Statement of Richard Parsons.
Re: Senate Antitrust Subcommittee Hearing on Convergence and Consolidation in the Entertainment and Information Industries.
Date: July 7, 1998.
Source: This document was created by scanning a photocopy of the original paper copy, and converting to HTML.

Testimony of Richard D. Parsons
President, Time Warner Inc.

before the

Subcommittee on Antitrust, Business Rights and Competition
Committee on the Judiciary
United States Senate
Washington, D.C.

July 7, 1998

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Testimony of Richard D. Parsons

Mr. Chairman, members of the subcommittee, my name is Richard Parsons, President of Time Warner Inc. Through its core businesses - publishing, film, music, programming and cable -- Time Warner is the worldwide leader in the creation and delivery of quality information content and entertainment. Time Warner takes pride in its success in enhancing the diversity of voices by providing a home to some of the world's most respected journalists, authors, musicians, filmmakers and other creative artists. Because of its leadership in these diverse yet interrelated businesses, Time Warner has a unique perspective on the tremendous forces transforming the information and telecommunications industries. I am pleased to have this opportunity to discuss with you Time Warner's views on some of the most recent developments in our industry as well as Time Warner's vision of how its businesses fit into the exciting world in which we live.

As Time Warner's Chairman, Gerald Levin, has said, our capacity to enhance our stature as a prime global source for news, information and entertainment depends on journalistic integrity, creative expression and diversity.  These core values define Time Warner and attract the exceptionally talented and [begin page 2] committed people who are responsible for our success. Creative expression results from an environment that nurtures imagination, encourages debate, welcomes dissent, and is always striving to reconcile the responsibilities of a publicly owned business with the aspirations of the artistic spirit. Our creative operations have unsurpassed records of achievement and a proud history of award-winning films, programming and music. Their energy and dynamism are central to who we are.

In the new digital era, Time Warner is committed to remaining the premier worldwide information content producer and distributor. In order to realize this goal, we recognized that Time Warner had to transform itself, to acquire certain strategic assets and forge new relationships to enable it to continue to develop and deliver new and exciting products to its customers. As I will describe later on, this realization required, among other things, an aggressive strategy of clustering Time Warner's cable properties and the acquisition of Turner Broadcasting. Through implementation of these long range business plans, in combination with dozens of other no less important ones, Time Warner has positioned itself to accomplish its goals.

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When it comes to the recent actions of other information and communications companies, I believe that they are reading many of the very same tea leaves that we are. Notwithstanding the actions of the local exchange companies, it has become obvious to every major player in the information and communications industry that they can not just sit and try to protect their traditional businesses and market shares. There is just too much at stake to play defense only. To survive in a fiercely competitive digital world, providers must fundamentally transform the way they do business, to think outside of the box, in order to offer their customers a full menu of informative and entertaining media and communications services. In order to do so, media and communications firms are finding it necessary to acquire assets, form alliances and develop partnerships that allow them to maximize their ability to deliver these services to consumers. This is the context in which many of these transactions must be viewed.

Moreover, long term success requires a vision which extends far beyond the domestic arena alone. Globalization is a reality in the communications business, and Time Warner has strived to remain competitive with well financed, diversified media and communications firms around the world. A recent industry [begin page 4] analysis released by Chairman Hatch and Senator Leahy of this Committee demonstrates the uniquely American strength in these sectors. Core copyright industries count for 3.65 % of U.S. Gross Domestic Product and foreign exports of $60 billion surpassed for the first time in 1996 every other export sector, including automotive, agriculture and aircraft. Thus, I would urge those charged with reviewing various transactions to resist the urge to micromanage individual business relationships and focus on the bigger picture of the impact on the U.S. economy and the benefits to consumers.

Technology, especially the transforming energy and potential of the Internet and digital packet networks, is driving this change. It has created a world where existing service categories are becoming indistinguishable and indeed interchangeable. True convergence of information delivery technologies is finally at hand. Computer networks, telephone networks, cable systems, the Internet -- each is slowly but surely collapsing into the other. Each will eventually be capable of acting as a digital platform for delivering an entire host of services to consumers.

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In this new world, every major player and their traditional businesses are both threatened and presented with tremendous opportunity. There will be winners and losers as some technologies will simply be faster, more versatile, more affordable and more accessible than others. These processes, and indeed competition, will only accelerate as our industry builds, and consumers and business begin to take full advantage of, the broadband, digital networks of the 21st century.

This is why we are so excited about our future plans for our cable systems. We believe the broadband, and eventually fully interactive and digital, nature of cable systems will provide the ultimate communications pipeline for our customers.

But regardless of the network platform a particular company decides upon, one overriding trend seems clear. To remain competitive, you must evolve, expand and transform your business to offer a diverse array of digital services or you will be swept aside by the tide of change.

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When it comes to many of the new combinations and partnerships in this industry, scale economies are proving to be necessary in order to be able to offer consumers the full range of services they demand. Indeed, we all have come to realize that only with scale can new, networked information services be economically brought to market. Moreover, major communications providers are striving to assemble the elements necessary to deliver to consumers bundled offerings of video, voice, data and Internet. The advantages to the public of such a one-stop-shopping approach to communications services are manifest.

