telecommunications free trade zones, Northwestern University, March 30, 1992. Sponsored by the Annenberg Washington Program of Northwestern University and the Illinois Commerce Commission.

JSC WRITTEN REBUTTAL STATEMENT Member, Editorial Board, Journal of Media Economics.

Member of Organizing Committee for the Nineteenth and Twentieth Annual Telecornmun1cations Policy Research Conference, Solomon Island, MD.

Member, Executive Committee, consortium for Research in Telecommunications.

REFEREEING, REVIEWING, AND EDITORIAL SERVICE American Economic Review (referee)

Communication Research (referee)

Journal of Communication (book reviewer)

Information. Economics and Policy (referee)

Journal of Economic Literature (book review)

Journal of Industrial Economics (referee)

Journal of Media Economics (editorial board, referee)

National Science Foundation (proposal reviewer)

The Rand Journal of Economics (referee)

TESTIMONY

Written testimony on behalf of CBS Inc. before the Federal Communications Commission in the 7-7-7 proceedings, Gen. Docket No. 83-1009 {1984}. Testimony on behalf of calculator manufacturer before the International Trade Commission, Docket No. 337-TA-198 (1985).

Written testimony on behalf of CBS Inc. before the FCC in its consideration of the Applications of TBS Inc. for transfer of control of CBS Inc. (1985).

Testimony on behalf of the National Association of Broadcasters before the Copyright Royalty Tribunal, Docket No. CRT 84-l-83CD (1985).

Testimony on behalf of paging applicant before the Massachusetts Department of Public Utilities, Docket No. 86-213 (1987).

JSC WRITTEN REBUTTAL STATEMENT Written testimony on behalf of the National Cable Television Association, Inc. before the FCC in the matter of Amendment of parts 1.63 and 76 of the Commission's Rules to Implement the Provision of the Cable Communications Policy Act of 1984, MM Docket No. 84-1296, (December 1987).

Written testimony on behalf of the National Cable Television Association, Inc. before the FCC in the matter of competition, rate deregulation and the Commission's policies relating to the provision of Cable Television, MM Docket No. 89-600, (February 1990) .

Written testimony on behalf of Telephone and Data Services, Inc. before the FCC in the matter of Amendment of the Commission's Rules to Establish New Personal Communication Services, GEN Docket No. 90-314, ET Docket No. 92-100, (November 1992).

Written testimony on behalf of Ameritech before the FCC in the matter of a Petition for a Declaratory Ruling and Related Waivers to Establish a New Regulatory Model for the Ameritech Region, (April 1993).

Written testimony on behalf of Viacom International Inc. before the FCC in the matter of implementation of sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, MM Docket 92-266, (June 1993).

Testimony on behalf of Blue Valley Telephone Company and other petitioners before the Kansas State Corporations Commission In the Matter of a General Investigation into Competition within the Telecommunications Industry in the State of Kansas, Docket No. 190-492-U 94-GIMT-478-GIT, (November 1994).

Written testimony on behalf of INTV, King World and Viacom before the FCC in Review of the Prime Time Access Rule, Section 73.658(k) of the Commission's Rules, MM Docket No. 94-123, March 7, 1995.

1.1.

JSC WRITTEN REBUTTAL STATEMENT Before the COPYRIGHT OFF1CE LIBRARY OF CONGRESS Washington, D.C. 20540

) In the Matter of ) ) 1990, 1991, and 1992 ) Docket No. 94-3 CARP-CD90-92 Cable Royalty Distribution ) Proceedings , )

DECLARATION

I, Steven S. Wildman, declare under penalty of perjury that the Statement of

Steven S. Wildman presented in the 1990-1992 Cable Copyright Royalty Distribution

Proceeding is true and correct to the best of my knowledge, information and belief.

Dated: August 15, 1995

JSC WRITTEN REBUTTAL STATEMENT Certificate of Service

I hereby certify that on Friday, September 15, 2017 I provided a true and correct copy of the Written Rebuttal Statement to the following:

Public Broadcasting Service (PBS), represented by Ronald G. Dove Jr. served via Electronic Service at [email protected]

Canadian Claimants Group, represented by Lawrence K Satterfield served via Electronic Service at [email protected]

Broadcast Music, Inc. (BMI), represented by Jennifer T. Criss served via Electronic Service at [email protected]

National Association of Broadcasters (NAB), represented by John Stewart served via Electronic Service at [email protected]

American Society of Composers, Authors and Publishers (ASCAP), represented by Sam Mosenkis served via Electronic Service at [email protected]

MPAA-represented Program Suppliers, represented by Gregory O Olaniran served via Electronic Service at [email protected]

Devotional Claimants, represented by Arnold P Lutzker served via Electronic Service at [email protected]

National Public Radio, Inc. (NPR), represented by Gregory A Lewis served via Electronic Service at [email protected]

Spanish Language Producers, represented by Brian D Boydston served via Electronic Service at [email protected]

Multigroup Claimants, represented by Brian D Boydston served via Electronic Service at [email protected]

SESAC, Inc., represented by John C. Beiter served via Electronic Service at [email protected] Signed: /s/ Robert A Garrett