HomeMy WebLinkAboutCivil Action 92-2494 Time Warner Entertainment Company LP against Federal Communications Commission and United States of America EUNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
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TIME WARNER ENTERTAINMENT )
COMPANY, L.P., )
)
)
Plaintiff, )
-against- ) Civil Action
Ci 2- 2y q Lf
)
)
)
FEDERAL COMMUNICATIONS COMMISSION, )
)
)
and )
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UNITED STATES OF AMERICA, )
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Defendants. )
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)
AFFIDAVIT OF JEFFREY BEWKES
STATE OF NEW YORK )
COUNTY OF NEW YORK)
ss:
Jeffrey Bewkes, being duly sworn, deposes and
states as follows:
1. I am President and Chief Operating Officer of
Home Box Office ("HBO"), an unincorporated division of Time
Warner Entertainment Company, L.P. ("TWE"). I have held
that position since TWE's formation in June of 1992. Prior
to that, I held the same position with HBO's predecessor,
Home Box Office, Inc. I first joined Home Box Office, Inc.,
-1-
in 1979. I make this affidavit in support of TWE's motion
for a preliminary injunction.
Nome Box Office
2. HBO operates two programming services: the
Home Box Office Service ("the HBO Service") and the Cinemax
Service. HBO also owns and operates, through a joint
venture with Viacom International, Inc., a programming
service known as Comedy Central.
3. The HBO and Cinemax Services are premium
television programming services, i.e., they are each
generally sold to subscribers for a monthly subscription fee
in addition to the monthly fee for the programming tier the
subscriber has selected.
4. The HBO and Cinemax Services are offered to
subscribers by cable operators, multichannel multipoint
'distribution services ("MMDS") and satellite master antenna
television ("SMATV") system operators. They are also
offered on a subscription,basis to owners of C -band home
satellite dishes, both directly by HBO and by packagers of
satellite programming such as Superstar Connection, Consumer
Satellite System, and the National Rural Telephone
Cooperative, which HBO has authorized to act as
distributors.
5. The HBO Service offers a wide variety of
programming, including motion pictures, sporting events,
concerts, and documentaries. The Cinemax Service primarily
offers motion pictures. HBO exercises editorial discretion
in determining which programs to include--and which programs-
not to include--in its programming services. In making such
determinations, it takes into account, among other things,
the nature, content, and quality of the programming, its
acceptance by audiences in other media, its distinctiveness
to HBO's programming services, and its timeliness in
relation to current events and issues.
6. Since its inception, HBO has produced (or
others have produced for it) its own programs for its
programming services, particularly for the HBO Service.
Such programs often address social or political issues of a
controversial nature, and therefore might not be shown on
network television, which is subject to broadcast content
restrictions and the willingness of advertisers to support
such programs. In recent years, for example, HBO has
produced (or others have produced for it) notable programs
on such subjects as abortion (A Private Matter; The Becky
Bell Story: Public Law 106; Abortion: Desperate Choices),
gun control (Without Warning: The James Brady Story; Guns: A
Day in the Death of America), AIDS (AIDS: Everything You and
Your Family Need to Know . . .; Common Threads: Stories from
the Quilt, First Love Fatal Love) and children's advertising
(puy Me That!; Buy Me That Too!). Sem generally Bill
Carter, HBO as a Modern-Dav Dickens, N.Y. Times, November 1,
1992, at F5 (attached hereto as Exhibit A). HBO has also
produced (or others have produced for it) programs
criticizing major U.S. corporations and the U.S. government,
such as Afterburn (criticizing the U.S. Air Force and
General Dynamics in the handling of the death of a pilot in
an F-16 test flight) and The Tragedy of Flight 103
(criticizing the Federal Aviation Administration and Pan
American World Airways). HBO also produces programming for
others, including broadcasters.
7. HBO has recently introduced "multiplexing".
Under multiplexing, the HBO and Cinemax Services are exhi-
bited to subscribers on two or three different channels
_(usually at no additional cost to the subscriber), using
differentiated scheduling so that different kinds of
programs appear on each of the channels at any given time in
order to appeal to various audiences. Multiplexing is an
innovative technique, pioneered by HBO, that is intended to
enhance viewing options, to increase subscriber satisfac-
tion, and to better enable HBO to compete with other sources
of programming.
The Must-Carry Provisions of the 1992 Cable
Act and the PEG and Leased-Access Provisions
of the 1992 Cable Act and the 1984 Cable Act
I. The Statutory Provisions
8. Sections 4 and 5 of the 1992 Cable Act require
cable operators to offer to their subscribers certain
commercial and noncommercial broadcast television stations,
regardless of whether operators wish to carry such stations
or their subscribers wish to receive them (the "must-carry
provisions"). Sections 4 and 5 further require that cable
operators carry these stations on the same channel on which
they are broadcast over the air, unless a station requests
otherwise (the "channel positioning provisions").
9. Section 611 of the 1934 Communications Act (as
added by Section 2 of the 1984 Cable Act and codified at 47
U.S.C. § 531) permits municipal franchising authorities to
require the cable operators they regulate to set aside
channel capacity for public, educational or governmental
("PEG") uses (the "PEG provisions"). There is no statutory
limitation upon the number of PEG channels that a
franchising authority may require.
10. Section 25 of the 1992 Cable Act provides that
a direct broadcast satellite (DBS) service must reserve from
4 to 7 percent (to be determined by the FCC) of its channel
capacity for noncommercial programming of an educational or
informational nature.
11. Section 612 of the 1934 Communications Act (as
added by Section 2 of the 1984 Cable Act and codified at 47
U.S.C. § 532) requires cable operators to set aside a
substantial portion --up to 15 percent --of their channels for
lease to unaffiliated programmers (the "leased -access
provisions").
II. Injury to HBO As a Result of the Must -Carry. PEG.
and Leased -Access Provisions
12. The must -carry, PEG, and leased -access
provisions will cause irreparable injury to HBO. The 1980s
have seen a steady increase in the number of available
programming services, and, as a result, most cable operators
have few or no excess channels. By compelling cable
operators to devote channel capacity to broadcast, PEG, and
leased -access programming that they would not otherwise
provide, the must -carry, PEG, and leased -access provisions
sharply diminish the number of cable channels on which HBO's
programming can be provided. These restrictions therefore
sharply curtail HBO's opportunities to communicate
information and entertainment.
13. Similarly, by requiring DBS operators to
reserve from 4 to 7 percent of their channel capacity for
noncommercial programming of an educational or informational
nature, Section 25 of the 1992 Cable Act diminishes the
number of channels on which such operators can provide HBO's
programming. This restriction therefore also curtails HBO's
opportunities to communicate information and entertainment.
14. Moreover, the must-carry, PEG, and leased-
access provisions will seriously impede HBO's efforts to
provide its services in multiplexed format, to HBO's
irreparable injury. The ability of cable operators to make
additional channels available is crucial to HBO's efforts to
provide its services in a multiplexed format. By
diminishing the available channel capacity, the must-carry,
PEG, and leased-access provisions impair HBO's ability to
engage in multiplexing, thereby diminishing viewing options
to HBO subscribers, reducing subscriber satisfaction, and
impairing HBO's effectiveness as a competitor.
15. The channel positioning provisions will cause
further irreparable injury to HBO. These provisions will
allow local broadcast television stations to demand carriage
on a channel that is currently occupied by one of HBO's
programming services, forcing the cable operator to move the
cable programming service to another channel. The likely
result of such a displacement will be consumer confusion,
and, ultimately, a loss of subscribers, to HBO's irreparable
injury.
The Standardized Terms and Conditions and
Exclusive License Provisions
I. The Statutory Provisions
A. The Standardized Terms and Conditions
Provisions
16. Section 19 of the 1992 Cable Act adds
Section 628 to the Communications Act of 1934.
Section 628(c) purports to require the FCC to establish
regulations to govern the licensing of programming by
programmers in which a cable operator has an attributable
interest. Under Section 628(c)(2)(B), these regulations
purportedly must "prohibit discrimination by a . . . cable
programming vendor in which a cable operator has an
attributable interest . . . in the prices, terms, and
conditions of sale or delivery of . . . cable programming
among or between . . . multichannel video programming
distributors" (the "standardized terms and conditions
provisions"). Neither Section 628 nor the regulations that
the FCC is directed to promulgate thereunder apply to a
cable programming vendor that is not affiliated with any
cable operator.
B. The Exclusive License Provisions
17. Section 19 of the 1992 Cable Act adds Sec-
tion 628 to the Communications Act of 1934.
Sections 628(c)(2)(C) and (D) direct the FCC to limit the
ability of programmers that are vertically integrated with
cable operators to enter into exclusive licenses with cable
-8-
operators (the "exclusive license provisions").
II. Injury to HBO as a Result of the Standardized Terms and
Conditions and Exclusive License Provisions
18. The standardized terms and conditions
provisions will cause irreparable injury to HBO by limiting
its power freely to determine the prices, terms, and
conditions on which it will disseminate its programming; by
subjecting such prices, terms, and conditions to extensive
federal regulation; and, potentially, by limiting HBO's
power to choose to which distributors and, ultimately, to
which audiences it will communicate its programming.
19. The exclusive license provisions will limit
HBO's ability to enter into exclusive licensing agreements
with cable operators for its programming services. Cable
operators are sometimes unwilling to promote and advertise a
programming service unless the service offers them an
exclusive arrangement, because promoting and advertising
services that their competitors (other cable systems, SMATV,
MMDS, DBS) also provide will do little to persuade viewers
to subscribe to their system as opposed to that of their
competitors. The likely effect of the exclusive license
provisions, then, will be to make some cable operators less
willing to promote and advertise HBO's services, to its
irreparable injury.
20. HBO regularly examines opportunities to start
up new programming services, which in the past have included
-9-
(in addition to the HBO Service itself) the Cinemax Service,
Festival, and the Comedy Channel (to which Comedy Central is
a successor). In today's competitive environment, exclusive
arrangements can be decisive in securing carriage for new
services, as cable operators have often been unwilling to
add new services (which are generally perceived as riskier
than established services) unless offered an exclusive
arrangement. Limitations on HBO's ability to offer exclu-
sive arrangements to cable operators will hamper its efforts
to secure carriage for new services, and will thus work as a
disincentive to the development of new services. The likely
net effect of the exclusive license provisions, then, is to
inhibit, not encourage, the development of new programming
services by those companies that have the greatest interest
in providing a wide variety of programming services. In
addition, the likely effect of the exclusive license provi-
sions will be to stifle capital investment by those compa-
nies in the programming services of others.
21. Moreover, many of HBO's competitors are not
vertically integrated and, thus, not subject to standardized
terms and conditions or exclusive license restrictions. For
example, the Disney Channel, A&E, CNBC, ESPN, the Nashville
Network, the Playboy Channel, USA Network, and the Weather
Channel are all popular programming services owned by
companies that, so far as I am aware, have no corporate
affiliation with any cable operator. See Cable Network
Ownership Chart, Cable TV Programming (April 30, 1992)
(attached hereto as Exhibit B). Accordingly, HBO will be at
a significant competitive disadvantage, to its irreparable
injury.
Sworn to before me this
' th day 9€ November, 1992.
i
Notary Public
• -
et Now 11.11
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4 111 alrrm 3*. ta.
THE NEW YORK TIMES, SUNDAY, NOVEMBER 1. 192
HBO as a Modern -Day Dickens
Altruism? Maybe.
,A business move?
Definitely.
syBILL CARTER
CHARLES DICKENS and Home Box Of -
bee would seem to have little in com-
mon — except perhaps that they have
both charged for their services, Dickens by
• the word and HBO by the month.
But Michael .1. Fudns, the dairman of
Inc._Home Box Office thinks the pay -televi-
sion company. which began 30 years ago next
Sunday. can be the new Dickens for the
' American underclass. 1t will soon roll at
programs including a mini -aeries on black
families and movies about Latino gangs, the
gun culture m the ghetto and • potential
medial epidemic among the pmt.
This is the pay -television business, two
decades alter. It is not only about buying
Hollywood movies anymore, at ',ass •_ ••
fined by HBO, which created the business
and still dominates it Rather it's about being
distineuve. Increasingly HBO 1s taking view-
ers on trips they used to miss or take else-
where — either on one of the three broadcast
networks or in movie theaters.
That has 111611111 mate -for -television mov-
ies with Hollywood-kvel stars, comedies with
jokes that could never be told on the net-
works. heavyweight championship lights.
programs on politically larged subjects lIke
abortion and AIDS, and, soon, the programs
addressing poverty and racial division.
The Time Warner subsidiary, which began
with 365 subscribers In Wilkes-Barre. Pa.,
has grown mto a 513 billion business with
MOM than 17 million subscribers across the
country. It has been eansistently profitable.
now supplying slightly more than 1300 mil-
lion a year to Time Warner's bottom line, or
about 6 percent of the company's apersUng•
ash flow, said John Tinker, a meds analyst
with Furman Selz Inc.
But after explosive growth thratgh the
mid -1980's, HBO's subscriber base has lev-
eled off. To continue to grow, the company
has been diversifying. not only Into other
businesses like television ptvducton but also
into new kinds of programgtung.
The new smisly madam programs are
the latest example. Last year Mr. Fuda read
• piece in The New York Times stmt the
chronic problems of the underclass. "Thu
article got my attention because it said no
ane in America is playing the ole of Dickens,
is writing about these Incredible problems.
So 1 say, O.K., we have an agenda. If no one's
doing it, that sounds like air kind of thing."
He asked his staff to start work an the
Dickensian programs. While these programs
may not attract Targe audiences. they may do
something Just ■• important to HBO: gener-
ate attention, promotion and awards that
help keep people paying their monthly sub
acripuon fee of about 510.
Mr. Fuchs emphasizes that HBO. in •
unique position In the television industry as a
dannel beholden neither to ratings nor ad-
vertiser support, has moved to make distinc-
tive programming Bke the coming sones on
social problems not out of altruism but be-
esuae t recognized that this was good busi-
ness strategy. While he is personally involved
M Detnoenue Party politics, he said the new
peogrammbng does not reflect • "personal
vision" as muds as K was a matter of fitting
Into the dimmers philosophy of finding a
Mdse that no television entity was filling.
"We have gone into a lot of areas you
might all political, but to us it was because
the network sponsorahlp+ystem wouldn't
permit thein to be oto" he wid Inst week in an
Interview at HBO headquarters at 1100 Ave-
nue
vecote of the Americas in Manhattan. "It wasn't
that .it was political but that the subject
matter was forbidden."
Projects that once qualified as network
mini-series also now Ill to HBO to bring alt.
HBO's big project for November. a 110 mil-
lion biography of Sebe shot inside the Krem-
lin and starting the Academy Award winner
Robert Duvall, was oiginally an ABC mini-
series. The network had passed on It after
another epic, "Son of the -Morning Star,"
about Qmter's Lau Stand, didn't score in the
ratings. And not year HBO will take a step
NBC couldn't take with a 17 million film
version of the Randy Shdts best seller about
AIDS• "And the Band Played On."
Metrical movies that don't supply
enough bang for the studio buck are now
often 'valved on a smaller budget by HBO.
Later this season HBO will present a 57
million film of "Barbarians at the Gate," the
story of the Nabisco takeover batik. It had
been commissioned by Columbia Pictures,
which then found the subject ton problematic
for theatrical release.
HBO had already pushed die boundaries
of mature themes with its most sue-
oesdul comedy ever, "Dream On,"
about • book editor who daydreams m old
television reruns. and this year added the
widely praised adult satire Of the rework
talkihow wars, "The Larry Sanders Show."
HBO has come to this point after years of
aavigatctg through a television industry con-
stantly being changed by tedmolugy. Its ap-
proach was first revolutionary, then evolu-
Ca ary. In 1175 HBO was the first cable
MI II wr erawYin Ur
Michael J. Fuchs, chairman of Home Box Office Inc. '
channel ever delivered to able systems by
satellite, a decision that led to the explosive
growth of the entire cable industry because it
enabled operators to deliver a whole range of
programs to local subscribers. Since then it
has diversified into oth^r areas such as basic
able channels like ,.,rrnedy Central and
Black Entertainment Television, Internation-
• 1 distribution and television production.
HBO started In 1972 as the only supplier of
u ncensored, commercial -free, recent -release
movies on television. In the late 1970's it
became so potent that the Hellywood studios.
all but declared war on it, ltyktg to establish
their own pay movie service. The company
blocked the service b court, but soon faced
eXtmction from • threat It helped create with
the concept That movies could be teen on
television at home: the VCR.
What It has taken to survive that threat,
Mr. Fuels said. is mounding that the com-
pany had to diversify. "We knew by 1164 that
Ihe.golden years were over, yet we managed
to grow our business 16 percent a year, even
u our subscriber base flathead,".Hanks to
the dlvenlflaUcei into new businesses.
Afar programming, Mr. Fuchs has cre-
ated what he calls "program fran-
chises." The dannel had already
staked out comedy as an area where it could '
make a mark at a relatively small price.
HBO had a hand in the elevation of many
comedy
rs, bicluding those of Rabin
Williams,Billy Crystal and Whoops Gold-
berg. They boeame the hosts for the flan-
nel's annual Comic Relief event for the home -
leas, which began in 1106.
Mr. Fuca saw boxing as another good
franchise. HBO's contract with the heavy-
weight Mike Tyson generated several al the
highest-rated events M able history.
The channel began making its awn movies
in 1161. usually emphasizing social, political
or historical themes. Several have subse-
quently been released lin foreign countries u
theatrical movies The canners biggest bit
thus far hu been "flee Josephine Baker
Story," which Kneed the highest ratings of
any HBO original program.
HBO celery to an audience far more Beim-
Uve than that to which the networks appaL
Its audience is slightly wealthier and more
educated. more likely to live in the suburbs
• and to read, and likely to watch more teevl-
sim than the average network audience -
H BO thinks It is an audience that responds
well to better -tan -average television
HBO's budget for original programs has
risen in recent years, but not in relation to
what the company spends on movies. Mr.
Fuchs said one-third of the total program
budget is devoted to original programming,
and so is one-third of the sdledule. The rest of
the motley and time goes to movies
Other pay donned, notably HBO's duef
rival Showtime, wtUdt is owned by Viacom
Inc, offer recently released movies. Show-
time has tried to compete by wmnmg exclu-
sive rights to major films, HBO sees that u
■ risky strategy given the comma possibili-
ties of movies on demand when cable sys-
tems expand to 151 and move channels.
Matthew Blankpresident of Showtime
Networks, agreed that HBO's strategy of
"going for daeeicUveness" makes sense for
the dannel because it Is the musket leader,
W ith more than 40 percent of the pay-TV
xlubecribers. BLit he said HBO faces a prob-
lem in "trying to grow the pay category."
Mr. Fuchs said HBO mots to technological
advances, such as backyard satellites, to
provide more subscriber growth. And the
company is aggressively expanding onto for-
eign markets. It is already in many South
American countries (as 1111-01e) and will
enter Europe soon, he said.
HBO's response to the latest threat, •
world with 50 or mote payer -view channels
offering movies. has been a concept called
rnuluplexvg. Systems with open channels
will receive three HBO dinned. each show-
ing a different program so subscribers will
have more for their monthly fee.
It is a gtxod time for significant enniver-
e ery, Mr. Fula said. "This moment is the
most successful simile we've ever had
We've lived through everything. Nothing will
kill this cmpany. We'lLadept" ■
01.4
HBO's biographies: Stalin and Josephine Bak.
Palm al tarr•✓MOO
"Dream On," HBO's hit comedy. "Larry
That's Right, HBO on
HBO will officiatjy celebrate Its kith an-
niversary nem month —on CBS.
CBS has height a orae -hour special
made up of highlights from HBO's 20 years of
original program• (A 00 -minute version will
run ata Iter date on HBO.)
For HBO's chairman, Midget fide, ante
a vocal and acerbic critic of network televi-
sion, the deal with CBS is "very symbolic of
how the world has Banged"
"It 1s a bit of coup to get the anniversary
show on CBS," he said. "It's old hat for able
to criticize the networks."
Indeed. the anniversary !how is not a
precedent Last yea es tfl'V'e 10th anniversa-
ry special ran on ABC.
For HBO, the anniversary show is just an-
other sale to network television, Mich is in-
creasingly buying from HBO Independent
Productions.
HBO has two hours of pnme-time shows on
the Fox network, including the successful
Sunday -night comedy "Roc." HBO also had a
show on ABC this pan summer, "Arresting
Behavior."
"Thus Is the irony of Ironies." Mr. Fuchs
said. "1 end up calling Dan Burke 'chairman
of Capital
havior.' A
manof Fc
HBOha
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Stockholders with IPOs then 52
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CABZr TV PROGRAMING/Apr. 30, I992/P. 3 of 8