Accordingly, while certain large-scale combinations and partnerships will inevitably be fully scrutinized by policy makers and regulators, they must also realize that many other combinations, including some of the most recent transactions in the information industries, are absolutely necessary if true competition to be realized. In addition, such alliances, joint ventures, mergers and other combinations are increasingly essential to remain competitive on a global scale.

While many of the most recent combinations might awe us in terms of their sheer size and complexity, they also hold the promise that every person on this [begin page 7] planet soon will have instantaneous, affordable access to an unprecedented inventory of information and entertainment. This is a world that Time Warner welcomes and will do everything in its power to foster.

Let me now address two significant strategies that Time Warner has undertaken in recent years to transform itself into a complete, balanced media company. First, Time Warner continues to pursue its strategy of clustering to create geographic blocks of contiguous cable systems. As many of you well know, Time Warner, like many of the other cable MSOs, has been purchasing, trading and joint venturing its cable systems in scores of markets across the country in order to consolidate assets and operations in more manageable geographic regions. This building process is ongoing. Indeed, over the past few years, Time Warner has built over 35 cable clusters of over 100,000 subscribers. These clusters will be the focus of our cable operations for years to come. But despite the success of our clustering efforts, even Time Warner's largest clusters pale in size compared to the contiguous multistate regions of the major local exchange carriers.

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Time Warner's regional clusters are essential to our cable business's success in that they allow Time Warner to reduce costs, improve operating and management efficiencies, eliminate system redundancies, develop new local programming services and attract more advertising. We have taken these savings and reinvested them into our systems. Indeed, upgrades are underway whereby over half of our clusters will enjoy state-of-the-art fiber optics with 750 MHZ digital capacity and two-way, interactive capability. By the end of this year, we will have commenced upgrading 70 % of our clusters, with completion targeted for the end of the year 2000. During this five year period, Time Warner will have invested over $4 billion in cable system infrastructure upgrades.

Through such upgrades, Time Warner will be able to offer its customers more reliable service, improved picture and sound quality, and enhanced programming services such as new cable networks, multiplexed premium channels, new program tiers, additional pay-per-view options and more local news and sports programming. More significantly, the continued growth of DBS provides compelling evidence that consumers demand more channels and more choices. In fact, our digital offerings have been well received by our customers, [begin page 9] and the average price of cable service has actually decrease on a per channel basis.

Furthermore, the upgrades in our clustered markets are allowing us to roll out important technological enhancements, to introduce our Road Runner cable modem service and provide our customers with our Pegasus cable boxes, the first of the most advanced, two-way, combination digital cable boxes-cable modems in the industry. Time Warner has worked closely with Cable Labs, electronics manufacturers and the FCC to ensure that the next generation of cable boxes will incorporate the open architecture of our Pegasus design and thus facilitate retail availability of such devices.

It is because of this great potential that Silicon Valley, AT&T and Wall Street have joined Time Warner in placing their bets with cable as the communications delivery technology of the future. I could not agree more.

Let me now turn to our strategy of transforming Time Warner into a balanced information content and distribution provider. In 1996, we completed the acquisition of Turner Broadcasting. The advantages of this transaction are [begin page 10] redounding to the benefit of consumers worldwide. Together, Time Warner and Turner have been able to improve the quality and diversity of our programming networks, while expanding their reach to serve a more global audience. These achievements have been able to be sustained and thrive only through an alliance of this scale. The obvious complementary nature of Time Warner and Turner allows us to position ourselves as the leading media company in the changing information marketplace.

The acquisition is truly a remarkable fit, allowing us to capitalize on brands, maximize the value of our distribution systems, integrate resources and develop new networks. In Turner Broadcasting, Time Warner received a set of blue-chip, ad-supported cable networks in all the areas we're interested in - news, movies, sports and television programming. Turner had the nationwide distribution in basic cable programming that Time Warner lacked, and Time Warner had access to a complementary library of films, television programs and cartoons that has reinforced position of these networks as the powerhouses of the industry.

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The combination of these two companies has generated amazing opportunities in children's and family entertainment financial news, merchandising and retailing, on-line services, film distribution and sports, developments which perfectly complement our cable distribution. The combined company now showcases some of the world's best known brands including Time, People and Sports Illustrated magazines, CNN, Warner Bros., TNT and HBO.   The world's largest film library now has access to the finest collection of programming networks ever assembled. Time Inc., the world's preeminent information gatherer and publisher, is finding new opportunities with CNN, the most trusted name in global television news.

My testimony today has focused largely on Time Warner's cable business, an industry that never seems to lack attention. However, the other sectors in which Time Warner is involved -- publishing, television programming, recorded music and film production -- are equally dynamic and no less competitive. In each of these areas, firms are engaged more in diversification than in consolidation. With the Turner acquisition, Time Warner diversified into the basic cable network business.  In creating The WB, Time Warner diversified into the broadcast network business.  And now AT&T has announced its plans to diversify into the cable business. In [begin page 12] today's highly competitive, global marketplace, these evolutionary transactions, alliances and strategic partnerships are not only inevitable for economic survival, they provide consumers with more choices and better value.