[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
THE STATUS OF COMPETITION IN THE MULTI-CHANNEL VIDEO PROGRAMMING
DISTRIBUTION MARKETPLACE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
DECEMBER 4, 2001
__________
Serial No. 107-77
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2002
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia BART STUPAK, Michigan
BARBARA CUBIN, Wyoming ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING, Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
TOM DAVIS, Virginia THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland LOIS CAPPS, California
STEVE BUYER, Indiana MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Telecommunications and the Internet
FRED UPTON, Michigan, Chairman
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas BART GORDON, Tennessee
CLIFF STEARNS, Florida BOBBY L. RUSH, Illinois
Vice Chairman ANNA G. ESHOO, California
PAUL E. GILLMOR, Ohio ELIOT L. ENGEL, New York
CHRISTOPHER COX, California GENE GREEN, Texas
NATHAN DEAL, Georgia KAREN McCARTHY, Missouri
STEVE LARGENT, Oklahoma BILL LUTHER, Minnesota
BARBARA CUBIN, Wyoming BART STUPAK, Michigan
JOHN SHIMKUS, Illinois DIANA DeGETTE, Colorado
HEATHER WILSON, New Mexico JANE HARMAN, California
CHARLES ``CHIP'' PICKERING, Mississippi RICK BOUCHER, Virginia
VITO FOSSELLA, New York SHERROD BROWN, Ohio
TOM DAVIS, Virginia TOM SAWYER, Ohio
ROY BLUNT, Missouri JOHN D. DINGELL, Michigan,
ROBERT L. EHRLICH, Jr., Maryland (Ex Officio)
LEE TERRY, Nebraska
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Abbruzzese, Jared E., acting CEO, WSNet...................... 45
Ergen, Charles W., CEO, EchoStar............................. 77
Fiorile, Michael J., President and CEO, Dispatch Broadcast
Group...................................................... 59
Hartenstein, Eddy W., Chairman and CEO, DIRECTV.............. 72
Pagon, Marshall W., President and CEO, Pegasus Communication. 55
Phillips, Bob, President and CEO, National Rural
Telecommunications Cooperative............................. 33
Sachs, Robert, President and CEO, National Cable and
Telecommunications Association............................. 20
Schnog, Neal, President, Uvision, on behalf of American Cable
Association................................................ 28
Material submitted for the record by:
Collier, Sophia, President and CEO, Northpoint Technology,
Ltd., prepared statement of................................ 114
Kelly, Shaun P., Representative, Commonwealth of
Massachusetts, letter dated December 4, 2001............... 118
(iii)
THE STATUS OF COMPETITION IN THE MULTI-CHANNEL VIDEO PROGRAMMING
DISTRIBUTION MARKETPLACE
----------
TUESDAY, DECEMBER 4, 2001
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Telecommunications
and the Internet,
Washington, DC.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2123, Rayburn House Office Building, Hon. Fred Upton
(chairman) presiding.
Members present: Representatives Upton, Barton, Gillmor,
Deal, Shimkus, Terry, Tauzin (ex officio), Markey, Green,
McCarthy, Harman, Boucher, Brown, and Dingell (ex officio).
Staff present: Jessica Wallace, majority counsel; Jon
Tripp, deputy communications director; Hollyn Kidd, legislative
clerk; Andy Levin, minority counsel; and Courtney Johnson,
research assistant.
Mr. Upton. Good afternoon. Years ago when driving through
the more rural areas of my district, I would see a few big
satellite TV dishes dotting the landscape, and nowadays they
are significantly smaller, more prevalent, and in more urban
and suburban areas as well.
In fact, in the old days if a person ever got lost, all
they had to do is wait until nightfall to navigate by the North
Star. Now satellite dishes are so prevalent that they can also
navigate during the day by the dishes which chart a
southwesterly course.
But much more than a navigational tool, satellite TV, more
specifically direct broadcast satellite, DBS, has become a
solid and formidable competitor with cable in the multi-channel
video programming distribution marketplace, primarily in urban
and suburban areas, and DBS and its predecessor technologies
have for the first time brought multi-channel video programming
to certain rural areas where the laws of physics preclude over-
the-air broadcast signals, and economics make cable service
impractical.
By and large, all of this has been great new for the
consumer, unleashing waves of innovation and expansion of
services in both DBS and cable.
In addition, almost 1 in 5 households continue to receive
their television signals through free, over-the-air local
broadcasts. So while not a multi-channel video programming
platform, free, over-the-air local broadcast remains a
critically important piece of our Nation's TV fabric.
Moreover, DBS carriage of a local broadcast signal in a
subscriber's local market remains an important public policy
objective embodied in the Satellite Home Viewer Improvement Act
of 1999, SHVIA. Today's hearing is on the status of competition
in the MVPD marketplace for it is the vitality of that
competition which will have a direct bearing on the quality,
price, array of viewing options, and other services which
Americans will have in their living rooms with respect to cable
and/or DBS, not to mention other emerging and aspiring
competitors.
What do we know about the MVPD marketplace today? Well,
recent surveys suggest that cable has about 80 percent market
share, while DBS has about 18 percent. We also know that both
cable and DBS have experienced significant consolidation in
past years, and we all know that more consolidation may be upon
us or may be right around the corner as EchoStar and DIRECTV,
America's two largest DBS providers, seek to merge, while AT&T
Broadband, America's largest cable company, might merge with
another cable giant like Comcast, Cox or even AOL Time Warner.
But as we seek to define the status of competition in the
MVPD marketplace today and to try to understand the impact of
proposed or imminent mergers on that marketplace, we first need
to define that marketplace. Do we look narrowly in isolation at
the DBS market as separate and distinct from the cable market,
or do we look at one, big, multi-channel video programming
distribution marketplace where DBS and cable and perhaps
aspiring and emerging technologies are going head to head.
Intuitively as a consumer I think that choice, where there
is a choice, is between cable and DBS. If I am unhappy with my
cable provider, as my folks were, I am going to switch to DBS.
If I am unhappy with DBS, I am going to switch back to cable,
and perhaps I will unplug altogether and rely solely on free,
over-the-air broadcasts as many Americans do today.
In an event, what this suggests is that those in the areas
where there is a choice, the relevant market is the whole MVPD
marketplace.
However, in examining the status of competition in the MVPD
marketplace, what is more difficult to grapple with is that
there are parts of the marketplace where there is no choice
between cable and DBS, principally those areas in which
approximately 9 million rural Americans live, where cable has
not reached or practically speaking cannot be reached.
These folks rely solely on DBS, and many are served through
the resale of DIRECTV by virtue of agreements with the National
Rural Telecommunications Cooperative and its affiliated
members, such as the Bloomingdale Telephone Company in my
district. It is a unique but important part of the marketplace
which, no doubt, adds some complexity to our examination of the
overall picture.
Part of today's hearing focuses on the proposed merger of
EchoStar and DIRECTV and its potential impact on competition in
the MVPD marketplace. Today EchoStar and DIRECTV are with us.
While I have not yet seen their filings with the FCC and DOJ,
which will begin to provide the necessary details for a
thorough examination of their proposed merger, I generally
understand what they are trying to accomplish through this
proposed merger.
And preliminarily, I would say this: What they bring to the
table cannot be easily dismissed in terms of competing against
cable, who have shown themselves to be fierce and worthy
competitors and continue to possess the overwhelming lion's
share of the MVPD marketplace.
Moreover, the companies state that once merged, they would
expand into local, from 36 and 41 markets probably to about
100, and perhaps a merged entity eventually could serve all
markets. As I mentioned earlier, carriage of local TV signals
is an important policy objective embodied in SHVIA, which must
be pursued on behalf of the consumer.
Certainly we will need to closely examine the aspects of
the proposal. Also, the companies state that the merger would
permit more efficient use of the company's combined spectrum,
enabling them to more robustly bring a host of non-video
services, like broadband, high speed Internet access, to market
more vigorously and competitively.
Moreover, the company suggests that more efficient use of
the spectrum would enable increased HDTV programming carriage,
which would certainly help the digital transition.
Thus, all in all these companies bring much to the table,
but in addition, as I indicated earlier, we will have to look
very closely at the implications of the merger for folks in the
rural areas where there is no cable service and, thus, DBS is
the only true competitor.
That is the issue that I look forward to learning about
more from our distinguished panelists this afternoon, and more
generally, the exclusivity portion of the program access rules,
which are said to sunset next year. Moreover, the cable
ownership limits proceedings are also important issues
potentially impacting on the competition in the MVPD
marketplace.
I know that our witnesses are prepared to discuss these
topics as well. I look forward to their testimony and recognize
my friend, the ranking member of the subcommittee, Mr. Markey.
[The prepared statement of Hon. Fred Upton follows:]
Prepared Statement of Hon. Fred Upton, Chairman, Subcommittee on
Telecommunications and the Internet
Good morning. Years ago--when driving through the more rural areas
of my district--I would see a few big satellite tv dishes dotting the
landscape. Nowadays, they are significantly smaller, more prevalent,
and in more urban and suburban areas, too. In fact, in the old days, if
a person ever got lost, he used to have to wait until nightfall to
navigate by the North Star. Now, satellite dishes are so prevalent, he
can also navigate during the day by the dishes--which chart a
southwesterly course.
But much more than a navigational tool, satellite tv--more
specifically Direct Broadcast Satellite (DBS)--has become a solid and
formidable competitor with cable in the multi-channel video programming
distribution (MVPD) marketplace, primarily in urban and suburban areas,
and DBS, and its predecessor technologies, have for the first time
brought multi-channel video programming to certain rural areas where
the laws of physics preclude over-the-air broadcast signals and
economics make cable service impractical. By and large, all of this has
been great news for the consumer--unleashing waves of innovation and
expansion of services in both DBS and cable. In addition, almost one in
five households continue to receive their television signals through
free, over-the-air local broadcast, so--while not a multi-channel video
programming platform--free, over-the-air local broadcast remains a
critically important piece of our nation's television fabric. Moreover,
DBS carriage of a local broadcast signals in a subscriber's local
market remains an important public policy objective, embodied in the
Satellite Home Viewer Improvement Act of 1999 (SHVIA).
Today's hearing is on the status of competition in the MVPD
marketplace, for it is the vitality of that competition which will have
a direct bearing on the quality, price, and array of viewing options,
and other services, which Americans will have in their living rooms
with respect to cable and/or DBS, not to mention other emerging and
aspiring competitors.
What do we know about the MVPD marketplace today? Recent surveys
suggest that cable has about 80% marketshare, while DBS has about 18%
marketshare. We also know that both cable and DBS have experienced
significant consolidation in past years--and we all know that more
consolidation may be upon us or may be right around the comer as
EchoStar and DirecTV, America's two largest DBS providers, seek to
merge--while AT&T Boradband, America's largest cable company, might
merge with another cable giant like Comcast, Cox, or AOL Time Warner.
As we seek to divine the status of competition in the MVPD
marketplace today and try to understand the impact of proposed or
imminent mergers on that marketplace, we first need to define that
marketplace. Do we look narrowly, and in isolation, at the DBS market
as separate and distinct from the cable market? Or do we look at one
big multi-channel video programming distribution marketplace where DBS
and cable, and perhaps aspiring and emerging technologies, are going
head-to-head? Intuitively as a consumer, I think the choice--where
there is a choice--is between cable and DBS. If I am unhappy with my
cable provider, I will switch to DBS. If I am unhappy with my DBS, I
will switch back to cable. Perhaps, I will unplug altogether and rely
solely on free over-the-air broadcast? Or, as my mother always urged,
perhaps I will turn off the tv and just read a book! In any event, what
this suggests to me is that, in those areas where there is a choice,
the relevant market is the whole MVPD marketplace.
However, in examining the status of competition in the MVPD
marketplace, what is more difficult to grapple with is that there are
parts of the marketplace where there is no choice between cable and
DBS, principally those areas in which approximately 9 million rural
Americans live--where cable has not reached or, practically speaking,
cannot be reached. These folks rely solely on DBS, and many are served
through resale of DirecTV--by virtue of agreements with the National
Rural Telecommunications Cooperative (NRTC) and its affiliated members,
such as the Bloomingdale Telephone Company in my district. This is a
unique, but important, part of the marketplace which no doubt adds some
complexity to our examination of the overall picture.
Part of today's hearing focuses on the proposed merger of EchoStar
and DirecTV and its potential impact on competition in the MVPD
marketplace. Today, EchoStar and DirecTV are with us. While I have yet
to see their filings with the FCC and the DOJ (filed last night)--which
will begin to provide the necessary details for a thorough examination
of their proposed merger--I generally understand what they are trying
to accomplish through their proposed merger. Preliminarily, I would say
this: what they bring to the table in this regard cannot be easily
dismissed in terms of competing against cable--who have shown
themselves to be fierce and worthy competitors and continue to possess
the overwhelming lion-share of MVPD marketplace. Moreover, the
companies state that, once merged, they would expand local-into-local--
from 36 and 41 markets, respectively, to over 100. Perhaps, a merged
entity eventually could serve all markets? As, I mentioned earlier,
carriage of local television signals is an important policy objective--
embodied in SHVIA--which must be pursued on behalf of the consumer.
Certainly, we will need to closely examine this aspect of the proposal.
Also, the companies state that the merger would permit more efficient
use of the companies' combined spectrum, enabling them to much more
robustly bring a host of non-video services, like broadband, to market
more vigorously and competitively. Moreover, the companies suggest that
more efficient use of spectrum would enable increased HDTV programming
carriage, which would certainly help the digital transition. Thus, all
in all, these companies are bringing a lot to the table today.
But in addition, as I indicated earlier, we will have to look very
closely at the implications of this merger for folks in those rural
areas where there is no cable service and thus DBS is the only truly
viable competitor. This is an issue which I look forward to learning
more about today from our distinguished panelists.
More generally, the program access rules, which are set to sunset
next, and the cable ownership limits are also important issues
potentially impacting on competition in the MVPD marketplace. I know
our witnesses are prepared to discuss these topics as well.
I want to thank all of our witnesses for being here today. I now
recognize my good friend, the Ranking Member of the Subcommittee, for
an opening statement.
Mr. Markey. Thank you, Mr. Chairman, very much, and I want
to commend you for calling these very important hearings today
on the current status of video competition and to explore the
impact of the proposed DIRECTV-EchoStar merger on the multi-
channel video marketplace.
It is clear that competition to the cable industry has not
materialized for most consumers in any significant way after
passage of the Telecommunications Act. We have ceased to expect
and no longer wait for the Bell Companies to mount a large
scale assault of cable markets across the country.
We do have RCN in a number of markets, and in the Boston
area the mere presence of RCN has had a positive effect upon
cable rates.
Yet the cold reality for the overwhelming majority of
consumers is that an alternative wire line competitor is not
going to show up in their neighborhood any time soon to provide
competition to the incumbent cable company.
I say all of this in an environment where AT&T will be
raising cable rates for millions of consumers in Massachusetts
in excess of 8 percent this year. Many other cable consumers
around the country will also see rate increases well over the
rate of inflation.
That is why we have increasingly looked to satellite
competition as a way to foster choice and competition. Although
it has not been a price competitor to cable, our Nation's two
direct broadcast satellite providers certainly offer many
consumers a needed choice.
I was the author in this committee of the local-to-local
amendment to the Satellite Home Viewer Improvement Act of 1999.
I worked with the gentleman from Louisiana, Mr. Tauzin, as we
have partnered over the past 12 and 15 years in this area as in
many others to insure that there would be additional
programming choices for consumers.
Permitting satellite providers to bring local broadcast
stations back into central, certain, local markets a part of a
seamless satellite service has helped to make DBS a more
realistic and a comparable alternative for many consumers in
the top 40 media markets, markets that include approximately 70
million households.
I commend the satellite industry for the competitive
inroads they have made in the marketplace and for their efforts
to deploy broadband access to the Internet by way of satellite
as well.
The proposed DIRECTV-EchoStar merger, however, absent other
regulatory intervention or action would eliminate the current
DBS versus DBS competition, which provides all consumers with a
choice of either DIRECTV or EchoStar.
A merger of the two would also lock up for the benefit of a
single company the preponderance of orbital assets presently
allocated to direct-to-home satellite services, including he
spectrum utilized to provide ubiquitous coverage to the 48
contiguous States.
Moreover, there are media reports and rumors of yet further
consolidation in the cable marketplace, as AT&T attempts to
spin off its cable assets most likely to other incumbent cable
companies. Cable pioneer Ted Turner recently predicted that the
cable industry will essentially be reduced to just two large
providers as well.
Does anybody else see the irony in calling this a hearing
on the status of video competition? It should be entitled a
status check on video consolidation. In my view, the challenge
for policymakers is to assess rapidly what we can do to jump
start competition across the board and to encourage the FCC to
explore ways to actively promote additional competition in our
telecommunications marketplace.
In addition, we need to extend the access to cable
programming rules that are up for renewal at the FCC, as well
as explore other issues about building access, must carry
obligations, and ever increasing cable programming fees if we
endeavor to increase the prospects for robust cable competition
in the future.
Finally, I believe the recent debacle involving shutoffs of
Excite-at-Home subscribers underscores the need for the FCC to
insure that cable modem consumers have choices over that cable
wire. I continue to believe that current law compels such
action because broadband access to the Internet is a
telecommunications service.
It is time for the FCC to act not only to foster open
competition consistent with the intent of the
Telecommunications Act, but to do so with haste so that the
consumers are no longer left vulnerable to an inside the
Beltway battle over semantics that only a telecommunications
lawyer could delight in.
And, by the way, I will note that every lawyer in the room
just nodding their head as I said that.
Which is every person in the room.
Again, I thank the chairman for putting this hearing
together today so that we can assess the implications of this
merger and look forward to future hearings where we can explore
other issues related to promoting cable and programming
competition.
I look forward, Mr. Chairman, to hearing from our
witnesses.
Mr. Upton. Thank you.
I would recognize chairman of the full committee, Mr.
Tauzin.
Chairman Tauzin. Thank you, Mr. Upton.
I, too, want to thank you for the hearing, sir.
As we proceed on these matters, I believe we must look
forward to insure that consumers are able to reap all the
tangible benefits that flow from healthy, vigorous competition.
They are easy to identify. Lower prices, increased programming
options, new, improved services, better attitudes. That is the
way it works: One store in town; you are stuck with bad prices,
bad service, bad product, bad attitudes. A second store in town
shows up, and all of these things improve dramatically. If you
get 3 or 4 stores in town, it really gets good.
And so the question is: how do we make sure consumers enjoy
these benefits?
And perhaps the biggest issue, of course, today is the
proposed merger of EchoStar and DIRECTV. This union, if
approved by regulators, would create a satellite company larger
than the largest cable MSO today, AT&T.
So the hearing, among other things, has to examine whether
this proposed merger's impact on competition in the MVPD
marketplace, the multi-channel video programming marketplace,
is, in fact, good for consumers. I want to look at its impact
on the broadband market place obviously as that develops and as
that new marketplace becomes one where hopefully competition
will rule.
In my mind, the question of whether the merger should go
forward comes down to three tests: (1) will the combined
EchoStar-DIRECTV increase the likelihood of the DBS and cable
industries will remain formidable competitors, as they are
becoming today?
(2) will a combined EchoStar-DIRECTV yield real benefits to
consumers? Will it insure that DBS and cable continue to prod
each other to serve an increasing number of markets, to offer
increasingly competitive prices and improved services through
technological innovation?
And finally, (3) will a combined EchoStar-DIRECTV result in
a multi-programming marketplace that will accommodate new and
aspiring multi-video programming competitors.
And as most of you know, Mr. Markey and I have worked long
and hard to insure that there is a vibrant DBS industry to
provide head-to-head competition with the incumbent cable
industry. They make each other better and consumers win.
Moreover, as the cable industry continues to undergo its
own consolidation, we see a number of cable companies looking
to buy AT&T's cable unit. The committee has to decide whether
or not the satellite industry needs this merger if it is going
to survive and thrive as one of the several competitors in the
video services of the future.
EchoStar and DIRECTV need to demonstrate clearly the
consumer benefits that will come from this merger. We are very
interested in the 9 million rural consumers who do not enjoy
access to cable. Today they can choose between EchoStar and
DIRECTV, but should the merger be approved by DOJ and FCC,
these consumers would be left with the Hobson's choice of
obtaining video services from the merged company or from no one
at all. We have to ask how will this merger increase or
diminish consumer choice in these video services, particularly
for these 9 million folks. Indeed, enabling the creation of a
vibrant and viable satellite TV industry was to create more
choices for consumers.
Will, for example, consumers get the guarantee of national
pricing so that they can have the benefits of consumers who do
face--who do live in a market where there is true competition.
We know the merger will also have an impact on the
broadband marketplace. If satellite is going to be a competent
competitor in the broadband world, providing video services
along with interactive high speed data services and Internet
services, it obviously needs to do a better job than it does
today.
Cable has a superior broadband product. Let's face it, and
the local phone companies need regulatory relief if they are to
unleash their potential as broadband competitors. That is why,
I am working so hard in trying to pass Tauzin-Dingell.
A merged DBS entity with more financial strength may,
indeed, be more capable of developing and providing competitive
broadband products. We need to think about that.
And while there has been much talk regarding this merger,
there is other activity in the marketplace I certainly expect
we are going to address other activity this afternoon, Mr.
Chairman.
For example, in 1992, Congress was concerned that a
majority of cable operators enjoyed a monopoly in program
distribution at the local level and concluded that the use of
exclusive contracts between vertically integrated program
vendors and cable operators served to thwart development of
competition among distributors.
So Congress absolutely prohibited exclusive contracts
between vertically integrated program vendors and cable
operators in areas unserved by cable, and we generally
prohibited exclusive contracts within areas served by cable
unless the FCC determined that such a contract was in the
public interest.
We did it because we recognized in these instances some
exclusive contracts do provide countervailing benefits for the
programming market or the development of competition among
distributors.
The general prohibition on exclusive contracts, Mr.
Chairman, expires, sunsets on October 5 2002, and unless the
FCC determines that the prohibition continues to be necessary,
it goes out of the law.
So while I have come to no absolute conclusions yet as to
whether or not the rule has served its purpose, we ought to
talk about that today.
Another issue, Congress passed the Satellite Home Viewers
Improvement Act of 1999, which granted DBS authority to provide
local broadcast stations, television stations, in their local
markets without obtaining a copyright permit to do it.
For the first time, the DBS industry would be able to
compete on comparable footing with the local cable company
operators because it could provide all of the video
programming, local as well as cable programming.
However, SHVIA requires satellite carriers by January 1,
2002, to carry upon request all local TV broadcast stations in
the local markets in which the satellite carriers carry at
least one TV broadcast station. That rule is know as the
``carry one, carry all'' rule.
The DBS industry has now sued, claiming that this law
violates their constitutional rights. We ought to ask today,
Mr. Chairman, how this lawsuit dovetails with EchoStar's
commitment to serve more local markets, and I look forward to
discussing this issue with both EchoStar and DIRECTV today.
And last but not least, the hearing will cover the FCC's
recently initiated proceeding to reexamine its horizontal and
vertical limits on cable companies. The FCC rules were remanded
because the court determined that the FCC's prior cable
ownership limits had not been adequately supported and that the
FCC had not sufficiently considered changes in the multi-video
programming marketplace.
Just yesterday the Supreme Court declined to review that
ruling. So we are anxious to hear from these witnesses today
and what do you think about it and where do we stand.
Mr. Chairman, we have got a lot of good issues to talk
about, and not just EchoStar and DIRECTV, but the whole issue
is are we really going to have good competition out there or
are all of these movements in some way going to diminish what
we tried to accomplish over all of these many years.
There is some thought that maybe if done correctly we can
make a few changes in policy that can make sure it all happens
right, and if we just sit back and watch it, we might see some
of the progress we created diminish.
We have got some work to do, Mr. Chairman. Thank you.
[The prepared statement of Hon. W.J. ``Billy'' Tauzin
follows:]
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
I would like to commend Chairman Upton for holding this hearing
today, which will allow us to examine important changes taking place in
the multi-channel video programming (``MVPD'') marketplace. As we
proceed on these matters, I believe we must look to ensure that
consumers are able to reap the tangible benefits that flow from
healthy, vigorous competition: lower prices, increased programming
options, and new services.
Perhaps the biggest issue in this market today is the proposed
merger of Echostar and DIRECTV. This union, if approved by regulators,
would marry the nation's two DBS providers, creating a satellite
company larger than the largest cable MSO today, AT&T. This hearing,
among other things, will examine this proposed merger's impact on
competition in the MVPD marketplace, its impact in the broadband
marketplace, and most importantly, its impact on consumers.
In my mind, the question of whether this merger should go forward
comes down to three tests: (1) will a combined Echostar/DIRECTV
increase the likelihood that DBS and cable industries will remain the
formidable competitors they are today?; Test 2: will a combined
Echostar/DIRECTV yield real benefits to consumers? Will it ensure that
DBS and cable continue to prod each other to serve an increasing number
of markets. offer increasingly competitive prices, and improve service
offerings through technological innovation? And finally Test Three:
will a combined Echostar/DIRECTV result in an MVPD marketplace that
will accommodate new, aspiring MVPD competitors?
As most of you know, I strongly believe that it is absolutely vital
to have a vibrant DBS industry to provide head-to-head competition with
the incumbent cable industry. They make each other better and consumers
win. Moreover, as the cable industry continues to undergo its own
consolidation--indeed a number of cable companies want to acquire ATT's
cable unit--this committee must consider whether or not the satellite
industry needs this merger if it is going to survive and thrive as one
of several competitors for video services in the future.
Echostar and DIRECTV need to demonstrate clearly the consumer
benefits that would result from this merger. In particular, I am
interested in the nine million rural consumers who do not have access
to cable. Today, they can choose between Echostar or DIRECTV. Should
this merger be blessed by DOJ and the FCC, these consumers will be left
with what some believe to be a Hobson's choice of obtaining video
services from the merged company or from no one at all. Because
enabling the creation of a viable and vibrant satellite TV industry was
to create more choice for consumers, I must ask: how would this merger
increase or diminish consumer choice in video services?
This merger also will have a tremendous impact on the broadband
marketplace. If satellite is going to be a competent competitor in the
broadband world, providing video services along with interactive high-
speed data services and Internet services, it needs to do a better job
than it does today. Cable has a superior broadband product, and the
local phone companies need regulatory relief to unleash their great
potential as broadband competitors (which is why I am working hard to
bring HR 1542 to the floor). A merged DBS entity, with more financial
strength, may indeed be more capable of developing and providing
competitive broadband products.
While there has been much talk regarding this merger, there is
other activity in this marketplace I hope will be addressed this
afternoon.
For example, in 1992 Congress was concerned that the majority of
cable operators enjoyed a monopoly in program distribution at the local
level, and concluded that the use of exclusive contracts between
vertically integrated programming vendors and cable operators served to
thwart the development of competition among distributors. So Congress
absolutely prohibited exclusive contracts between vertically integrated
programming vendors and cable operators in areas unserved by cable.
However, we generally prohibited exclusive contracts within areas
served by cable, unless the FCC determined that such a contract was in
the public interest. We did this because we recognized that in these
instances. some exclusive contracts provide countervailing benefits to
the programming market or to the development of competition among
distributors. This general prohibition on exclusive contracts in areas
served by cable will sunset on October 5, 2002, unless the FCC
determines that the prohibition continues to be necessary. At this
point I have come to no absolute conclusions on whether or not this
rule has served its purpose so I hope to learn more today.
On another issue, Congress also passed the Satellite Home Viewer
Improvement Act of 1999, which granted DBS providers the authority to
distribute local broadcast television stations in their local markets
without obtaining copyright permission to do so. For the first time the
DBS industry would be able to compete on comparable footing with local
cable operators when it comes to the availability of broadcast
programming. However, SHVIA requires satellite carriers, by January 1,
2002, to carry upon request all local TV broadcast stations in local
markets in which the satellite carriers carry at least one TV broadcast
station, also known as the ``carry one, carry all'' rule. The DBS
industry has brought suit saying that this law violates their
constitutional rights. How does this lawsuit dovetail with Echostar's
commitment to serve more local markets? I look forward to discussing
this issue with Echostar, DIRECTV and NAB today.
Last but not least, this hearing will cover the FCC's recently
initiated proceeding to re-examine its horizontal and vertical limits
for cable companies. The FCC's rules were remanded because the court
determined that the FCC's prior cable ownership limits had not been
adequately supported and that the FCC had not sufficiently considered
changes in the MVPD marketplace. Just yesterday, the Supreme Court
declined to review that ruling.
I am anxious to hear from our witnesses on these and other issues.
Thank you.
Mr. Upton. Thank you.
Mr. Boucher.
Mr. Boucher. Well, thank you very much, Mr. Chairman, for
convening the hearing today on competition in the multi-channel
video marketplace.
I am going to focus my comments today on the proposed
acquisition of DIRECTV by EchoStar and note that the focus of
the debate about whether the acquisition is in the public
interest is whether it is in the interest of rural America.
I represent one of the largest stretches of rural America
of any Member of Congress in the eastern U.S., and in the area
that I represent, there are tens of thousands of constituents
who do not have access to cable. The only means of obtaining
multi-channel video programming in these homes is through a
satellite service.
And today I clearly want to say that in my opinion this
acquisition is definitely in the interest of my constituents
and in the interest of rural Americans who will receive
expanded services and better service offerings as a consequence
of this merger being consummated.
It takes a lot of satellite capacity to compete effectively
with cable TV, an industry that has horizontal breadth and
vertical integration. I have no doubt that the proposed merger
will benefit consumers by making the surviving satellite
company a far stronger competitor to cable TV.
I am going to spend just a few minutes this afternoon
addressing the rural matters that are at the core of this
debate.
First, it is absolutely clear that as a result of the
merger, services to rural residents will improve. My
constituents in the western part of Virginia do not have access
at the present time to local television stations delivered by
satellite, and under present circumstances, they are not likely
to have this new local-into-local service for several years at
best.
The merger will lead to a far more efficient use of
satellites, and as a consequence, enable EchoStar to more than
double the number of local television markets that are served
with local-into-local service. That number today is
approximately 40, and upon a consummation of this merger that
number could be increased to approximately 100.
The merger will also enable the more rapid launch of
satellite delivered, high speed Internet access services by
significantly lowering the per subscriber cost of the service
and making the service truly economical on a large scale for
the first time.
That service will also broadly benefit my rural
constituents who have no cable access by making broadband
available to them for the first time through any delivery
mechanism.
But what about the argument that some have put forward that
reducing two major service providers to one provider simply
cannot be in the interest of consumers? I, frankly, think that
EchoStar has answered these questions in a way that is more
than satisfactory.
As a first matter, the company will commit to uniform
national pricing so that the prices charged where there is no
cable competition in rural areas is the same price that is
charged in the markets with cable where I would note the
satellite customers derive most of their subscribers at the
present time.
Other elements of the service will also be the same. The
same national programming will be offered everywhere, in urban
areas and in rural areas alike with no difference. The same 800
number for customer service can be accessed by any subscriber
to the service in rural areas or urban areas alike just as it
is today with no difference.
An on premises installation of the set top box and the
satellite dish is currently performed by local independent
retailers who compete with each other in offering that service.
That would not change with this merger, and there would still
be the same competition in the installation of on premises
customer equipment.
And so rural residents who are the focus of the antitrust
debate will receive valuable new services from the merger,
broadband opportunities they don't have, local-into-local
services they don't have, and they will have no disadvantages
arising to them as a consequence of the merger.
I think this merger is broadly in their interest, and
because it will create a far stronger cable competitor
nationally, it is in the greater American national interest as
well.
So, Mr. Chairman, I want to thank you for holding this
hearing and convening this very impressive panel of witnesses.
There are broader issues in terms of multi-channel video
competition that I would personally like to address at a future
time, and I share with Mr. Markey, for example, the desire to
have open access over all Internet transport platforms. I think
it is broadly in the national interest to do that.
That is a subject, I might suggest, that deserves its own
day of hearings, and I would commend that to the subcommittee
at the proper time.
But I want to thank you for organizing this hearing. It is
an important subject, and I look forward to this testimony.
Mr. Upton. Thank you.
Mr. Terry.
Mr. Terry. Thank you, Mr. Chairman.
Just to add to some redundance, I will state my opening
statement here. First of all, let me state or tell you, Mr.
Chairman, as we have talked in the past, before I came to
Congress 3 years ago now, I spent 8 years on the Omaha City
Council where I chaired what would be the companion committee
to this at the local level, and we had an unprecedented run for
about 8 years in Omaha. We had three cable companies competing
against each other, and it was fantastic.
We had incredible service provided to its customers. We had
what was unheard of in the industry, and that is falling prices
and adding channels.
But something started to happen in the late 1990's. First
of all, U.S. West decided its experiment into the cable field
was a failed experiment and stopped competing, and then
Cablevision and Cox decided to stop competing by swapping
territories, and we were left with one cable company and no
competition.
And what have we seen? Increasing prices.
So as we talk here today about competition in the field, I
have to wonder how we're going to define and look at
competition. Fortunately within the city limits, DIRECTV has
made some inroads. They've been somewhat aggressive in their
marketing.
So now Cox got a little fat for a while, but now they
actually have someone they have to pay attention to in Omaha,
although I will state Cox has done a fantastic job in the city
of Omaha providing their cable services.
But once you step out of the city limits, you don't have a
cable company anymore. All you have is satellite TV. so as
there is at least some semblance of competition within the city
limits, there is maybe soon no competition once you step
outside of those city limits.
So how do we define competition? Is it simply territories?
As long as there are some territories where there is
competition and ignore the areas that there are not?
And I wonder out loud that if cable companies have
eliminated competition by swapping territories, if in essence
we sit here and flex our muscles and talk about competition
today, whether some time the, quote, unquote, just nature of
the business isn't going to do the same thing between satellite
and your cable companies, that is, cables get the inner cities;
satellites get everything else, and no competition anymore.
And I can see that. I can see it moving in that direction.
We have already seen semblances and evidences of that occurring
within the industry.
So we have this blue ribbon panel of witnesses today. I
would like to hear about not only the state of competition
today, but what will it be for a rural consumer in the future?
How are those people in my district in Valley, Nebraska that do
not have access to cable but only have satellite, how will they
fare 2 years from now? How will they be insured that they will
have some semblance of TV service?
And, yes, Mr. Chairman, one of our options is simply to go
back to antenna, but you have children as well. And as we moved
into our new home in Valley and have neither cable nor
satellite yet, an hourly request for, ``Will you turn it to
Cartoon Network? Will you turn it to Nickelodeon?'' and I have
to explain then the mechanics of antenna versus cable, that is
really not an option for some families.
I yield back my time.
Mr. Upton. It sounds like you have a problem.
Mr. Terry. Yes.
Mr. Upton. I recognize Ms. Harman.
Ms. Harman. Thank you, Mr. Chairman.
And thank you for holding this important hearing and this
timely hearing on competition in the direct broadcast satellite
and cable television markets.
Like you, I remember the world before satellite dishes. I
even vaguely remember the world before television.
Of course, like Mr. Boucher, I am very interested in the
proposed merger between EchoStar and DIRECTV. As you know, this
committee, and the Nation's telecommunications policies have
wisely been guided by the principle that the consumer and the
marketplace are best served by vigorous competition. I believe
that principle must guide us in this case, as well.
Of course, as we have just heard from Mr. Boucher and Mr.
Terry, who gets my sympathies for having young children who are
so TV oriented, the arguments about competition are
complicated. One argument has to do, as Mr. Terry was saying
about competition between the DBS and the cable industries.
Another argument has to do about access to service in the DBS
industry. That is what Mr. Boucher was talking about.
But I would put out there a third argument or maybe an
additional argument that has to do not with the effect of
competition on service, but the effect of competition on
innovation.
It is critically important that going forward we not only
have competition in service, but we have innovation in the
television transmission and the broadband industries. If we do
not continue to have innovation, we will never solve the tough
problems of service access to rural areas.
Let me mention one additional point that, of course, is of
extreme interest to me, and that is that DIRECTV is my
constituent, and so, of course, it has been very well
represented.
But the truth is that DIRECTV employs about 1,200 people in
El Segundo, California, and 150 more at its antenna farm in
Marina del Rey, California, both of them in the 36th District.
El Segundo, as some of you may know, is just south of Los
Angeles International Airport, which of course, like all other
major airport hubs has been hard hit by job losses since
September 11th.
Two weeks ago, for example, I visited a major company in El
Segundo that prepares food for the airlines. It has laid off
half its work force. The South Bay in California in which these
cities are located has lost about 41,000 jobs in the last 3
months. So I am very concerned about reports that a merger
between DIRECTV and EchoStar could result in substantial
additional job cuts and the closing, the possible closing of
DIRECTV's California facilities.
Let me point out that DIRECTV also plays a broader role in
the aerospace sector and in the regional economy of Los
Angeles. DIRECTV, as I think we all know, had its origins in
Hughes Electronics, which was the original developer of the
geosynchronous satellite. That satellite, the first of which
was built in 1961, was built in Culver City, California, and
our commercial satellite system that grew from that has been a
mainstay of the California economy.
In the early 1990's, when California's aerospace industry
was headed to depression, Hughes and other aerospace companies
diversified into many new industry sectors, and that
diversification saved them and saved our economy.
Part of that diversification was the development of
DIRECTV. Today both the private and public sectors benefit from
the coexistence and interaction of commercial, military, and
intelligence satellite applications which have benefited from
the formation of companies like DIRECTV.
And I would be very, very worried if a merger of DIRECTV
with any other company put some of those synergies at risk.
So in conclusion, Mr. Chairman, these days I spend most of
my time talking about the need to develop digital capacity to
counter a digital terrorist threat. As we think about that, we
have to think about the need for a robust commercial satellite
industry and a strong high tech software and hardware sector.
This merger and these issues are about a lot more than
channel surfing, even though Mr. Terry's kids may think that is
the issue. They are really about our survival.
I yield back the balance of my time. Thank you.
Mr. Upton. The gentleman from Illinois, Mr. Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman.
I will be brief. I appreciate the hearing. We are all
interested in what is going on in the multi-channel video
programming marketplace and to access the direction that we as
a Nation through public policy want to move.
I want to focus on a couple of things. I also represent a
large rural district that we have the fear of being
disenfranchised based upon maybe the major markets being
covered in local into local and the smaller markets being left
out. And I do not know if the proposed merger will do anything
to help that, and I have heard comments that it will not.
So I am a very strong supporter of the benefits of free,
over-the-air broadcasts for community service and safety
issues, and I have seen it work in my district with floods and
hurricanes and the like, and I want to make sure that that is
protected and available.
One provider could, in essence, even if they were going to
provide it, could make that cost exorbitant for the local
broadcaster, which is another concern.
So we are looking at this closely. We want to be open
minded, but the promise of or a guarantee of high quality DBS
service being available to all my constituents not just for the
benefits of entertainment, but really the growth of rural
America is really dependent upon a vibrant broadband access,
whether that is from direct satellite or whether that is from
cable or that cellular or even on the telephone wire.
So I will be focusing on that. I appreciate the hearing,
Mr. Chairman, and I yield back my time.
Mr. Upton. Thank you.
The Chair will recognize the ranking member of the full
committee, Mr. Dingell.
Mr. Dingell. Mr. Chairman, thank you, and I want to commend
you for the hearing today.
This is an important hearing. It may very well be the only
one, which we have on this particular subject for some time
into the future, and it relates to the state of competition in
the multi-channel video marketplace, and I believe that it is
not only timely, but as I have said, important, given the
recent merger announcement by the two national satellite
television companies, EchoStar and DIRECTV.
Separately these two companies are the third and the sixth
largest multi-channeled video programming distributors in the
United States. If approved, the combined company will become
No. 1 in the country with nearly 17 million subscribers.
Questions relative to consumer service, competition, and of
course, antitrust matters are raised by this event, but in this
age of rapid consolidation, one must observe that the vaunted
position which will be achieved by this newly merged company
may not last long. AT&T, which instantly became No. 1 when it
swallowed the cable giants TCI and Media One just a few years
ago, is also on the auction block. AT&T suitors include AOL
Time Warner and Comcast, currently the second and fourth
largest industry players, respectively.
And whoever succeeds in pursuit of AT&T will quickly
leapfrog a newly merged EchoStar to occupy the No. 1 position,
at least until the next merger.
Now, having said these things, I have enormous respect for
my friends in the satellite and cable industries. They provide
a necessary and widely accepted service to the American people,
and I look forward with great fascination to hearing all of
them and everybody else explain how this consolidation will
actually increase competition in the MVPD market.
Certainly we will hear how these mergers will result in
additional consumer welfare. It may well be that in a year or
so we will hear differently from the consumers.
Increased efficiencies, it is said, lead to lower prices
and better service for the American public. These arguments are
occasionally true, but they presume that effective competition
in the market will remain after the merger is completed, and
that a number of questions which need to be answered prior to
that merger are, in fact, both asked, responded to, and
understood.
I am not prepared to make any judgments today as to whether
the EchoStar transaction will substantially lessen competition
in the MVPD market. That determination will be made by the
antitrust authorities after more intensive analysis.
But I am concerned about some of the practical effects of
this combination on the consuming public. While I am heartened
by the public statements of EchoStar expressing its intent to
expand local-into-local service to more markets nationwide, I
understood that both EchoStar and DIRECTV have recently
requested a judicial stay of the must carry requirements that
the Congress imposed as a condition of providing this service.
I note that EchoStar indicated support of those at a prior
time, but now raises questions as to constitutionality.
In my view, a full ``must carry'' obligation beginning
January 1, 2002, was an integral part of the compromise struck
in the Satellite Home Viewer Improvement Act of 1999. That
considered not only the concerns of the viewing public, but
also of others in the different parties of the industry,
including those parts which provide free viewing to the
American public of over-the-air broadcasting, something which I
regard as being very necessary for this country to continue to
sustain. The law gave the satellite companies a compulsory
copyright license free of charge entitling them to carry
broadcast of local stations so that they could compete more
effectively with cable, something I applaud. The condition was
that satellite companies, like their cable competitors, must be
subject to the same set of rules, i.e., ``must carry.''
The Congress believed in 1999 that EchoStar must bear the
burden of complying with the law and receive the benefit which
they had sought rather than to litigate one half of the bargain
struck. I hope that the good intentions expressed by EchoStar
more recently in the context of this merger will, in fact,
stand the test of time and will not confront this committee
with any sudden changes of view or position by EchoStar.
Specifically EchoStar has stated that it will absorb the
cost of replacing any consumer equipment made obsolete by the
merger. I hope we will learn more about the content and the
extent of this commitment today, and to understand what it will
really mean to the consuming public, to the industry, and to
the Congress.
I also hope that we will learn more about the extent of the
commitment today. Does it include new satellite dishes, new set
top boxes, professional installation, which can be expensive,
and/or positioning or repositioning of satellite receivers?
Does it cover replacement of high end equipment, including high
definition satellite tuners and the combination of set top
boxes containing personal video recorders? I believe that 17
million of our constituents expect us to find the answers to
these questions, and I join them in thinking that they have a
right to know exactly and precisely what will become of their
stranded investment as a result of this merger.
Finally, I hope to hear more about EchoStar's plan for the
future of uniform national pricing. Will rural communities have
access to the same pricing plans as urban consumers for all
programming, including premium and a la carte services? I have
heard that it is the intention of EchoStar to assure this. I
want to hear that assurance here, but I also want to hear what
that assurance means and whether or not there might be some
change in that subsequent to enactment of legislation or
actions by the regulatory agencies.
Now, other questions. Will marketing promotions and special
offers continue to be available to consumers in communities
that are no longer served by a cable competitor? An important
question to many who live in rural areas and elsewhere in this
country.
Mr. Chairman, these are critical questions. There probably
are others. It is my view they must be answered satisfactorily
in the very near future if we are to be sure that we are
carrying out our responsibilities to consumers and that we are
protecting them and assuring that competition continues to
survive and to provide broad benefits to the American public in
the multi-channel video marketplace.
I commend you for these hearings, Mr. Chairman, and I thank
you for recognizing me and making this statement possible.
[The prepared statement of Hon. John D. Dingell follows:]
Prepared Statement of Hon. John D. Dingell, a Representative in
Congress from the State of Michigan
Thank you, Mr. Chairman. Today's hearing on the state of
competition in the multichannel video marketplace is particularly
timely, given the recent merger announcement by the two national
satellite television companies, EchoStar and DIRECTV.
Separately, these two companies are the third and sixth largest
multichannel video programming distributors, or ``MVPDs,'' in the
United States. If approved, the combined company will become number one
in the country with nearly 17 million subscribers.
But in this age of rapid consolidation, that vaunted position may
not last long. AT&T, which instantly became number one when it
swallowed cable giants TCI and Media One just a few years ago, is also
on the auction block.
AT&T's suitors include AOL Time Warner and Comcast, currently the
second and fourth largest industry players, respectively. And whoever
succeeds in its pursuit of AT&T will quickly leapfrog a merged EchoStar
to occupy the number one position--at least for a time.
Now I have enormous respect for my friends in the satellite and
cable industries, and I look forward with great fascination to hearing
them explain how all this consolidation is actually increasing
competition in the MVPD market.
Certainly we will hear how these mergers result in additional
consumer welfare. Increased efficiencies, they say, lead to lower
prices and better service for the American public. And these arguments
are often true. But they presuppose that effective competition in the
market will remain after the merger is completed.
I am not prepared to make a judgment today as to whether the
EchoStar transaction will substantially lessen competition in the MVPD
market. That determination will be made by the antitrust authorities
after more intensive analysis. But I am concerned about some of the
practical effects of this combination on the consuming public.
While I am heartened by the public statements of EchoStar
expressing its intent to expand ``local into local'' service to more
markets nationwide, I understand that both EchoStar and DIRECTV
recently requested a judicial stay of the ``must carry'' requirements
that Congress imposed as a condition of providing this service.
In my view, a full ``must carry'' obligation beginning January 1,
2002, was an integral part of the compromise struck in the Satellite
Home Viewer Improvement Act of 1999. That law gave satellite companies
a compulsory copyright license, free of charge, entitling them to carry
local broadcast stations so they could compete more effectively with
cable. The condition was that satellite companies--like their cable
competitors--would be subject to must carry rules.
The Congress believed in 1999 that EchoStar would bear both the
burden and the benefit of that law, rather than litigate one half of
the bargain struck. I hope the good intentions expressed by EchoStar
more recently in the context of this merger will, in fact, stand the
test of time.
Specifically, EchoStar has stated that it will absorb the cost of
replacing any consumer equipment made obsolete by this merger. I hope
we will learn more about the extent of this commitment today. Does it
include the cost of new satellite dishes, new set top boxes,
professional installation and/or repositioning of satellite receivers?
Does it cover replacement of higher-end equipment, including high
definition satellite tuners, and combination set-top boxes containing
personal video recorders? I believe that 17 million of our constituents
have a right to know precisely what will become of their stranded
investment as a result of this merger.
Finally, I hope to hear more about EchoStar's plan for the future
of uniform national pricing. Will rural communities have access to the
same pricing plans as urban consumers for all programming, including
premium and ala carte services? Will marketing promotions and special
offers continue to be available to consumers in communities that are
not served by a cable competitor?
Mr. Chairman, I believe these are some of the critical questions
that must be answered satisfactorily if we are to make sure consumers
are protected and competition continues to survive in the multichannel
video marketplace.
Mr. Upton. Thank you.
Mr. Gillmor.
Mr. Gillmor. Pass, Mr. Chairman.
Mr. Upton. Mr. Brown.
Mr. Brown. The issues today are obviously very complex.
They have significant implications for the future of the multi-
channel video programming marketplace. Both large and small
companies play a very important role in this enterprise, and it
is important to continue to promote competition and protect
consumers.
I wanted to take this opportunity to welcome Michael
Fiorile, the President and CEO for the Dispatch Broadcast Group
in Columbus, Ohio. Dispatch Broadcast Group includes WBNS-TV
and AM-FM in Columbus; the Ohio News Network, WTHR-TV in
Indianapolis; and Dispatch Interactive Television. WBNS-DT is
the only digital signal in the Columbus market.
Mike's credentials are impressive. He served as Vice
President and General Manager of TV stations in Sacramento and
Ashville and Flint, in Scranton. He currently serves as Vice
Chairman of the National Association of Broadcasters'
Television Board and is Vice Chairman of the NAB Digital
Television Task Force.
Thank you for joining us today, and thank you to all of the
panel.
I yield back, Mr. Chairman.
Mr. Upton. Ms. McCarthy.
Ms. McCarthy. Mr. Chairman, there has already been a whole
lot of wisdom shared by members more senior than I about what
today is all about and about what the future must determine,
and so I am going to submit my remarks for the record.
I am thankful that you are holding this hearing. I suspect
it will be one of many. I know that I, too, share the concern
raised by the chairman and ranking member about how the
consumer will benefit, how the spectrum will be divided, but we
make sure that we provide local channels, at least 100 of them
across this Nation. You know, we are only at 42 right now.
All of these probably will come out in the testimony from
the experts we have here before us, and so I am going to yield
back so that we can proceed to hear from them.
[The prepared statement of Hon. Karen McCarthy follows:]
Prepared Statement of Hon. Karen McCarthy, a Representative in Congress
from the State of Missouri
Thank you Chairman Upton and Ranking Member Markey for holding this
hearing on the status of competition in the multichannel video
programming marketplace. I look forward to the testimony of all of the
witnesses regarding the merger between DirecTV and EchoStar as well as
program access rates, cable ownership limits, cable pricing, and local
content providers.
Cable and satellite television send a variety of programming to
more than 80 percent of households nationwide. Consumers now have
hundreds of channels to choose from due to advances in digital
technology. While the number and variety of services offered by these
programming distributors is increasing, including broadband Internet
and digital music channels, the number of competitors in the industry
is decreasing, potentially providing consumers less choice.
In Missouri, only \2/3\ of the households are accessible by cable.
Nearly 850,000 families had no option for multichannel programming
before Direct Broadcast Satellite (DBS) came to the marketplace.
Because of the efforts of many of these companies with representatives
before us today, consumers in rural areas can now watch 150 channels of
digital programming and download files from the Internet at broadband
speeds which were previously unattainable.
I am concerned the merger of the two companies which provide these
services, DirecTV and EchoStar may remove competitive incentives from
improving services while maintaining low prices. We need to ensure that
if this merger is approved, benefits will be passed on to consumers,
not just the companies involved. While mergers frequently lead to
increased efficiencies and economies of scale, I would like to ensure
the consolidated companies will pass on savings to consumers. I hope to
learn how the single merged company plans to continue to expand
competitive services and offer competitive prices to the 9 million DBS
subscribers who do not have the option to subscribe to cable. We cannot
allow a monopoly satellite company to take advantage of rural
consumers.
DirecTV and EchoStar are currently the third and sixth largest
multichannel video programming distributors, respectively. If the
merger proceeds, the new entity would become the largest in the
country. As a proponent of competition, I would like to know how
consolidation in the industry will increase competition in this market.
I also look forward to hearing how the merger will ensure that all
local channels will be provided to 100 localities, when currently the
two separate companies only serve 42 unique markets. I am interested in
the witnesses' views of the implementation of this proposal as well as
their opinions of the current lawsuit to overturn the Satellite Home
Viewer Improvement Act of 1999 in which Public Law 106-113 required all
local channels must be provided by the DBS system if one is, the
``carry one, carry all'' policy.
Furthermore, I am concerned how the spectrum will be divided to
contain the new high definition signals while continuing to provide
local content. Local content requires a great deal of capacity
consideration each local signal is sent to the entire country but only
viewable in certain areas. This is a large waste of spectrum, and I
look forward to hearing how more this can be more efficiently used.
I eagerly anticipate the testimony of the distinguished panelists
so we can gather more insight into the state of competition in this
high tech industry which is so vital to the economic livelihood of
America.
Thank you Mr. Chairman. I yield back the balance of my time.
Mr. Upton. Thank you.
I would note that all members by unanimous consent will
have their opening statement as part of the record.
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. Eliot Engel, a Representative in Congress
from the State of New York
Mr. Chairman: I truly appreciate your calling this hearing. The
multi-channel video programming distribution (MVPD) marketplace is
certainly an exciting and growing industry. New technologies and
capabilities for existing ones are being introduced all the time.
My primary concern for today's hearing is the merger of Echostar
and DirecTV. In the days following September 11th, as awful as I felt,
I was strengthened by the outpouring of assistance from across the
nation. From the millions of dollars in donations to the construction
companies who are now cleaning up Ground Zero--without a written
contract I would add, and an issue our full committee should be looking
into--I was amazed at the response by individuals and companies.
Thus, I must admit my amazement at the reaction to a simple request
from WNET Channel 13, my local PBS station in New York. DirecTV was
asked for temporary space on its system because Channel 13 was no
longer broadcasting. Instead of DirecTV leaping at the chance to assist
a gravely wounded partner in the world of television, DirecTV chose to
act in a inconsiderate manner and deny this request. Considering the
numerous channels on their system, 225 or so, I was quite frankly
stunned at the reaction. Now DirecTV is asking the federal government
to approve the creation of a national monopoly in the satellite home
viewer market. I am forced to wonder if DirecTV, with a competitor in
the industry, was so unresponsive, what would the reaction of a
megacompany be to future requests.
As we are the subcommittee that directly oversees the FCC, and the
FCC oversees the merger, I am very interested in learning more about
this proposal. As it stands, these companies must prove to the FCC--and
us--why such a merger is in the public interest. These companies, after
being a party to the SHVIA, have now sought to overturn the must carry
rules in court and even now are seeking an injunction to prevent the
laws requirement's from taking force on January 1, 2002.
Beyond my own parochial concerns, I believe this has direct
implications for a number of issues that Mr. Tauzin and others have
regarding program access rules. I also think we should be aware that an
alternative technology presented by Northpoint is trying to break into
the MVDP market, which is opposed by EchoStar and DirecTV.
I have many, many concerns, Mr. Chairman. I look forward to
learning the answers to them.
Mr. Upton. At this point we are going to go to the panel.
We have an impressive list of witnesses led by Mr. Charlie
Ergen, CEO of EchoStar; Mr. Eddy Hartenstein, Chairman and CEO
of DIRECTV; Mr. Robert Sachs, President and CEO of the National
Cable and Telecommunications Association; Mr. Neal Schnog,
President of UVISION on behalf of the American Cable
Association; Mr. Bob Phillips, President and CEO of National
Rural Telecommunications Cooperative; Mr. Jared Abbruzzese--how
do I get closer?--Abbruzzese, Acting CEO of WSNet; Mr. Marshall
Pagon, President and CEO of Pegasus Communications; and Mr.
Michael Fiorile, president and CEO of the Dispatch Broadcast
Group and represented by the National Association of
Broadcasters.
Gentlemen, we appreciate your testimony coming in advance.
It is all made part of the record, and we will start, Ms.
Sachs, with you. If you could limit your remarks to 5 minutes,
at which point when we are doing with the panel we will
entertain questions from those members that are here.
Thank you, Mr. Sachs.
We are getting an upgrade. I want you to know when this
calendar year is over, we are going to be at least as wired as
the Education Committee. I have made that pledge.
We are going to start your time over as well. So go ahead.
I am not going to be like the Michigan State timekeeper.
STATEMENTS OF ROBERT SACHS, PRESIDENT AND CEO, NATIONAL CABLE
AND TELECOMMUNICATIONS ASSOCIATION; NEAL SCHNOG, PRESIDENT,
UVISION, ON BEHALF OF AMERICAN CABLE ASSOCIATION; BOB PHILLIPS,
PRESIDENT AND CEO, NATIONAL RURAL TELECOMMUNICATIONS
COOPERATIVE; JARED E. ABBRUZZESE, ACTING CEO, WSNet; MARSHALL
W. PAGON, PRESIDENT AND CEO, PEGASUS COMMUNICATION; MICHAEL J.
FIORILE, PRESIDENT AND CEO, DISPATCH BROADCAST GROUP; EDDY W.
HARTENSTEIN, CHAIRMAN AND CEO, DIRECTV; AND CHARLES W. ERGEN,
CEO, EchoSTAR
Mr. Sachs. Thank you.
Mr. Upton. Welcome to the big house.
Mr. Sachs. That is the equivalent of does your TV turn to
Channel 3.
Mr. Chairman, members of the subcommittee, my name is
Robert Sachs, and I am President and CEO of the National Cable
and Telecommunications Association.
Thank you for providing us with the opportunity to testify
before your subcommittee on the subject of video competition.
Mr. Chairman, competition in the video marketplace is
vigorous and well established. Today consumers can choose from
a variety of multi-channel video providers, including direct
broadcast satellites, alternative broad band providers like
RCN, phone companies and utilities. Indeed, most consumers have
a choice of at least three multi-channel video providers.
Last year in its seventh annual report on competition in
the video marketplace, the FCC found that ``competitive
alternatives and consumer choice continue to develop.''
Subscribership to satellite and terrestrial competitors to
cable has jumped nearly tenfold from an aggregate of 2.3
million non-cable, multi-channel video customers at the time of
the 1992 Cable Act to almost 21 million in September 2001.
That is correct, and the number may surprise you. But
nearly 21 million consumers, almost one out of every four
subscription television customers, today obtain multi-channel
video programming from a source other than a cable operator.
Mr. Chairman, as these results demonstrate, we believe that
the goal of fostering video competition set by Congress in the
1992 act has been met. While cable operators are clearly facing
competition from a variety of sources, DBS, in particular, has
proven itself as a competitive substitute for cable.
With the passage of the Satellite Home Viewer Improvement
Act, DBS companies can now retransmit local broadcast signals
into their market of origin. The total number of DBS
subscribers jumped from 14 million to 17 million between
September 2000 and this past September, a 19 percent annual
growth rate. DIRECTV now has 10.4 million subscribers, more
than all but two cable companies, AT&T Broadband and AOL Time
Warner.
The No. 2 DBS provider, EchoStar, has 6.4 million
subscribers, more than all but four cable companies. By any
measure EchoStar and DIRECTV are formidable competitors to
cable.
Moreover, with the additional channels and operating
efficiencies that would result from combining these two
companies, there is no reason to believe that a 17 million
subscriber satellite company will be any less formidable.
NCTA does not take a position with regard to the proposed
EchoStar-DIRECTV merger. We do not seek to gain competitive
advantage by imposing regulatory conditions on competitors, and
we believe that any antitrust issues raised by the merger are
best left to resolution by expert agencies.
Our position, however, is that multi-channel video
competition is already fierce, leading our industry to respond
by embarking on a massive effort to upgrade facilities and
launch new services. Since 1996, our industry has invested
approximately $55 billion of risk capital to deploy broadband
plant in order to offer new advanced digital services,
including digital video, high speed Internet, and cable
telephony.
Mr. Chairman, consumers are benefiting from this rapid and
unabated growth of competition in the video market, and the
convergence of video, voice, and data services in the digital
broadband marketplace will only accelerate this trend.
Cable will continue to be a leader in providing consumers
with choice not only in video services, but also in high speed
Internet and cable telephony.
At the same time, consumers will be able to choose from
among multiple vendors when making their purchases. In this
highly competitive environment, companies that succeed will be
those who offer consumers the best quality, value, and service.
It is not possible to forecast which companies will be most
successful, but one thing that can be said with certainty is
that American consumers will be the ultimate winners.
Thank you very much.
[The prepared statement of Robert Sachs follows:]
Prepared Statement of Robert Sachs, President and CEO, National Cable &
Telecommunications Association
introduction
Mr. Chairman, members of the Subcommittee, my name is Robert Sachs
and I am President and CEO of the National Cable & Telecommunications
Association. Thank you for providing us with the opportunity to testify
before your subcommittee regarding competition in the multichannel
video market.
Mr. Chairman, competition in the multichannel video marketplace is
vigorous and well established. Today, consumers can choose from a
variety of multichannel video providers, including direct broadcast
satellites (DBS), alternative broadband providers like RCN, phone
companies, like Qwest and utilities, like Sigecom. Indeed, most
consumers have a choice of at least three multichannel video providers.
As a result of this competition, nearly 21 million consumers--almost 23
percent of subscription television customers--today obtain multichannel
video programming from a source other than a cable operator.
To determine whether competition exists, one only need look at
what's been happening in the marketplace since the passage of the 1996
Telecommunications Act. With respect to the marketplace for the
delivery of video services, the answer to that question is clear. Video
competition is fierce, leading to service enhancements and product
innovation that inure to the benefit of consumers.
The cable industry responded to this competition and the regulatory
stability created by the passage of the 1996 Act by embarking on a
massive effort to upgrade facilities and launch new services. Since the
passage of the 1996 Act, the cable industry has invested roughly $55
billion to deploy broadband plant in order to offer a wide array of new
advanced digital services, including digital video, high speed Internet
access, cable telephony and interactive applications. The DBS industry,
seeking to maintain its lead position in subscriber growth has
responded to cable's investment by launching its own satellite
delivered broadband services and obtaining exclusive sports
programming.
Competition in the Video Market Is Well Established And Growing Steadily
Market Share of Multichannel Video Program Distributors (MVPDs)--
September 2001
------------------------------------------------------------------------
Subscribers
MVPD (in Percent of
Millions) MVPD Market
------------------------------------------------------------------------
DBS......................................... 16.73 18.05
C-Band...................................... 0.94 1.01
MMDS........................................ 0.62 0.67
SMATV....................................... 1.50 1.62
Local Telephone Companies................... 0.43 0.46
Broadband Competitors....................... 0.66 0.71
Total Non-Cable............................. 20.87 22.53
Cable....................................... 71.79 77.47
Total Multichannel Subscribers.............. 92.66 100.00
------------------------------------------------------------------------
Source: NCTA Research Department estimate based on data from A. C.
Nielsen, Paul Kagan Associates, Cable World, SkyREPORT, and public
reports of individual companies.
Today, cable competes with a wide range of satellite and
terrestrial providers. Last year in its Seventh Annual Report on
Competition in the Video Marketplace, the FCC found that ``competitive
alternatives and consumer choice continue to develop.'' Customers have
increasingly flocked to these alternatives, with non-cable
subscribership growing nearly ten-fold from an aggregate of 2,330,000
non-cable MVPD customers at the time of the 1992 Cable Act to more than
20,876,000 in September 2001.
[GRAPHIC] [TIFF OMITTED] T7116.001
While cable operators are clearly facing competition from a
variety of sources, DBS in particular has proven itself as a
competitive substitute for cable. With the passage of the
Satellite Home Viewer Improvement Act (SHVIA) in November 1999,
DBS companies can now retransmit local broadcast signals into
their market of origin (``local-into-local''). As of November
2001, DirecTV and EchoStar made available local TV signals in
42 markets with over 65 million television households. When
combined with their ability to offer hundreds of channels of
digital video and CD quality sound, DBS companies compete
vigorously with cable. The total number of DBS subscribers
jumped from 14 million to 16.73 million between September 2000
and September 2001--a 19 percent annual growth rate. DirecTV
now has more subscribers (10.4 million) than all but two cable
operators--AT&T and AOL Time Warner--making it the third
largest multichannel video provider in the U.S. The number two
DBS provider, EchoStar, is the fifth largest MVPD and has more
customers than all but three cable companies. Furthermore,
DirecTV predicts that it will add 1-1.2 million new subscribers
in 2002.1 EchoStar forecasts net subscriber
additions to total between 1.5 and 1.75 million in 2001, with
similar gains predicted in 2002.2
---------------------------------------------------------------------------
\1\ Video Business Online, ``DirecTV parent sees 10% growth next
year,'' www.video
business.com/news/111401.
\2\ ``EchoStar reports Q3 profit on subscriber growth,''
biz.yahoo.com/rf/011023/n23236477-
TOP 12 MULITCHANNEL VIDEO PROVIDERS
------------------------------------------------------------------------
Number of
Company Subscribers
------------------------------------------------------------------------
AT&T Broadband............................................. 13,750,000
Time Warner Cable.......................................... 12,654,000
DirecTV.................................................... 10,341,000
Comcast.................................................... 8,437,000
Charter.................................................... 6,970,000
Echostar................................................... 6,430,000
Cox Communications......................................... 6,206,737
Adelphia................................................... 5,693,035
Cablevision Systems........................................ 2,988,590
Mediacom................................................... 1,585,000
Insight.................................................... 1,275,500
CableOne................................................... 760,000
------------------------------------------------------------------------
Source: NCTA Research based on Company 3Q reports
Clearly, EchoStar and DirecTV are formidable competitors to cable
and enjoy a number of competitive advantages. For example, DBS has been
all digital from the start, giving it greater channel capacity than
many cable systems, and has been able to achieve greater efficiencies
in advertising and promotion with uniform national pricing. In
addition, DBS companies are not subject to local franchise fees and
taxes which can add so much as 15% to a cable customer's monthly bill,
as they do in the District of Columbia. Also, DBS companies are not
saddled with the costs of public access studios, institutional networks
and free municipal cable hook-ups which are required by most cable
franchise agreements.
On cable's side of the competitive ledger, upgraded cable systems
can match the programming variety and choice that DBS companies offer,
and provide consumers with 7 by 24 local customer service, interactive
digital video, cable modem and cable telephony products.
The marketplace will determine which MVPD offers the better package
of services with the best price and customer care. And individual
consumers will determine which service offering best suits their
particular needs. But what is undeniably clear is that consumers have
multiple choices and are deciding among them with their pocket books.
NCTA does not take a position with regard to the proposed EchoStar/
DirecTV merger. As indicated earlier, cable operators see the Dish
Network and DirecTV as very formidable competitors, and compete
vigorously with these satellite companies everyday. Moreover, with the
additional channel capacity and operating efficiencies that would
result from combining these two companies, we have no reason to believe
that a 17 million subscriber satellite company will be any less
formidable. Charlie Ergen is a fierce and respected competitor, as his
track record amply demonstrates.
We believe that antitrust and public policy issues that have been
raised about the proposed EchoStar/DirecTV merger are best left to
resolution by expert agencies like the U.S. Department of Justice and
Federal Communications Commission. NCTA represents cable operators
serving over 90% of the nation's cable television customers and more
than 200 cable program networks, as well as equipment suppliers and
providers of other services to the cable industry. Many of these
companies are also suppliers to the satellite industry. Individual
member companies may choose to submit comments to the expert agencies,
however, the cable industry, as an industry, does not plan to take a
position on the merger.
Total dish subscribership (C-Band and DBS) now exceeds 15 percent
in 41 states. According to SkyREPORT, Direct-to-Home (DTH) subscribers
(all dish customers, including DBS and C-Band) grew from 15.3 million
to 17.9 million between September 2000 and September 2001, an increase
of 15.6 percent (versus 1 percent for cable). In 41 states, DTH
satellite subscribership now exceeds 15 percent of all television
homes. As of July 2001, DTH penetration exceeded 20 percent in 31
states, 25 percent in 16 states, 30 percent in 5 states, and 40 percent
in 1 state. As mentioned, today most consumers have the choice of two
DBS providers in addition to cable, and some have other multichannel
video choices as well.
States with Direct-To-Home (DTH) Dish Penetration of Fifteen Percent or
More (July 2001)
------------------------------------------------------------------------
% OF TVHH w/
STATE DTH
------------------------------------------------------------------------
Vermont.................................................... 41.62
Montana.................................................... 38.86
Wyoming.................................................... 34.23
Mississippi................................................ 32.97
Arkansas................................................... 30.79
Idaho...................................................... 29.26
North Carolina............................................. 28.34
North Dakota............................................... 28.10
Missouri................................................... 27.12
Kentucky................................................... 27.11
Utah....................................................... 26.96
South Carolina............................................. 26.26
West Virginia.............................................. 26.22
Texas...................................................... 25.68
Indiana.................................................... 25.14
New Mexico................................................. 25.11
Georgia.................................................... 24.93
South Dakota............................................... 24.59
Tennessee.................................................. 24.43
Alabama.................................................... 24.15
Virginia................................................... 23.82
Oklahoma................................................... 23.48
Maine...................................................... 23.21
Colorado................................................... 22.89
Iowa....................................................... 22.68
Arizona.................................................... 22.29
Wisconsin.................................................. 21.96
Nebraska................................................... 21.38
Oregon..................................................... 20.97
Minnesota.................................................. 20.67
Kansas..................................................... 20.65
Michigan................................................... 18.86
Florida.................................................... 18.75
Louisiana.................................................. 18.55
Washington................................................. 17.82
Ohio....................................................... 16.76
Nevada..................................................... 16.49
California................................................. 16.47
New Hampshire.............................................. 16.45
Illinois................................................... 16.37
Delaware................................................... 15.05
------------------------------------------------------------------------
Source: SkyTRENDS SkyMAP July 1, 2001; www.skyreport.com
While DBS has clearly become the chief competitor to cable, a
growing number of new competitors have entered the marketplace.
Companies like RCN, Knology, WideOpenWest, and others are providing
consumers with competitive video and broadband services. Some utilities
and incumbent local exchange carriers are also adding video programming
to their product line-ups.
Mr. Chairman, the goal of multichannel video competition set by
Congress in the 1992 Cable Act has been accomplished.
The Cable Industry's Response to Burgeoning Competition
Cable companies have responded to competition in the video market
by aggressively upgrading their facilities and launching new services.
Since passage of the Telecommunications Act of 1996, the cable industry
has invested nearly $55 billion to deploy broadband plant in order to
offer a wide array of advanced services, including digital video,
digital music, high speed access to the Internet, and telephony. These
upgrades involve rebuilding more than a million miles of cable plant
and by year-end 2001, they will be approximately 80 percent complete.
As of September 30, 2001, cable had 13.7 million digital video
customers, 6.4 million high-speed data customers, and 1.5 million
residential cable telephone customers.
Among the new options that cable customers have are digital video
services. Cable program networks have already launched some 60 new
digital channels, offering consumers additional choice and further
program diversity. Examples include the Biography Channel and History
Channel International (from A&E); Science, Civilization, and Kids (from
Discovery); Noggin, Nick Too, and Nickelodeon Games & Sports (from
Nickelodeon); and style. (from E!). There are six new Hispanic channels
from Liberty Canales, new music channels from MTV and BET, and separate
channels targeting Indian, Italian, Arabic, Filipino, French, South
Asian and Chinese viewers from The International Channel. There are
also many new premium offerings from HBO (HBO Family, ActionMAX, and
ThrillerMAX), Showtime (Showtime Extreme, Showtime Beyond) and Starz
Encore (Family, Cinema, Movies for the Soul, and Adventure Zone).
Prices for Cable Programming Services
Despite escalating programming costs (especially higher sports
rights fees) and billions spent on system upgrades, cable prices have
remained relatively stable on a per-channel basis. For example, in its
most recent report the Federal Communications Commission found that
cable rates stayed unchanged in the year 2000 on a cost-per-channel
basis (Report on Cable Industry Prices, FCC 01-49, MM Docket No. 92-
266, released February 14, 2001). According to the same report, during
the 12-month period ending July 1, 2000, average monthly prices for
basic service tiers (BST), cable programming service tiers (CPST), and
equipment increased by 5.8 percent. This represents a very slight
increase (from 5.2 percent) for the year ending July 1, 1999--during
which CPST prices were subject to FCC regulation from July 1, 1998, to
March 31, 1999.
Industry critics will cite the fact that average monthly cable
prices increased 5.8 percent compared to the inflation rate of 3.7
percent during the 12-month period ending July 1, 2000. But their
criticism fails to take into account the fact that cable subscribers
also received an average of three additional channels of BST and/or
CPST programming. In fact, it is the competition from direct broadcast
satellite services and other competitive broadband providers that has
driven cable operators to upgrade their plant and add the new channels
of programming consumers want.
Year-to-year comparisons which fail to consider the increased
number of channels that operators provide to customers therefore create
a misleading picture. In fact, data from the FCC and General Accounting
Office show that the price per channel of cable's video services has
declined since 1986 when adjusted for inflation:
Price Per Cable Channel, 1986-2000
------------------------------------------------------------------------
12/1/86 4/1/91 7/31/97 7/31/00
------------------------------------------------------------------------
Nominal Price per Channel........... $0.44 $0.53 $0.63 $0.66
Price Per Channel Adjusted for $0.69 $0.68 $0.68 $0.66
Inflation (in 2000 dollars)........
------------------------------------------------------------------------
Source: GAO Survey of Cable Television Rates and Services, July 1991;
FCC Reports on Cable Industry Prices, released 12-15-97 and 2-14-01;
Bureau of Labor Statistics, CPI-U.
This drop in real per-channel cable prices has occurred even though
programming costs have skyrocketed since 1986. For example, between
1996 and 2001, the cable industry spent over $46 billion on basic and
premium programming--nearly twice the $23.8 billion it spent during the
previous six years.
Cable Systems' Programming Expenditures: 1986-2001
------------------------------------------------------------------------
Expenditures
Year (in
Billions)
------------------------------------------------------------------------
1986...................................................... $2.030
1987...................................................... $2.289
1988...................................................... $2.599
1989...................................................... $2.918
1990...................................................... $3.195
1991...................................................... $3.463
1992...................................................... $3.811
1993...................................................... $4.000
1994...................................................... $4.370
1995...................................................... $4.963
1996...................................................... $5.656
1997...................................................... $6.413
1998...................................................... $7.466
1999...................................................... $8.000
2000...................................................... $8.882
2001...................................................... $9.800
------------------------------------------------------------------------
Source: NCTA Research Department estimate, based on data from Paul Kagan
Associates, Inc. and the U.S. Copyright Office.
Cable customers today are receiving more channels and better value
for their dollar than ever before. And consumers are using their cable
service more than ever. During primetime, ad-supported cable viewership
increased from a 7.5 share during the 1985-1986 television season to a
41.7 share during the 2000/2001 television season, according to a
Cabletelevision Advertising Bureau analysis of Nielsen data.
Expiration of Restrictions on Exclusive Contracts
Finally, I know this subcommittee has a particular interest in a
provision of the 1992 Cable Act that imposed a 10-year restriction on
the ability of vertically-integrated satellite cable programming
networks to enter into exclusive contracts with cable operators. That
restriction is scheduled to sunset in October 2002, unless the FCC
finds that ``such prohibition continues to be necessary to preserve and
protect competition and diversity in the distribution of video
programming.''
The prohibition on the ability of vertically integrated programmers
to enter into exclusive contracts was enacted in a very different
environment. As my testimony indicates, the competitive landscape in
the multichannel video market place has changed dramatically since
then. In 1992, DBS had no subscribers. Today, DBS serves more than 17
million customers. In 1992, cable operators served 95% of all MVPD
subscribers. Today, cable serves less than 78% of multichannel video
customers.
And, in a total turnaround of circumstances, the most valuable
exclusive rights in subscription television--to the NFL's Sunday
afternoon football package--are held by DirecTV, the third largest
MVPD. Regulations that were established during a period when there were
significantly fewer multichannel video programming alternatives for
consumers should be allowed to expire in a competitive environment. In
limiting the restriction on exclusive contracts for 10 years, Congress
recognized that a competitive marketplace is preferable to regulation.
Prolonging the ban disserves competition and diversity by disincenting
cable operators and their competitors to develop differentiated
programming services.
The dramatic growth over the last decade in the number of
multichannel customers subscribing to alternatives to cable is only
part of the picture. The increase in diverse program services in which
cable operators have no ownership interest has totally changed the
landscape from 1992. In 1992, there were only 45 non-vertically
integrated satellite-delivered services. Today, there are more than 200
national satellite delivered services that have no cable ownership.
These networks compete with vertically-integrated networks for viewers,
offering a variety of programming genres, such as news, children's,
music and general interest programming, among others. While nearly half
of all program services were vertically integrated in 1992, that
percentage has dropped to 26% today. And no single cable company has
ownership interests in more than 10% of these satellite delivered
programming services.
----------------------------------------------------------------------------------------------------------------
Total Number
Number of Percent of Number of Non- Percent of Non- of Satellite
Year Vertically Vertically Vertically Vertically Delivered
Integrated Integrated Integrated Integrated Programming
Services Services Services Services Services
----------------------------------------------------------------------------------------------------------------
1992............................ 42 48% 45 52% 87
1994............................ 56 53% 50 47% 106
1995............................ 66 51% 63 49% 129
1996............................ 67 46% 80 54% 147
1997............................ 68 40% 104 60% 172
1998............................ 95 39% 150 61% 245
1999............................ 104 37% 179 63% 283
2000............................ 99 35% 182 65% 281
2001............................ 73 26% 208 74% 281
----------------------------------------------------------------------------------------------------------------
Source: 1999-2000 FCC Annual Competition Reports; NCTA Research
In contrast, major media conglomerates like Disney, General
Electric, Viacom, and News Corp (who respectively own the ABC, NBC, CBS
and Fox broadcast networks), are increasing their ownership of cable
networks. Each of the major commercial broadcast TV networks today is
owned by a media company that has financial interests in 10 to 20 cable
networks. Some are nationally distributed channels like CNBC, while
others are regional channels like Fox Sports Net. And, as the following
chart shows, the stable of broadcast-owned cable networks includes some
of the most powerful brands in television, among them ESPN, The Disney
Channel, MTV, VH-1, Nickelodeon, Lifetime, the History Channel, and
Showtime Networks.
November 2001
Broadcast Network Investments in Cable Networks
General Electric/NBC: CNBC
Partial Ownership: A&E; AMC; Biography Channel; Bravo; Fox Sports Net
(regional sports networks); History Channel; History Channel
International; Independent Film Channel; MSNBC; MuchMusic; Valuevision;
WE: Women's Entertainment
Viacom/CBS/UPN: BET Holdings: BET, BET Action Pay-Per-View, BET on
Jazz, BET Gospel; The Box; CMT (Country Music Television); Flix; MTV;
MTV2; Nickelodeon/Nick at Nite; TV Land; VH1; Showtime; The Movie
Channel; TNN: The National Network; The Suite (digital networks):
Noggin, Nickelodeon GAS, Nick Too, M2, MTV X, MTV S, VH1 Smooth, VH1
Country, VH1 Soul
Partial Ownership: Comedy Central; Sundance Channel
News Corporation/Fox: Fox Movie Channel; Fox News; Fox Sport Americas;
Fox Sports World; FX
Partial Ownership: Discovery Health; Fox Sports Net (regional sports
networks); National Geographic; Speedvision
Walt Disney/ABC: ; ABC Family; Disney Channel; SoapNet; Toon Disney
Partial Ownership: A&E; Biography Channel; E!; ESPN; ESPN2; ESPNews;
ESPN Classic; History Channel; History Channel International; Lifetime;
Lifetime Movie Network; style
conclusion
Mr. Chairman, consumers are benefiting from a rapid and unabated
growth of competition in the video market. The convergence of video,
voice, and data services in the digital broadband marketplace will only
accelerate this trend. Cable will continue to be a leader in providing
consumers with choice--not only in video services, but also in high
speed Internet services and telephony. At the same time, consumers will
be able to choose from among multiple vendors when making their
purchases. In this highly competitive environment, companies that
succeed will be those who offer consumers the best quality, value, and
service. It is not possible to forecast precisely which will be most
successful. But one thing that can be said with certainty is that
American consumers are sure to be the ultimate winners.
Thank you again for this opportunity to present the cable
industry's views. I would be happy to answer the Subcommittee's
questions.
Mr. Upton. Thank you.
Mr. Schnog.
STATEMENT OF NEAL SCHNOG
Mr. Schnog. Thank you, Mr. Chairman.
My name is Neal Schnog, and I am the President and part
owner of Uvision. We are a small cable TV company with 8,300
customers in rural Oregon.
I am also a board member of the American Cable Association
and represent more than 900 independent cable businesses
serving more than 7.5 million customers in mostly smaller,
rural markets across the United States.
Unlike some larger companies you will hear about, ACA
members are not affiliated with program suppliers, but
satellite, cable, telephone companies, major ISPs or other
media companies. We are little guys.
As a first generation American whose family was given
shelter and prosperity by the shores of our great Nation, I
cannot express how proud I am to take part in this hearing. But
being on this panel, I do not just feel like a regular
constituent. I feel like an extra in a movie called ``Clash of
the Titans.''
The American Cable Association represents no goliaths. We
speak for the millions of small town customers who are
represented by nearly every member of this committee.
Competition really means customer choice. No choice; no
competition.
The irony here is that the competition and customer choice
today, especially in rural areas, are endangered because they
are governed by an unlikely cast of players that do not live in
rural America and do not care what happens out in our small
towns.
Unless there is significant congressional and regulatory
review of these issues, the situation is not likely to improve.
There are three very important issues that threaten consumer
choice in smaller markets and rural America and that will
derail the progress to provide advanced services in smaller
markets. That is the digital divide we all talk about.
First, vastly increasing control over content, pricing,
terms, conditions, and placement requirements by just a few
programming giants; Second, the adverse effect in the smaller
rural marketplace of the proposed EchoStar-DIRECTV merger which
will limit competition in these markets; and Third, the burden
of regulation on small or independent cable companies compared
to the free regulatory ride enjoyed by the satellite companies.
So who controls what your constituents see? You probably
think it is me, but surprisingly enough, it is not. While
customers and local franchise authorities do not see it, their
choices on what they watch are controlled by five companies or
programming cartels. I call them America's own OPEC, the
organization of programming extorting companies.
We have seen an explosive consolidation in the programming
industry that has led to sharply increased prices, less freedom
to offer popular content, and little customer awareness as to
why they are forced to buy the channels they do and why their
rates go up so much.
For example, ESPN has raised its rates to our members by up
to 20 percent each year for the past 5 years. Our customers
want ESPN. Fine, but ABC-Disney will not just let us buy ESPN.
Oftentimes in order to get the local ABC affiliate, Disney will
force us through retransmission consent to take other channels,
such as SoapNet and the same for Fox, GE, and CBS.
This might not be so bad if we could offer the programming
on an a la carte basis to allow the consumer to choose what
they want, but all of the cartel programming companies, like
Independent Cable, make us pay for every customer and pay
punitive prices if we do not carry many of their services in a
bundle, just like they won.
Even more appalling is the fact that these programmers also
imbed into their contracts various nondisclosure terms. These
provisions prohibit cable operators from telling any customer
and even Congress what the terms or rates are for their
programming.
Customers will also face less choice as a result of
satellite monopoly that would be created from the EchoStar
deal. The merger of EchoStar and DIRECT will create the world's
largest programming distributor with nearly 17 million
customers and give the merged companies nearly 90 percent of
the full power, full CONUS satellite transponders that exist.
These two facts, along with the possible sunsetting of the
programming access rules would give EchoStar the ability to
control access to programming, thereby limiting customer choice
and providing enough forward bandwidth that small cable
companies would never be able to compete, and many of us have
already gone out of business with the satellite as it is.
Already DIRECTV has exclusive contracts for certain
sporting events, meaning that Americans can only purchase this
programming by buying it from DIRECT. Now imagine what happens
if they have the power of the two companies and they start to
buy things on an exclusive basis. Millions of consumers would
be forced to pay higher rates to get the same programming they
used to have.
EchoStar says Congress and the Federal Government should
support its merger because it will help satellite compete
against cable. However, two facts are clear. EchoStar will have
a complete monopoly in the direct broadcast satellite industry.
And, second, my company is not a monopoly in rural America.
Rather, we are the competitor to satellite, the monopoly that
already exists.
But it is more than that. If the merger is approved,
EchoStar will have succeeded in escaping any meaningful
regulation whatsoever. They'll go on to be like all the other
Goliaths.
So I ask Congress, one, please act to remedy the problems
that plague the programming industry.
Two, the EchoStar merger does not advance the interests of
rural consumers. So stop it.
And, three, effective competition requires Congress to
reduce the regulatory inequities between satellite and cable.
I would like to sincerely thank you, and if you have any
questions, we would love to talk.
[The prepared statement of Neal Schnog follows:]
Prepared Statement of Neal Schnog, Board Member, American Cable
Association, President and General Manager, Uvision, LLC
introduction
Thank you, Mr. Chairman.
My name is Neal Schnog, and I am the president, general manager and
part owner of UVISION, an independent cable business currently serving
8,300 customers in rural Oregon.
I also serve as a board member of the American Cable Association,
which represents more than 900 independent cable businesses serving
more than 7.5 million customers primarily in smaller markets and rural
areas across the United States. In fact, our American Cable Association
members serve customers in every state and U.S. territory and also in
nearly every congressional district represented by the members of this
committee.
Unlike some larger companies you hear about, ACA members are not
affiliated with program suppliers, big satellite, cable and telephone
companies, major ISPs or other media conglomerates. We focus on smaller
market cable and communications services, often in markets that the
bigger companies choose not to serve. Because we live and work in these
rural communities, we know how important it is to have advanced
telecommunications services available to us.
Just for the record, my small company is not the ``giant entrenched
cable monopoly'' that others talk about so frequently. We're simply a
small business in cable that happens to serve customers in rural
America. Quite frankly, we're the competitor to what may soon become
the ``giant entrenched satellite monopoly.''
Like other ACA members, my company, UVISION, specializes in serving
customers in smaller markets and more rural areas. Our company today is
on the forefront of providing advanced telecommunications services to
customers in these markets. In fact, my small company is now providing
digital cable services and high-speed cable modem Internet services to
the majority of our customers.
As a first-generation American whose family was given shelter and
prosperity by the shores of our great nation, I cannot express how
proud I am to take part in this hearing. I hope my testimony will help
you serve your constituents by understanding the critical issues facing
the multi-video programming and distribution industry. These issues
will have a significant impact on all Americans and could have a
devastating effect on rural communities. I therefore ask for your
consideration and hope you will agree that the industry is in need of
congressional and regulatory review.
As you know, most of today's headlines in the communications world
are about the large companies--the EchoStar-DirecTV merger, the
potential merger of AT&T and Comcast, and the media giants created by
the mergers of the 1990s. Being on this panel, I feel like an extra in
the movie, Clash of the Titans. But, the American Cable Association
represents no Goliaths. We here to speak for the millions of small-town
customers who are represented by nearly every member of this committee.
To me, the real benefit of this hearing is the opportunity to
highlight the current status of customer choice in the multiple-video
services market, because competition really means customer choice. No
choice, no competition. However, the irony here is that the status of
competition and customer choice today, especially in rural areas and
small towns, is already significantly limited because it is governed by
an unlikely cast of players that do not live in rural America, do not
focus on rural Americans' needs, and who have found anti-competitive
means to extract monopolistic earnings from all Americans.
Unless there is significant congressional and regulatory review of
these issues, the situation is not likely to improve. Consumer choice
and competition may be wiped out in the wake of the mighty merged
communications giants. Let me tell you why.
There are three very important issues that threaten consumer choice
in smaller markets and rural America and that will derail the progress
to provide advanced services in smaller markets:
The vastly increasing control of content, pricing, terms,
conditions and placement requirements by just a few programming
behemoths that truly control what the consumer sees.
The adverse effect in the smaller, rural marketplace of the
proposed EchoStar-DirecTV merger, which will limit current
competition in these markets from three current providers
(EchoStar, DirecTV, and independent cable) to just one--the
merged EchoTV monopoly.
The disproportionate burden of regulation on smaller,
independent cable companies, like mine in rural America,
compared to the free regulatory ride enjoyed by the satellite
monopoly.
I. Programming
So, who does control what your constituents' see on their TV sets?
Surprisingly enough, it isn't a small cable operator like me. While
customers and local franchise authorities don't see it, their choices
on what they watch are controlled by five companies, or programming
cartels. I call them America's own OPEC--the Organization of
Programming Extorting Companies. In an unforeseen development, over the
past five years we have seen an explosive consolidation in the
programming industry that has led to sharply increased prices, less
freedom to offer popular content, and little customer awareness as to
why they are forced to buy the channels they do.
For example, ESPN has raised its rates to our members by up to 20%
each year for the past five years. This while their viewership is
declining. Our customers want ESPN. Fine. But ABC-Disney will not let
us just buy ESPN. Oftentimes, in order to get the local ABC affiliate,
Disney will force us through retransmission consent to take other
channels, such as SoapNet. Same for Fox-News Corp., GE-NBC and CBS-
Viacom.
This might not be so bad if we could offer the programming on an a
la carte basis to allow the consumer to choose what they want. But all
of the cartel programming companies make independent cable pay for
every customer and pay punitive prices if we do not carry many of their
services in a bundle, just like they want.
Consolidation has turned retransmission consent into extortion.
These same programming cartels also dictate channel locations and other
terms. Even more appalling is that fact that these programmers also
embed into their contracts various ``non-disclosure'' terms. These
provisions prohibit cable operators from telling any customer, even the
local franchise authority, what the terms or rates are for their
programming. Thus, rate increases and unfair bundling practices are
kept hidden from the public and even from you, the key federal policy
makers who have created this industry. That is not the definition of an
open and fully competitive marketplace.
I am sure you all watched the retransmission consent showdown
between Time Warner and Disney over this very issue. Imagine the odds
that a small system like mine has when negotiating with the programming
cartels.
The four or five major programming cartels control the broadcast
networks and at least 50 other of the most popular stations. More than
90% of cable systems offer 30 to 90 channels, which, as you can see,
are monopolized by the programming cartels.
II. The EchoStar-DirecTV Merger
Customers will also face less choice as a result of the satellite
monopoly that would be created from an EchoStar-DirecTV merger.
The merger of EchoStar and DirecTV will create the world's largest
multi-video programming distributor with nearly 20 million subscribers
and give the merged companies nearly 90% of the full power, full-CONUS
satellite transponders that exist. These two facts along with the
possible sunsetting of the programming access rules, would give
EchoStar the ability to control access to programming, there by
limiting customer choice and providing enough forward bandwidth that
small cable companies would never be able to compete on an economic
basis.
Already, DirecTV has exclusive contracts for certain sporting
events, meaning that Americans can only purchase this programming by
buying it from DirecTV. Now imagine what would happen after the sunset
of the program access rules if the combined DirecTV/EchoStar used its
huge leverage to buy hundreds of sporting events and other programming
on an exclusive basis. Millions of consumers would be forced to pay
higher rates to get the same programming they used to have.
Of course, many would argue that this would not happen because the
current programming cartels would not let it happen. After all the
programming cartels already control their own distribution arms. But
what if the cartels are ready to admit a new member? Deals could be cut
so that all the cartel members have access to programming at the
expense of small cable. The current cartel members could shut off
programming to small cable companies effectively giving our customers
to EchoStar/DirecTV in order to bring EchoStar into the cartel. Or
worse the cartel could save face by providing access, but charging
independent companies usurious rates meaning that there was no real
access to programming.
This would give every giant player access to programming but small
cable companies and upstart distributors like telephone companies could
never again get access to the programming market, further securing the
monopolies of the giant communication companies.
The monopoly over satellite slots would further secure EchoStar/
DirecTV's new position by allowing them to deliver over 400 channels
with no real competition. In order for a small cable company to deliver
this number of channels, they would have to spend millions of dollars.
This is not economically reasonable where most of our members have less
than 1,000 customers. Without being able to provide the same number of
channels, many small operators would soon be out of business leaving
only one provider in many rural areas.
III. Regulatory Parity
In recent days we have increasingly heard representatives of the
EchoStar company saying how Congress and the federal government should
support its merger with DirecTV because it will help the satellite
monopoly compete against the giant, cable monopoly.
However, contrary to EchoStar's story, two facts are clear:
One, as we have already outlined, EchoStar will have a complete
monopoly in the direct broadcast satellite industry and will have the
ability to leverage this massive power to the detriment of choice,
competition and consumers in rural America.
Second, my company and the nearly 1,000 other small, independent
cable businesses in the American Cable Association are not the monopoly
in rural America that EchoStar claims. Rather, we are and will be the
competitor to the satellite monopoly that will exist in rural America
if the merger is approved. We will be the ``Southwest Airlines'' to the
merged satellite giant's ``United.'' And that's why preserving
competition in rural markets is vital.
But it's more than that. Right now direct broadcast satellite
enjoys favored regulatory treatment that gives it a great advantage in
the rural marketplace. If the merger is approved, the giant satellite
monopoly will have succeeded in rural markets to escape any meaningful
regulation that benefits consumers while ensuring that small business
competitors to the giant, like my company and the members of the
American Cable Association, have to bear it all. Look at the following
list and ask why the following are not required of all providers in the
marketplace, particularly if the goal is to promote fairness in
competition and the application of fair, public interest regulation to
all customers of cable or satellite alike.
Regulatory Burdens on Cable vs. DBS
------------------------------------------------------------------------
CABLE DBS
------------------------------------------------------------------------
Must-Carry Must-Carry (1/102)
Retransmission Consent Retransmission Consent
EAS Limited Public Interest
Obligations
Tier Buy-Through
Franchise Fees
Local Taxes
Signal Leakage/CLI
Rate Regulation
Mandatory Broadcast Basic
Privacy Obligations
Customer Service Obligations
Public Interest Obligations
Service Notice Provisions
Closed Captioning
Billing Requirements
Pole Attachment Fees
Public File Requirements
------------------------------------------------------------------------
In smaller markets and rural areas, the regulatory disparity that
exists between independent cable and dbs must be addressed if Congress
and federal policymakers want to ensure that multiple providers of
video service are there to provide choice to consumers.
conclusion
Each one of the foregoing issues directly affect the ability of
independent cable companies to (1) provide competition and choice in
the smaller markets and (2) to provide advanced new services in the
marketplace. If there is no viable competitor to the new giant
entrenched satellite monopoly, then there is no chance for consumers in
rural America to receive advanced digital services or high-speed cable
service as so many of our companies are providing now.
The irony here is that the impact of these issues, if not
addressed, will do exactly the opposite of what Congress wants--
providing competition and choice for consumers in the smaller and rural
marketplaces from multiple providers of video services, digital, high-
speed data and more. Instead, these markets may be left with just one
provider--the satellite monopoly.
The American Cable Association and its members are committed to
working with the Committee to solve these important issues.
I would like to sincerely thank the Committee again for allowing me
to speak before you today.
Mr. Upton. Thank you.
Mr. Phillips.
STATEMENT OF BOB PHILLIPS
Mr. Phillips. Good afternoon, Mr. Chairman and members of
the committee.
It is a privilege to appear before you today to present the
position of the National Rural Telecommunications Cooperative,
NRTC, regarding the state of competition in the cable and
satellite industry and the most critical issue, which is the
proposed impact of the DIRECTV-EchoStar merger in the
marketplace.
From our founding in 1986, it has been NRTC's primary
mission to bring state-of-the-art telecommunications services
to those who live and work in rural America. NRTC has been
involved in every facet of this business, from large dish
satellite or C-Band to delivering more than $100 million to
used communications to help launch the DIRECTV service.
Today, NRTC, through its participating members, which are
rural electric cooperatives and rural telephone systems, as
well as private affiliates, such as Pegasus Communications,
serves more than 1.8 million rural consumers with DIRECTV
service.
First, I would like to urge the committee to continue its
fight for program access by carefully monitoring the
developments of the FCC. We have formally just urged the
Commission to exercise its statutory authority and to extend
the October 5th, 2002 sunset of the program access rules that
bar exclusive contracts in areas served by cable operators.
Turning to the merger, NRTC believes that this merger as
proposed is bad for competition in rural America. It creates a
rural monopoly. It eliminates choice, and it eliminates
competition. Literally millions of homes in rural America have
no access to cable television or digital cable services, making
satellite TV their own option for video programming.
I did bring a map today which is included as a chart in my
testimony, which shows how there are tens of millions of people
who have no choice for video programming other than by
satellite, and I would call attention to particularly the red,
blue, and the green States on that map which have the lowest
penetration of cable, from 30 to 50 percent in some cases.
NRTC's mission is to serve these rural consumers, and today
these rural consumers can choose between EchoStar's dish
service or DIRECTV. If this merger is approved, their choices
go from two providers to one.
Now, the proponents of this merger would argue to you that
their promises are going to suffice for competition and that
the overall benefits of the merger outweigh the lack of choice
in providers which is going to result from this combination.
So instead of a vibrant and competitive satellite TV
marketplace which protects competition and choice, EchoStar
would promise to protect rural Americans by charging them the
same price as urban consumers.
I suggest to you that no price guarantee is going to solve
the monopoly problem that this merger creates. It would be
hard, if not next to impossible, to enforce any such promise,
and in fact, price is not the only issue when you do eliminate
choice. What about service quality or what about the choice in
content?
The proponents of this merger would also suggest that a
benefit will be increased delivery of local TV channels by
satellite, and with the approval of the merger EchoStar has
offered to increase its capacity dedicated to delivering local
markets, but nowhere near the total 210 TV markets.
A Department of Justice expert has testified, and a copy of
his testimony is attached to my statement, that each of these
merger applications in and of themselves have sufficient FCC
licenses and capacity to separately deliver all 210 markets.
Approving this merger will remove all competitive pressure
to expand coverage, and it is going to leave one company with
the sole power to decide whether or not to deliver all 210
markets.
This merger does also have far-reaching implications for
rural America with respect to satellite delivered, broadband
Internet service. Rural America is going to be threatened by
this proposed merger in that regard. Currently there are
already two providers of satellite Internet broadband. DIRECTV
offers a service owned by Hughes, which is called DirectWay and
EchoStar offers a service which they control called StarBand.
Again, the merger applicants are suggesting to you that
forming one broadband satellite provider by creating a monopoly
is in the best interest of rural Americans, and I fail to see
how that is going to benefit consumers.
Just a few years ago there were four competitors in the
satellite market. First Hughes bought Primestar. Then Hughes
bought USSB, and now if EchoStar is permitted to buy Hughes,
there will be only one. And I suggest that one supplier is a
very lonely number for a rural consumer.
As currently proposed, the merger of two highly successful
DBS companies with huge market value is so anti-competitive
with respect to rural America that it should not be permitted
in its current form. If this merger is permitted in its current
form, then it would appear to me that there is little left or
nothing left, in fact, to antitrust policy and enforcement in
the first years of this 21st Century.
I'm grateful for your attention, and I look forward to
answering your questions.
Thank you.
[The prepared statement of Bob Phillips follows:]
Prepared Statement of Bob Phillips, CEO, National Rural
Telecommunications Cooperative
Good afternoon, Mr. Chairman and Members of the Subcommittee. I
appreciate very much the opportunity to discuss the state of
competition in the multi-channel video program distribution (MVPD)
market.
My name is Bob Phillips, and I am the President and CEO of the
National Rural Telecommunications Cooperative (NRTC). NRTC has been
fighting for fair access to programming since our founding in 1986. We
were proud to represent rural American during the ``Program Access
Wars'' in the early 90's, which set the stage for MVPD competition
today.
executive summaryabout nrtc.
The National Rural Telecommunications Cooperative (NRTC) is a non-
profit national cooperative comprised of more than 1,000 rural
utilities and affiliates located in 46 states. For the last 15 years,
our primary mission has been to bring rural Americans the same state-
of-the-art telecommunications services that are commonplace in more
populated urban areas. To this end, NRTC and its members invested more
than $100 million toward launching DIRECTV, one of the two dominant DBS
operators in the country.
NRTC delivers to rural America the full benefits of competition in
the Multi-Channel Video Programming Distribution (MVPD) market,
including a diversity of programming choices, service options, and
lower prices. Today, NRTC members and affiliates serve more than 1.8
million rural consumers, nearly 20 percent of all DIRECTV subscribers.
As the leading distributor of DIRECTV's programming services to rural
Americans, NRTC's customers have a strong interest in--and serious
questions about--the proposed merger of DIRECTV and EchoStar. Extend
the FCC's Program Access Rules.
Given the continued vertical integration and dominant status of the
cable industry, continued fair access to programming remains essential
for the development of truly robust and viable competition to the
heavily entrenched cable industry. To that end, just yesterday NRTC
urged the FCC to exercise its statutory authority and to extend the
October 5, 2002 sunset of the Program Access rule that bars exclusive
contracts in areas served by cable operators.
The Proposed Merger Threatens Viable Competition in the MVPD Market.
Currently, EchoStar and DIRECTV provide competing MVPD programming
services to rural Americans. In approximately 20 percent of the U.S.,
they are the only sources of multi-channel video programming. If the
merger is permitted to go ahead, there will be no competition for MVPD
services in any household where comparable digital cable services are
not available.
There are no Viable Alternatives to DBS in Much of America.
Only three orbital slots for satellites have a signal footprint
that allows a high-power DBS satellite to transmit programming to the
entire continental United States, so-called full-CONUS slots.
Collectively, EchoStar and DIRECTV control all three of these slots.
In addition, in those areas only passed by analog cable, there is
no competition for DBS. Analog cable has fewer channels, lower quality,
fewer or no pay-per-view movies, significantly higher per-channel cost,
and an inability to use new technologies, such as interactive
television. Most analysts believe that many rural cable operators will
go out of business because they cannot afford to upgrade to digital and
cannot effectively compete with EchoStar and DIRECTV using an analog
signal.
The other, most-commonly mentioned MVPD alternatives to DBS are
also inadequate to compete with EchoStar, should the merger be
approved. The C Band ``backyard dish'' business is dying out. The
medium-power DBS provider, Primestar, was purchased by DIRECTV, and is
also losing subscribers. Multichannel Multipoint Distribution Service
(MMDS) has a shrinking subscriber base that is now around 700,000, and
will likely be converted to broadband delivery over time. Satellite
Master Antenna Television (SMATV) only serves multiple dwelling units
(MDUs), like apartment buildings, which rarely exist in rural America.
Not only does Northpoint's terrestrial-based technology interfere with
EchoStar's and DIRECTV's DBS signal, there are serious doubts that
Northpoint will ever obtain a license or launch service, especially if
it is required to pay for its spectrum. Suffice it to say, if this
merger is approved, rural Americans will only be able to see what the
new EchoStar chooses to deliver.
Promises of ``National Pricing'' are Insufficient to Protect Rural
Customers.
Prices of digital video services will go up in rural America
because of this merger. Whether it be video or broadband service, if
there is no effective competition, prices will be set by the monopoly
provider. The claim has been made that the new monopoly will choose to
sell its video service in urban areas such as Manhattan, Chicago and
Los Angeles at the same price as rural Missouri, Texas, Virginia and
Wisconsin. But this half-made promise raises important questions: Will
the proposed merged entity promise to set rural prices at the level of
its lowest urban prices? Will the proposed merged entity provide rural
consumers new services, such as broadband services, at the lowest urban
price? If the proposed merged entity provides urban America with free
installation for a thirty day promotion, will rural Americans benefit
from the offer?
Currently the set top box technologies used by DIRECTV and EchoStar
are incompatible, and the customers' dishes are pointed towards
different satellites. We have estimated that the cost of this switchout
will be in excess of $5-6 billion, although we have seen much smaller
cost estimates proposed. We believe having accurate cost estimates here
is critical, because promises to pay without a direct or indirect
contribution from the consumers will become increasingly unrealistic as
the cost goes up. Does anyone really think the consumers will not be
charged, directly or indirectly, for these multi-billion dollar merger
related costs? We believe enforcement of the half promise about pricing
is a potentially insurmountable problem. No agency of this government
is currently enforcing such a promise.
Price Isn't Everything.
But even if some form of ``national pricing'' can meet the
requirement for enforceability and realism, it is only one issue of
many that concerns consumers. We know our customers. They are not
solely concerned with price alone. Quality of service is equally
important. If a subscriber's system is broken, he wants it fixed. If a
subscriber has a question about his billing, he wants it fixed. Service
under monopolies traditionally declines because of the lack of
competition. If you can't go anywhere else, there is no economic
imperative to provide good service. No promise solves this problem.
Local-into-Local Service Could be Provided More Efficiently Without a
Merger.
EchoStar and DIRECTV have claimed that redundant programming could
be eliminated, thus allowing the merged entity to provide local-into-
local service in more markets if the merger is approved. If the merger
goes forward as proposed, it is unlikely that local-into-local will
ever be provided to rural Americans. Today, EchoStar and DIRECTV are
fierce competitors. When one offers local-into-local in a particular
market, the other usually follows shortly thereafter. Absent the
merger, we believe that this competition will likely cause the
companies to provide local-into-local to all--or almost all--DMAs. If
the merger occurs, we fear that EchoStar will simply stop providing
local-into-local after they have reached the top 100 markets because
the competition, which is currently forcing them to launch newer and
better satellites and to improve compression technology, will cease to
exist.
When compared to the cost of the set-top box change out required by
the merger, the two non-merged companies could provide local-into-local
for a fraction of the cost. On November 26, 2001, DIRECTV launched a
satellite able to transmit all 500 or so channels eligible for
transmission in markets 41-100. We believe that a fleet of these
satellites--enough to meet each company's must-carry obligation--could
be ordered, built, and launched for less that the $5-$7 billion that we
estimate the swap-out will cost. It could also be completed in less
time than we estimate it will take to swap out every subscriber's
incompatible set-top box and satellite dish.
Broadband Internet Access Would Be Severely Impacted by Merger.
MVPD and broadband Internet access are inextricably linked. MVPD
providers are providing access to the Internet now, and the roles will
soon reverse: Americans will receive their MVPD access from the
Internet. The proposed merger not only threatens competition in the
MVPD market, it also threatens rural Americans' chance to bridge the
digital divide.
There are three possible sources of broadband services in rural
America: satellite, cable and telephone companies. Because of the
sparse population density in much of rural America and the projected
failure of many small rural cable providers, satellite is the only
economically viable option.
EchoStar and Hughes each owns or controls both Ku-band broadband
satellite service providers currently operating. The next generation of
broadband satellite services, Ka-band, is just developing, but already,
EchoStar is acquiring one potential Ka-band competitor, Visionstar.
The proposed merger would leave control of most broadband satellite
services in the hands of a single company, which would be free to
charge as much as it wants for the provision of broadband Internet
access--as well as video services. As MVPD and broadband continue to
converge, this issue will become even more important.
nrtc's background.
NRTC is a not-for-profit cooperative comprised of 705 rural
electric cooperatives, 128 rural telephone cooperatives and 189
independent rural telephone companies located throughout 46 states. For
the last 15 years, our primary mission has been to bring to rural
America the same state-of-the art telecommunications services that are
commonplace in more populated urban areas.
The National Rural Electric Cooperative Association (NRECA) and the
National Rural Utilities Cooperative Finance Corporation (CFC) created
NRTC to bring valuable telecommunications services to rural
communities, just as the rural electric cooperative members of NRECA
and CFC brought electric and telephone services to rural America in the
1930's and 40's.
NRTC's family of products and services for rural America includes
dial-up and high-speed Internet services, power quality products,
utility power quality monitoring system, a nationwide wireless
communications network, and e-business applications. But much of our
effort to date has been devoted to delivering to rural America the full
benefits of competition in the MVPD market, including a diversity of
programming choices, service options and lower prices.
congressional support is the critical element in the fight for program
access in the mvpd market.
As early as 1989, NRTC supported efforts by the Federal
Communications Commission (FCC) and Congress to provide fair and non-
discriminatory access to satellite delivered programming.1
At that time, NRTC complained that as a C Band home satellite dish
(HSD) distributor to rural America, it was required to pay 400%, 500%
or even 800% more than cable operators were required to pay for the
same programming.2
NRTC was pleased to work with members of Congress to help obtain
passage over a Presidential veto of the Program Access provisions in
the Cable Television Consumer Protection and Competition Act of 1992
(``the 1992 Cable Act'').3 ``Persons in rural areas'' were
specifically targeted by Congress to benefit from the Program Access
rules.4
When the FCC implemented the1992 Cable Act, NRTC continued to
highlight the fact that as a rural HSD distributor it was unfairly
required to pay substantially more than cable operators for the
identical programming. To resolve this and related problems, the
Commission implemented the Program Access rules, which have at their
heart the objective of releasing programming to the existing or
potential competitors of traditional cable systems so that the public
may benefit from the development of competitive distributors.
On April 10, 1992, NRTC moved beyond the HSD business and forged an
important partnership with DIRECTV, Inc., a unit of Hughes Electronics
Corporation. NRTC, its members and affiliates invested more than $100
million toward launching the nation's first and most successful high-
power direct broadcast satellite (DBS) system. NRTC's early financial
commitment to DBS was absolutely critical to the introduction of this
new service across the country.
With its members and affiliates--including Pegasus Communications--
NRTC has become the leading distributor of satellite television service
to rural America. Today, NRTC members and affiliates serve more than
1.8 million rural consumers, nearly 20 percent of all DIRECTV
programming subscribers. This is a responsibility to rural America that
we do not take lightly.
The growth of the DBS industry is in large part a result of the
FCC's successful implementation of the Congressionally mandated Program
Access rules. Particularly in rural America, where DBS is necessarily
more popular because cable alternatives are often not available, the
Program Access rules have been necessary to preserve and protect
competition and diversity in the distribution of video
programming.5
continued congressional oversight of the cable industry and programming
is necessary.
The National Cable & Telecommunications Association (NCTA)
maintains that cable faces a robust, fully-competitive video
marketplace.6 Notwithstanding these claims, cable operators
and vertically integrated programmers continue to wield an inordinate
amount of power over potential competitors in the MVPD industry.
Since the Program Access rules were first adopted by the
Commission, the cable industry has maintained its stranglehold on
programming necessary for the non-cable MVPD marketplace to develop as
a competitive force.
The Commission's latest Cable Competition Report shows that
vertically integrated programming services continue to dominate the
MVPD market.7 More than \1/3\ of all national programming
services are currently vertically integrated with at least one cable
Multiple System Operator (MSO). While the cable industry has cited this
percentage as a measure of its decreasing influence,8 the
actual number of vertically integrated programming services has almost
doubled from 56 in 1994 to 99 in 2000.9
Continued access to vertically integrated programming remains
absolutely necessary for DBS to continue developing and flourishing as
a viable competitive force to cable.10 Given the continued
vertical integration and dominant status of the cable industry,
continued access to programming on fair and reasonable terms remains
essential for the development of truly robust and viable competition.
To that end, just yesterday NRTC urged the FCC to exercise its
statutory authority and extend the October 5, 2002 ``sunset'' of the
Program Access rule that bars exclusive contracts in areas served by
cable operators.
to properly evaluate the status of competition and the proposed merger,
the percentage of homes passed by cable needs to be confirmed.
At the direction of Congress, the FCC has issued an Annual Report
in each of the last seven years describing the status of competition in
the video programming market.11
One of the foundations of the FCC's Annual Reports, and the most
widely used measurement of cable availability, is the number of ``Homes
Passed'' by cable.12 The cable Homes Passed number is
intended to reflect the percentage of American consumers who have
access to cable services. Conversely, the remaining percentage reflects
those consumers who likely have access to MVPD services only through
DBS.
In previous Cable Competition Reports, the FCC has unfortunately
accepted without review or challenge the cable industry's claim that
approximately 97% of homes across the country are passed by
cable.13 However, a joint report released in April of 2000
by the National Telecommunications and Information Administration
(NTIA) and the Rural Utilities Service (RUS), titled Advanced
Telecommunications in Rural America: the Challenge of Bringing
Broadband Service to All Americans (``NTIA/RUS Report''), questions the
manner in which the percentage of cable Homes Passed has typically been
calculated. The NTIA/RUS Report found that the actual percentage of
Homes Passed could be as low as 81%.14 The Report discusses
apparent flaws with the cable industry's long-standing numbers and
suggests remedies for a more accurate determination.15
A recent New York Times article also shows that the percentage of
homes with access to cable could be as low as 78.4%, with more than
25,000,000 households unserved.16 It graphically illustrates
that in approximately 20 states, less than 70% of homes have access to
cable.
These facts are beginning to generate concerns on the part of state
antitrust officials and others impacted by the potential merger. For
example, Missouri's Attorney General, Mr. Jay Nixon, has recently
written to U.S. Attorney General Ashcroft, expressing his office's
concern that nearly 850,000 homes in his state--fully one-third of
Missouri's population--must rely solely upon the proposed merged
company for multi-channel video services if the merger is permitted.
As NRTC pointed out to the FCC, 17 widespread acceptance
of the flawed 97% Homes Passed number has vastly overstated the status
of video competition in rural America. We are particularly concerned
about the accuracy of this number, because it is being widely used to
describe competition in the MVPD market--and to minimize the impact of
the proposed EchoStar/DIRECTV merger on rural America. Proponents of
the merger have been quick to embrace the incorrect number. For
example, according to a transcript of a ``Charlie Chat'' on November
12, 2001, Mr. Ergen, CEO of EchoStar, stated that ``I don't agree in
these kind of circumstances there would be any kind of monopoly at all.
We compete against cable companies across the country (. . .) over 96%
or 97% is passed by cable so probably almost nobody watching this
tonight (via satellite) doesn't have the opportunity to subscribe to
cable if they'd like to.'' 18
To evaluate the status of MVPD competition, as well as the proposed
merger, the number of ``Homes Passed'' by cable must be established
accurately and conclusively--and it must be done on both the nation and
the local level. We urge this Subcommittee to require the FCC to
independently verify the actual percentage of Homes Passed, and for the
U.S. Department of Justice Antitrust Division to also demand careful
analysis of this critical question.
serious concerns are raised by the proposed echostar/directv merger.
Mr. Chairman, let me begin by saying that I have a great deal of
respect for Mr. Ergen. He has built a successful business in EchoStar.
We compete with his company every day as it provides different
programming than our DIRECTV product. EchoStar has aggressively priced
and provided a strong and competitive service to consumers. But if this
merger is successful, EchoStar would become our exclusive wholesale
supplier, and the choice in satellite providers throughout rural
America would be cut from two to one. That is a serious concern for the
rural consumers we represent.
programming decisions would be made by a single company for rural
america.
Currently EchoStar and DIRECTV provide competing digital video
programming services. If the merger is permitted to go ahead, there
will be no alternative MVPD provider in any household in the U.S. where
comparable digital cable services are not available. As discussed
above, the number of households unserved by any type of cable is far
more than the 3% mentioned by Mr. Ergen. It could as high or higher
than 20% of the homes across the country--or more than 25,000,000
households.
In all of these homes, EchoStar would decide what programming to
provide and how much to charge for it. For instance, just last week
EchoStar announced that it would no longer offer ESPN Classic or ABC
Family channel over its DISH network. If the merger is approved, rural
homes that previously enjoyed that programming simply won't see it
again. EchoStar could reach a similar decision regarding CNN or Disney
or any other programming service that it chooses not to carry.
in those areas not served by digital cable (the vast majority of rural
america), there is no viable alternative to dbs.
The latest generation of DBS services operates in the high-power
portion of the KuBand and delivers video programming directly to a
pizza-sized dish antennas located at the subscriber's home.
International treaties limit the KuBand spectrum allocated for DBS
service, and the FCC is responsible for assigning all U.S. satellite
orbital positions and frequencies. Only three U.S. orbital slots have a
signal footprint that allows a high-power DBS satellite to transmit
programming to the entire continental United States. These three slots
are referred to as full-CONUS slots, and they are located at the
101 deg. W.L. orbital position, at 110 deg. W.L., and at 119 deg. W.L.
There are 32 frequencies available at each of the three full-CONUS
orbital slots. Collectively, DIRECTV and EchoStar control all of these
frequencies at all of these slots.
There are non-full-CONUS orbital slots at 61.5 deg., 148 deg.,
157 deg., 166 deg. and 175 deg. W.L. To the extent these slots have
been assigned by the FCC, they are either controlled by DIRECTV or
EchoStar or are used to provide ``niche'' programming, such as
Dominion's Christian programming from the 61.5 deg. slot. We are
unaware of anyone intending to use a combination of non-full-CONUS
slots to compete with DIRECTV or EchoStar. Moreover, effective
competition from multiple slots would be unlikely because it would take
twice the number of satellites to cover the same amount of the country,
a huge competitive disadvantage.
In those areas passed only by analog cable (as opposed to digital
cable), there is no real competition aside from DIRECTV and EchoStar.
Analog cable has far fewer channels (often only 50 or 60), poor picture
quality, few or no pay-per-view movies, significantly higher per
channel cost, and an inability to use new technologies, such as
interactive television. Most analysts believe that many rural cable
operators will slowly go out of business if they cannot afford to
upgrade to digital and effectively compete with DIRECTV and EchoStar.
We discuss below some of the inadequacies of the most commonly
mentioned MVPD alternatives to high-powered DBS service.
1. C Band.
Beginning in the late 1970's, C Band frequency satellites delivered
programming directly to households. C Band's low-power signal requires
enormous backyard receiving dishes, usually measuring six to eight feet
in diameter. C Band services have traditionally been marketed
exclusively to rural areas. The price of the dish plus installation
generally runs into the thousands of dollars, while the cost of an
entry-level DIRECTV or EchoStar system is typically less than $200.
Because of C Band's high cost and the unsightly large dishes, the
consensus in the industry is that the C Band business will continue to
diminish as existing customers replace their larger dishes with
smaller, less expensive DBS equipment.
The FCC's recent Cable Competition Reports support this conclusion.
The FCC found that between June 1999 and June 2000, the number of C
Band subscribers declined from 1.8 million to 1.5 million (a decrease
of 17%), probably due to subscribers switching to DBS. Since the
release of the Commission's Report, the number of C Band subscribers
has further decreased to 850,000, or approximately 1% of the total MVPD
market.
2. Medium-Power Satellites.
The next satellite TV technology to emerge after C Band was medium-
power DBS. Medium-power providers operated in a different Ku-Band range
than high-power DBS. Because this technology operated at a lower power,
it was unable to deliver as many channels as high-power DBS, yet its
overhead costs were at least as high. In addition, it required
satellite dishes approximately 27'' to 39'' in diameter. With the rise
of DIRECTV and EchoStar, medium-power DBS was unable to compete. The
last medium-power DBS provider offering service directly to consumers
was Primestar, which was purchased by DIRECTV. The Primestar
subscribers have been converted to DIRECTV's high-power DBS service.
There currently is no medium-power DBS company providing service
directly to consumers.
3. MMDS.
Multichannel Multipoint Distribution Service (MMDS) is another
dying video technology. MMDS is a ground-based, fixed wireless
technology, with its signal transmitted from a large antenna on a high
tower to nearby households. Many video systems are analog and do not
offer many channels. In addition, and most importantly, MMDS is
unavailable in much of rural America because it is not cost effective
to build large towers that serve comparatively few rural households. In
recent years, MMDS operators have been converting their systems from
video to broadband delivery, and in the last few months the FCC
authorized mobile uses of the spectrum. Like C Band, MMDS has also
shown drastic decreases in the Commission's Cable Competition Reports.
The number of subscribers has decreased from 1.1 million in December of
1996 to 700,000 in June of 2000. MMDS holds only .83% of the total MVPD
market.
4. SMATV.
Satellite Master Antenna Television (SMATV) Systems serve only
multiple dwelling units (MDUs). Generally, an apartment building or
other MDU complex has one or more large C Band or medium-power dishes,
which the provider then transmits, often through cables, to all of the
dwelling units in the complex. SMATV only serves MDUs and thus is not a
viable alternative for the vast majority of rural Americans, who tend
not to live in multiple dwelling complexes.
5. Northpoint.
Northpoint is a start-up company that does not even have an FCC
license. It is seeking a terrestrial license to operate in the same Ku-
Band DBS spectrum as EchoStar and DIRECTV, which have opposed the
request. It would operate somewhat similarly to MMDS, using large
antenna towers to serve nearby households with a clear line of sight to
the antennas. There are a number of significant impediments to
Northpoint ever coming to market.
One main impediment is that its technology interferes with
DIRECTV's and EchoStar's DBS signal. An independent study commissioned
by the FCC at the direction of Congress was performed on Northpoint's
technology by the MITRE Corp.19 That study found that
Northpoint's technology caused interference to DBS reception. It
further found that the interference could be reduced if certain
mitigation measures were undertaken, some of which were quite costly.
It is unclear whether Northpoint has sufficient financing to undertake
these remedial measures.
Another significant impediment is that Northpoint's FCC application
seeks a license for free, instead of under the FCC's Congressionally-
mandated method of auctioning terrestrial spectrum. Northpoint's CEO
has intimated that the company cannot afford to roll out its product if
it has to pay for the spectrum like other applicants. It is unlikely
that the FCC will, or should, give away valuable spectrum.
Even if Northpoint obtained a license and made it to market, which
is speculative at best, it would not be a significant competitor in
rural America because of economics. Northpoint's technology, like MMDS,
will not be practical in rural America because of the high costs for
building numerous large antenna towers that would serve very few rural
households.
local-into-local service could be provided more efficiently without a
merger.
EchoStar and DIRECTV have claimed that as a benefit of the merger,
redundant programming could be eliminated, allowing the merged entity
to provide local-into-local service in additional markets, instead of
just the top 40 markets (DMAs) they are serving today. However, we
believe that both DIRECTV and EchoStar could provide local-into-local
programming in these additional markets for a fraction of what it would
cost to change-out the set-top boxes in connection with the merger.
In the ``Must-Carry'' litigation filed by DIRECTV, EchoStar and
others against the FCC, the Department of Justice filed a declaration
by its expert witness Roger J. Rusch.20 Mr. Rusch stated
that it is technically feasible to build a single satellite that could
deliver all 1475 local television stations in all 210 DMAs using
available ``spot-beam'' technology. He further added that a single
satellite, using existing technology, could be designed that would
deliver 1,114 channels (or enough to cover every local station outside
of the top 40 markets being carried by DIRECTV and EchoStar) without
any modifications to existing set-top boxes.
To deliver local-into-local only in markets 41-100 (and not 41-
210), the cost would be even less. While Mr. Rusch believes existing
satellites could provide these resources, this could probably be
alternatively accomplished by launching only one additional spot-beam
satellite, similar to the spot-beam satellite launched by DIRECTV on
November 26, 2001. Such a satellite should be able to transmit all 500
or so local television channels eligible for transmission in DMAs 41-
100.21 We estimate the cost of a spot-beam satellite
(including launch and insurance) to be less than $250 million.
The proposed merger makes it less likely that local-into-local will
ever be provided to the far reaches of rural America. Today, DIRECTV
and EchoStar are fierce competitors. When one offers local-into-local
in a particular market, the other usually follows shortly thereafter.
Without the merger, we believe that this competition will likely cause
the companies to provide local-into-local to all, or almost all, DMAs.
With the merger, we fear that the companies will simply stop providing
local-into-local after they have reached the top 100 markets because
the competition, which is forcing them to launch newer and better
satellites and to improve compression technology, will cease to exist.
the proposed merger would require disruptive and expensive efforts to
replace and re-point millions of existing satellite dishes.
As DIRECTV and EchoStar have acknowledged, their set-top boxes use
incompatible technology and one of the company's set-top boxes will
have to be switched out. They have estimated that the cost of the
change out to the merged company will be $2.5 billion and that the
change out could be accomplished in 2-4 years. DIRECTV and EchoStar
have stated that the rest of the cost of the change out would be borne
by consumers. They have not stated what the total cost of the change
out will be or how it will be financed.
We think that the cost of the change out will be approximately $5
to $6 billion. In the near future, experts will be able to provide the
most accurate estimate of these amounts. Currently, DIRECTV transmits
almost all of its programming from the 101 degree orbital slot. Almost
all of its subscribers receive that programming on an 18'' round dish.
Some DIRECTV subscribers also receive limited programming from
DIRECTV's 3 frequencies located at the 110 degree orbital slot. These
subscribers cannot use the 18'' round dish (which can only receive
programming from one orbital slot), but must instead use a slightly
larger oblong dish, which allows them to receive programming from two
orbital slots.
EchoStar has many subscribers with 18'' round dishes, which are
generally pointed at the 119 degree orbital slot; however, a
significant percentage of EchoStar's subscribers use oblong dishes,
which are capable of receiving programming from both the 110 and 119
orbital slots. EchoStar has stated that the merged company will likely
have the core cable programming transmitted from the middle, 110 degree
orbital slot, with local signals and niche programming transmitted from
the 101 degree and 119 degree slots.
For a number of reasons, most analysts believe that DIRECTV boxes
and not EchoStar boxes will be changed out: EchoStar uses a standard
which is generally considered better than DIRECTV's; security for
EchoStar's boxes is designed by a company 50% owned by EchoStar; and
EchoStar Technologies would then be the dominant player in set-top box
manufacturing.
Assuming that DIRECTV boxes are changed out, we estimate the cost
of the change out to be between $5.275 billion to as much as
approximately $6.9 billion. We reach this by estimating that there will
at least 11.5 million DIRECTV subscribers when the merger is set to
close. We further estimate that the cost of the change out would be
$450-$600 per subscriber (including cost of box, oblong dish and
labor). We also estimate that the cost of repointing EchoStar's 18''
dishes from 119 degrees to 110 degrees will be upwards of $100 million.
(Note: if the EchoStar boxes are changed out, the costs would likely be
more than $4 billion because almost every DIRECTV subscriber would
require a service call either to repoint the dish or to receive an
oblong dish.)
We also believe that the 2-4 year estimate is optimistic at best.
The logistics of having 15 million or so service calls by trained
technicians are daunting. Until the change out is complete, both sets
of the redundant programming will have to be transmitted (because
otherwise existing subscribers using the ``old'' technology would be
``cut-off'').
promises of ``national pricing'' are insufficient to protect rural
consumers.
Recognizing that the merger would create a monopoly in rural
America, DIRECTV and EchoStar contend that the lack of competition
created by the monopoly can be ameliorated through pricing their
product on a national basis. We believe that enforcement of this
promise would be an insurmountable problem. There is no agency in this
government currently enforcing such a promise or equipped to regulate
the proposed monopoly.
We believe this promise has been made for its appealing nature, not
because it offers meaningful protection for rural Americans. This
proposed national price ``fix'' does not work for at least three
reasons, each of which is discussed in more detail below:
1. Prices Actually Will Be Higher.
Since the merged company will be able to charge monopoly prices in
rural America, it will likely raise prices significantly in order to
benefit from the monopoly. Because DBS monthly subscriber rates are
much lower than analog cable on a per channel basis, the merged company
could raise prices substantially without hurting subscriber growth in
those areas. Similarly, in areas served by competitively priced digital
cable, DBS subscriber rates are still generally lower on a per channel
basis for anything except basic service. Hence, the merged entity could
substantially raise prices for all of its expanded packages (sports,
HBO, etc.) while still keeping its price advantage over cable.
Today, prices for DBS services are generally below cable because of
intense price competition between EchoStar and DIRECTV. With the
merger, this competition would cease and prices would likely go up for
every DBS subscriber--rural and non-rural alike.
2. ``National Pricing'' is Easy To Evade.
There are numerous ways that the merged company could use its
monopoly power to charge rural America non-competitive prices, even
with national pricing. For example, it could undercharge (or give away)
local-into-local programming, which will apparently only be provided to
urban America, and offset this subsidy by charging more for basic
service that must be purchased by rural households. Urban households
would be paying the same for basic plus local-to-local, while rural
households would be paying monopoly prices for basic service.
Similarly, the merged company could determine, through its
subscriber database, that rural subscribers are much more likely to
purchase a particular programming package and then charge non-
competitive prices for that package. The merged entity also could
subsidize the set-top box or subsidize installation only in urban
America, either overtly or covertly (such as through promotions with
companies that only have stores in urban America). Rural consumers
could be charged more ``shipping and handling'' for products purchased
through the e-commerce function in the set-top box. The list is
endless.
3. ``National Pricing'' Fails To Address Service and Other Problems
Inherent In A Monopoly.
Not only will national pricing fail to prevent the merged company
from charging rural America non-competitive prices, it will also not
eliminate any of the other problems inherent in a monopoly. In
particular, as discussed above, there will be no competition spurring
the monopoly to provide local-into-local service to rural America or
other advanced services. Similarly, there will be no competition
regarding customer service. Now, if a DBS provider fails to send a
technician to a remote place, the subscriber can change service to the
other DBS provider. After the merger, there will be no financial
incentive for the monopoly to provide good customer service to rural
America. In addition, advances in technology spurred by competition,
such as compression technology or the launching of additional
satellites, will likely slow greatly. In sum, the merged company will
behave like a typical monopoly.
delivery of broadband internet satellite services to rural america also
would be severely impacted by the merger.
Mr. Chairman, I know that your focus today is on MVPD competition.
But the availability of broadband services is inextricably linked to
the offering of video programming. Without a companion video offering,
the prospects for a successful broadband offering are weak.
Broadband Internet access--which many in Congress and elsewhere
recognize as a key to the future economic development of rural
America--is seriously threatened by this proposed merger. There are
three possible sources of broadband services in rural America--
satellite, cable and telephone companies. Because of the low population
density and rough terrain in much of rural America, satellite is the
only universally available broadband provider.
There are currently two providers of KuBand broadband satellite
services: DIRECWAY, owned by Hughes, and Starband, controlled by
EchoStar. The merger of the two companies would create a monopoly in
the KuBand broadband market.
More importantly, it also would create a monopoly in the next
generation of KaBand broadband market. The KaBand is just developing as
a new, emerging market, and it is expected to have greater capacity,
faster speeds and lower costs than KuBand.
In a post-merger world, however, the emerging KaBand market would
be absolutely dominated by EchoStar. For all practical purposes, other
competitors would be frozen out. That effect was felt immediately after
the announcement of the merger, when one of the most promising of the
potential KaBand providers shut down and funding for others dried-up.
Meanwhile, EchoStar is completing its acquisition of Visionstar,
another potential KaBand provider.
Rural America will remain on the wrong side of the digital divide
if broadband Internet is not available at reasonable, competitive
rates. This proposed merger, if approved, would leave EchoStar
controlling the availability, breadth and cost of nearly all satellite
broadband Internet (and video) services. That's a major problem for
rural America.
past monopoly claims by echostar against its proposed merger partner
merit careful review.
As recently as two months ago, EchoStar was engaged in a lawsuit
which accused DIRECTV of being a monopoly that repeatedly abused its
monopoly power. Attached to my testimony you will find a copy of
EchoStar's complaint against DIRECTV. I believe you will be
particularly interested in reviewing EchoStar's characterization of the
uniqueness of the DBS marketplace 1 and their allegations of
DIRECTV's abuse of its power which permeate the document. Of course,
the proposed merger partners dismissed this suit when they decided to
marry their corporations. But if DIRECTV constituted a monopoly, please
think carefully about the resulting single entity's overwhelming market
power.
---------------------------------------------------------------------------
\1\ Of particular interest are paragraphs 26, 28, 34, 52, 56 and
57.
---------------------------------------------------------------------------
antitrust law should block this merger as proposed.
Claims that a merger will generate efficiencies in one market
cannot justify or offset anti-competitive effects created by that
merger in a separate market. This conclusion follows from the language
of Section 7 of the Clayton Act, which prohibits mergers or
acquisitions which may substantially lessen competition ``. . . in any
line of commerce or . . . in any section of the country . . .'' Thus,
Section 7 presents a legislative conclusion that one section of the
country will not be sacrificed to anti-competitive effects in order to
generate a benefit for a different section of the country. This hearing
reaffirms that conclusion in its own way.
This statutory language was relied upon by the United States
Supreme Court in United States v. Philadelphia National Bank, 374 U.S.
321 (1963), where the Court explained that a merger leading to anti-
competitive effects in one portion of the country could not be
justified by arguable pro-competitive benefits to another section of
the country. The Court stated: ``If anti-competitive effects in one
market could be justified by procompetitive consequences in another,
the logical upshot would be that every firm in an industry could,
without violating Sec. 7, embark on a series of mergers that would make
it in the end as large as the industry leader.'' The Supreme Court
enjoined the proposed merger.
The area of effective competition is the geographic area where
customers can practically turn for alternative sources of the product.
Anti-competitive effects in one market, such as rural America, cannot
be shrugged off or disregarded, even if there is allegedly a benefit in
another market.
conclusion.
Mr. Chairman, members of this Subcommittee, the proposed merger of
EchoStar and DIRECTV offers bleak options to rural America. Much of
rural America has no access to MVPD programming except through high
powered DBS services. Just a few years ago there were four competitors
in the satellite market. Then Hughes bought Primestar. Then Hughes
bought USSB. If EchoStar is permitted to buy Hughes, there will be only
one provider--and no competitors.
Rural America deserves a diversity of programming choices and a
wide variety of advanced telecommunications services, not a single,
monopoly satellite provider. We firmly believe that the merger of two
highly successful DBS companies into one monopoly provider is so
inconsistent with the interests of rural America that it should not be
permitted in its current form.
I appreciate your interest in this important issue and welcome the
opportunity to address any questions.
Thank you.
Endnotes
1 Notice of Inquiry, Inquiry Into the Existence of
Discrimination in the Provision of Superstation and Network Station
Programming, 4 FCC Rcd 3833 (May 1, 1989).
2 Report, Inquiry into the Existence of Discrimination
in the Provision of Superstation and Network Station Programming, 67 RR
2d 675, 5 FCC Rcd 523, para. 58, fn. 82 (December 29, 1989).
3 47 U.S.CA. Sec. 628 See also First Report and Order,
Implementation of Sections 12 and 19 of the Cable Television Consumer
Protection and Competition Act of 1992, 72 RR 2d 649, 8 FCC Rcd 3359
(April 30, 1993) (``Cable Act Report'').
4 47 U.S.C.A. Sec. 548(a); See also 135 Cong. Rec.
S1215202 (discussing the benefits of the statute to rural consumers).
5 The highest DBS penetration rates ``averaging almost
32%--have occurred in states with substantial rural populations (See,
Satellite Broadcasting & Communications Association web site ). Although the Program Access
rules benefit all American consumers, their loss would
disproportionately affect rural Americans.
6 Comments of the National Cable & Telecommunications
Association at pages 6-26, 37-40 (``NCTA Cable Comments''), filed in
response to Notice of Inquiry, Annual Assessment of the Status of
Competition in the Market for the Delivery of Video Programming, CS
Docket No. 01-129, FCC 01-191 (Released June 25, 2001) (``2001 Cable
NOI'').
7 Seventh Cable Competition Report, para. 181.
8 NCTA Cable Comments, at page 39-40 (discussing general
decrease in vertical integration); See Also, NCTA Press Release, The
Program Access Laws of 1992 are Working: No Further Congressional
Action is Needed, May 2001, obtained from, (visited November 20, 2001) (stating that
vertical integration of cable program networks declined to 35%).
9 First Annual Report, In the Matter of Annual
Assessment of the Status of Competition in the Market for the Delivery
of Video Programming, 9 FCC Rcd. 7442, ]161, fn. 434 (Released
September 24, 1994) (``First Cable Competition Report''). See also
Seventh Cable Competition Report at para. 173.
10 The Commission noted that ``large cable operators,
because of their size and market share, have overwhelming buying power
in the programming market that restricts access to independent
programming as well as to vertically integrated programming.'' Report
to Congressional Committees Pursuant to the Rural Local Broadcast
Signal Act, FCC 00-454 (rel. Jan. 2, 2001), at para. 26 (citing
observations by EchoStar).
11 See Communications Act of 1934, as amended, 47 U.S.C.
Sec. 548(g).
12 ``Homes Passed'' is defined as the total number of
households capable of receiving cable television service (see Seventh
Cable Competition Report, n. 12.
13 See First Annual Report, In the Matter of Annual
Assessment of the Status of Competition in the Market for the Delivery
of Video Programming, 9 FCC Rcd. 7442, 7451, para. 18 (stating that 96%
of homes were passed by cable); See, Third Annual Report, In the Matter
of Annual Assessment of the Status of Competition in the Market for the
Delivery of Video Programming, 12 FCC Rcd. 4358, 4368, para. 13
(stating that 96.7% of homes were passed by cable); See, Fourth Annual
Report, In the Matter of Annual Assessment of the Status of Competition
in the Market for the Delivery of Video Programming, 13 FCC Rcd 1034,
para. 14 (stating that 97.1% of homes were passed by cable). See also
Fifth Annual Report, In the Matter of Annual Assessment of the Status
of Competition in the Market for the Delivery of Video Programming, 13
FCC Rcd 24284, para. 16 (stating that 96.5% of homes were passed by
cable); See Also, Sixth Annual Report, In the Matter of Annual
Assessment of the Status of Competition in the Market for the Delivery
of Video Programming, 15 FCC Rcd 978, para. 19 (stating that 96.6% of
homes were passed by cable); And See, Seventh Cable Competition Report,
para. 18 (stating that 96.6% of homes were passed by cable).
14 National Telecommunications and Information
Administration and Rural Utilities Service, Advanced Telecommunications
In Rural America: The Challenge of Bringing Broadband Service to All
Americans, April, 2000, fn. 62 (``NTIA RUS Report'').
15 As the NTIA/RUS Report points out, the calculation of
cable passage rates can be dramatically impacted by three basic,
different sets of statistics: 1) Housing Units; 2) Households; and 3)
TV Households. A ``Housing Unit'' is defined as a house, apartment,
mobile home, group of rooms, or single room, that is occupied (or, if
vacant, is intended for occupancy) as separate living quarters. A
``Household'' is a currently occupied ``Housing Unit.'' A ``TV
Household'' is defined as a home with at least one television. In
arriving at its 97% figure, the cable industry may by comparing
``apples to oranges,'' by counting Housing Units--not TV Households--as
a percentage of TV Households. The NTIA/RUS Report points out that when
a cable provider does not serve a house, it has no easy way to
distinguish among a household without a TV, a household with a TV, or
an unoccupied housing unit. The cable provider knows only that a
Housing Unit is passed. The NTIA/RUS Report concludes, therefore, that
a comparison of Homes Passed to Housing Units is especially useful in
determining cable passage rates. NTIA/RUS Report, at fn. 62.
16 Look, Up in the Sky! Big Bets on a Big Deal, N.Y.
Times, October 30, 2001, at C-1. The article states that 115.9 million
households have access to DBS programming, whereas only 90.9 million
households have access to cable services. With a 78.3% passage rate,
the number of unserved households equals more than 25,000,000. Sources
for the article are cited as: NCTA, the Census Bureau, SkyRESEARCH,
Satellite Broadcasting and Communications Association of America, and
Kagan World Media.
17 Comments and Reply Comments of NRTC, filed in
response to 2001 Cable NOI. NRTC also addressed the accuracy of the
Homes Passed statistic in its Comments filed in the Commission's Sixth
Annual Cable Competition Report (See, Comments of the National Rural
Telecommunications Cooperative, CS Docket No. 00-132, para.para. 8-15
(submitted September 8, 2000)).
18 Rule 425 filing by EchoStar with Security Exchange
Commission, November 16, 2001, p.5.
19 MITRE Technical Report, Analysis of Potential MVDDS
Interference to DBS in the 12.2-12.7 GHz Band, the MITRE Corporation
(April, 2001).
20 Declaration of Robert J. Rusch, Satellite
Broadcasting and Communications Association of America, et al, v.
Federal Communications Commission et al., Civil Action No. 00-1571-A
(U.S.D.C., E.D. Va., May 23, 2001).
21 On November 29, 2001, the President authorized
funding for the administration of the Launching Our Communities Access
to Local Television Act of 200 (the ``LOCAL Act''), Pub. L. No. 106-553
(2000), which created a loan guarantee program for the provision of
local service to unserved and underserved areas.
Mr. Upton. Thank you.
STATEMENT OF JARED E. ABBRUZZESE
Mr. Abbruzzese. Hi. Good afternoon, Mr. Chairman. Thank you
for the opportunity to testify before the committee.
My name is Jared Abbruzzese, and I am Chairman and Acting
CEO of WSNet, a satellite facilities based wholesale provider
of digital video programming services, headquartered down in
Austin, Texas.
Today what I will try and do is briefly touch on a lot of
the subjects that were brought up today by the committee.
WSNet offers satellite facilities-based wholesale
programming and technology services to over 1,200 small,
private cable and rural cable TV companies nationwide,
representing almost 4,000 local cable TV systems. WSNet's role
is that of an enabler. We enable these small operators to
deploy advanced video service technologies that they otherwise
would not have access to because of the unique demographics
that are associated with the rural market.
These multiple services include prepackaged, pre-digitized
video services, new technologies that allow small rural cable
operators to upgrade their service offering so that they can
provide more channels developed over their existing cable plant
at a fraction of the cost than they would otherwise be able to
do if they had to incur the cost of upgrading their plant
directly.
In addition, WSNet offers its cable operators a satellite
delivered direct to the home service of more than 200 digital
video channels.
The 1992 Cable Act was successful in creating an
environment that allowed for the number of households with
access to pay TV services to go to 87 million households that
are served today. The act was also helpful in greatly expanding
the availability of new upgraded digital video and data
services.
The act, however, was less than successful in creating the
desired goal of increasing the number of competitive multi-
channel TV service providers and slowing the increased cost of
cable TV services.
These shortcomings can mainly be attributed to two factors,
the first being the restructuring, consolidation, ongoing
consolidation of the programming industry, and the second being
the consolidation of the cable TV industry.
In response to the 1992 Cable Act, most vertically
integrated programming companies immediately de-vertically
integrated themselves. After a series of divestitures,
restructurings, and consolidation, there now exists 5 to 7
major programming companies. Most of these operate free of the
1992 act restrictions governing program access and pricing.
These programmers can now decide when, for how much, and to
whom they wish to sell their commercially critical programming
content. In effect, those entities who do not have millions of
customers worth of buying power can sometimes find that the
access to critical programming is delayed; it's overpriced;
it's packaged with unwanted services, or even denied.
In light of these concerns, WSNet would respectfully ask
this committee and the Congress to consider imposition of
expanded program access rules.
Regarding the status of MVPD, in 1996, the approximate 72
million households that were pay TV customers, the largest
seven cable TV companies had 42 million, or 58 percent of the
overall customer base. The three DBS providers at the time
controlled about 3.9 million customers, or 5 percent.
And during that time local private cable and rural cable TV
companies--and the smaller operators controlled about 26
million or 36 percent of the total market.
Since 1996, there has been a massive consolidation effort
on the part of the largest TV cable companies. Not only have
these cable TV companies become dramatically larger, but just
as importantly, as Mr. Terry indicated, they have
systematically consolidated franchise assets around large
metropolitan areas through acquisitions and trade amongst each
other.
In prior years, a large metropolitan area may have several
cable TV companies operating adjacent franchise areas. Today
you will generally find one dominating the area. This gives
them tremendous pricing power and control over the content of
the area.
The results of this industry consolidation since 1996 are
impressive. Of the approximately 87 million households today
that are currently paid TV customers, the largest seven
companies now control 65 percent, or almost 57 million
customers, an increase of 35 percent in 5 years.
The two remaining high powered DBS companies now control 19
percent of 17 million customers, a staggering 356 percent
increase in 5 years. This is with two large DBS competitors
competing against each other. Obviously their respective
service offerings are quite vibrant.
During this same period of explosive growth in the market
share for both the large cable providers and the DBS guys, the
smaller rural and local cable TV companies have seen their
market share shrink by almost 48 percent, to about 13.4 million
customers. Clearly since 1996 the smaller cable TV operators
have been steadily losing both market share and customers. The
decline, again, can be contributed to the lack of ability to
upgrade their services and increase the number of channels.
Typically rural cable companies have 30 to 40 analogue
channels. There are currently three companies that provide
satellite, facilities based digital video operating today in
the U.S. The two largest are EchoStar and DIRECTV. They operate
high powered DBS satellites. The third is WSNet utilizing
medium powered KU band satellites.
If the announced merger or the announced EchoStar and
Hughes DIRECTV merger goes through, the combined entity will
control 100 percent of all three U.S. licensed high powered DBS
full CONUS, which means it sees all 48 States, contiguous
States, in the U.S.
In addition, it will also control more than 55 percent of
the two remaining usable high powered DBS semi-conus locations.
In short, the merged entity will control virtually all of the
U.S. high powered capacity available and licensed.
Clearly the merged entity will be a daunting giant with
vast competitive weapons at its disposal. WSNet has not been
able to and cannot find commercially viable, high powered DBS
capacity in the United States, and it is the much preferred
technology.
Largely in response to this extraordinarily controlled that
a merged EchoStar and DIRECTV entity will enjoy, WSNet has
sought the only high powered alternative in existence in North
America recently, and filed for landing rights to the FCC from
two Canadian high powered DBS lots. It should be noted that
that capacity is currently committed to Canadian companies and
it's highly questionable as to whether we will ever be able to
use it.
Mr. Chairman, even considering the intimidating realities
posed by a merged entity, we believe at WSNet that the
EchoStar-DIRECTV combination can be good for competition in the
larger markets, but I think I have to underscore at this point
in creating an entity that can compete in the larger markets,
we will also be creating or allowing the creation of an entity
that will be a de facto monopolist in that role in the smaller
markets unless certain conditions and modifications are
attached to this to assure that there is competition not only
in large markets, but also in the rural and small markets in
America, and that's the only way that these people, the 20-some
odd million households in rural America enjoy the same
competitive benefits as those people that live in the large
urban markets.
Thank you, Mr. Chairman.
[The prepared statement of Jared E. Abbruzzese follows:]
Prepared Statement Jared E. Abbruzzese, Chairman and Acting CEO, World
Satellite Network, Inc.
World Satellite Network, Inc. (``WSNet'') a satellite based,
wholesale provider of digital video programming services headquartered
in Austin, Texas and its Chairman and Acting CEO, Jared E. Abbruzzese,
submits the following written statement in response to a request to
testify before the hearing on The Status of Competition in the Multi-
Channel Video Programming Distribution Marketplace by the Subcommittee
on Telecommunications and the Internet on Tuesday, December 4, 2001.
As a satellite-facilities based wholesale provider, WSNet serves
small private cable and rural cable television companies nationwide.
WSNet competes in multichannel video markets by offering a variety of
programming services and technologies to these operators. First, WSNet
operates the third, and newest, nationwide direct-to-home (``DTH'')
television platform in the United States. Aside from Echostar and
DIRECTV, WSNet is the only other satellite facilities based multi-
channel video programming distributor (MVPD) in operation today. Using
the WSNet digital satellite platform, small cable operators can provide
multi-channel video service to households within their service area not
currently reached by their wired facilities by installing a satellite
dish on their subscriber's home allowing them to receive approximately
200 channels of video and music. In addition small system operators
(typically less than 150 homes passed) may upgrade their existing wired
service with all-digital satellite channels and continue to provide
local channels via their wired facilities.
Second, WSNet's satellite platform also is used to provide a
unique, cost-effective, digital upgrade for smaller cable systems,
particularly in rural areas. By taking advantage of WSNet's all-digital
satellite platform, small cable system operators (including Satellite
Master Antenna Television [SMATV] operators) can upgrade their systems
by replacing all of their analog cable channels (excluding local
channels) with a digital format, dramatically expanding the number of
channels offered. Each analog channel replaced can then be used to
deliver ten to twelve digital channels. This means that systems with
limited bandwidth (i.e 330 MHz) can move from offering 35 channels to
over 200 channels, and still have bandwidth available to eventually
support high speed data. By taking advantage of Quadrature Amplitude
Modulation (QAM) technology and taking advantage of an all-digital
satellite delivery and authorization, the capital expense of existing
plant can be significantly reduced. This eliminates a major barrier
that rural cable companies have faced in trying to compete with DBS
providers over the last six years. This enables them to deliver
approximately 200 channels of high quality, digital video and audio
programming to cable system operators at a fraction of the capital cost
of traditional video delivery mechanisms.
Additionally, WSNet continues to be a leading wholesale provider of
analog television programming and equipment to private cable operators
and wireless cable operators in the United States. As of May 31, 2001,
WSNet served approximately 1,200 operators who collectively served over
750,000 video subscribers.
The 1992 Cable Act and the 1996 Telecommunications Act were
successful in increasing the number of households with access to pay-TV
services to about 87 million households today. The environment that the
Acts created was also helpful in expanding the availability of new
upgraded digital video and data services.
These Acts however, were less than successful in creating the
desired goal of increasing the number of competitive multi-channel TV
services providers and in slowing the increasing cost of cable TV
services. These shortcomings can mainly be attributed to two factors;
the first being the restructuring and consolidation of the programming
industry and the second being the consolidation of the cable TV
industry.
consolidation of programming providers
In response to the '92 Act, most vertically integrated companies
de-vertically integrated themselves. After a series of divestitures,
restructurings, and consolidations, there now exists seven major
programming companies (AOL/Time Warner, Liberty Media, News
Corporation, Viacom, GE/NBC, Disney, and Vivendi) most of these now
operate free of '92 Act restrictions governing pricing and program
access. A list of the core programming services and their ownership
structure is included in Appendix A. After beginning as affiliates of
the large Multiple System Operators (MSOs), the recent restructurings
by AT&T and other cable companies have now created independent
companies. However a major shift that has occurred now has the major
broadcasters owning significant positions in many of the cable
programmers. Thus, these programmers can decide how, when, for how
much, and to whom they wish to sell their commercially critical
programming content. In effect, those entities who do not have millions
of customers worth of buying power, can sometimes find that access to
critical programming is delayed, over-priced, packaged with unwanted
services or even service maybe denied. In light of this, WSNet would
ask this Committee to consider the imposition of expanded program
access rules.
consolidation of mvpd distribution
Regarding recent consolidation of the cable TV distribution
industry, in 1996, of the approximately 72 million households that were
pay TV customers at the time, the 7 largest cable TV companies had 42.1
million or 58% of the overall customer base. The 3 DBS satellite
service providers at the time controlled about 3.9 million customers or
about 5% of the total market. During this period, the remaining cable
companies, consisting of primarily local private cable, rural cable TV
and smaller operators controlled about 26 million customers or about
36% of the total market at that time.
Table 1: 1996 MVPD Subscriber Summary \1\
----------------------------------------------------------------------------------------------------------------
1996 Cumulative
Rank MVPD Providers Subscribers % of Total % of Total
----------------------------------------------------------------------------------------------------------------
1.......................................... TCI........................... 15.9 22.1% 22.1%
2.......................................... Time Warner................... 10.8 15.0% 37.1%
3.......................................... Continental/US West........... 4.4 6.1% 43.1%
4.......................................... Comcast....................... 3.9 5.4% 48.6%
5.......................................... Cox........................... 3.0 4.2% 52.8%
6.......................................... Cablevision................... 2.5 3.5% 56.3%
7.......................................... DirecTV/USSB (DBS)............ 2.1 3.0% 59.3%
8.......................................... Adelphia...................... 1.6 2.2% 61.4%
9.......................................... Primestar (DBS)............... 1.5 2.1% 63.5%
10......................................... Jones Intercable.............. 1.4 1.9% 65.4%
11......................................... HSD........................... 2.3 3.2% 72.2%
12......................................... MMDS.......................... 1.2 1.7% 68.9%
13......................................... SMATV......................... 1.1 1.5% 67.3%
14......................................... Echostar (DBS)................ 0.3 0.4% 65.8%
15......................................... Other Cable Operators......... 20.1 27.8% 100.0%
Total....................... 72.0 100.0%
----------------------------------------------------------------------------------------------------------------
\1\ Figures based on 1996 and 1997 FCC Annual Assessment of the Status of Competition in the Market for the
Delivery of Video Programming and WSNet estimates using Skyreports.
Since 1996, there has been a massive consolidation effort on the
part of the largest cable TV companies. Not only did the large cable
companies consolidate to become larger, they also, and just as
importantly, systematically consolidated franchise assets surrounding
large metropolitan areas through acquisitions and trades with each
other. The net result of this activity is that today you will rarely
find more than one of the top cable TV operators servicing a single
large metropolitan area, whereas before, you would find them operating
in adjacent franchises within a given metropolitan market. This new
strategy rewarded them with tremendous buying and pricing power.
One result is that, of the approximately 87 million U.S. households
that are pay-TV customers today, the largest 7 cable TV companies now
control 65% or almost 56.9 million customers (an increase of almost 35%
in 5 yrs.). The two remaining high-powered DBS satellite companies now
control service to about 19% or 17 million customers (a staggering 400%
increase). During this period of explosive growth in market share for
both the large cable TV operators and the two high-powered DBS
operators, the smaller local and rural cable TV companies have seen
their market share shrink by almost 48% to about 13.4 million
customers.
Table 2: 2001 MVPD Subscriber Summary \2\
----------------------------------------------------------------------------------------------------------------
Sep 2001 Cumulative
Rank MVPD Providers Subscribers % of Total % of Total
----------------------------------------------------------------------------------------------------------------
1.......................................... AT&T.......................... 13.7 15.8% 15.8%
2.......................................... Time Warner................... 12.6 14.5% 30.2%
3.......................................... DirecTV (DBS)................. 10.3 11.8% 42.1%
4.......................................... Comcast....................... 8.4 9.7% 51.8%
5.......................................... Charter....................... 7.0 8.0% 59.8%
6.......................................... Echostar (DBS)................ 6.4 7.4% 67.1%
7.......................................... Cox........................... 6.5 7.5% 74.6%
8.......................................... Adelphia...................... 5.7 6.6% 81.2%
9.......................................... Cablevision................... 3.0 3.4% 84.6%
10......................................... Mediacom...................... 1.6 1.8% 86.4%
11......................................... Insight....................... 1.6 1.8% 88.3%
12......................................... HSD........................... 0.9 1.1% 90.7%
13......................................... SMATV......................... 1.2 1.4% 89.6%
14......................................... MMDS.......................... 0.6 0.7% 91.4%
15......................................... Other Cable Operators......... 7.5 8.6% 100.0%
Total......................... 87.0 100.0%
----------------------------------------------------------------------------------------------------------------
\2\ Figures based on WSNet estimates using Skyreport and earnings reports for periods ending September 2001.
Obviously, since 1996 the smaller cable TV operators have been
steadily losing market share and losing in absolute numbers of
customers, primarily due to the two high-powered DBS providers. This is
largely due to the fact that until WSNet began to provide its wholesale
satellite solutions, the smaller operators could not offer either the
number of channels nor the enhanced digital services that the satellite
video providers could.
Consolidation of Satellite Spectrum
There are currently three companies that provide digital video,
satellite facilities-based services operating in the U.S. The two
largest, Echostar and DIRECTV, operate utilizing high-powered DBS
satellites, and the third, WSNet operates utilizing medium-powered KU
band satellites.
If the announced Echostar and Hughes/DIRECTV merger goes through,
the combined entity will control 100% of all 3 of the U.S. licensed,
high-powered DBS, full-conus orbital locations (means each one can
broadcast to all of the U.S.). In addition, they will also control more
than 55% of the only 2 remaining useable high-powered DBS semi-conus
orbital locations (each broadcasts to \1/2\ the U.S.). In short, the
merged company will control virtually all of the U.S. high-powered DBS
satellite assets (over 130 high-powered DBS transmitters). In addition,
Echostar/DIRECTV will combine substantial other satellite assets in
other frequency bands. Clearly, the merged company will be a daunting
giant with vast competitive weapons at its disposal.
This continues a trend of satellite consolidation since 1996.
Initially there were going to be six other potential DBS providers (in
both high-powered and medium power) including Primestar, United States
Satellite Broadcasting Company, Inc. (USSB), Alphastar, AskyB (a joint
venture between MCI/Worldcom and News Corporation), Dominion Video
Satellite, and Continental Satellite Corporations (CSC). In a continued
effort to consolidate the spectrum both Echostar and DIRECTV have
either acquired or obtained the rights to control virtually all of the
U.S. high-powered orbital slots.
The U.S. medium powered Ku-Band orbital capacity is also undergoing
the same type of consolidation. Of the 33 frequencies that are
currently approved for use, there are currently 35 satellites in use,
not including the DARS radio satellites. There are currently four
companies that control the US orbital slots, Hughes, Loral Skynet, SES
Americom, and Echostar. Telesat has control over the Canadian
frequencies. After a merger between Echostar and Hughes/DIRECTV, the
combined entity will control 16 different satellites and have
operational control over 13 of the orbital positions. The table below
shows the orbital positions and satellites currently in use.
Table 3: Ku-Band Orbital Slots (Medium and High Power) \3\
----------------------------------------------------------------------------------------------------------------
Oribtal Slot Licensee
Slot Power Satellites Number
----------------------------------------------------------------------------------------------------------------
61.5W............................. High................. EchoStar............. Echostar 3.......... 1
72.0W............................. Medium............... SES Americom......... AMC 6............... 1
74.0W............................. Medium............... Hughes/PanAmSat...... SBS 6............... 1
79.0W............................. Medium............... SES Americom......... AMC 5, SatCom C1.... 2
81.0W............................. Medium............... SES Americom......... SatCom K2........... 1
82.0W............................. High................. Telesat (Canada)..... Not In Service...... 0
83.0W............................. Medium............... EchoStar............. Not In Service...... 0
85.0W............................. Medium............... SES Americom, XM AMC 2, XM Roll...... 2
Radio.
87.0W............................. Medium............... SES Americom......... AMC 3............... 1
89.0W............................. Medium............... Loral Skynet......... Telstar 4........... 1
91.0W............................. High................. Hughes/PanAmSat, Galaxy 11, Nimiq 1.. 2
Telesat.
93.0W............................. Medium............... Loral Skynet......... Telstar 6........... 1
95.0W............................. Medium............... Hughes/PanAmSat...... Galaxy 3R........... 1
97.0W............................. Medium............... Loral Skynet......... Telstar 5........... 1
99.0W............................. Medium............... Hughes/PanAmSat...... Galaxy 4R........... 1
101.0W............................ High................. DirecTV (U.S.), SES Directv 1R/2/3, AMC 4
Americom. 4.
103.0W............................ Medium............... SES Americom......... AMC 1............... 1
105.0W............................ Medium............... SES Americom......... G-Star 4............ 1
107.3W............................ Medium............... Telesat.............. Anik F.............. 1
109.2W............................ Medium............... SatMex (Mexico)...... Not In Service...... 0
110.0W............................ High................. DirecTVEchoStar...... Echostar 5, Direct 1 2
111.1W............................ Medium............... Telesat.............. Anik E2............. 1
113.0W............................ Medium............... Loral Skynet, SatMex. Solidaridad 2....... 1
115.0W............................ Medium............... XM Radio............. XM Rock............. 1
116.8W............................ Medium............... Loral Skynet, SatMex. SatMex 5............ 1
118.7W............................ Medium............... Telesat.............. Anik E1............. 1
119.0W............................ High................. DirecTVEchoStar...... Echostar 4/6, 3
DirecTV 6.
121.0W............................ Medium............... EchoStar............. Not In Service...... 0
123.0W............................ Medium............... Hughes/PanAmSat...... Galaxy 10R.......... 1
129.0W............................ Medium............... Loral Skynet......... Telestar 7.......... 1
148.0W............................ High................. EchoStar............. Echostar 1.......... 1
155.5W............................ Medium............... Hughes/PanAmSat...... PAS 5............... 1
175.0W............................ High................. EchoStar............. Not In Service...... 0
33 Slots 37
----------------------------------------------------------------------------------------------------------------
\3\ Lyngemark Satellite (www.lngsat.com) and WSNet company esearch.
Echostar's combined capacity of both medium and high powered Ku-
band frequencies could make it very difficult for both programmers and
alternative providers, since many are dependent on Hughe's PanAmSat as
their current provider.
WSNet has not been able to, and currently cannot find any
commercially viable high-powered DBS capacity in the U.S. While high-
powered DBS is the much-preferred technology, WSNet must compete
utilizing 17 leased transmitters of medium-powered KU band capacity
operated from two different satellites. These medium-powered
transmitters can only provide service to WSNet and its customers,
through a 34''-36'' receive dish, an antenna more than twice the size
of the 18'' receive dish of Echostar and DIRECTV, impacting the overall
cost-effectiveness of any solution any independent operator can
provide.
Largely in response to the extraordinary control that a merged
Echostar and DirecTV will enjoy, effectively dominating the U.S. high-
powered the DBS market; WSNet sought out the only possible high-powered
alternative in existence in North America and recently filed with the
FCC for landing-rights from two Canadian high-powered DBS satellites.
It should be noted that all of the capacity from both Canadian DBS
locations are currently committed to Canadian operators and it is
highly questionable as to whether these satellites would be useable in
the U.S.
potential impact to local broadcasting
Even considering the intimidating realities posed by a merged
entity, WSNet believes that the Echostar/DIRECTV combination can be
good for competition; positioning it well for competing with big cable
TV companies in the large markets. Unfortunately, we also believe that
as currently structured, an undesired consequence of this merger could
be the further elimination competition in the smaller and especially
the rural markets. It is also evident that any further negative impact
on the small local and rural cable TV operators could have a
corresponding negative impact on the 800-1,000 local broadcasters who
also rely on these operators to reach large portions of their markets.
Table 4: Local-into-Local Station Carriage Requirements
----------------------------------------------------------------------------------------------------------------
Secondary Total
4 Major Other All Network All % of All
Networks Networks \1\ Networks Stations \2\ Stations Stations
----------------------------------------------------------------------------------------------------------------
Top 40 DMAs................................. 159 138 297 145 442 28.3%
Top 100 DMAs................................ 398 282 680 293 973 62.4%
>100 DMAs................................... 324 123 447 140 587 37.6%
All DMAs.................................... 722 405 1,127 433 1,560 100.0%
----------------------------------------------------------------------------------------------------------------
As illustrated in Table 4, there are 1,560 non-digital television
broadcast stations within the United States.4 Within the top
40 Designated Marketing Areas (DMAs) there are 442 network stations,
and within the top 100 DMAs there are 973 stations. Based on EchoStar's
proposal to expand local-into local service to the top 100 DMAs, they
would have to carry 973 total stations, provided must-carry provisions
and that duplicated network stations within a DMA be carried. This is
an addition of 812 new channels on top of the 161 local channels they
currently transmit.5 This is more capacity than DIRECTV
currently has with its existing satellite base. There are three
solutions to this problem that EchoStar could elect.
---------------------------------------------------------------------------
\4\ Warren Communications News, Television & Cable FactBook 2001
\5\ Lyngemark Satellite, last updated 2001-12-01--http://
www.lyngsat.com/
---------------------------------------------------------------------------
First, they could significantly expand their existing satellite
capacity by launching new satellites in their licensed DBS frequencies
with spot-beam technology, allowing them to add more channels to the
limited frequencies by directing certain stations into specific
footprints, allowing them to gain the additional capacity required to
carry all the stations with these DMAs.
Second, they could vigorously fight, as they have done in the past,
any must-carry legislation, with the hope of overturning the
requirement in a court of law. This would significantly reduce the need
for new satellites to support the must-carry requirement.
A third option that they could push the limits on the
interpretation of the must-carry regulations in DMA's with large
footprints. One approach would be to carry a national PBS channel (as
they do now), eliminating the need to carry the 422 local PBS stations
that support many local communities. If they chose to carry a local PBS
feed in the DMA, they could then choose not to broadcast the 243 local
PBS stations that cover multiple cities in 179 DMAs.6 This
approach could be expanded with the network broadcast stations as well.
For example, in the Phoenix DMA, Echostar currently broadcasts the four
networks (ABC, CBS, NBC, and FOX) that originate from Phoenix, Arizona.
They do not carry the secondary NBC Affiliate (KNAZ-TV) in Flagstaff,
even though it falls within the Phoenix DMA, since they already carry
Phoenix's NBC affiliate KPNX-TV. Another example is in the Denver DMA,
where there are 6 secondary major network stations in addition to the
main Denver affiliates. For example, while they carry Denver's ABC
affiliate KMGH-TV, they do not carry the other ABC affiliates within
the DMA such as K57CR from Rifle, Colorado, KNFR out of Rawlins,
Wyoming or K36AF from New Castle, Colorado. If these secondary networks
are not carried, 293 different stations could be adversely affected and
consumers in their communities would have to depend on regional news
versus local news. Many of these secondary affiliate stations are
carried by small local cable companies in rural America. Should a
EchoStar/DirecTV merger be approved, it is imperative that EchoStar not
be allowed to bypass or avoid the legislative requirements for a
comprehensive must-carry implementation. If this means that EchoStar
would support fewer than the top 100 DMAs, then that is a business
decision they must make. But to allow EchoStar to loosely interpret or
legally challenge the must-carry rules would significantly affect many
small local broadcasters.
---------------------------------------------------------------------------
\6\ Based on WSNet analysis of local station data from Television &
Cable FactBook 2001.
---------------------------------------------------------------------------
Even given a merged EchoStar's ability to successfully meet the
comprehensive must-carry requirements in the top 100 DMAs, the fact
still remains that 14+ million households in rural America will not get
the chance to see the 587 (37.6% of all broadcast stations) stations
located outside the top 100 DMAs. The potential impact to these small
stations and their local communities could be devastating. Many of the
states outside the top 100 DMAs are subject to severe weather. Key
tornado states like Kansas, Texas, Oklahoma, and Nebraska, along with
severe winter weather states in the upper West such as North and South
Dakota, Montana, Wyoming, and Idaho in addition to hurricane risk
states such as Florida, Alabama, Mississippi and Louisiana along with
the eastern seaboard of North and South Carolina are all subject to
losing access to the local emergency broadcast network. Many households
in these areas have poor off-air reception and rely on their local
cable companies to carry their local broadcasting stations. Since a
merged EchoStar would not carry these stations, it is critical as a
condition to this merger, that local cable operators be supported in
delivering a comprehensive digital satellite service in conjunction
with their local channels. The local cable operators must have access
to all the same programming provided by EchoStar along with the ability
to compete both by providing service via their existing wired service
and if it is too expensive to reach a remote home, with a satellite
dish.
conclusion
In conclusion, WSNet believes that the Echostar/DIRECTV merger
should go forward with the addition of some modifications that would
afford WSNet permanent access to enhanced satellite facilities. This
accommodation should be accomplished in a way that does not materially
diminish Echostar/DIRECTV's ability to compete aggressively with the
large cable TV companies. WSNet is confident, that an enhanced
satellite facilities commitment combined with the suggested
modifications to the program access rules, will provide the best
opportunity to ensure that real competition will exist in all markets
in the U.S.
Appendix A
Popular National Video Programming Services by Ownership \6\
----------------------------------------------------------------------------------------------------------------
2000
Subs Core Launch
Programming Service (mil. Channel Year MSO Ownership (%) Owner Type Tier
HHs)
----------------------------------------------------------------------------------------------------------------
A&E (Arts & Entertainment).... 79.4 Yes 1984 Disney (37.5), Broadcaster..... Basic
Hearst (37.5),
GE/NBC (25).
ABC Family (formerly Fox 79.3 Yes 1977 Disney (100)..... Broadcaster..... Basic
Family Worldwide).
American Movie Classics (AMC). 75.9 Yes 1984 GE/NBC (53), Broadcaster..... Basic
Cablevision
(27), MGM (20).
Animal Planet................. 66.3 Yes 1996 Liberty (49), Cox Independent..... Basic
(24.5), Newhouse
(24.5),
Hendricks (2).
BET (Black Entertainment 63.4 Yes 1980 Viacom (100)..... Broadcaster..... Basic
Television).
BET on Jazz................... 8.4 Yes 1996 Viacom (100)..... Broadcaster..... Expanded
Bloomberg Information 6 Yes 1995 Bloomberg (100).. Independent..... Expanded
Television.
Bravo......................... 50.4 Yes 1980 GE/NBC (52.8), Broadcaster..... Expanded
Cablevision
(27.2), MGM (20).
Cartoon Network............... 69.3 Yes 1992 AOL (100)........ MSO............. Basic
Cinemax....................... Yes 1980 AOL (100)........ MSO............. Premium
CMT (Country Music Television) 44.7 Yes 1983 Viacom (100)..... Broadcaster..... Basic
CNBC.......................... 75.6 Yes 1989 GE/NBC (100)..... Broadcaster..... Basic
CNN........................... 80.3 Yes 1980 AOL (100)........ MSO............. Basic
CNN Headline News............. 76.2 Yes 1982 AOL (100)........ MSO............. Basic
CNN/SI........................ 16 Yes 1996 AOL (100)........ MSO............. Expanded
CNNfn (The Financial Network). 16.5 Yes 1995 AOL (100)........ MSO............. Expanded
Comedy Central................ 69 Yes 1991 Viacom (50), AOL MSO............. Basic
(37), AT&T (13).
Court TV...................... 51.1 Yes 1991 AOL (58), Liberty MSO............. Basic
(42).
C-SPAN........................ 79.4 Yes 1979 Independent...... Independent..... Basic
C-SPAN2....................... 60.7 Yes 1986 Independent...... Independent..... Basic
Discovery Channel............. 80.8 Yes 1985 Liberty (49), Cox Independent..... Basic
(24.5), Newhouse
(24.5),
Hendricks (2).
Discovery Health.............. 21.5 Yes 1999 Liberty (49), Cox Independent..... Expanded
(24.5), Newhouse
(24.5),
Hendricks (2).
Disney Channel................ 68.2 Yes 1983 Disney (100)..... Broadcaster..... Basic
E! Entertainment.............. 66.7 Yes 1990 Comcast (90), MSO............. Basic
Liberty (10).
Encore........................ Yes 1991 Liberty (100).... Independent..... Premium
ESPN.......................... 80.5 Yes 1979 Disney (80), Broadcaster..... Basic
Hearst (20).
ESPN Classic Sports (formerly 30 Yes 1995 Disney (80), Broadcaster..... Expanded
Classic Sports Network). Hearst (20).
ESPN.......................... 274.1 Yes 1993 Disney (80), Broadcaster..... Basic
Hearst (20).
ESPNEWS....................... 20 Yes 1996 Disney (80), Broadcaster..... Expanded
Hearst (20).
Flix.......................... Yes 1992 Viacom (100)..... Broadcaster..... Premium
Food Network.................. 54.5 Yes 1993 EW Scripps (64), Independent..... Basic
Tribune (29),
AT&T (5), Others
(2).
Fox Health Network............ 21.5 Yes 1999 AT&T (49), Cox MSO............. Expanded
(24.6).
Fox News Channel.............. 57.5 Yes 1996 News Corp. (100). Broadcaster..... Basic
FOX Sports Net (5 channels)... Yes 1995 News Corp. (100). Broadcaster..... Basic
FX............................ 57 Yes 1994 News Corp. (100). Broadcaster..... Basic
FXM: Movies from Fox.......... 13 Yes 1994 News Corp. (100). Broadcaster..... Expanded
Game Show Network............. 31.2 Yes 1994 Liberty (50), Independent..... Expanded
Digital (50).
Golf Channel.................. 31.9 Yes 1995 Comcast (54.7), MSO............. Expanded
News Corp
(30.9), Times
Mirror (8.6),
Others (5.8).
Goodlife Television Network 10.1 Yes 1998 Concept Comm. Independent..... Expanded
(formerly Nostalgia Channel). (71), Others
(29).
Great American Country........ 14.7 Yes 1995 Jones Independent..... Expanded
International
Networks.
HBO (Home Box Office)......... Yes 1972 AOL (74.5), AT&T MSO............. Premium
(25.5).
History Channe................ l69.6 Yes 1995 Disney (37.5), Broadcaster..... Basic
Hearst (37.5),
GE/NBC (25).
Home & Garden Television 67.1 Yes 1994 EW Scripps (100). Independent..... Basic
(HGTV).
Home Shopping Network (HSN)... 66.9 Yes 1985 Vivendi (45), Independent..... Basic
Liberty (21),
Others (34).
Independent Film Channel...... 14 Yes 1994 GE/NBC (52.8), Broadcaster..... Expanded
Cablevision
(27.2), MGM (20).
Inspirational Network......... 14.6 Yes 1990 INSP (100)....... Independent..... Expanded
International Channel......... 10.2 Yes 1990 Liberty (90)..... MSO............. Expanded
Lifetime Television........... 78.8 Yes 1984 Disney (50), Broadcaster..... Basic
Hearst (50).
M2: Music Television.......... 21.2 Yes 1996 Viacom (100)..... Broadcaster..... Expanded
MSNBC......................... 61.4 Yes 1996 GE/NBC (50), Broadcaster..... Basic
Microsoft (50).
MTV ``X''..................... 21.2 Yes 1996 Viacom (100)..... Broadcaster..... Expanded
MTV: Music Television......... 77.3 Yes 1981 Viacom (100)..... Broadcaster..... Basic
Newsworld International....... Yes 1994 Vivendi (45), Independent..... Expanded
Liberty (21),
Others (34).
Nickelodeon................... 79.8 Yes 1979 Viacom (100)..... Broadcaster..... Basic
Outdoor Life Network.......... 26 Yes 1995 Cox (33), Comcast MSO............. Expanded
(30), AT&T (4).
Ovation: The Arts Network..... 21.5 Yes 1996 AOL (4.0)........ MSO............. Expanded
Playboy TV.................... Yes 1982 Playboy.......... Independent..... Premium
QVC........................... 76.9 Yes 1986 Comcast (57), MSO............. Basic
AT&T (43).
Sci-Fi Channel................ 67.3 Yes 1992 Vivendi (45), Independent..... Basic
Liberty (21),
Others (34).
Showtime...................... Yes 1976 Viacom (100)..... Broadcaster..... Premium
Sneak Prevue.................. 32 Yes 1991 Gemstar (100).... Independent..... Expanded
SoapNet....................... 6 Yes 2000 Disney (100)..... Broadcaster..... Expanded
Speedvision................... 33 Yes 1995 Cox (33), Comcast MSO............. Expanded
(30), AT&T (4).
Starz!........................ Yes 1994 Liberty (88), Independent..... Premium
Others (12).
Style......................... 10 Yes 1999 Comcast (89.6), MSO............. Expanded
Liberty (10.4).
TBS........................... 81.4 Yes 1976 AOL (100)........ MSO............. Basic
TechTV........................ 23 Yes 1998 Vulcan Ventures.. Independent..... Expanded
The Hallmark Channel (Odyssey 27.5 Yes 1993 Crown Media...... Independent..... Expanded
Channel).
The Weather Channel (TWC)..... 78.5 Yes 1982 Landmark Independent..... Basic
Communications.
TLC (The Learning Channel).... 76.8 Yes 1980 Liberty (49), Cox Independent..... Basic
(24.5), Newhouse
(24.5),
Hendricks (2).
TNN: The National Network 78.8 Yes 1983 Viacom (100)..... Broadcaster..... Basic
(formerly The Nashville
Network).
Toon Disney................... 17.8 Yes 1998 Disney (100)..... Broadcaster..... Expanded
Travel Channel................ 49.8 Yes 1987 Liberty (49), Cox Independent..... Basic
(24.5), Newhouse
(24.5),
Hendricks (2).
Turner Classic Movies (TCM)... 47.2 Yes 1994 AOL (100)........ MSO............. Basic
TV Guide Channel.............. 54.6 Yes 1988 Gemstar (100).... Independent..... Basic
TV Land....................... 55.5 Yes 1996 Viacom (100)..... Broadcaster..... Basic
USA Network................... 80.4 Yes 1980 Vivendi (45), Independent..... Basic
Liberty (21),
Others (34).
VH-1.......................... 74.2 Yes 1985 Viacom (100)..... Broadcaster..... Basic
WGN-C......................... 51.1 Yes 1978 Tribune Media.... Independent..... Basic
Women's Entertainment 25 Yes 1997 GE/NBC (52.8), Broadcaster..... Basic
(formerly Romance Classics). Cablevision
(27.2), MGM (20).
----------------------------------------------------------------------------------------------------------------
Mr. Upton. Thank you.
Mr. Pagon, welcome.
STATEMENT OF MARSHALL W. PAGON
Mr. Pagon. Mr. Chairman and members of the committee, I
thank you for the invitation to appear before you today. My
name is Mark Pagon. I am the Chief Executive Officer of Pegasus
Communications Corporation.
I founded Pegasus in 1991. Sine then we have grown to
become America's tenth largest multi-channel video provider.
Today we provide digital satellite TV or DBS to more than 1.5
million rural households in 41 States. We are the only major
cable or satellite provider in the United States exclusively
focused on service to rural communities.
The binding lesson of my professional experience is that
competition has worked extremely well in providing American
consumers choice, innovation, and value in multi-channel video.
The first DBS system was sold in July 1994 in Cowboy
Maloney's Consumer Electronics Superstore in Jackson,
Mississippi. That first subscriber lives in a rural area
outside of Jackson and is a Pegasus customer.
In the 7 years since, DBS companies have grown to serve
more than 17 million subscribers. As a point of reference, it
took the cable industry 32 years to sign up 17 million
customers.
Almost 10 million rural homes, 1 in 4, now have a satellite
dish. In Montana and Vermont, the ratio is approaching almost 1
in 2.
As a result of DBS, digital television is now more
prevalent in rural areas than in America's most affluent urban
communities. The simple truth is that the satellite and cable
industries are more competitive than they have ever been. Today
the majority of American have a choice between a cable company
an two DBS service providers. Even for the almost 20 million
homes not passed by cable, there is still a choice of two
satellite companies.
The cost of becoming a multi-channel subscribers has never
been lower. Seven years ago a new customer had to spend almost
$1,000 to become a DBS subscriber. Today you can become a
DIRECTV, EchoStar, or Pegasus customer without any initial up
front payment.
Perhaps the most compelling indication of how competitive
this market is can be seen in how the cable industry has
responded to competition from the DBS providers. When DBS was
first launched in 1994, cable companies did not offer digital
video or cable broadband. In the 7 years since, the cable
industry has spent $50 billion to upgrade their facilities to
enable the delivery of these new services.
Without the competitive threat of two or more DBS
providers, it is unlikely that the cable industry would have
done this. In short, competition among the cable and satellite
industries is working very well for the American consumer.
However, while competition among the satellite and cable
industries is working, the announced merger of Hughes
Electronics and EchoStar Communications threatens to eliminate
competition in the DBS industry and to replace it with a
satellite monopoly.
EchoStar and General Motors acknowledged publicly that the
proposed merger would create a satellite monopoly and that
millions of rural households will be left without any choice in
multi-channel video. While EchoStar and General Motors have
also publicly committed to resolving antitrust issues that may
be raised by Congress, the FCC and the Department of Justice,
they have to date offered no specific proposals that would
assure the continuation of competition in the DBS industry.
Indeed, Mr. Ergen has indicated that a consent decree that
requires such a result is a deal breaker. This is the central
issue concerning the merger. Will American consumers,
especially the 20 million rural homes not passed by cable,
continue to have a choice of satellite providers?
We need a clear and specific statement of intent from
EchoStar on this subject. I, therefore, pose the following
simple question to Mr. Ergen: will you commit to take the steps
necessary to assure that real and viable competition will
continue in the DBS industry prior to completing your merger?
If the answer is yes, the proposed merger should be given
fair consideration. If the answer is anything short of yes, the
proposed merger should be rejected quickly and as anti-
competitive and harmful to rural consumers.
Mr. Chairman and members of the committee, I again thank
you for your invitation to participate in this hearing. In
addition to my written statement, I would like to submit for
the record letters from the National Grange and the National
Cattlemen's Beef Association.
Thank you.
[The prepared statement of Marshall W. Pagon follows:]
Prepared Statement of Marshall Pagon, Chief Executive Officer, Pegasus
Communications Corporation
Mr. Chairman and Members of the Committee, I thank you for the
invitation to appear before you today.
My name is Mark Pagon. I am the Chief Executive Officer of Pegasus
Communications Corporation.
To say that a hearing on the state of competition in the cable and
satellite industries is timely would be an understatement. The
announced merger of Hughes Electronics and Echostar Communications, the
two remaining facilities based satellite competitors, and the imminent
prospect of a merger of AT&T Broadband, America's largest cable
company, with Comcast, Cox or AOL Time Warner and likely further
consolidation in the cable industry, make the present an especially
important time to be evaluating the record of competition in the cable
and satellite industries.
I have spent my entire professional life in efforts to expand
choice in multi-channel video programming for those living in rural and
underserved areas. In the 1980's and early 1990's, I did this by
building and operating cable systems in rural areas of New England, the
Middle Atlantic, the Southeast and Puerto Rico. Since 1994, I have
committed most of my time and effort to providing digital satellite
television (DBS) to rural areas of the United States.
I founded Pegasus in 1991. Since then we have grown to become
America's 10th largest multi-channel video provider. Today we provide
digital satellite TV (DBS) to more than 1.5 million rural households in
41 states. We are the only major cable or satellite provider in the
United States exclusively focused on service to rural communities.
The abiding lesson of my professional experience is that
competition has worked extremely well in providing American consumers
choice, innovation and value in multi-channel video.
Competition has generated two waves of innovation in the
distribution of multi-channel video in the United States. In the late
1970's and 1980's, the innovators were cable companies. Over the last
decade, the innovators have been DBS providers. In each instance,
consumers and shareholders have benefited significantly. In both
instances, however, success has encouraged a process of consolidation
that will, if unchecked, succeed in creating cable and satellite
monopolies that have as their goal the elimination of competition.
In 1975, the average American home had access to less than four
channels. Virtually all viewing was devoted to CBS, NBC and ABC. Choice
was therefore limited to what the management of those networks decided
their viewers should see.
Cable changed that in the 1980's by creating cable networks such as
TBS, CNN, ESPN, MTV, Discovery, CSPAN and CNBC and giving consumers
access to 30 to 50 new channels. By doing so, cable went from a small
sector of marginal importance in the media industry to an industry
serving almost 70 million homes.
Over the last decade, DBS has been the innovator by being the first
to provide American consumers digital multi-channel video. Like cable
before it, the DBS business was not built by established media
companies--cable companies, the broadcast networks or vertically
integrated entertainment companies--though they each were well situated
to take the risks to do so.
No, DBS has been built by the entrepreneurs testifying before you
today:
Eddy Hartenstein, whose vision brought DBS technology into
existence;
Charlie Ergen, who has bootstrapped Echostar into America's
second largest DBS company through aggressive competition and
nimble negotiation and who will become the controlling
shareholder in the $40 billion combination of Echostar and
Hughes Electronics if their merger is successfully completed;
Bob Phillips and the NRTC, whose members (including Pegasus)
provided over $100 million of seed capital to the launch of
DIRECTV when GE, News Corporation, Cablevision Systems and
other established media companies balked at the risk of such an
unproven technology; and
My company, Pegasus, which has grown to serve almost 10% of
all DBS subscribers by focusing on rural markets that the big
cable and satellite companies don't care about.
Today, Americans who subscribe to DBS or to digital cable have
access to seven national broadcast networks, more than 200 national
cable networks and over one hundred pay per view movie, digital audio
and sports channels.
The first DBS system was sold in July 1994 in Cowboy Maloney's
consumer electronics superstore in Jackson, Mississippi. That first
subscriber lives in a rural area outside of Jackson and is a Pegasus
customer.
In the seven years since, DBS companies have grown to serve more
than 17 million subscribers. As a point of reference, it took the cable
industry 32 years (1949-1981) to sign up 17 million subscribers.
Almost 10 million rural homes--one in four--now have a satellite
dish. In Montana and Vermont, the ratio is approaching one in two. As a
result of DBS, digital television is now more prevalent in rural areas
than in America's most affluent urban communities.
According to the FCC, from 1999 to 2000 DBS grew by 28.86%, gaining
over 2.9 million new subscribers. During the same period, cable grew by
only 1.51%.
DBS companies have been successful, because we have created real
and vibrant competition to cable. However, we would not have been able
to do so without Congressional, FCC and Department of Justice support
to ensure access to cable programming and DBS orbital spectrum and to
prevent efforts by cable companies and others to frustrate such access.
The passage of the Satellite Home Viewer Improvement Act (SHVIA) in
1999, which granted satellite companies a license to deliver the
signals of the local television broadcast stations, has also been
instrumental in furthering competition between cable and satellite
providers. Since the passage of SHVIA just two years ago, DIRECTV and
Echostar have made local TV via satellite available in 40 of America's
largest TV markets--markets that include almost 70 million American TV
households.
There remain 170 TV markets that today still do not have access to
their local TV stations via satellite. This is the single most
important impediment to DBS becoming an even more effective competitor
to cable.
Some would have you believe that there is not enough orbital
spectrum for competing satellite providers to provide local TV via
satellite to smaller TV markets. I believe that these arguments are
factually wrong and have been advanced primarily because it would be
inconvenient for Echostar and DIRECTV to provide local TV in more TV
markets while arguing that spectrum scarcity is the reason why the Must
Carry provisions of SHVIA should be thrown out by the Federal Courts. I
am confident that when the Must Carry litigation is finally resolved,
the DBS industry will admit that adequate spectrum exists to provide
satellite delivery of all local TV stations. I believe that when the
DBS industry owns up to this fact and commits itself to this goal,
satellite access to local TV will become a reality for all American TV
homes.
Despite the festering issue of access to local TV stations in rural
markets, the simple truth is that the satellite and cable industries
are more competitive than they have ever been. Today the majority of
Americans have a choice between a cable company and two DBS service
providers. Even for the almost 20 million homes not passed by cable,
there is still a choice of two satellite companies.
The cost of becoming a multi-channel subscriber has never been
lower. Seven years ago, a new customer had to spend almost $1,000 to
become a DBS subscriber. Today, you can become a DIRECTV, Echostar or
Pegasus DBS customer without any initial upfront cost.
Perhaps the most compelling indication of how competitive this
market is can be seen in how the cable industry has responded to
competition from the DBS providers. When DBS was first launched in
1994, cable companies did not offer digital video or cable broadband.
In the seven years since, the cable industry has spent almost $50
billion to upgrade their facilities to enable the delivery of these new
services. Cable now provides digital video to 13 million homes and
cable broadband to another 7 million American households. Without the
competitive threat of two or more DBS providers, it is unlikely that
the cable industry would have done this.
In short, competition among the cable and satellite industries is
working very well for the American consumer. There is no reason to
expect that competition will not continue to be the best means to
assuring consumers more and better services at increasingly lower
costs.
While competition among the satellite and cable industries is
working, the announced merger of Hughes Electronics and Echostar
Communications, the imminent prospect of a merger of AT&T Broadband
with Comcast, Cox or AOL Time Warner and likely further consolidation
in the cable industry threaten to create satellite and cable monopolies
that will eliminate competition.
Just last week at the Western Cable Show, Ted Turner predicted that
the cable industry would consolidate to just two companies in the next
twelve months.
Let us consider the proposed merger of Hughes Electronics
(currently a wholly-owned subsidiary of General Motors) as an example
of the imminent threat to continued competition in these markets.
The proposed merger would create the largest multi-channel video
provider in the world, serving 17 million American households. Echostar
and General Motors project that the merger will create ``efficiencies''
equal to more than 50% of the revenues of the combined companies! ($5
billion of annual efficiencies for a company with combined revenues of
$9 billion annually.)
In so doing, however, the merger would also:
Eliminate facilities based competition in the DBS industry;
Eliminate choice in multi-channel service providers for as
many as 20 million rural homes;
Reduce choice for another 95 million homes from two satellite
providers and one cable company to just one of each; and
Combine in one company 100% of the DBS satellite spectrum from
which ubiquitous coverage of the 48 contiguous states can be
provided, thereby pre-empting future facilities based DBS
competition.
This merger, if approved without material modifications, would
create a formidable satellite monopoly. Such a result would be directly
contrary to the central premise of US anti-trust law and policy of the
past 100 years.
That central premise is to entrust the public interest to the
efficacy of competitive markets rather than to the benevolence of
monopolists. The key provision of Section 7 of the Clayton Act reads as
follows: ``No person engaged in commerce or in any activity affecting
commerce shall acquire, directly or indirectly, . . . another person
engaged also in commerce or in any activity affecting commerce, where
in any line of commerce or in any activity affecting commerce in any
section of the country, the effect of such acquisition may be
substantially to lessen competition, or to tend to create a monopoly.''
15 U.S.C. Sec. 18.
Echostar and Hughes acknowledge publicly that the proposed merger
will reduce choice in the distribution of multi-channel video. They
acknowledge publicly that it would create a satellite monopoly and that
millions of rural households will be left without any choice in multi-
channel video.
Echostar and General Motors have also publicly committed to
resolving all anti-trust issues that may be raised by Congress, the FCC
and the Department of Justice. Unfortunately, they have to date offered
no specific proposals that would convey an intention to assure the
continuation of competition in the DBS industry. Indeed, Mr. Ergen has
indicated that a consent decree that requires such a result is a ``deal
breaker''.
This is the central issue for consumers, for manufacturers, for
programmers, for those (such as Pegasus) who compete in the satellite
industry and for policy makers concerning this merger. We therefore
need a clear and specific statement of intention from the parties to
the proposed merger on this subject.
I therefore pose the following simple question to each of Echostar
and General Motors:
Will you commit to the continuation of real and viable competition
in the DBS industry and to take the steps necessary to assure this
prior to completing your merger?
If their answer is yes, then I suggest that their proposed merger
be given fair consideration.
If their answer is anything short of yes, then I suggest that their
proposed merger be rejected quickly as anti-competitive and
unambiguously contrary to US anti-trust law and policy.
Mr. Chairman and Members of the Committee, I again thank you for
your invitation to participate in this hearing.
Mr. Upton. Without objection, that will be included as part
of the record.
Thank you.
Mr. Fiorile.
STATEMENT OF MICHAEL J. FIORILE
Mr. Fiorile. Thank you, Mr. Chairman and committee members.
My name is Michael Fiorile, and I am President and CEO of
the Dispatch Broadcast Group based on Columbus, Ohio.
I am here today to tell you how competition, current
competition in the DBS market will be totally eliminated by an
EchoStar-DIRECTV merger. The merger would harm consumers and
broadcasters on a number of levels.
First, a DBS monopoly would completely end the competition
that currently exists between satellite companies today,
depriving consumers of future innovations and price battles
that we see that competition has otherwise yielded, in
particular, in rural America.
Second, the merger would end any hope of expanding local-
to-local television service into a majority of television
markets.
And, third, the merger could lead to more disruptions in
local television stations and the delivery of those stations,
just as it has occurred with the cable gatekeepers recently. An
EchoStar-DIRECTV merger would severely restrict choices for
vast numbers of people.
EchoStar asserts that decisions regarding this merger
should be viewed in the context of the entire MVPD market.
However, it was just a few months ago in a Federal antitrust
suit against DIRECTV that EchoStar itself defined the relevant
market as ``the high powered DBS market,'' nothing that
satellite-to-home broadcast service constitutes a stand alone
market.
This merger should be held to that same standard. The
combined company, as previously mentioned, would control every
single full CONUS DBS frequency in the continental United
States. And even if DBS were interchangeable with cable, which
it is not, the merger would be a bad deal in the end for
consumers.
Competition between the two DBS companies has yielded a
tremendous amount of consumer benefits. DIRECTV, for one, has
taken the lead in offering high end sports and movie
programming. EchoStar, on the other hand, responded to the
innovation with aggressive competition, as we've heard, in
price and in other service offerings.
EchoStar's 1996 entrance into the market slashed the price
then of buying a satellite dish by hundreds of dollars, and
today consumers, as you have heard, have opportunities to get
free dishes through numerous promotions in places like
Blockbuster when you rent a movie or at Sears or at your
grocery store, for that matter, and many, many other
opportunities through local retailers.
For consumers with access to cable, the proposed merger
represents a reduction from three competitive options to two,
in essence. And as most cable subscribers have only one cable
option as it is, worse yet for tens of millions of viewers
without access to cable, particularly in rural areas, this
merger would remove one of the two competitors, giving EchoStar
a perfect monopoly in those areas.
Under this proposed monopoly, consumers in 110 U.S.
television markets would never receive local news, local
sports, or local weather through satellite. Once these two
companies stop competing against each other, we lose the
incentive for them to try to gain advantage by adding local-to-
local in new markets or through the competitive pricing we've
seen.
While EchoStar claims that it will offer local-to-local in
100 markets, the broadcast industry has little faith in this
claim. Right after, as was mentioned earlier, the ink had dried
on the 1999 Satellite Home Viewer Act, EchoStar challenged the
compromise legislation by trying to get to court to invalidate
``carry one, carry all'' mandates, despite promises to the
contrary.
Further based on a trumped up claim of inadequate signals,
EchoStar initially denied carriage to the many broadcast
stations it is obliged to carry. The FCC has since determined
these challenges are largely baseless.
EchoStar claims they do not have the capacity to provide
local-to-local in all markets, but with today's technological
advancements they, in fact, could easily provide local into
local in all 210 markets without this merger.
Finally, a DBS monopoly as proposed will also adversely
affect negotiations between local broadcasters and the DBS
industry over retransmission consent. We all remember the
nightmare when a cable company in New York cutoff the local ABC
affiliate from their customers. In fact, you can expect the
same type of abuse to occur by now creating a second monopoly
gatekeeper.
The tremendous advancements in technology and programming
and in pricing in the DBS industry have been driven principally
by one thing, and that is by competition. Despite the track
record, DBS companies are asking you to give up on competition
and instead rely on their promises to get these benefits in the
future.
We urge you to continue to rely upon competition in the
marketplace. In fact, it is working, and we look for a
continuation of this DBS competition to foster the competition
that all of the committee members have talked about.
Thank you.
[The prepared statement of Michael J. Fiorile follows:]
Prepared Statement of Michael J. Fiorile, President and CEO, Dispatch
Broadcast Group
a. introduction
As President and CEO of Dispatch Broadcast Group, I am pleased to
appear before the U.S. House of Representatives Subcommittee on
Telecommunications and the Internet to discuss the status of
competition in multichannel video programming distribution (``MVPD'').
Dispatch Broadcast Group owns two commercial television stations--
WBNS-TV, Columbus, OH and WTHR-TV, Indianapolis, IN. Both television
stations are on the air with a digital signal, with WBNS-DT as the only
digital signal in the Columbus, OH market. Our other broadcast
interests include WBNS-AM/FM, Columbus, OH, Radio Sound Network, Ohio
News Network, SkyTrak weather and Dispatch Interactive Television.
Additionally, I am currently the Vice Chairman of the National
Association of Broadcasters Television Board, and serve as Vice
Chairman of the NAB DTV Task Force.
b. the role of the broadcasting industry and the impact of cable and
dbs on broadcasters
As this committee is well aware, the broadcasting industry has
historically provided free, over the air local programming and news
within the United States. The advent of cable and satellite television
as multi-channel video programming distributors has made cable systems
and satellite carriers, the ``gatekeepers'' of programming,
particularly local programming, throughout the United States.
The available data demonstrates that while millions of U.S.
consumers (particularly those with lower incomes) continue to rely on
over-the-air broadcast television reception for their delivery of video
programming, the majority receives local TV signals through a MVPD
service.
According to data in the Fall 2001 Home Technology Monitor
Ownership Report prepared by Statistical Research, Inc. (``Home
Technology Report'') 1, a total of 77 million television
sets (or approximately 27.3% of the 283 million sets in the U.S.) are
not connected to any MVPD service and receive all broadcast signals
over-the-air. This leaves the rest of the sets attached to cable,
satellite, or another MVPD service.
---------------------------------------------------------------------------
\1\ This Report, issued twice a year by Statistical Research, Inc.,
is a comprehensive survey of television, telephone and computer
equipment in U.S. homes. This estimate of the number of broadcast-only
television sets is derived from information in the Home Technology
Report and from Nielsen's estimates of the number of U.S. television
households.
---------------------------------------------------------------------------
Even for television households subscribing to an MVPD service,
broadcast stations remain a very significant source of local, diverse
programming--and it is the carriage of the local television stations
that has substantially benefited the MVPD services. Particularly in
this era of increasing consolidation in the cable industry, the
broadcast stations carried on cable systems continue to provide a
guaranteed minimum of local and diverse voices for subscribers. The
Federal Communications Commission explicitly recognizes that most
programming carried on any cable system is ``either originated or
selected by the cable system operator, who thereby ultimately controls
the content of such programming.'' Report and Order in MM Docket Nos.
91-221 and 87-8, 14 FCC Rcd 12903, 12953 (1999). Moreover, according to
the Commission, cable systems ``typically do not serve as independent
sources of local information; most of any local programming they
provide is originated'' by broadcast stations, which ``are the dominant
source of local news and information.'' Memorandum Opinion and Second
Order on Reconsideration in MM Docket Nos. 91-221 and 87-8, FCC 00-431
at para. 22 (2001) (emphasis in original).2 Given these
views, it would be inappropriate to discount the important role that
broadcasters play in the provision of local, diverse programming to all
television households, whether or not they subscribe to an MVPD
service.3
---------------------------------------------------------------------------
\2\ See also Report and Order, 14 FCC Rcd at 12933 (noting that
``diversity of viewpoints in local news presentation'' is ``at the
heart'' of the Commission's ``diversity goal'').
\3\ Congress has expressed similar concerns about cable subscribers
retaining access to local, diverse information sources. See H.R Rep.
No. 628, 102d Cong., 2d Sess. at 56 (1992) (consumers who ``rely on
cable television for video services'' should ``not be deprived of the
programs presented by their local television stations,'' which include
local news and information); 47 U.S.C. Sec. 532(g) (authorizing FCC to
``promulgate any additional rules necessary to provide diversity of
information sources,'' once cable systems reach a specified subscriber
level).
---------------------------------------------------------------------------
The role of broadcasters will be enhanced as the digital television
(``DTV'') transition moves towards completion. DTV is our future, and
will offer consumers more choices, better picture and sound quality,
and ancillary services. Currently, there are 221 TV stations
broadcasting a digital signal, reaching 78% of the U.S. TV households.
By the FCC mandate of May 2002, NAB estimates nearly two-thirds of the
commercial TV stations will be on the air with a digital signal--and
the rest will not be far behind.
DTV allows broadcasters to provide High-Definition television
programming (``HDTV'')--the highest quality digital signal with several
times the picture quality of current analog television--or Standard-
Definition television (``SDTV'')--where consumers can additional
channels of programming. Digital broadcasters also will have the
ability to provide ancillary services--such as datacasting--in addition
to their digital signals. Thus, there are increased opportunities for
consumers with DTV, and NAB has consistently advocated that Congress
and the FCC need to take steps to facilitate the transition to bring
these benefits to consumers as soon as possible.
Broadcasters are committed to our role as the main source of local
programming to all viewers whether they receive it free, over-the-air
or through a MVPD service. However, as we have found--both historically
and looking ahead to the future--the ``gatekeeper'' role cable and DBS
abuse with regard to programming access has a substantial impact on the
broadcasting industry.
c. the cable industry has abused its ``gatekeeper'' role
1. Digital TV
The monopoly position enjoyed by local cable systems in local
markets underscores the harm to consumers from the lack of competition.
Over 70% of the U.S. television households are connected to cable.
Thus, cable serves as the dominant gatekeeper for broadcasters, and
other programming providers. This ``gatekeeper'' role is one that cable
has abused time and again.In 1992, Congress passed the Cable
Act.4 As part of that comprehensive piece of legislation,
Congress reimposed the ``must carry'' obligation on cable operators in
order to preserve free, over-the-air broadcasting, and give local
broadcasters control of the use of their signals by cable systems and
other distributors. Additionally, the 1992 Cable Act required
``retransmission consent.'' Thus, MVPDs can only retransmit a broadcast
signal with consent of the originating station. The cable industry
resisted the new must carry obligations, appealing to the U.S. Supreme
Court. However, the Court found the must carry obligation
constitutional in 1997.5
---------------------------------------------------------------------------
\4\ Cable Television Consumer Protection & Competition Act of 1992,
Pub. L. No. 102-385 (Oct. 5, 1992).
\5\ Turner Broadcasting System, Inc. v. FCC, 520 U.S. 180 (1997).
See also Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622 (1994).
---------------------------------------------------------------------------
Now, as we move into a digital world, the cable industry is up to
its old tricks. It is fighting any attempt to impose digital must carry
obligations--despite the Supreme Court ruling. Additionally, the desire
of cable gatekeepers to control access to consumers also is reflected
in the current lack of agreements between cable operators and
broadcasters for the carriage of DTV signals. Cable operators generally
will not respond to broadcaster inquiries about cable carriage of DTV
signals, and only a handful of actual carriage agreements have
consequently been negotiated.6
---------------------------------------------------------------------------
\6\ See Comments of NAB/MSTV/ALTV filed with the FCC in CS Docket
Nos. 98-120, 00-96 and 00-2 at 17-26 (filed June 11, 2001) (explaining
that cable has increased incentives not to carry DTV broadcasters and
that cable carriage of DTV broadcasters will not happen without must
carry).
---------------------------------------------------------------------------
The reluctance of cable operators to even discuss carriage of DTV
signals clearly demonstrates that cable systems have ``systemic
reasons'' for limiting the access that broadcasters and other
competitors have to consumers.7 Without a majority of U.S.
households having access to local DTV signals, the pace of the DTV
transition--and broadcasters' ability to compete--is drastically
impaired.
---------------------------------------------------------------------------
\7\ Turner Broadcasting System, Inc. v. FCC, 520 U.S. 180, 201-202
(1997) (cable systems have the incentive to disadvantage broadcast
competitors ``in favor of programmers . . . less likely to compete with
them for audience and advertisers'').
---------------------------------------------------------------------------
2. Interactive TV
The development of new technologies, such as interactive television
(``ITV''), will only expand opportunities for the cable operators, and
disadvantage competitors, because the cable systems control the optimal
distribution platform for digital, interactive services.8
The delivery of digital ITV requires a mechanism to link all of the
interactive elements (i.e. video, audio, and data) once they reach the
subscriber. Cable operators in the digital environment will be able to
control this vital linking of the various elements through their
creation of electronic program guides (EPGs). The EPGs will
consequently become a powerful mechanism by which cable operators can
favor or disfavor whatever interactive content and services they
choose. In an interactive environment, a cable operator will be able to
disadvantage the programming of competitors by blocking, interfering
with or degrading the ITV enhancements associated with that
programming. Discrimination in a variety of technology related
matters--such as EPGs, screen displays, channel assignment and
position, caching of information, and downstream and return path
bandwidth and transmission speed--could also occur. Thus, the growth of
digital ITV will only expand opportunities for cable operators to
discriminate against unaffiliated entities and competitors--including
broadcasters.
---------------------------------------------------------------------------
\8\ The cable platform has the upstream and downstream bandwidth to
provide the high-speed connection necessary for the full range of ITV
services, in addition to its dominance in the MVPD marketplace.
---------------------------------------------------------------------------
3. Carriage Agreements
Cable operators wield their market power in other ways, too. For
example, some cable systems have attempted to restrict the amount of
programming that cable networks can stream directly to consumers over
the Internet.9 If these types of agreements are forced on
cable networks in return for cable carriage, the provision of video on
the Internet will be significantly impeded--adversely impacting both
consumers and competitors. These agreements to block Internet video
stem from cable's attempt to protect its power in the MVPD market. This
same approach could be taken with respect to broadcast interactive
triggers or data and other new services in digital.
---------------------------------------------------------------------------
\9\ For example, Charter Communications wanted to insert a clause
in its carriage agreement with ESPN that would have effectively
prevented ESPNews from video streaming its content on the Web. See,
e.g., L. Moss, ESPN to Charter: You're Out, Cable World at 7 (May 28,
2001); L. Rich, Kicking and Streaming, The Industry Standard (June 11,
2001); S. Schiesel, Charter Removes ESPNews from Some Cable Systems in
Dispute, The New York Times, Section C, Page 2 (July 2, 2001). Other
cable system operators are similarly ``pushing for guarantees that
programmers won't offer content over the Web.'' L. Moss, Operators Back
Charter in Web Dispute, Cable World at 1 (June 4, 2001). Charter, AT&T
Broadband, Time Warner Cable and Comcast have been identified as the
cable system operators attempting to limit streaming by programmers the
most strictly. See R.T. Umstead and S. Donohue, Making Tense Times
Worse, Charter Raises ``Stream'' Bar, Multichannel News at 1 (June 4,
2001).
---------------------------------------------------------------------------
NAB also observes that cable operators' attempts to use carriage
agreements as vehicles to restrict the Internet streaming of video
programming seem inconsistent with at least the intent, and arguably
the terms, of Sections 616 and 628 of the Communications Act. Section
616(a) directs the Commission to prevent cable operators from
``coercing'' any programming vendor ``to provide . . . exclusive rights
against other multichannel video programming distributors as a
condition of carriage on a system.'' 47 U.S.C. Sec. 536(a)(2). If, ``as
a condition of carriage,'' a cable operator attempts to obtain
exclusive rights to a cable network's programming so as to prevent its
distribution via the Internet, then a question of compliance with the
Communications Act arises.10
---------------------------------------------------------------------------
\10\ Section 616(a) also prevents cable operators from utilizing
carriage agreements ``to unreasonably restrain the ability of an
unaffiliated video programming vendor to compete fairly.'' 47 U.S.C.
Sec. 536(a)(3). Unaffiliated cable programming networks could contend
that cable operators' use of carriage agreements to restrict Internet
streaming unreasonably restrains their ability to compete.
---------------------------------------------------------------------------
Congressional concern with efforts by cable operators to deny
competing distributors access to programming directly led to passage of
Section 628 of the Communications Act. This section makes it unlawful
for ``a cable operator'' to ``engage in unfair methods of competition
or unfair or deceptive acts or practices, the purpose or effect of
which is to hinder significantly or to prevent any multichannel video
programming distributor'' from providing certain programming ``to
subscribers or consumers.'' 47 U.S.C. Sec. 548(b). Cable operators'
current efforts to ``hinder significantly or to prevent'' the
distribution of cable network programming to ``consumers'' via the
Internet are entirely in keeping with the cable industry's history of
using its control over programming to the disadvantage of competing
distributors, and are obviously contrary to Congress' intent in passing
Section 628.
2. Cable-Broadcast Cross-Ownership
Finally, there is yet another avenue where cable would like to
further its gatekeeper role: through the elimination or relaxation of
the cable-broadcast cross-ownership ban. The rule's fate is part of a
pending court case before the U.S. Court of Appeals for the D.C.
Circuit.11 NAB supports retention of the ban. If a cable
operator were allowed to own and operate local stations, there would be
nothing stopping it from giving preferential treatment to its own
stations, and perhaps diminishing carriage of local stations owned by
other entities and manipulating channel positioning. Cable would, of
course, argue that the must carry statute prevents such discrimination
from occurring. However, while there is an analog must carry rule in
place, there is no digital must carry obligation at this time. Thus,
digital TV stations could suffer such discrimination.
---------------------------------------------------------------------------
\11\ Fox Television, National Broadcasting Company, Viacom, CBS,
Inc, & Time Warner v. FCC, No. 00-1222 (consolidated with No. 00-1263,
00-1381, 00-1326, 00-1359) (Oral Arguments heard Sept. 7, 2001).
---------------------------------------------------------------------------
The cable-broadcast cross-ownership rule is different than other
cross-ownership bans because in no other cross-ownership situation is
there the potential for one competitor to eliminate or hamper the
ability of another competitor to reach the public. Cable is unique
because, ``by virtue of [its] ownership of the essential pathway'' to
consumers' homes, it can, ``silence the voice of the competing speakers
with a mere flick of the switch.'' 12 Retaining the cable-
broadcast cross-ownership ban is necessary to keep cable's market power
reigned in to a limited degree.
---------------------------------------------------------------------------
\12\ Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622, 656
(1994).
---------------------------------------------------------------------------
d. a merger to monopoly in direct broadcast satellite service will harm
broadcasters and consumers
The history of cable as the dominant gatekeeper provides a lesson
in the abuse of market power and--harm to consumers. The proposed
merger of the only two DBS carriers, Hughes and EchoStar, directly will
harm broadcasters and consumers in forging another monopoly, this time
in satellite broadcast distribution, as well as in reducing needed
competition to cable. Competition between the only two satellite
carriers has proven beneficial to both broadcasters and consumers in
innovation, service, pricing, and in particular the growth of local-to-
local satellite service. Those benefits will be lost if this merger
proceeds.
3. The Direct Broadcast Satellite (DBS) Industry's Track Record with
Local Stations: A Consistent Pattern of Abuse and Lawlessness
In every aspect of their dealings with local TV stations, the DBS
industry--and particularly EchoStar--has shown a shameful disrespect
for obedience to law. Since EchoStar and DirecTV have been perfectly
willing to openly defy actual statutory mandates in their dealings with
local TV stations, there is little doubt that they will readily walk
away from vague assurances they may make today to obtain government
blessing for a merger to DBS monopoly.
i. EchoStar's and DirecTV's Abuse of the Distant-Signal Compulsory
License: ``Catch Me if You Can''
In 1988, with an extension in 1994, Congress created a special
compulsory license in the Copyright Act to allow satellite carriers to
retransmit distant ABC, CBS, Fox, and NBC stations--but only to the
tiny fraction of households that are ``unserved'' by local broadcast
stations. 17 U.S.C. Sec. 119. This statute is called the ``Satellite
Home Viewer Act,'' or ``SHVA.''
When DirecTV went into business in 1994, and when EchoStar did so
in 1996, they immediately began abusing this narrow compulsory license
by using it to illegally deliver distant ABC, CBS, Fox, and NBC
stations to ineligible subscribers. In essence, the DBS companies
pretended that a narrow license that could legally be used only with
remote rural viewers was in fact a blanket license to deliver distant
network stations to viewers in cities and suburbs.13
---------------------------------------------------------------------------
\13\ For the first few years of this exercise in lawbreaking,
DirecTV and EchoStar hid behind a small, foreign-owned company called
PrimeTime 24. See CBS Broadcasting Inc. v. PrimeTime 24, 48 F. Supp. 2d
1342, 1348 (S.D. Fla. 1998) (``PrimeTime 24 sells its service through
distributors, such as DirecTV and EchoStar . . . [M]ost of PrimeTime's
growth is through customer sales to owners of small dishes who purchase
programming from packagers such as DirecTV or EchoStar.''). Starting in
1998 (for EchoStar) and 1999 (for DirecTV), the two companies fired
PrimeTime 24 in an effort to dodge court orders to obey the Copyright
Act.
---------------------------------------------------------------------------
As a result of EchoStar's and DirecTV's lawbreaking, viewers in
markets such as Meridian, Mississippi, Lafayette, Louisiana, Traverse
City, Michigan, Santa Barbara, California, Springfield, Massachusetts,
Peoria, Illinois, and Lima, Ohio were watching their favorite network
shows not from their local stations but from stations in distant cities
such as New York. Since local viewers are the lifeblood of local
stations, EchoStar's and DirecTV's copyright infringements were a
direct assault on free, over-the-air local television.
When broadcasters complained about this flagrant lawbreaking, the
satellite industry effectively said: if you want me to obey the law,
you're going to have to sue me. Broadcasters were finally forced to do
just that, starting in 1996, when they sued the vendor (PrimeTime 24)
that both DirecTV and EchoStar used as their supplier of distant
signals. But even a lawsuit for copyright infringement was not enough
to get the DBS firms to obey the law: both EchoStar and DirecTV decided
that they would continue delivering distant stations illegally until
the moment a court ordered them to stop.
The courts immediately recognized--and condemned--the satellite
industry's lawbreaking. See, e.g., CBS Broadcasting Inc. v. PrimeTime
24, 9 F. Supp. 2d 1333 (S.D. Fla. 1998) (entering preliminary
injunction against DirecTV's and EchoStar's distributor, PrimeTime 24);
CBS Broadcasting Inc. v. PrimeTime 24 Joint Venture, 48 F. Supp. 2d
1342 (S.D. Fla. 1998) (permanent injunction); CBS Broadcasting Inc. v.
DIRECTV, Inc., No. 99-0565-CIV-NESBITT (S.D. Fla. Sept. 17, 1999)
(permanent injunction after entry of contested preliminary injunction);
ABC, Inc. v. PrimeTime 24, 184 F.3d 348 (4th Cir. 1999) (affirming
issuance of permanent injunction).
By the time the courts began putting a halt to this lawlessness,
however, satellite carriers were delivering distant ABC, CBS, Fox, and
NBC stations to millions and millions of subscribers, the vast majority
of whom were ineligible city and suburban households. See CBS
Broadcasting, 9 F. Supp. 2d 1333.
By getting so many subscribers accustomed to an illegal service,
DirecTV and EchoStar put both the courts and Congress in a terrible
box: putting a complete stop to the DBS firms' lawbreaking meant
irritating millions of consumers. Any member of Congress who was around
in 1999 will remember the storm of protest that DirecTV and EchoStar
stirred up from the subscribers they had illegally signed up for
distant network stations.
While Congress properly refused to grandfather all of the illegal
subscribers signed up by DirecTV and EchoStar, the two firms ultimately
profited from their own wrongdoing when Congress--having heard an
earful of consumer complaints--enacted legislation in late 1999
providing for limited grandfathering.
Not only did EchoStar and DirecTV ignore the plain requirements of
the Copyright Act for years, but also when courts finally ordered their
vendor (and them) to stop breaking the law, they took further evasive
action to enable them to continue their lawbreaking. In particular,
when their vendor (PrimeTime 24) was ordered to stop breaking the law,
and to ensure that its partners (such as DirecTV and EchoStar) stopped
doing so, both DBS firms fired their supplier in an effort to continue
their lawbreaking.
When DirecTV tried this in February 1999, a United States District
Judge held in open court that DirecTV's claims were ``a little
disingenuous'' and promptly squelched its scheme. CBS Broadcasting Inc.
et al v. DirecTV, No. 99-565-CIV-Nesbitt (S.D. Fla. Feb. 25, 1999); see
id. (S.D. Fla. Sept. 17, 1999) (stipulated permanent injunction).
EchoStar has played the game of ``catch me if you can'' with
greater success. Thanks to a series of stalling tactics in court,
EchoStar is continuing today to serve large numbers of illegal
subscribers. Realizing that broadcasters were about to sue it in
Florida, for example, in October 1998 EchoStar filed a declaratory
judgment action in its home district--Colorado--against ABC, CBS, Fox,
NBC, and their Affiliate Associations. The District Court in Colorado
(Judge Nottingham) granted broadcasters' request to transfer EchoStar's
lawsuit to Florida, finding that EchoStar had engaged in ``flagrant
forum-shopping.'' Hearing Transcript, EchoStar Communications Corp. v.
CBS Broadcasting Inc. (D. Colo. Mar. 24, 1999).
Although EchoStar's stalling techniques have thus far kept it from
being subject to any long-term court order to stop its infringements,
there is no doubt that EchoStar is continuing to break the law. When
EchoStar was (briefly) ordered to start turning off its illegal
subscribers in late 2000, for example, it candidly told the Court that
it had so many illegal subscribers that it would take a long, long time
to turn them all off, even if it turned off 5,000 subscribers per
day.14
---------------------------------------------------------------------------
\14\ Declaration of Mark Jackson, Senior Vice President, EchoStar
Technologies, para.para. 17, 19, 20, 21 (executed Oct. 11, 2000)
(``Jackson Decl.'') (claiming that EchoStar can only terminate 6,000 to
10,000'' per day); Declaration of James DeFranco, Executive Vice
President and Director for EchoStar Communications Corp. (executed Oct.
11, 2000) (``DeFranco Decl.'') at para.para. 18-21 (describing
EchoStar's proposed time frame and alleged need for lengthy period for
shut off process).
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ii. The Satellite Carriers' Breach of Faith With Congress on the Local-
to-Local Compulsory License
Starting in 1997, EchoStar began urging Congress to enact a new
compulsory license that would allow satellite companies to carry local
TV stations to local viewers without paying any copyright fees. DirecTV
joined in the call for such a law in 1999.
In December 1999, Congress granted the DBS companies' wish: it gave
them carte blanche to deliver any TV station within its own market,
without paying a penny in copyright fees to the owners of the
programming carried on the station. Satellite Home Viewer Act of 1999
(``SHVIA''). Congress wanted to make sure, however, that the new
compulsory license would not harm other stations in the market by
putting a barrier--the DBS firm--between non-carried stations and many
of their viewers.
Congress therefore told EchoStar and DirecTV in the SHVIA that if
they wished to use this special new license, they would need--starting
in 2002--to carry all of the stations in each market. This simple and
equitable principle, embodied in the SHVIA, is called ``carry one,
carry all.''
The DBS firms happily accepted the gift that Congress had given
them--a local-to-local compulsory license. Thanks to that congressional
largesse, the DBS firms have grown at a blistering pace since then:
DirecTV has expanded from 7.86 million subscribers in November 1999 to
10.3 million today, while EchoStar has grown even more explosively,
from 3.25 million in November 1999 to 6.43 million today.
The DBS industry made no secret of the fact that its phenomenal
post-SHVIA growth has been largely the result of Congress' decision to
make it easy for them to carry local TV stations. The Satellite
Broadcasting & Communications Association, for example, said that the
industry's ``40% subscriber addition growth in 2000 is primarily the
result of legislation passed in November 1999 allowing the DBS
operators to offer local broadcast channels in markets of their
choice.'' 15
---------------------------------------------------------------------------
\15\ SBCA Comments, In Re Annual Assessment of the Status of
Competition in the Market for the Delivery of Video Programming, CS
Docket No. 00-132 (filed July 2000) (quoting industry analyst).
---------------------------------------------------------------------------
How did EchoStar and DirecTV show their gratitude for this
extraordinary gift? By brazenly seeking to defeat the will of Congress.
Only a few months after the SHVIA went into effect, EchoStar,
DirecTV, and SBCA filed a lawsuit demanding that the Court invalidate
the ``carry one, carry all'' principle, on the theory that Congress'
generous (and lucrative) gift to the DBS industry somehow had to be
even more generous to satisfy the First Amendment.
In effect, the DBS firms demanded that the court rewrite the SHVIA
to give them a sweet deal that Congress had emphatically refused them:
the ability to use the programming of local TV stations with no
copyright fees whatsoever, combined with a free hand to cherrypick a
few stations while effectively cutting all other local stations off
from DBS households. (Just two weeks ago, EchoStar and DirecTV filed an
emergency motion asking the Court to stay the January 1, 2002 effective
date of the SHVIA carry-one-carry-all provisions.)
Luckily, the courts have thus far brushed aside the satellite
industry's intense effort to thwart Congress' will. But the lesson is
clear: Congress (and the administration) would be foolish to approve a
merger to DBS monopoly based on vague promises about future benefits.
EchoStar and DirecTV's track record shows that they are perfectly
willing to take a government-granted benefit--here, permission to merge
to DBS monopoly--and then use every available tactic to unravel the
terms on which the government granted the benefit.
iii. The Satellite Carriers' Relentless Guerrilla Warfare Against
``Carry One, Carry All.''
EchoStar and DirecTV have not only attacked the principle of
``carry one, carry all'' on a wholesale basis in the courts, but have
sought to sabotage it in their ``retail'' dealings with local stations
requesting carriage. When local stations sent requests to EchoStar in
the summer of 2001 asking for carriage, for example, EchoStar sent back
crude form letters offering nonsense reasons for rejecting most
stations, such as absurd claims that the stations didn't list the city
in which they are licensed or that TV towers a few miles away did not
provide a strong enough signal.
On its own initiative, the FCC sharply criticized EchoStar form-
rejection-letter tactic for failing to ``comply with the rule or the
Report and Order.'' In re Implementation of the Satellite Home Viewer
Improvement Act of 1999: Broadcast Signal Carriage Issues, CS Docket
No. 00-96, para. 59, 16 FCC Rcd 1918 (Sept. 5, 2001).
EchoStar's recalcitrance has continued since then: many station
owners have been forced to file complaints against EchoStar at the FCC
to enforce the carriage rights that Congress granted them. See
EchoStar, DirecTV Turn Down Dozens Of Requests For Carriage,
Communications Daily (Oct. 19, 2001). Indeed, as press reports reflect,
the FCC has been ``inundated'' by an ``avalanche'' of complaints that
broadcasters were forced to file after being turned away by EchoStar,
DirecTV, or both. Id.
iv. EchoStar's Brazen Proposal to Defy the FCC by Placing Disfavored
Stations in ``Satellite Siberia''
EchoStar and DirecTV have twice asked the FCC to rule that
satellite companies can ``satisfy'' the carry-one-carry-all rules by
relegating disfavored stations to an out-of-the-way satellite that
viewers could receive only if they purchased an additional dish. In
response, the Commission has twice emphatically rejected that proposal.
See In Re Implementation of the Satellite Home Viewer Improvement Act
of 1999: Broadcast Signal Carriage Issues, para.para. 37-41, CS Dkt.
No. 00-96 (released Sept. 5, 2001) (discussing initial rejection of DBS
proposal and reaffirming prior rejection).
Both in its original decision in early 2001 and on reconsideration
in August 2001, the Commission made absolutely clear that satellite
carriers could not place ``disfavored'' stations ``on a satellite . . .
that would require a subscriber to purchase equipment additional to
what is needed to receive other local stations in the same market.''
Id., para. 40.
In an extraordinary slap in the face to Congress and to the FCC,
EchoStar announced in late October--just before the merger
announcement--that EchoStar is considering doing exactly what the
Commission said it could not do: purporting to ``satisfy'' its carry-
one-carry-all obligations by putting disfavored stations on a
completely different satellite that requires viewers to buy new
equipment. EchoStar Analyst Presentation (Oct. 23, 2001) (statements of
President & Chairman Charlie Ergen).
Even more recently, EchoStar filed a request with the FCC to move
one of its backup satellites to a location far over the Pacific,
apparently for the purpose of carrying out this sham ``compliance''
technique.
In short, EchoStar is evidently considering a new method of openly
defying the will of Congress and the FCC, even when it has twice tried
and failed to get permission to do what it now proposes to do. The
lesson for a possible merger to DBS monopoly is clear: no matter how
explicit a governmental directive may be, EchoStar will resist with all
of its powers if what Congress or the Executive Branch has ordered does
not fit with EchoStar's preferred business plan of the moment.
v. EchoStar's ``Abuse of the Commission's Processes'' About
Retransmission Consent
EchoStar has brought the same abusive approach to the arena of
retransmission consent--the process by which DBS firms obtain
permission from those local stations that the DBS firms do wish to
carry. EchoStar's approach has been simple: if it is unable to make a
retransmission consent deal with a station, it automatically--as
punishment--files an FCC complaint alleging that the station had failed
to bargain in good faith.
One broadcaster victimized by this practice was Young Broadcasting,
Inc., which owns local TV stations in several markets. On August 2,
2001, the FCC's Cable Services Bureau rejected EchoStar's
retransmission consent complaint against Young Broadcasting as
unfounded. In re EchoStar Satellite Corp. v. Young Broadcasting, Inc.,
File No. CSR-5655-C, para. 32, at 15 (Aug. 6, 2001). Not only did the
Commission reject EchoStar's complaint, but the FCC Bureau found that
EchoStar had engaged in misconduct that the Bureau could not
``excuse.'' The FCC Bureau chastised EchoStar for ``abuse of process''
and cautioned EchoStar ``to take greater care with regard to future
filings'' (id. at 16), finding further that ``EchoStar failed in its
duty of candor to the Commission'' by publicly disclosing portions of
the documents for which it sought strict confidentiality in Commission
proceedings. (Emphasis added.)
The FCC's Bureau held that ``EchoStar's conduct in filing material
with the Commission requesting confidentiality, while concurrently
engaging in a public debate over the issues raised in this proceeding
and publicly disclosing selected portions of the alleged confidential
material, constitutes an abuse of the Commission's processes.'' Id.
(emphasis added).
Again, the lesson is clear: it would be foolish to expect a
monopoly DBS firm to obey the law and comply with legal processes when
the company that would own the monopoly firm (EchoStar) has never done
so in the past.
4. EchoStar/DirecTV Merger Will Eliminate Competition in Satellite
Television Service and Reduce Competition in Multichannel Video
Programming Distribution Against Cable.
Over the past several years, competition between EchoStar and
DirecTV has contributed directly to the success of DBS. This
competition not only has taken place in regard to price, but also in
service offerings, customer service policies, marketing strategies, and
technical innovations. The merger would eliminate competition over such
items as the development of advanced set-top boxes and the delivery of
high-definition programming and lead to fewer programming options and
higher prices for consumers.
In rural areas not currently served by cable, the result would be a
single multichannel video provider in those areas. Furthermore, as DBS
increases its stranglehold on rural customers, many rural cable systems
are likely to go out of business. A recent report by a prominent
satellite analyst at Credit Suisse First Boston has determined that
approximately 8,270 cable systems serving roughly 8.2 million
subscribers located primarily in rural territories will become extinct
over the next five to eight years as a result of DBS competition. In
fact, the CEO of Pegasus Communications recently stated that DBS might
become the only programming option for rural customers in the near
future. See Communications Daily, p. 5 (October 9, 2001). In sum,
millions of rural customers could be at risk and subject to the
monopolistic tendencies and practices of a combined Echostar/DirecTV.
Even in markets where cable is currently available, American
consumers would go from three competitive options to two because in
most areas of the U.S., most consumers are served only by one cable
system. Economic literature indicates that two competitors in a market
will behave in an oligopolistic fashion and not compete on the basis of
price, thus, allowing this merger is likely to lead to increased prices
for consumers.
EchoStar has suggested that the merger will not threaten
competition because DBS operators compete in the broader MVPD market,
which includes cable. Indeed, Mr. Ergen, himself, has acknowledged that
``[i]f the market is satellite only, then I wouldn't approve this
deal.'' See The Wall Street Journal, Echostar's Ergen Starts Campaign
to Get Approval for DirecTV Deal, B6, Oct. 31, 2001. However, in its
antitrust lawsuit filed against DirecTV last year (which EchoStar
recently dropped), EchoStar defined the relevant market as the ``high-
power DBS market'' noting that ``satellite-to-home broadcast services
constitute [] a stand-alone market, distinctly separate from the cable
business.'' See Echostar Communications Corp. v. DirecTV Enters., Inc.,
Civ. No. 00-K-212 (D. Colo.). Accordingly, NAB respectfully suggests
that this committee closely examine any claims by EchoStar aimed at
lessening antitrust concerns.
For example, in an attempt to alleviate these concerns, EchoStar
has proposed to adhere to a nationwide pricing plan with equal pricing
for rural and urban customers. NAB believes that any such behavioral
remedy would not mitigate the inherent competitive harm resulting from
a merger of EchoStar and DirecTV. Behavioral remedies are ineffective
because they require constant monitoring and incentivize the merging
companies to seek loopholes to avoid the intended relief--EchoStar's
past behavior makes this more likely to occur.
More fundamentally, however, a decree that only guarantees
unilateral pricing in rural communities vis-a-vis metropolitan markets
ignores many other forms of competition, such as improved and
differentiated product offerings, marketing strategies, and customer
service policies. Thus, under the proposed remedy, there would be no
adequate method to ensure that the level of service (i.e., number,
type, and variety of channels) provided to rural areas would equal that
offered to urban markets. Not surprisingly, antitrust authorities
strongly disfavor behavioral consent decrees similar to that offered by
EchoStar since marketplace competition is always preferred to a
regulatory solution.
EchoStar's proposal also could not replicate the unique competition
that exists between these two firms today. EchoStar has garnered a
reputation as the pricing ``maverick'' that has marketed its lower
priced offerings to increase market share. By contrast, DirecTV is
known as the provider of premium programming services (e.g., exclusive
sports packages and high-end pay-per-view services). After the
consummation of the proposed deal, the merged firm would have no
incentive to engage in this behavior, and consumers would suffer.
Moreover, EchoStar and DirecTV each have proven to be very effective
competitors against cable when operated under separate ownership. DBS
currently wins 6 out of every 10 new DBS/cable subscribers, with
EchoStar gaining roughly six million, and DirecTV over ten million
subscribers over the last seven years. See 2000 Annual Assessment at
para. 61-67. Even more compelling, both companies have become
profitable. In light of this competitive history, EchoStar's claim that
it needs this merger to compete with cable seems disingenuous, at best.
5. The EchoStar/DirecTV monopoly will be a fatal blow to local-to-local
in rural America
If EchoStar and DirecTV are allowed to merge, consumers in 110 U.S.
television markets will likely never receive local news, sports and
weather via satellite. Charlie Ergen, who will serve as Chairman and
CEO of the combined company, has publicly stated that the company will
offer local signals in only 100 markets--virtually all in the top 100.
Therefore, satellite's earliest and most loyal customers located in
rural America will be denied the opportunity to receive their local
broadcast signals. In fact, consumers located in non-cabled areas will
have no choice to receive local signals via any MVPD platform.
Two and a half years ago the DBS industry faced tough legal,
technical and financial obstacles preventing the delivery of local
signals, but today none of those obstacles exist for either DirecTV or
EchoStar. The passage of SHVIA creating a statutory compulsory
copyright eliminated local-to-local's legal obstacle. Previous DBS
industry consolidation, the resulting concentration of spectrum and
subscribers, the licensing of the Ka-band, and technological advances,
such as digital compression, statistical multiplexing, and spot beam
satellites, have virtually eliminated the technical and financial
hurdles for DirecTV and EchoStar. Unfortunately, other potential third-
party local-to-local providers continue to face significant technical
and financial obstacles. If the EchoStar/DirecTV monopoly cherry-picks
the top 100 markets, those obstacles magnify. Third-party local-to-
local providers face the following barriers to entry:
No available CONUS DBS spectrum: DirecTV and EchoStar already
control all prime DBS spectrum--resulting in existing spectrum
concentration. In 1997, there were five DBS licensees with high-powered
DBS Ku-band satellite capacity within the coveted full CONUS
(contiguous U.S.) orbital arc that covers the entire U.S. The five
included:
1) DirecTV,
2) EchoStar,
3) American Sky Broadcasting (ASkyB), a joint venture of MCI and News
Corp.,
4) Tempo Satellite, Inc., a subsidiary of TCI Satellite Entertainment
and later rolled into PrimeStar, Inc. (PrimeStar), and
5) United States Satellite Broadcasting (USSB).
Entering 2000, only DirecTV and EchoStar remained. During 1999,
ASkyB was merged into EchoStar, and DirecTV acquired USSB and
PrimeStar. With this consolidation, EchoStar's full CONUS satellite
capacity increased 125% and DirecTV's increased 70%, giving each
tremendous capacity.16 In addition, DirecTV's and EchoStar's
experience with technological innovations such as digital compression,
statistical multiplexing and spot beam satellites further expanded
their capacity. As a result, both DirecTV and EchoStar currently have
enough DBS Ku-band broadcast spectrum to carry their premium
programming and all local television signals.
---------------------------------------------------------------------------
\16\ EchoStar is also a licensee of DBS frequencies at five high-
powered, non-CONUS orbital slots, 11 at 61.5 deg. WL, 24 at 148 deg.
WL, 1 at 166 deg. WL and 32 at 175 deg. WL.
---------------------------------------------------------------------------
Even without the DirecTV/EchoStar monopoly, spectrum concentration
already exists--EchoStar and DirecTV are licensees of all high-powered
DBS, full CONUS Ku-band spectrum. As a result, no full CONUS, DBS
spectrum is available for any potential third-party local-to-local
provider.
Limited availability of CONUS Ka Slots: Hughes and EchoStar
dominate CONUS Ka-band licensees, adding to existing spectrum
concentration. When the Federal Communications Commission first issued
Ka-band licenses in 1997, many projected Ka-band as the answer to
local-to-local with its higher frequencies suitable for spot beam
satellites and CONUS locations adjacent to the coveted DBS spectrum.
Utilizing the capacity in just one Ka slot, spot beam satellites and
today's digital compression rates, all local stations in all markets
could be carried. Although Hughes and EchoStar are licensees of five
full-CONUS Ka-band orbital slots (Hughes at 99 deg., 101 deg. and
103 deg. and EchoStar at 113 deg. and 121 deg.) and eight non-CONUS Ka-
band slots, DirecTV and EchoStar have chosen to ignore this capacity
for local-to-local. Meanwhile, other potential local-to-local providers
have struggled to lease or license Ka CONUS capacity.
The limited rural marketplace: A rural, standalone local-to-local
plan is not economically viable. Markets 101 through 210 account for
only 15% of U.S. TV households--making it difficult for a third-party
to develop an economically viable business plan. Licensing or leasing
an orbital slot; designing, building and launching a spot beam
satellite; building uplink facilities; creating a backroom support
operation; and manufacturing and subsidizing consumer hardware will
cost a third-party local-to-local provider hundreds of millions of
dollars.
In addition, it is not practicable to develop any local-to-local,
standalone plan without partnering with a DBS provider. The two primary
reasons are the need for a consumer-friendly, marketable product--
consumers want one dish, one receiver and one bill--and the economics
of marketing, subsidizing consumer hardware and building a backroom
operation to support a separate local-to-local plan.
Proprietary transport and conditional access systems limit any
third-party local-to-local provider's ability to reach the DirecTV and
EchoStar subscriber bases in a consumer-friendly manner without the
cooperation of DirecTV and EchoStar. Since 1997, both DirecTV and
EchoStar have refused to cooperate with a potential third-party local-
to-local wholesaler. In addition, when Pegasus Communications Corp.,
one of DirecTV's largest rural distributors, proposed a possible local-
to-local rural plan, DirecTV again refused to cooperate.
A Long Lead Time: A local-to-local satellite business will require
30-36 months before revenues. The time to acquire spectrum, to design,
build and launch a satellite, and to begin operations is approximately
30-36 months.
The bottomline. NAB vigorously supports local-to-local in all 210
markets, but understands the enormous economic and technical hurdles
faced by any third-party business focused exclusively on markets 101
through 210. Without a larger potential market base and without the
cooperation of DirecTV and EchoStar, NAB believes that no third-party
provider can leap these hurdles to provide local news, sports and
weather to 110 underserved markets in rural America, representing more
than half of the U.S. TV markets.
4. Local-to-local will benefit more from a competitive satellite
marketplace with two DBS providers than from the DirecTV/
EchoStar monopoly.
Today DirecTV and EchoStar offer local-to-local in 41 and 36 TV
markets respectively. Due to the competitiveness between the two
providers, many of those markets overlap. See Appendix A. As one
provider added a market, the other followed suit. Throughout the
history of DBS, DIRECTV and EchoStar have driven each other to the
benefit of consumers. Other examples of this ``leapfrogging''
competitiveness include:
The introduction of the $199 receiver.
Free installation offerings.
Consumer hardware lease programs.
Development of advanced digital receivers, which include
interactive offerings and personal video recorders.
Expansive ethnic and niche programming.
Multiple broadband offerings.
In addition, EchoStar and DirecTV have invested in innovative, start-up
companies to gain access to new technologies and programming.
Prior to the merger announcement, both DirecTV and EchoStar had
already stated plans to expand their local-to-local coverage to 60
markets using spot beam satellites. However, NAB believes that the
fierce competitiveness that exists between DirecTV and EchoStar,
combined with each provider's enormous satellite capacity and the
desire to differentiate its product, will ultimately drive DirecTV and
EchoStar to offer more local markets independently than together--
either by utilizing their existing DBS and Ka-band capacity or by
partnering with a third-party to deliver markets 60 and above. With the
DirecTV/EchoStar merger, this competitive ``one upmanship'' disappears.
The bottomline. The NAB believes that more consumers will have
access to their local news, sports, and weather via satellite with two
DBS platform providers than with one for the following reasons:
Capacity for local-to-local is not the issue. DirecTV and
EchoStar each have sufficient DBS Ku satellite capacity to
offer all local markets via satellite. Further, both DirecTV
and EchoStar have Ka capacity, suitable for local-to-local,
adjacent to their DBS spectrum--allowing them to develop a
consumer-friendly product. In fact, with one CONUS Ka slot and
well-designed spot beam satellites, a provider could offer all
local stations in all markets.
The merged entity has capped its local-to-local plan at 100
markets, mostly in urban America, abandoning rural subscribers.
Based on prior dealings, there is no guarantee that the merged
entity will actually ever offer 100 markets.
Due to the previously outlined barriers to entry, a third
party local-to-local plan for markets 101 to 210 is
economically unviable.
As a result, it is unlikely that rural, underserved consumers
will ever have access to local news, sports and weather via
satellite if there is only one DBS platform provider.
Consumers have reaped enormous benefits from the intense
competition between DirecTV and EchoStar, including diverse
programming options, lower prices, and advanced technologies.
That competition has already resulted in the carriage of 41
and 36 local markets by DirecTV and EchoStar respectively.
Prior to the merger, both DirecTV and EchoStar had stated they
planned to expand their local-to-local offerings to 60 markets.
Since late 1999, local-to-local has driven DirecTV and
EchoStar subscriber growth.
Continuing competitive pressures to differentiate the DirecTV
and the EchoStar brand will drive DirecTV and EchoStar to add
more markets via their own capacity or in cooperation with a
third-party provider--resulting in carriage of more than 100
markets.
A successful third-party wholesale provider offering universal
local-to-local service is more likely if it not dealing with a
DBS monopoly. The potential to negotiate with two DBS platform
providers is more likely to result in the development of a
viable business plan.
5. A DirecTV/EchoStar monopoly eliminates a local broadcaster's
leverage for retransmission consent.
Local broadcasters, particularly those in smaller markets, fear
dealing with a monopoly when granting retransmission consent based upon
prior experience with cable and based upon the contentious history
between broadcasters and the DBS industry. With two competitive DBS
providers, broadcasters maintain some leverage to gain favorable
retransmission terms. That leverage is eliminated with one.
6. A DirecTV/EchoStar monopoly is unnecessary to expand local-to-local
As previously noted, both DirecTV and EchoStar have sufficient DBS
spectrum to carry all stations in all markets. Both DirecTV and
EchoStar have Ka spectrum located adjacent to their DBS spectrum, which
could also be used to offer all stations in all markets. With these
options, expanding local-to-local coverage is simply not a
justification for a DBS monopoly.
e. conclusion
Broadcasters will continue to fill the pivotal role of providing
critical local news and programming. That role is threatened by the
``gatekeeper'' roles played by both cable and DBS systems. Broadcasters
want to insure that local programming and news is made available in all
markets and that it is best served by competition between EchoStar and
Direct TV and between the satellite companies and cable systems.
Consumers have long benefited from competition among local broadcasters
and there is no reason why the same should not be true for the DBS
carriers and cable systems.
Appendix A
Local Markets on DBS
------------------------------------------------------------------------
Market DirecTV EchoStar
------------------------------------------------------------------------
Albuquerque.....................................
Atlanta.........................................
Austin..........................................
Baltimore.......................................
Birmingham......................................
Boston..........................................
Charlotte.......................................
Chicago.........................................
Cincinnati......................................
Cleveland.......................................
Columbus, OH....................................
Dallas/Ft. Worth................................
Denver..........................................
Detroit.........................................
Greensboro......................................
Greenville/Spartanburg..........................
Houston.........................................
Indianapolis....................................
Kansas City.....................................
Los Angeles.....................................
Memphis.........................................
Miami...........................................
Milwaukee.......................................
Minneapolis/St. Paul............................
Nashville.......................................
New York........................................
Orlando.........................................
Philadelphia....................................
Phoenix.........................................
Pittsburgh......................................
Portland, OR....................................
Raleigh/Durham..................................
Sacramento......................................
St. Louis.......................................
Salt Lake City..................................
San Antonio.....................................
San Diego.......................................
San Francisco...................................
Seattle.........................................
Tampa/St. Petersburg............................
Washington, DC..................................
West Palm Beach.................................
------------------------------------------------------------------------
Source: DirecTV and EchoStar Consumer Websites
Mr. Upton. Thank you.
Mr. Hartenstein.
STATEMENT OF EDDY W. HARTENSTEIN
Mr. Hartenstein. Thank you, Chairman Upton, members of the
subcommittee.
I appreciate the opportunity to present our views. The last
time DIRECTV appeared before this subcommittee was in April
1998. We had barely been in business for a little over 3 years,
just had a little over 3 million customers, and a lot has
changed.
Just 8 days ago, and a quarter billion dollars
incrementally more investment on behalf of DIRECTV and Hughes,
we successfully launched a new high power spot beam satellite
that will enable the must carry obligation in all 41 major
marketplaces that we are in today to begin offering all local
stations.
Now, notwithstanding the success we've had over the last 7
years, we feel that it's important to combine our businesses
with EchoStar's Dish Network to enable us to offer consumers a
stronger competitive alternative to the market dominant cable
operators.
There are a number of developments and changes and
challenges in the MVPD marketplace that motivated our decision.
Cable is still the dominant technology for the delivery of
video programming to consumers, with 80 percent of all video
subscribers receiving their program from the franchised cable
operator, while DBS subscribers combined represent only 17
percent.
The cable MSOs, or multiple system operators, have engaged
in regional clustering, mergers, and trades, all viable
business practices, and this consolidation has strengthened
their ability to compete by lowering operating and programming
costs and facilitating the provision of related services, such
as cable modems, high speed Internet access, and telephony.
Digital cable has in the last 2 years become very widely
available. Before the advent of that, DBS providers had a
distinct advantage over analog cable in terms of picture
quality and channel capacity. Today, where digital cable is
available, consumers believe that the picture quality and
programming choices offered by cable and DBS, digital cable,
are essentially the same.
Finally, the advent of the must carry deadline has caused
us to reexamine the issue of DBS spectrum constraints. Today
EchoStar and DIRECTV each carry more than 200 identical
national channels of entertainment, news, sports programming,
as well as more than 140 identical local broadcast stations in
35 common markets that we share.
After the must carry takes effect in just 26 more days, our
two companies will be required to carry a total of more than
300 identical local broadcast stations while still serving just
those 35 common markets.
That is 500 redundant duplicated channels of spectrum. That
would be 500 more channels that we could spread among other
services and local television stations across the country.
It became clear to us the most efficient use of the limited
DBS spectrum could be achieved by a merger and only achieved by
a merger between EchoStar and DIRECTV. Channels will need to be
broadcast once instead of twice to reach all consumers, and
this will enable the transmission to consumers of additional
programming that just cannot be delivered today.
Local channels in about 100 markets, a wider variety of
programming up to a dozen high definition television channels,
new interactive services, more foreign language programming,
more pay-per-view options, and improved service to Alaska and
Hawaii, all things we need to do to continue to be competitive
with our competition, cable.
It was these market realities that convinced our parent
companies, Hughes Electronics and General Motors, and us that a
merger with EchoStar could be both pro competitive and pro
consumer. Combined we will be able to provide a greater variety
of services and better value to urban, suburban, and rural
customers alike.
This will make us a much stronger competitor to cable in
the MVPD market and bring the benefits of this robust
competition to the current cable customers, as well as our own.
Let me turn to a couple of statutory and regulatory
obstacles that are inhibiting our ability to compete with local
cable operators.
First, as we said in the comments we filed yesterday, and
Bob indicated that the NRTC did as well, the program access
provision prohibiting exclusive cable contracts with vertically
integrated programmers will continue to be necessary to protect
competition after 2002. We hope the FCC will not allow that
provision to sunset.
Second, all of our efforts to bring a robust cable
alternative to the marketplace will be undermined if DBS
subscribers suddenly started to suffer service outages due to
interference from terrestrial wireless services, such as these
proposed by Northpoint.
Our concern has always been about interference, not
competition, and yesterday we, along with EchoStar, suggested
to the FCC that the immediately adjacent spectrum band in
frequency, the exact same amount of spectrum, the CARS band, is
better suited and available for service such as Northpoint.
Finally, our penetration rates in apartment buildings and
condominiums continue to lag behind that of single family
homes. We believe the FCC, through the Cable Act of 1992, has
the ability to alleviate those barriers to entry and has yet to
do so. We would hope that Congress asks to help rectify this
situation.
As I mentioned at the outset, there have been significant
changes in the MVPD market in the 3 years since we last
appeared here, and we think the next step in the evolution of
the MVPD market is the approval of the pro competitive merger
of DIRECTV and EchoStar's Dish Network, as well as the
extension of the program access law's prohibition on exclusive
cable contracts in the loopholes such as those employed by
Comcast in not delivering via satellite, via cable, to prohibit
us and others from having access to that programming.
We appreciate the opportunity here today for us to share
our views and look forward to questions you have after.
Thank you.
[The prepared statement of Eddy W. Hartenstein follows:]
Prepared Statement of Eddy W. Hartenstein, Chairman and Chief Executive
Officer, DIRECTV, Inc.
Chairman Upton, Mr. Markey, and members of the Subcommittee, thank
you for inviting me to appear before you today. I appreciate the
opportunity to present our views on the status of competition in the
multichannel video programming distribution (MVPD) marketplace and to
discuss our proposed merger with EchoStar.
The last time DIRECTV appeared before this Subcommittee in April
1998, we had been in business for three and three-quarter years and had
3.45 million subscribers nationwide. Today, having celebrated our
seventh anniversary this summer, we have more than 10.3 million
customers.1
---------------------------------------------------------------------------
\1\ Of the 10.3 million DIRECTV subscribers, 1.8 million are served
through the National Rural Telecommunications Cooperative (NRTC) and
its members and affiliates.
---------------------------------------------------------------------------
We are offering local network stations in 41 major metropolitan
markets (see Attachment A) which represent more than 61 percent of the
television households in the country. Just eight days ago, we
successfully launched a new high-power spot beam satellite. The DIRECTV
4S satellite will enable us to make the most efficient use of our
existing capacity in order to meet the must carry obligation imposed by
the Satellite Home Viewer Improvement Act (SHVIA) in all 41 markets.
Given the success we have had over the last seven years, you might
ask why we feel that it is important to combine our business with
EchoStar's Dish Network to enable us to offer consumers a stronger
competitive alternative to the market dominant cable operators. There
were a number of developments and challenges in the MVPD marketplace
that motivated our decision.
Cable television still is the dominant technology for the
delivery of video programming to consumers. Eighty percent of
all subscribers to multichannel video services receive their
programming from a franchised cable operator,2 while
DBS subscribers still represent only 17 percent of all MVPD
subscribers.3
---------------------------------------------------------------------------
\2\ Annual Assessment of the Status of Competition in the Market
for the Delivery of Video Programming, Seventh Annual Report, CS Docket
No. 00-132, FCC 01-1, para. 5 (released Jan. 8, 2001).
\3\ Cable Industry Outlook, Deutsche Banc Alex Brown at 32 (Sept.
6, 2001).
---------------------------------------------------------------------------
The cable multiple system operators (MSOs) have engaged in
regional clustering, mergers and trades.4 The result
of this consolidation is that the ten largest cable operators
now serve close to 90 percent of all U.S. cable
subscribers.5 This consolidation has strengthened
cable's ability to compete by lowering operating and
programming costs and facilitating the provision of related
services, such as cable modem service and
telephony.6
---------------------------------------------------------------------------
\4\ Seventh Annual Report at para.para. 15, 35.
\5\ Id. para. 15.
\6\ Id.
---------------------------------------------------------------------------
Digital cable has become widely available.7 Before
the advent of digital cable, DBS providers had a distinct
advantage over analog cable in terms of picture quality and
channel capacity. Today, where digital cable is available,
consumers believe that the picture quality and programming
choices offered by cable and DBS are essentially the same.
---------------------------------------------------------------------------
\7\ Id. para.para. 17, 41; see Cable Industry Outlook, Deutsche
Banc Alex Brown at 16 (89.271 million digital-ready homes at the end of
the second quarter of 2001).
---------------------------------------------------------------------------
Cable has aggressively launched cable modem service, and is
able to offer an attractive bundled video/high-speed Internet
access product to consumers 8 that neither DIRECTV
nor EchoStar can match today.
---------------------------------------------------------------------------
\8\ Seventh Annual Report at para.para. 11, 48-49.
---------------------------------------------------------------------------
Finally, the advent of the must carry deadline has caused us
to re-examine the issue of DBS spectrum constraints. Unlike
cable, DBS has bandwidth limitations that constrain growth in
service offerings. Today, EchoStar and DIRECTV each carry more
than 200 identical national channels of entertainment, news and
sports programming, as well as more than 140 identical local
broadcast stations in 35 markets. After must carry takes effect
on January 1, 2002, the two companies will be required to carry
a total of more than 300 identical local broadcast stations,
while still serving just those 35 markets.
It became clear to us that the most efficient use of the limited
DBS spectrum could be achieved by a merger of EchoStar and DIRECTV.
Channels will need to be broadcast once, instead of twice, to reach all
consumers. This will enable the transmission to consumers of additional
programming that cannot be delivered today--local channels in about 100
metropolitan areas, a wider variety of programming, up to 12 HDTV
channels, new interactive services, more foreign language programming
like the DIRECTV PARA TODOS TM Spanish-language service we
offer today, more pay-per-view options and improved service to Alaska
and Hawaii.
It was these market realities that convinced our parent companies,
Hughes Electronics and General Motors, and us that a merger with
EchoStar would be both pro-competitive and pro-consumer. We are
committed to working with both the FCC and the Department of Justice as
they evaluate the merger. In the end, we hope both agencies conclude,
as we did, that the combined company will be able to provide a greater
variety of services and better value to urban, suburban and rural
consumers alike. This will make us a much stronger competitor to cable
in the MVPD market and bring the benefits of this robust competition to
the more than 67 million cable subscribers,9 as well as to
our own customers.
---------------------------------------------------------------------------
\9\ Id. para. 7.
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During the pendancy of the merger, we will continue to operate as
separate companies. We are continuing to attract new subscribers, and
to provide our existing customers with the same high quality service
they have come to expect.
Let me turn to a couple of other issues. Several statutory and
regulatory obstacles are inhibiting our ability to compete with local
cable operators.
Extension of the Program Access Law's Prohibition on Cable Exclusive
Contracts
As I have said on many occasions, without Congress' passage of the
program access provision of the 1992 Cable Act, I would not be here
before you today. That provision allows cable's competitors to gain
access to cable-affiliated programming, such as CNN, Headline News,
HBO, and Discovery Channel. Without this programming, we cannot
compete. This was true in 1992 when the program access law was passed,
and remains true today.10
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\10\ Id. para. 15 (``In 2000, one or more of the top five cable
MSOs held an ownership interest in each of 99 vertically integrated
national programming services.'')
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The program access provision prohibiting exclusive contracts
between cable operators and vertically-integrated programmers is
scheduled to expire in October of next year, unless the FCC finds, in a
proceeding it began last month, that the provision continues to be
necessary to ``preserve and protect competition and diversity in the
distribution of video programming.'' 11 Using recent events
as a likely indicator of future cable industry behavior, I can predict
with some confidence that this provision of the program access law will
continue to be necessary to protect competition after 2002, and to
ensure that subscribers to video services other than cable continue to
receive the programming they've been enjoying for some time now.
---------------------------------------------------------------------------
\11\ 47 U.S.C. Sec. 548(c)(2)(D).
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In particular, Comcast, the nation's third largest cable operator,
has refused to negotiate with DIRECTV or EchoStar for carriage of
Comcast SportsNet, the Philadelphia-area regional sports network.
Comcast's action has disenfranchised tens of thousands of Philadelphia-
area DIRECTV subscribers and hundreds of thousands of other DIRECTV
subscribers who enjoy out-of-market sports. Comcast has used what it
perceives to be a ``loophole'' in the exclusivity prohibition provision
of the program access law, claiming that because it has chosen to
distribute Comcast SportsNet using terrestrial rather than satellite
facilities it does not have to make the regional sports network
available to its DBS competitors.
DIRECTV's experience with Comcast SportsNet is not an isolated one.
There is every indication that other cable operators are contemplating
similar strategies given the regional clustering to attempt to evade
the exclusivity prohibition of the program access law, particularly
with regard to regional sports networks. Thus, it is our hope that the
FCC will conclude that the cable exclusivity prohibition continues to
be necessary, and that Congress will consider tightening the law to
ensure that cable operators cannot evade the law simply by delivering
programming by terrestrial means instead of via satellite, as Comcast
is attempting to do. The law should be revised to cover programming
owned by cable operators, no matter the delivery mechanism they
choose.Improved Access for MDU Residents
Our penetration rates in apartment buildings, condominiums, and
other multiple dwelling units (MDUs) continue to lag behind our single-
family home rates. The FCC has not yet taken full advantage of the
preemptive authority Congress intended to convey in the 1992 Cable Act
with respect to restrictive covenants and other impediments, including
exclusive, long-term cable contracts, that prevent both MDU owners and
renters who do not have exclusive use of areas suitable for antenna
installation from subscribing to alternative video services such as
DIRECTV. For years, DIRECTV has urged the Commission to amend its rules
to require landlords, condominium associations, and other homeowner
groups to provide access to at least two multichannel video services to
residents who do not have exclusive use of areas suitable for antenna
installation. I do not believe Congress ever intended to discriminate
against residents of multiple dwelling units (MDUs) by depriving them
of the benefits of competition available to single-family homeowners,
and we would ask Congress to help rectify this situation.
Ill-Advised Spectrum Sharing Proposals
All of our efforts to bring a robust competitive alternative to
cable to the marketplace will be undermined if the primary spectrum
used by DBS operators to downlink programming to subscribers across the
United States is invaded by terrestrial wireless point-to-multipoint
services such as those proposed by Northpoint Technology. One of the
top reasons consumers switch from cable to DBS is the pristine and
reliable signal of DBS. Millions of U.S. consumers who use and rely
upon the DBS service could see increased interference in the form of
longer and more frequent service outages if a mass market fixed
wireless service is introduced into the DBS band. Today's happy
customers could easily become tomorrow's unhappy constituents if, as a
result of an ill-considered government action, they begin to see
increased service interruptions.
Let me assure you that our opposition to the deployment of a
terrestrial service in the DBS band has nothing to do with fear of
facing another competitor. We compete every day against the cable
giants, so it's ridiculous to say that we're afraid of competition. And
we will compete against these proposed terrestrial services if they're
properly located in a different spectrum band, such as the immediately
adjacent Cable Television Relay Service (CARS) band or the band used by
the Instructional Television Fixed Service (ITFS) and Multichanel
Multipoint Distribution Service (MMDS), as we suggested in the FCC
filing we made yesterday. Our only concern is protecting the level of
service our customers have come to expect and which we have spent
hundreds of millions of dollars to ensure. The extensive efforts
Congress has undertaken to increase cable competition will be
undermined if the FCC allows the spectrum intended for DBS use to be
shared with terrestrial fixed wireless services.
Before I conclude, I wanted to let you know about an exciting
initiative we've recently undertaken. As a company, we believe in
public service. That is why we launched DIRECTV GOES TO SCHOOL
TM, a public service initiative that provides public and
private schools around the country with free access to our SCHOOL
CHOICE TM programming package. Participating schools receive
more than 60 channels of educational programming, including such
networks as CNN, Discovery Channel, The History Channel, A&E, The
Learning Channel, and of course, C-SPAN, which teachers can use to
enhance their lesson plans. In addition, we provide free-of-charge to
participating schools special issues of DIRECTV--The Guide
TM, which includes feature articles on the educational
programming offered in the SCHOOL CHOICE package. The program is
available to schools in all 50 states and the District of Columbia.
Conclusion
As I mentioned at the outset, there have been significant changes
in the MVPD market in the three years since we last appeared before
this Subcommittee. We think the next step in the evolution of the MVPD
market is the approval of the pro-competitive merger of DIRECTV and
EchoStar's DISH Network, as well as the extension of the program access
law's prohibition on exclusive cable contracts.
I appreciate the opportunity to share my views.
Attachment A
directv customers in the following metropolitan markets can receive
local broadcast channels:
Atlanta, Austin, Baltimore, Birmingham, Boston, Charlotte, Chicago,
Cincinnati, Cleveland, Columbus, Dallas/Ft. Worth, Denver, Detroit,
Greensboro, Greenville/Spartanburg, Houston, Indianapolis, Kansas City,
Los Angeles, Memphis, Miami/Ft. Lauderdale, Milwaukee, Minneapolis/St.
Paul, Nashville, New York, Orlando/Daytona, Philadelphia, Phoenix,
Pittsburgh, Portland, Raleigh/Durham, Sacramento/Stockton/Modesto, Salt
Lake City, San Antonio, San Diego, San Francisco/Oakland/San Jose,
Seattle/Tacoma, St. Louis, Tampa/St. Petersburg, Washington, D.C., and
West Palm Beach.
Mr. Upton. Thank you. Thank you very much.
Mr. Ergen.
STATEMENT OF CHARLES W. ERGEN
Mr. Ergen. Thank you, Mr. Chairman and distinguished
members of the committee.
Thank you for inviting our company to testify today on
video competition issues, in particular about the merger,
proposed merger of EchoStar and Hughes.
First, a little history of our company. We started over 21
years ago as a small business digging holes and putting in a
large dish when only about 1,000 dishes existed, and we were
relegated to farmers and ranchers and people who didn't have
television.
After about 10 years, we realized that our dish was too big
and too expensive, and if we really wanted to grow our
business, we would have to effectively compete against the
cable industry.
In doing so, we found out about some FCC spectrum and
applied for high powered DBS satellites. Over the period of the
next 6 years we designed and financed and launched high powered
satellites and started Dish Network in 1996 to compete against
cable not only in big cities, but wherever cable existed.
There were lots of numbers thrown around in the committee
hearings both this morning and today, but according to the FCC,
96.6 percent of the country is passed by cable. So customers
have an option of cable, leaving only about 3.5 million homes
who do not have access to table. Some people have said it is a
little higher. I have heard as much as 9 million at the
committee today, but the vast majority of people do have access
to cable in America today.
The first thing I think this committee has to do is to look
at what is the relevant market that we compete in, and I have
heard from the broadcasters here today that we are a monopoly
of some kind in the video business.
But the fact of the matter is the Department of Justice in
1998 through the Primestar merger review defined our market,
the MVPD market, as cable and satellite. We have several
competitors in that, both the C-Band big dish owners. We heard
from WSNet today. We have cable over-builders, such as RCN, and
we have, of course, the satellite companies and cable.
Combined this merger with EchoStar and Hughes only will be
17 percent of that MVPD market, hardly a monopoly by anybody's
standard, and yet the dominant cable incumbent will be 80
percent of that market, and where they have clustered in cities
sometimes can be upwards over 90 percent in that particular
community.
Once you get past the emotion of the market that we are in,
then we also realized that cable since the advent of DBS, 1994,
the price increases have been at 2.5 to 3 times the rate of
inflation. If we were such a dominant competitor against the
entrenched monopoly, we certainly would have held those prices
down.
We have not been able to do that, and our sole charter at
EchoStar has been how do we go out there and hold those prices
down and give customers a better deal.
Because of the barriers to competition with digital cable
now and broadband access, we realize that the only way to do
that was to merge our two companies. The big savings, the big
thing we can do from an economic point of view in a market with
recession and capital markets demanding efficiencies and
productivity is to combine our spectrum together.
Eddy mentioned that we duplicate over 500 channels of TV.
Over 90 percent of our spectrum is repeated wastelessly. I do
not believe that is what the FCC had in mind for the spectrum,
and I believe that what we can do is take that spectrum and
quit duplicating that spectrum so that we can go out and
compete against cable.
We have also been burdened by the must carry rules under
SHVIA, and contrary to what had been mentioned by the
broadcasters, EchoStar, in fact, testified to this committee, I
think, on three different occasions about our opposition to
must carry and the burden.
It makes no sense to us on January 1st to carry 36
different Home Shopping channels. They are exactly the same.
They have absolutely no local new, weather or weather alerts,
and are not anything but a 24 hour commercial channel when we
already carry a national Home Shopping channel. I do not
believe consumers are asking for that, and it inhibits our
ability to compete.
So let me just get to the point. This merger has tremendous
benefits for consumers. First and foremost, access to the
spectrum will allow us to increase our local markets from a
minimum, by a minimum of 60 markets to at least the top 100 and
at least one city in every State.
Second, we can jump start high definition television.
Broadcasters have had the spectrum for many, many years, have
now filed for extensions on that broadcast, on that spectrum.
We believe with satellite and our merger we can do at least 12
channels of HDTV, which jump starts this new technology in a
way that broadcasters haven't been able to do.
Broadband Internet access for all consumers. In my opinion,
he economics of broadband, the capital markets and the touch
technical challenge ahead, the only way we can bring broadband
to rural America is to combine these companies and combine our
technologies to one standard platform. Not only will we be able
to bring broadband to rural customers, but we will be able to
compete in the cities where perhaps Excite at Home suddenly is
taken off cable companies and there is no place for people to
turn.
Finally, there will be a new array of programming choices,
things such video on demand that the cable industry is already
actively doing, interactive services so that people in rural
America get the same interactive services at all of these band
widths.
And finally, we are cognizant of the fact that in some
parts of rural America, whether it be several million homes or
4 or 5 million homes, there may be less choices for consumers.
That's why we've offered a nationwide pricing mechanism which
we already do. Both of our companies already do this today.
We are willing to commit to continue to do that in whatever
way the regulatory officials would like us to so that people in
rural America get all of the benefits of broadband, high
definition television, local-to-local, and true competition
with cable at the very lowest price of anywhere in the country.
I would like to thank you for allowing me to appear today,
and I will be happy to answer any questions that you might
have.
[The prepared statement of Charles W. Ergen follows:]
Prepared Statement of Charles W. Ergen, Chairman and CEO, EchoStar
Communications Corporation
Mr. Chairman, Mr. Markey, and distinguished members of this
Subcommittee, on behalf of EchoStar Communications Corporation, I want
to thank you for inviting our company to discuss video competition
issues and how the merger of EchoStar Communications Corporation
(EchoStar) and Hughes Electronics Corporation (Hughes) will promote
competition and provide much needed benefits for American consumers. We
would also like to outline for you why we believe the merger should and
will win antitrust approval from the Department of Justice (DOJ) and
regulatory approval from the Federal Communications Commission (FCC).
i. echostar's long history of competing against cable
EchoStar started 21 years ago providing large, C-band satellite TV
dishes to rural Americans. The demand grew quickly as consumers,
schools and businesses sought television service in areas untouched by
cable or off-air network TV signals. In 1996, we launched the small
dish satellite TV service called DISH Network to provide competitive
television services to urban and suburban consumers as well as those in
rural areas. Since its debut, EchoStar's DISH Network has been the
leader in the pay television industry in offering low prices for
superior, digital television products. Other notable items about
EchoStar include the following:
a) EchoStar began lowering its prices for satellite TV equipment to
offer affordable or even free equipment and switched its annual
programming fees for consumers to monthly rates, all in an
attempt to compete better with cable companies.
b) Today, DISH Network offers consumers four main programming packages
starting with America's Top 50 for $21.99 per month for over 60
channels that include the best in entertainment, sports, news
and children's programming. The top programming package
available from DISH Network is America's Everything Pak for
$69.99 which offers 200 channels, including premium movie
packages such as the popular HBO and Showtime.
c) We have been ranked number one in 2 of the last 3 years in the J.D.
Power and Associate's customer satisfaction survey among
satellite and cable TV subscribers.
d) A study by the University of Michigan Business School also rated
EchoStar's DISH Network number one in overall customer
satisfaction in 2001.1
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\1\ Source: American Customer Satisfaction Index, University of
Michigan Business School, August 2001.
---------------------------------------------------------------------------
e) We currently have 6 high-power direct broadcast satellites in orbit,
and we expect to launch three more satellites within the next 2
years to expand our local TV channel service, to comply with
must-carry rules and to offer other services.
f) We have invested billions of dollars and extensive technological
resources to compete vigorously in the marketplace with cable
and to make satellite technology affordable and accessible for
all Americans.
ii. overview of providing effective competition to cable
The planned merger with Hughes resulting in the new EchoStar will
be a huge advance in our long-standing mission to compete with the
dominant and entrenched cable companies. Satellite TV providers have
limited, scarce spectrum to broadcast programming, and right now, DISH
Network and DirecTV each broadcast hundreds of duplicate channels. For
instance, both companies broadcast the same two C-SPAN channels, the
same Disney channels, and so on. The merger will end this wasteful
redundancy and offer consumers more programming such as the following:
local broadcast channels available via satellite to more markets;
greatly expanded high-definition television programming; pay-per-view
and video-on-demand services and educational, specialty and foreign-
language programming; and other new and improved product offerings,
including interactive TV services. The merger will also allow us to
reduce the rates we pay programmers which will create greater value for
consumers, especially by ending the practice of programming providers
charging satellite TV companies higher rates than they do cable
companies. The combined company will also help bridge the rural/urban
``digital divide'' through the rapid development of an affordable,
satellite-based, two-way, always on, high-speed Internet access product
available to both rural and urban areas. New and better products,
efficient operations, and more vigorous competition are precisely those
things that the antitrust laws are meant to promote. That is why we
believe that this merger will win the support of the DOJ and FCC.
We want to talk to you today about how Congress can spur
competition in the MultiChannel Video Programming Distribution (MVPD)
marketplace. Specifically, Congress should: (1) support the efforts of
EchoStar and Hughes in combining their satellite TV resources and
spectrum to create an aggressive competitor to cable; and (2) continue
to address and improve upon the role of program access regulation in
preserving a competitive and diverse MVPD landscape; and (3) encourage
new entrants to the MVPD market without damaging the viability of
existing providers.
iii. the proposed combination of echostar and hughes will allow
satellite tv to become a truly effective competitor to cable
Providing competition against cable remains the single most
important focus of satellite TV. DirecTV and DISH Network are the
nation's third and sixth largest MVPD providers, which after the merger
would consist of about 15 million combined subscribers, or 17% of the
MVPD market. By contrast, the dominant and entrenched cable companies
control about 80% of the MVPD market with nearly 70 million
subscribers, according to the FCC's Annual Assessment of the Status of
Competition in the Market for the Delivery of Video
Programming.2 In fact, the top 10 largest cable firms such
as AT&T, AOL-Time Warner, Comcast, Charter, and others account for over
61 million cable customers.3
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\2\ FCC's Annual Assessment of the Status of Competition in the
Market for the Delivery of Video Programming, published January 2001.
\3\ Source: Cablevision Magazine Database, October 22, 2001. Basic
subscriber counts are provided by MSOs and systems to Cablevision
Magazine.
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1.) Satellite TV Faces Barriers to Effective Competition Against Cable
Satellite TV has worked diligently to compete with cable by
offering technologically superior products and services, such as 100
percent digital channels and expansive channel choices. However,
despite satellite TV's lower pricing and better products, EchoStar and
Hughes' ability to compete with cable has been hampered by several
barriers, such as the following:
1) We are constrained in offering local broadcast TV channels and other
desirable programming to consumers due to constraints on scarce
and limited satellite spectrum allocated by the government,
2) We have a small market share of customers compared to cable
operators which creates difficulties in purchasing necessary
programming from cable programmers at reasonable rates,
3) The burden of complying with must-carry rules, which force satellite
TV providers to add hundreds of less popular channels in
markets where we carry local network TV channels,
4) Satellite companies today do not have a high speed Internet service
option that can effectively compete against cable's bundled
Internet and video services.
This competitive imbalance has permitted cable companies to
maintain their dominant market share while raising their prices an
average of 6% per year over the last 10 years, more than twice the rate
of inflation 4. At the same time, satellite TV has
maintained low monthly rates for service with minimal rate increases
and even then, well below the rate of inflation. Satellite TV equipment
prices have dropped, and the equipment has even been offered for free
in competitive promotions. In contrast to cable's recently announced
round of rate increases, our recent ``I Like 9'' promotion offered
consumers over 100 channels for only $9 a month for one year.
---------------------------------------------------------------------------
\4\ Source: Kagan World Media.
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Over the past several years, to its credit, the cable industry
responded to the competitive threat of satellite TV by introducing new
products like digital cable, broadband, and telephony. The only way to
remove the barriers to competition for satellite TV and realize a more
competitive marketplace is by taking advantage of the extraordinary
efficiencies and synergies created by combining EchoStar and Hughes.
Currently, the two satellite TV providers broadcast approximately 200
of the same entertainment, news and sports channels, and with the
advent of must carry rules on Jan. 1, 2002, both satellite TV companies
will broadcast over 300 more of the same local and national TV channels
for a total of over 500 duplicated channels. In other words,
approximately 90% of the DBS spectrum will be wastefully repeated.
These redundant transmissions are an inefficient use of limited, scarce
satellite spectrum, and they prevent satellite TV providers from
delivering other much needed content, such as local TV channels into
more local areas or more high definition TV channels.
2.) Benefits of Proposed Merger
By eliminating this duplication, we will be able to offer hundreds
of new channels of attractive content such as high definition
television and local channels in more markets. This extraordinary
increase in capacity will permit satellite TV to offer a wide variety
of additional programming and services to consumers, including these
benefits:
a) The new EchoStar will expand local network television coverage from
the current 42 markets the companies serve to over 100 markets,
with local TV channels offered in at least one city in each
state, including Alaska and Hawaii. This will provide local TV
service to about 85% of U.S. households. This increase in the
ability to serve local communities will eliminate the reason
that consumers cite most often when deciding not to subscribe
to satellite TV--the inability to receive their local broadcast
channels.
b) The efficiencies from the merger will also allow the new EchoStar to
offer more bandwidth-intensive HDTV programming with a minimum
of 12 different channels. By offering a critical mass of HDTV
programming, satellite TV could help jumpstart HDTV adoption,
which has stagnated due to lack of the necessary bandwidth and
the slow conversion by broadcasters and cable operators to this
new medium. Our commitment to HDTV will provide incentives for
programmers to increase HDTV programming, for manufacturers to
market their HDTV sets more aggressively, for consumers to buy
more HDTV sets, and for competitors like cable and network
broadcasters to upgrade their HDTV capabilities, all resulting
in lower prices for equipment and more HDTV channel choices for
consumers.
c) As a result of the merger, the efficiencies that are created will
make more bandwidth available for additional pay-per-view
services as well as the necessary bandwidth and equipment
development needed to compete against cable's new video-on-
demand technologies.
d) Provide increased educational programming such as tele-medicine for
rural areas, as well as more specialty and foreign-language
programming,
e) The additional bandwidth will also allow the development of new and
expanded interactive services such as localized weather and
traffic, detailed point-and-click news and sports information,
and television commerce shopping.
f) The merger will also allow the new company to expedite the
introduction of affordable, always-on, two-way, high-speed
satellite Internet access.
The enhanced product offerings enabled by the merger will make
satellite TV a much stronger competitor to cable and will force cable
to respond in a similar manner. The American consumer ultimately wins
by having a better satellite TV competitor to cable in the MVPD
landscape.
iv. program access rules brought real competition and should be
preserved and strengthened
The program access statute that Congress enacted in 1992 is a true
policy success story. No single governmental act is more responsible
for the success of the satellite TV industry and for MVPD competition
generally. We cannot offer consumers a competitive product if we do not
carry the programming that consumers expect, including cable-owned
networks. In fact, as was the case when Congress enacted the statute in
1992, many of today's highest rated program networks are owned in part
or wholly by cable operators, including HBO, TNT, and CNN. By
prohibiting cable-owned programmers from refusing to sell their product
to us, the program access law opened the door to meaningful competition
against cable.
Congress gave the FCC the ability to either let this prohibition on
exclusive contracts sunset next year or to extend it. As we told the
FCC yesterday in our comments concerning this proceeding, we believe
that the prohibition on exclusivity is as important today as it was
when Congress first enacted it. First, the fully competitive market
that Congress envisioned stemming from the program access rules has not
yet materialized. Cable remains the dominant platform and has an
incentive to withhold programming from companies that take away its
subscribers. We see this most clearly in the regional sports networks,
which I will describe in more detail, where cable refuses to sell
popular programming to satellite TV companies, giving up a huge
potential source of revenue in order to hobble a competitor.
Second, the ability of satellite TV to compete would be severely
undermined by exclusive deals covering popular networks that are
vertically integrated with cable operators and exclusive deals covering
relatively minor networks. In both instances, consumers would be left
with less than the full complement of channels. One of our industry's
primary competitive advantages is that of price--offering the American
consumer the same or more for less money. That is the competitive
pressure Congress sought to impose on the cable industry. However, if
we are forced to offer fewer channels for less money, our ability to
effectively compete against cable evaporates.
Third, EchoStar is not vertically integrated with program
producers. Because we do not own or create the programming content, we
are totally dependent on an open and competitive programming market to
serve our customers.
Fourth, even after EchoStar and Hughes combine, the dominant and
entrenched cable industry collectively will still control about 80% of
the MVPD market and will be able to invest jointly in programming
ventures much more heavily than the new EchoStar ever could. Such
programming, if allowed to be a cable exclusive, would be leveraged to
the disadvantage of satellite TV providers and consumers.
Cable's activities in the regional sports programming context not
only shine light on how far cable is willing to go to undermine
satellite TV competition, but they expose a shortcoming in the existing
law that Congress and the FCC should address. Specifically, the 1992
statute defined the relevant programming as ``satellite cable
programming,'' meaning that the cable operator receives programming at
the headend via satellite. That was an accurate technological
description in 1992, but today with the abundance of terrestrial fiber,
many cable operators are delivering programming to the headend
terrestrially, thereby avoiding the program access rules.
Comcast, for example, is a dominant cable company that owns two-
thirds of the Philadelphia Flyers, the Philadelphia 76ers, and holds a
stake in the Philadelphia Phillies while also holding investments in
the teams' arenas and other related interests. In 1997, it launched its
own sports network called Comcast SportsNet, which owns the rights to
the televised games of each of these popular sports teams. Comcast
refuses to make this wildly popular sports network available to its
competitors in the Philadelphia market, using the program access
loophole as protection.
Cablevision, which provides service in the New York area, owns the
New York Rangers, Knicks, and their TV home, the Madison Square Garden
Network. In early 1999, Cablevision revised its sports programming
distribution system from satellite to terrestrial so as to preclude
RCN's carriage of their sports network. Last year, RCN filed a
complaint against Cablevision because Cablevision would not provide
access to the Madison Square Garden Network, claiming a terrestrial
exception from the program access rules.
EchoStar's inability to provide local team sports programming has a
direct effect on our ability to compete in these markets. Just as we
would not be able to compete effectively with cable nationwide if we
did not offer HBO, we cannot compete effectively in Philadelphia if we
do not carry the Flyers or 76ers.
Congress and the FCC can address these anomalies in the competitive
landscape by closing the terrestrial loophole and extending program
access rules. Technology has changed since 1992 and the law should
reflect that. The means of delivering programming should not determine
whether the MVPD market is competitive.
v. new entrants should be permitted to enter the mvpd market provided
they do not cause spectrum interference
According to the FCC, only 3.4 percent of rural American homes are
not passed by cable,5 constituting a small amount of homes.
While the majority of these homes will have a choice between video
services provided by the National Rural Telecommunications Cooperative
(NRTC) and their affiliates, the new EchoStar or other MVPD providers
such as the C-Band providers, we are sensitive to the concern that
competition in rural America could potentially be reduced. That is why
we have committed to nationwide pricing where all consumers, including
rural Americans, will get the same price benefits from the intense
competition occurring in urban areas. We offer nationwide pricing today
and we're willing to commit to this going forward so that rural areas
will get the advantages of competitive prices occurring in urban areas
for more entertainment channels, high definition television, greater
access to local TV channels, specialty and educational channels and
high speed Internet.
---------------------------------------------------------------------------
\5\ Source for number of rural consumers unserved by cable: FCC's
Annual Assessment of the Status of Competition in the Market for the
Delivery of Video Programming, Footnote #80, December 1. Assessment
released January 2001.
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1. The New EchoStar Will Compete Against Many Others
The new company will also continue to honor DirecTV's contract with
the NRTC, which gives the co-op and its corporate partner, Pegasus, the
ability to offer competitive DBS service from a single orbital position
that covers the entire country. This will not change with the merger.
In addition, consumers will be able to purchase service from DISH
Network, which will likely continue to offer its brand name in these
regions, and from its established network of dealers who have proven
extremely effective at serving rural America. It is our hope that
Pegasus and NRTC will continue to sell their product and continue to be
aggressive in their territories as a competitive participant in the
MVPD marketplace.
There will be other competitors in this region besides the NRTC. C-
Band, which offers a new digital service driven by Motorola, is strong
in rural America. Cablevision and Dominion are video providers who also
have FCC licenses to offer satellite TV service and have announced
plans to expand their MVPD services in the near future. Proposed
terrestrial and other wireless spectrum technologies, such as MMDS and
those proposed by Northpoint Technologies, will also offer additional
options for rural customers. EchoStar is not opposed to any of these
technologies or similar competitors. However, like any other wireless
licensee in other spectrum frequencies, such as cellular services or
digital services offered by network broadcasters, we are opposed to
having interference from other providers within the same spectrum in
which we operate.
2. Interference of Satellite TV Signals Hurts Competition
While EchoStar does not oppose the emergence of new competitors in
the MVPD market, we are opposing the proposal by Northpoint, one of the
companies seeking to enter the multichannel delivery market by using
``wireless cable technologies'' because NorthPoint's current proposal
would interfere with the satellite reception of our established
satellite TV customers. EchoStar's concerns about the electrical
interference that Northpoint would cause to our customers' satellite TV
signals have been confirmed by an independent arbiter: after conducting
tests required by Congress, the MITRE Corporation has concluded that
such a new service would threaten ``significant interference'' for the
satellite TV service, and that the benefit of any mitigation methods
must be weighed against their cost as well as the interference that
would remain.6 In the spirit of constructiveness, not
obstruction, EchoStar has recently filed with the FCC a petition
suggesting alternative frequencies, including the ``CARS''
frequencies--which are ``next-door neighbors'' to satellite TV
frequencies as well as the MMDS frequencies, in an effort to find a
suitable home for Northpoint's plan.
---------------------------------------------------------------------------
\6\ Source: The MITRE Technical Report: Analysis of Potential MVDDS
Interference to DBS in the 12.2-12.7 GHz band. April 2001.
---------------------------------------------------------------------------
The FCC has identified the CARS spectrum as a suitable place to
increase spectrum usage. CARS spectrum is not currently used to serve
consumers directly, eliminating any major interference concerns. Like
the satellite TV spectrum, the CARS spectrum can be used to deliver
MVPD service. Also similar to satellite TV spectrum, the CARS spectrum
is used for point-to-point and point-to-multipoint technology,
suggesting that a directional service like that proposed by Northpoint
would be feasible on a spectrum-sharing basis. Finally, like satellite
TV, CARS offers a full 500 MHz of spectrum, meeting one of the
conditions sought by Northpoint.
With our filing yesterday concerning this proposed solution, we
hope that Congress will see that we are not opposed to competition.
Rather, we welcome the competition, so long as it does not interfere
with satellite TV service for approximately 15 million Americans
receiving service from the new EchoStar.
vi. conclusion
Competition in the MVPD marketplace is developing but will only
reach fruition if satellite TV is allowed to become a truly effective
competitor to the dominant and entrenched cable companies. Through the
proposed combination of EchoStar and Hughes, a continued ban on
exclusive agreements between cable-owned programmers and the cable
operators, an improved program access rule addressing the terrestrial
loophole, and a reasonable approach to allowing new MVPD competitors
without damaging existing ones, Congress can help make truly effective
competition a reality and provide new product benefits to the American
consumer.
On behalf of EchoStar, I thank you for allowing us to testify here
about our proposed merger and other video competition issues, and we
look forward to working closely with Congress and the appropriate
governmental agencies in their reviews.
I am willing to answer any questions.
Mr. Upton. Well, thank you all. Thank you all very much.
At this point we are going to proceed. My suspicion is we
may have two rounds of questions based on the number of members
right here, and I would note that we have other ongoing
committee business as well. I think we will go to 5 minutes per
member, and we will see where that takes us at the end.
Thank you again for your testimony, and I wrote down a
number of questions that I have for all of you. Let me just
tell you where my perspective is, and I say this as someone who
has been home every week certainly since September 11th, and in
this capacity I have been able to witness much of the
telecommunication industry not only in my district, but around
the country as well.
And I am pleased where they have gone in terms of
technology and what is available in people's homes and
businesses. There is a disparity between a good number of parts
of the country in terms of what is here and what may be there.
As I look at this proposed deal, I would have to say that I am
thinking about the consumer because I want the consumer to have
HDTV. I want the consumer to have access to high speed Internet
access or broadband.
I know in my own household the number of channels that are
available, whether it's my own kids at age 10 and 14, my wife,
or myself. I look at the advances that are coming with
interactive TV. I am excited about the technology changes that
we have seen, and I also know as a supporter of must carry, we
need to have local broadcast channels carried in local markets.
This is very important.
Mr. Ergen and Mr. Hartenstein, when you talk about
providing local channels on your services, does that mean that,
as an example, in my home county in Michigan, if I had a decent
antenna, I could pick up an affiliate of CBS and ABC, NBC and
an affiliate from both Chicago, South Bend, and maybe
Kalamazoo, and Grand Rapids.
As you provide local stations on your network, how do you
pick and choose between what I can get over the antenna versus
what you count as local?
Mr. Hartenstein. We are very specifically limited as
satellite operators. Depending on where you live as to what
local stations we can deliver based on where you live. Those
are DMAs, designated and specified, and have the purview of the
rights through the broadcasters. I can't tell you exactly what
you might also pick up, if it might be Kalamazoo, if it might
be another station with an off air antenna. That would vary
from almost house to house.
If you life in the Chicago defined area, we would be able
and only able to deliver the Chicago local stations,a nd that's
what, in fact, we would do and will do in 26 days from now in
addition to the ones that we're delivering today.
Mr. Upton. Well, how do you all answer the charge that Mr.
Fiorile makes? That is you say that if the merger comes about
you are going to provide local to local in at least 100
markets, perhaps the technology to go the full route. How do we
believe you in saying that when, in fact, as Mr. Fiorile
indicated in his testimony the challenge that has happened in
the court is you have tried to undermine that in those specific
cases where you provide local broadcasting now?
How is that a guarantee? When you say you are going to
provide local to local, there is a very compelling argument in
terms of how the deal ought to proceed if, in fact, you are
able to deliver that. But, if, in fact, the track record shows
that you have challenged it in court and you have tried to
undermine your obligations now, how is it that we would take it
to the next step to believe it will, in fact, come about?
Mr. Hartenstein. Our point was this. When SHVIA came about
in 1999, and members of your committee were key in bringing
that about, we in general supported the passage of it, although
we did not agree with all of the terms. We were very clear that
we did not support the provision in the bill, such as must
carry, because we think it is (a) an infringement on our First
Amendment rights, and also it prevents us from serving more
markets.
As Mr. Ergen indicated, we would under the strictest of
interpretations of that have to replicate every Home Shopping
channel in every market that we serve.
Mr. Upton. We can understand why people do not want 30.
Mr. Hartenstein. Right, and we stand prepared today and
have launched the facilities at considerable expense and have
others under construction as has EchoStar to provide satellites
to be compliant with that. Our continuation of our action
through the courts is to challenge that provision. We will
abide by that.
Mr. Upton. I am one of those non-lawyers in the room.
Mr. Hartenstein. So am I.
Mr. Upton. So is what you are saying that your deal is not
to provide 30 Home Shopping channel stations coming in, but in
fact, to provide the local ABC, the NBC, the major affiliates
within the region? Those you are absolutely in favor of having
carried on your new system.
Mr. Hartenstein. Absolutely.
Mr. Upton. Without the redundancy of a number of other
stations that, in fact, have exactly the same program.
Mr. Hartenstein. Exactly.
Mr. Ergen. I might just add, I think, and I am surprised
the broadcasters are against this because when we put our
company is launching two high powered satellites, we have spent
over $500 million to do it, and so has DIRECTV, to comply with
must carry. In doing that, we still believe we can get to these
100 markets or maybe a few more, and why the broadcasters would
be against 500, on the one hand, they are talking about must
carry and attacking us. On the other hand, they are denying 500
of their members' the ability to go up on satellite and have
their service go into homes.
And it does include all of the broadcast networks. In fact,
it covers all high powered stations today. We do think the law
has some constitutional challenge. I noticed that broadcasters,
cable companies, for example, have challenged the ownership cap
limits. It happens in business all the time. That is why we
have three branches of government.
But we will abide by the law as the judiciary, you know.
Mr. Upton. Let me just ask, and I think this merits a
little discussion. So with the prerogative of the chairman, I
am going to allow the time to stop for a moment.
Take that time keeper at Michigan State, a lesson from
them.
Pegasus claims in their testimony that you have got the
capacity already to provide. You have the spectrum space; you
have the capability to provide all of the local stations now.
Is that true?
Mr. Ergen. I think Pegasus is referring to an engineering
study done by a gentleman who did an engineering study that
basically failed to take into consideration that we would have
to change out all of our systems to do so and uses some
advanced technology that we do not believe is ready for the
market yet.
Believe me. If I could build a satellite that would
broadcast every station in America, I would do it as a business
person, but engineers sometimes get caught up in details of
with enough money and enough time you can do anything.
I mean, we would put people on the moon that could commute
to work, but it would be a long community. You know, we do not
do that because it is not practical, and I think that study was
just not a practical study.
Mr. Upton. Mr. Pagon, do you want to comment on that?
Mr. Ergen. By the way, I might mention that Pegasus does
have some orbital spectrum and K band, and if all of this
technology they agree with, they could certainly build their
own satellites today to do exactly that.
I have no seen them start construction of that like we have
in the past.
Mr. Pagon. The study to which Mr. Ergen refers is on the
record in the must carry litigation in Federal court. The
Department of Justice's own expert witness is the party in
question. He is a very well respected and longstanding expert
in the satellite arena, and all that he reflected was that if
you built one spot beam satellite appropriately with contiguous
beams covering the contiguous 48 States with as few as 12
frequencies, you could provide ubiquitous coverage. You could
provide coverage for all 210 television markets, not just 100,
within the constraints of the existing technologies, MPEG-2
technologies.
If, in fact, you were to do so in the context of MPEG-4,
which is our current technology--MPEG-2 is a technology which
exists in the DIRECTV and DISH Network systems today, but it is
about 10 years old--you could do with fewer frequencies,
perhaps half as many frequencies.
So in terms of the costs to do so, it would require
significant expenditure for a new satellite, but a new
satellite would cost $250 or $300 million perhaps. The
companies have proposed in their mergers that they are going to
spend as much as $3 to $5 billion in changing out equipment
over the next 5 years as a result of conforming their
technologies together. So $250 or $300 million seems a
relatively modest expenditure to extend local-to-local to all
television markets.
Mr. Upton. Thank you, sir.
Mr. Abbruzzese. Mr. Chairman, may I just add something
quickly, if I might? There are 16 to 1,800 local broadcasters
in the United States. So carrying 500, while it is impressive,
there are still close to 1,000 that will be left out in the
cold under the current proposal.
What WSNet does by working with local operators, primarily
small local cable operators, is we facilitate them providing
more channels so that they can compete against Charlie Ergen
and Eddy Hartenstein, but also it allows them to continue to
carry the local programming services and deliver it to their
neighborhoods.
And in Kalamazoo, Michigan, WSNet, what it would do is
providing currently pre-digitized programming to services and
private cable operators in Kalamazoo today, and it affords them
to also have enough space to carry the local programming
services. So God help us if there was some tragedy or weather
tragedy about to occur in Kalamazoo. The local emergency
broadcasting system would be heard by everybody where it would
not unless it hit Chicago first over EchoStar, and the same
would occur down in Fancy Gap, Virginia where Congressman
Boucher is from.
Mr. Boucher. Boucher.
Mr. Abbruzzese. Boucher. Sorry. Excuse me. It is a very
complicated name. I apologize.
But we have a relationship down there where the local
channels are carried, again, and the local programming is
carried by the cable company there who has expanded service
offered through WSNet.
So, I mean, there is an answer here for local programming,
and it exists today in the marketplace if we just do not let
these entities get squashed by this giant that we are talking
about creating today.
So there is an answer. It does not require spot beams. It
does not require a lot of new things.
Mr. Upton. I know my time has expired. We will come back to
this, but I want to yield to Mr. Boucher.
Mr. Boucher. Well, thank you very much, Mr. Chairman, and I
want to say thank you to these witnesses for enlightening us
today.
Mr. Ergen, I am intrigued by the possibility that this
merger might enable EchoStar to offer a more robust and durable
and perhaps less expensively priced, high speed Internet access
service, and that would be a tremendous advance for people in
rural America.
There are tens of millions of Americans who do not have any
broadband opportunity. They include the 3.5 million homes that
are not passed by cable. Other homeowners live in a place where
the cable company offers a service, but it does not offer cable
modem service, and chances are that those same residents also
would not have access to DSL. They are in a rural area
typically and well beyond the DSL research of the local
telephone company.
So tens of millions of Americans do not have a broadband
opportunity at all.
I might note that the heads of the major technology
companies in the United States from Bill Gates to Andy Grove
and a number of others have recently said that a revival of the
technology sector in our economy depends upon providing
broadband to homes and businesses throughout the Nation and
that the best thing that could happen for a spark of the
technology sector, which in turn could spark an American
economic revival, would be an aggressive and sustained
deployment of broadband.
And perhaps you are bringing us a partial answer to that
and a way that we could make that happen. Let me ask you how
the merger with DIRECTV would enable EchoStar to offer that
more durable broadband service, and in particular, how does it
enable you to offer that service in a way that it is priced
comparatively to the cable modem service and to DSL service?
Mr. Ergen. Okay. Well, again, it is all about economies of
scale. I agree with you that broadband is not in rural America
and it is hard for small communities of less than 10,000 to
bring jobs to those communities or to encourage businesses to
come without broad band.
I saw a recent study where only 5 percent of communities
under 10,000 have any kind of high speed access. We can do that
really overnight after we build and launch new generations of
satellites to do that.
Hughes is a leader in that technology. We have done some
things with that technology. Both of us are looking at billions
of projects or billions of dollars. Yet we spread that in non-
standard systems across different subscriber bases, and what we
believe needs to be done given the state of the capital markets
today where the money is dried up and all of the broadband
companies that have tried to do satellite have yet to fulfill
that dream, is to combine those resources and spread that fixed
cost at a cost or subscriber basis of 15 million.
That essentially cuts the cost in half from each company
individually doing it and puts it on a standard plat form. That
allows us to be competitive in rural America and give somebody
in rural America exactly the same opportunity of somebody in
Boston.
But more importantly, it also allows us to compete in the
cities with a robust, two-way system, and I think that is
critical. We are not in just the video business anymore. The
cable industry has made great inroads and is clearly the leader
in broadband today over phone companies and satellite.
Mr. Boucher. Let me ask you the reverse side of that
question. If this merger is not consummated, what will that do
to your ability to become a viable broadband offeror and
competitor with cable?
Mr. Ergen. At least from our company's perspective I do not
believe the capital is available in today's market to take the
risk, and we have taken a lot of risk as a company, as people
know, starting with the Chinese rocket back in 1996. So we are
not averse to risk.
But I do not think that we could take the risk to spend the
several billion dollars to provide broadband to rural. I think
we would have to partner up with the phone company. In some
case, maybe we would have to sell to the phone company because
that is really the only alternative we would have.
And I am just a big believer in broadband as being the next
thing that will bring efficiency and technology and
productivity to America.
Mr. Boucher. Mr. Phillips, just excuse me. I need to
inquire of Mr. Ergen with regard to a couple of other matters.
I will come to you in a second round.
The other thing that I find so interesting about the
prospects of this merger is that it will immediately more than
double the number of local television markets that have local-
into-local services. That number is about 40 today. You have
committed to move to 100 markets very shortly after the merger
is consummated.
My question is designed to give you an opportunity to
respond to those who have said, ``But what about the other 110
local markets?'' How should people in the other 110 local
markets that still will not have local-into-local service view
this merger, and what can you say to them in terms of how this
merger improves the long term prospects for them to get this
service also?
Mr. Ergen. Well, first of all, I think the only hope that
those people in the other 110 markets have is for this merger,
and I just do not want to over promise this committee. I have
been testifying for many years here now, and I believe when you
look at the track record of what we have testified as a
company, we have done each and every thing that we have said we
were going to do.
So that is why we have committed to 100 today. Our
engineers are working together and seeing what we can do to get
beyond that.
The key is, the key is by putting this merger together we
will end up in a standard system several years from now, and
when you do that, there then are economies for other people to
come in perhaps and use that same standard to go across the
other 100 markets.
For example, the rural loan guarantee that you and others
have gotten through is a great thing because now that billion
dollars in the loan guarantee would never be enough to replace
all of the boxes out there that would need to be done to get in
the standard. But because our company is going to do that at no
charge to consumers because of the efficiencies of this merger,
it will allow companies, perhaps like the NRTC or Pegasus, to
go out and provide that service, and I am certain things can be
done there. We certainly would look at it as a company as well.
So I am cautiously optimistic that we ultimately will get
to all of the market with this merger, but I do not want to
over promise.
Mr. Boucher. Thank you, Mr. Ergen.
Thank you, Mr. Chairman.
Mr. Upton. Mr. Terry.
Mr. Terry. Thank you, Mr. Chairman.
As I mentioned in my opening statement, my concern was not
necessarily the macro, but the micro. The micro competition
factors are in those areas that cable does not serve. Satellite
becomes 100 percent of their access to the television.
So focusing on those rural areas, the two companies
combine, and you are now more efficient in eliminating the
redundancies that Mr. Hartenstein had mentioned in his
statement, and in the macro you are able to compete. You can go
into the big cities, the New York Cities, the Chicagos, the
Detroits, and the Omahas, and maybe even the Kalamazoos and
compete in there against cable.
So here is what my fear is, and I am going to ask Mr. Ergen
this question. My fear is you become so competitive in those
areas that you have to reduce your prices, have a subsidized
price, in essence, in the urban areas to compete against cable
that will then be transferred to the rural areas that have no
remedy available to them, no other satellite competitors to go
to to get a better price.
Obviously as a consumer we focus on three things: you know,
service. How often do you go off line? How often does the TV go
off channels? Do you have what I want to watch? And price?
So those outside the city limits, are they going to get
stuck then paying a higher price for the quality of service and
channels that you will provide in trying to compete in the
urban areas? How do you insure those consumers that they will
not get stuck with a bigger bill?
Mr. Ergen. I think you have asked a great question, and I
think the way that we have tried to be sensitive to that issue
is to say that we would go to nationwide pricing. We will
commit to nationwide pricing so that those people in rural
America get exactly the same price that we charge in the most
competitive city, for a Boston where you have an RCN as an over
builder. You have the Cablevision cable company there, and of
course, you would have DIRECTV there. That would be a very
competitive market.
Somebody in Nebraska would get that exact same price, but
in addition to that, and here is where they are going to be
better off, particularly when you go home over Christmas and
talk to them, they are going to have the ability to get HDTV.
Without this merger, they are not going to get a lot of HDTV.
They are going to have the ability to get video on demand
from satellite. Probably not going to have that without this
merger. And they are going to have the ability to get broadband
at a low price, always on connection without using a phone line
some day.
So those are things they are going to get with this merger,
and we will give them the benefit of committing to nationwide
pricing. There may be other remedies that people have. We are
open to suggestion if the committee or regulatory agencies have
a different mechanism for doing that.
But I would point out that after 6 years in business on the
EchoStar side and, I think, 8 years now, almost 7 years for a
DIRECTV, we have always done that. Our prices are the same no
matter where you go, just like America On Line has the same
price across the Nation.
Mr. Terry. Well, I do think your nationwide pricing plan
does answer that question. Though how do I assure my
constituents in Valley Nebraska in my district or go outside of
Douglas County to any small community in Nebraska? How do I
assure them that their community will be part of your
nationwide pricing plan? And how do I assure them that 2 years
after the merger is approved that competition does not force
you to a different plan?
Mr. Ergen. Yes, I am not the legal expert here, but my
understanding is that the regulatory agencies have entered into
consent decrees to protect consumers. So you are not just
taking my word for it or Eddy's word for it, and we would
certainly consider a consent decree that would be long term in
nature, binding, and protect that very piece of America that is
so important to you.
Mr. Terry. Do you feel that the nationwide plan resolves
any of the antitrust issues that some of us may have concerns
about?
Mr. Ergen. Well, again, I am not a lawyer, but I believe
you have to look at the merger in the context of the
marketplace. We are in high technology business. We are not
certainly in the baby food business. We are in a very high
technology business. Our competition owns 80 percent of the
markets moving 90 miles an hour. We have to catch up. We have
to invest capital.
And I think when we look at the broad context and the
benefits and the efficiencies, I believe the antitrust law
takes that into consideration when they review a merger. And I
am certainly not an expert, but I believe the people at
Department of Justice are, and I think when they go through and
look at the facts that they will some to the conclusion that
this does pass all antitrust muster.
Mr. Terry. Mr. Chairman, I know my time is up. If I can ask
just one quick follow-up question, when we talk about
nationwide pricing, earlier I said as a consumer you look at
service, startup costs, channels, all of those type of things.
So when we talk about nationwide pricing, what do you mean by
that?
Does that mean, you know, the up front cost to the
consumer? Does it include equipment, installation, those type
of things as well?
Mr. Ergen. Yes, I think it needs to cover not only the cost
of your service, which in our case perhaps we have our top 50
channels for $21 nationwide, but it would include the price of
our set top box, which today we sell. If you lease it from us,
it is $49 up front first month. It would include free
installation, which we do on a nationwide basis, and again, we
do that today. This is not a departure because we have huge
fixed costs in our space. We have very low marginal costs. It
costs is very little to get the next subscriber. So we have to
go get subscribers from the incumbent cable company. We have to
have low cost across the Nation from our billing systems and so
forth, and so this also then protects customers and includes a
wide range of services.
Mr. Terry. Thank you.
Mr. Upton. Mr. Shimkus.
Mr. Shimkus. So many questions, so little time.
It is great to have you all here. You bring up a lot of
compelling arguments and counterpoints that I am finding very
interesting.
I would just say, to begin with, I find it difficult when
people in other industries try to preach to another industry
how to run their business. I know it is very difficult to you
to operate in competitive markets, whether that is cable or
that is free over-the-air broadcasting or whether that is
direct satellite.
And those who put up capital to try to do it should be
admired and thanked, and those who have not put up the capital
to do what they are doing and may be doing something else ought
to be admired, but that is what makes this world and this
country great.
And then we have the conflict of when the paths cross and
we get into the competitive market, but we want a lot of things
that the promises that are being made by this proposed merger.
You know, we do want broadband access. We do want, I think,
nationwide pricing if it accomplishes what you are entailing to
my colleague from Nebraska. It would be beneficial.
Who could argue that if there is no competition currently
in rural America and there is no cable that they have the same
competitive price as if they were in the St. Louis metropolitan
market?
High definition TV, which we are all supporting and offers
great benefits.
Let me ask to Mr. Hartenstein and Mr. Ergen: why can't the
competition that you are now fighting against each other, why
can that not bring the services that you are promising with the
merger?
Mr. Hartenstein. If you look at how we started in the
business, it was really sort of upside down from how our
competition did. The first thing we did when we launched our
first satellite is put up the first hundred or so services that
we could deliver, and those are nationwide services, the likes
of ESPN, the Disney channel and some of the others, HBO and a
few more.
It wasn't until only 2 years ago when certain members of
this committee helped author the SHVIA Act that allowed us to
really compete and bring the most watched product and most
watched channels in anyone's home, namely, the local stations,
the network affiliates and the independent television stations.
So we had to then add on with a fixed amount of capacity
that we have, we at DIRECTV and separately Charlie at EchoStar,
the local channels into as many markets as we could.
The best that we're doing today, notwithstanding
theoretical expert postulations as to what might happen, the
best we can do in Hughes and DIRECTV comes from a long
heritage, as Congressman Harman indicated, developing the first
satellites; the best we could do is deliver a few local
channels into a few markets, and obviously from an economic
perspective, we picked the most populated ones first.
Mr. Shimkus. Well, let me, and I understand. I only have 5
minutes.
Mr. Hartenstein. Okay.
Mr. Shimkus. And I want to keep the responses relatively
short.
And I understand that. And there is going to be a
convergence of the ability to do this and more capital or the
ability to get capital to get this new technology, but we would
hope the competitive market would bring these services.
And actually, aren't you providing broadband direct
satellite in the West right now?
Mr. Ergen. We do provide some experimental broadband
service today. It has not been economical. We have to charge
about $1,000 for the equipment with installation, and we have
to charge about $70 a month, and we lose a lot of money on it.
We believe that we have got to get the cost of that system to
the consumers down to a couple hundred dollars, about the
prices of a satellite system, and we have got to get the
service down to the national average of about $50 a month.
To do that we have got to put the companies together and
invest several billion dollars, and both to Hughes' credit and
EchoStar's credit, we're both willing to do that going forward
with this merger.
It is a risky proposition. I am not sure our shareholders
are particularly happy about it, but we feel strongly about it.
Mr. Shimkus. Okay. Let me follow up on the discussion on
local into local, and I think you probably have consensus here
that there are services that need to be broadcast and there are
some that may not be as arguable.
You know, I will talk for the local broadcasters, and I
represent currently about 19 counties in the State of Illinois
and possibly in the next cycle over 30. So I have communities
of Quincy, Springfield, Decatur, Harrisburg, Evansville,
Indiana, Terra Haute, Indiana, Paducah, Kentucky. They probably
do not make the cut.
Mr. Hartenstein. Actually I think some of them do. Some of
them do not. We have to look at the best possible engineering
solution we can give with the combined spectrum as quickly as
we can roll that out and consolidate it, taking into account
all of the real world technologies.
But, yes, we are going to do as many as we can, and if we
do get some relief on must carry, then there is just that many
more that we could deliver.
Mr. Shimkus. Who is from the broadcast? Do we have someone
on the table?
Address the high definition TV and the proposals that could
occur to help offset the cost and the sharing spectrums. No one
has really addressed the transition to high definition TV. And
does this help or hinder that?
Mr. Fiorile. Well, I find it interesting to hear one of the
things a merger will do will advance high definition
television. There are currently over 225 stations on the air
covering about 75 percent of America. To the best of my
knowledge, none of them are carried by either EchoStar or
DIRECTV.
The fact the merger will double the amount of local markets
or almost triple the amount of local markets, up to 60 markets
or up to 100 markets and not service the other 110 markets, I
am confused as to how it is also going to deliver high
definition television because there is not even enough room to
cover the other half of the United States.
You know, again, the record shows there are no, to the best
of my knowledge, no high definition stations. We have two that
have been on the air more than a year that are currently
carried on DBS.
Mr. Ergen. Yes, I would just like to state for the record
that EchoStar does carry CBS, an owned and operated station out
of New York and Los Angeles. We do carry it in the owned and
operated station. CBS has worked very closely with us to get
high definition television going forward.
I might also mention that local broadcasters, while
accusing us of being a monopoly, we have asked them when they
do not broadcast the CBS station; we have asked them to let us
bring it in via satellite, and we have been turned down by all
of the affiliate groups, stations, across the country. Only the
CBS corporate owned and operated stations in about 15 markets
allow us to do that.
And we are very appreciative of that, that they have taken
the lead in advancing the technology.
Mr. Shimkus. And I have consumed much more than my time. I
will just yield back.
We understand the turf wars. We have dealt with them over
many, many years, and I yield back, Mr. Chairman.
Mr. Upton. Actually, we were hoping to broadcast some of
the Cub games down there. There are some St. Louis fans down
there.
Mr. Shimkus. No one would watch. We do not watch minor
league ball. We just watch major league ball.
Mr. Upton. The gentleman from Texas, Mr. Green.
Mr. Green. Thank you, Mr. Chairman.
Mr. Ergen, I was interested to hear what EchoStar is doing
with HDTV, and is CBS, the national affiliate in New York and
L.A., the only two that you are providing?
Mr. Ergen. No, we also provide a full-time channel of HBO
and a full-time channel of Showtime. Occasionally when
Hollywood will release a movie in HDTV and DIRECTV--I will let
Eddy mention what you broadcast.
Mr. Hartenstein. We have an HBO feed of high definition and
an HDNet.
We are looking at this as members of also the Consumer
Electronics Association to try to jump start and get through
the chicken and egg process, to make about a dozen nationwide
high definition channels available. The content is out there.
No, it is not the local affiliates, but we think this would be
a tremendous boon for the industry and the economy and the
broadcasters to help bring a dozen channels of high definition
content to every home in America.
Mr. Green. Mr. Ergen, let me follow up. I have read in your
testimony that your company is planning to make a major push in
the carriage of local into local broadcast if the proposed
merger is approved; is that correct?
Mr. Ergen. That is correct.
Mr. Green. I would like to know what hurdles your company
has been experiencing that currently limits you to only
offering limited local-into-local service. In particular, I am
interested to know if you are currently utilizing all of your
Ka-Band satellite slots that are not Y.
In addition, I would like to know how long you have owned
those unused Ka-Band slots and what your future plans are for
them.
Mr. Ergen. Okay. The limitations and the barriers to doing
more local cities today is the absence of a spectrum. Our
satellites are full. So we do not have spectrum to do it.
Second, those satellites were designed before technologies,
such as spot beaming, were available to increase our capacity.
And, third, the burdensome must carry law requires us to
carry every channel in a market no matter how many times it is
redundant, such as Home Shopping.
So those are the factors. We have spent $500 million to
build and launch two new generation satellites to comply with
must carry. It does not necessarily give us particularly more
markets. We are hopeful we will get a few more beyond the 36 we
carry today.
As far as our Ka-Band slot, we have had that slot for
several years. We have a satellite under construction with the
Loral Space Corporation that is a Ka-Band satellite to launch.
I believe in October of next year is when they are telling us
it will be finished. It is an experimental Ka-Band satellite
because the technology is relatively new, and we believe that
it will take some work to make that economical.
And so we started to sell out a couple of years ago and
just took about 3 years to build it. So every slot that we have
gotten as a company we have built or intend to build. We have
not let any slots lay fallow as other companies have done.
Mr. Schnog. Excuse me, Mr. Green.
Mr. Hartenstein. Well, excuse me 1 second. Hughes
Electronics also has a couple of Ka-Band slots for which
satellites at the expense, including ground equipment, of over
a billion dollars has under construction and will be launched
in early 2003 for the so-called Spaceway Project.
Mr. Schnog. Excuse me, