495 Senator METZENBAUM Let me ask you, Mr Hostetter—your entire statement will be included in the record as will the entire statement of each of the witnesses today How important is the availability of HBO to the success of a cable system, or Showtime' Mr HOSTETTER The availability of unique product is what has built the cable mdustry The product we are selling is a smorgas­ bord of channels And the fact that we have things from Black En­ tertainment Television to first run motion pictures, whether it be by HBO or by Showtime, it is the mix that we market and it is the uniqueness of that mix Senator METZENBAUM You stated recently that following the ac­ quisition of American Cablesystems, that it is inevitable that the cable TV mdustry will become more concentrated What is the rea­ soning behind that prediction7 Mr HOSTETTER Because as yet, even the largest of these compa­ nies are not large by American industrial standards And the trend towards concentration as a result of efficiency of operation, region­ al clustering of systems, additional revenue sources are gomg to come from more concentrated blocks of systems The fact that Bas- comb would have a different CATV company from Fostona or from Tiffin or from Finley is just illogical, and eventually those clusters are gomg to pull together for the efficiency of marketing the serv­ ice Senator METZENBAUM Am I correct that just as m TV stations, cable systems have a one-time major capital investment7 I know that there are supplemental But m the main, you lay down the wire and that is the major capital mvestment, and from that point on that there is not substantial additional capital investment re­ quired unless you are expanding or unless you are buying up an­ other system Is that true or false7 Mr HOSTETTER That is false The revenue-to-investment relation­ ship in broadcastmg, revenues will run five or six times the invest­ ed capital In cable almost the reverse is true Our invested capital will be five or six times our gross revenue And the pattern is that every new customer who is hooked up requires an installation from the house, some internal wiring m the house, a converter box We have $150 to $200 just per pop with each new installation We then have rolling stock to replace We have to maintain and update the plant The plant we built in Tiffin and Fostona, OH, 25 years ago has been totally rebuilt twice since that day 7 Senator METZENBAUM Why is that needed Mr HOSTETTER Because the capacity of the plant becomes obso­ lete Senator METZENBAUM That is because you are expanding Mr HOSTETTER We are adding to the number of services that we are offering Senator METZENBAUM Number of services offered or number of persons served7 Mr HOSTETTER Well, as the town grows, we will grow with it But that original system was a 12-channel system We now have either a 36- or a 40ihannel system m both Tiffin and Fostona We had an intervening step where we had a 25-channel system 496 7 Senator METZENBAUM What is the normal number of outlets In other words, 30, 25, 40? Mr HOSTETTER Channels on a system? Senator METZENBAUM Yes, channels Mr HOSTETTER Thirty-six is probably the standard today There are some, I mean, we have systems with over 80-channel capacity But 36—I think throughout our systems in Ohio we have a 36- to 40-channel standard Senator METZENBAUM Explain this to me because I am not too hep as to what happens with these VCR's, et cetera My recollec­ tion is that the VCR that we have does not have 36 different but­ tons on it It has maybe 18 or so How is that handled? Mr HOSTETTER If you have a VCR, in addition to giving you a converter to operate your set, we will probably have to give you a converter to operate your VCR So that you will not use the tuner on the VCR, you will use it on our converter And by way of remaking a point, instead of you being a house­ hold that would cost $150 to $200 to install, we have got to double that because you want to also serve your VCR If I may, Senator, picking up on a question to Mr Mooney about rates I would just like to make one point on that Any year-to-year comparison is really tough You do not know what the date of the last rate increase is I sat here and did a back of the envelope calculation In 1965, when we started in Tiffin and Fostoria, our rates were $5 95 a month and we offered a 12-channel service Today our rates there are approximately $14 and we offer a 36-channel service CPI, which is a series that started in 1967, so it was a couple of years after we started, basis 1967 of 100 is currently 340 So if we had simply kept our rates up with the CPI, our $5 95 rate would now be $20 23 It is not It is $14 and we have tripled the number of chan­ nels we are offering So I think there is an element of demagoguery in—not, please be sure, not suggesting by the chair or the committee, but by those who criticize cable's rate pattern We have been incredibly re­ strained And I would point out for Mr Finneran's benefit, the record of State rate regulation was that in those States that regu­ lated rates, rates were higher than in those States that did not reg­ ulate rates Senator METZENBAUM Could you describe for us the trend of Continental's prices since cable was deregulated on January 1, 1987? In other words, what has been the percentage increase in your company's prices since that time? Mr HOSTETTER I would be happy to Our average basic rate in the State of Ohio on the last day of 1986 was $13 51 Our average rate on the last day of 1987 was $14 90, a 10 3-percent increase Now our typical subscriber also buys a pay unit so that his bill was the $13 plus $9 for pay, approximately $22 We slightly lowered our pay rates from $9 72 to $9 70 So the average Ohio customer's bill increased almost exactly 5 percent in the year 1987, in the year from the date of deregulation to a year later That is only slightly above the CPI change for that year, and I think is a much more typical pattern both of us nation- 497 ally and of the cable industry nationally than some of the specific examples that have been cited Senator METZENBAUM I have some additional questions We may submit them to you m writing, Mr Hostetter We are very happy to have you with us today Mr HOSTETTER I would be happy to respond, and I thank you for the opportunity Senator METZENBAUM Our next witness is Mr Robert Thomson, vice president of government affairs, TCI, Denver, CO STATEMENT OF ROBERT N THOMSON Mr THOMSON Good to see you again, Mr Chairman Senator METZENBAUM Good to see you, sir Mr THOMSON Since I am batting cleanup, I am not going to summarize my statement m any detail But I would like to focus on one or two of the issues that the other panelists have yet to touch on I would like to commend its reading, particular with respect to its description of the competitive environment which we think we operate m In that competitive environment, broadcasting stations are clearly the dominant competitors With respect to our pay services—and I am sure Mr Collins would agree with this—the VCR industry is a substantial competi­ tor As you may know, there are more television households that have VCR's now than those that have cable In addition, in the VCR industry they have an earlier exhibition window than do our pay services, 3 to 6 months after a theatrical appearance a title will appear in a VCR store, as opposed to an average of 12 months for our premium services I would like to spend a little bit of time on the competitive impact of the home satellite dish industry There are essentially four issues, Mr Chan-man, that have been discussed, the growth of the industry, access to programming, the prices that are available to customers m the home satellite dish industry, and the distribu­ tors that are allowed to distribute the product You have already received information on growth The growth in the industry, as a matter of fact, has been quite phenomenal There are a lot of dish owners out there As far as access to programming, they get all cable programming and more It is true that some of the services are scrambled But now that the scrambling technology is widely available, and there has been a settlement on a standard, access we do not think is going to be a long term problem unless the security of the encryp­ tion system is breached If that happens, then access will once again be a problem As far as the prices, as you noted, my statement does say and our price list for TCI programming does indicate that home satellite dish owners can receive a basic package of programming which is very, very similar to that which our cable subscribers receive, for much less money, approximately two-thirds the cost TCI is not unique in that pricing practice That is common to other cable companies and other distributors It is the retail prices 498 here that are important It is the consumer, we would suggest, that we should be concerned about And the retail prices to consumers are less In addition to that, when we talk about distributors, there are at least—I would suggest that there are now 20 distributors available that are active now in the home satellite dish marketplace Only a very few of those are connected with cable As a matter of fact, cable is getting its lunch eaten in this par­ ticular marketplace Only 5 percent of home satellite dish program­ ming is sold by cable operators, 50 percent is sold by equipment— that is satellite equipment—wholesalers and distributors The dish dealers themselves sell 20 percent or 25 percent And Mr Collins and Showtime and the others sell the rest directly We do not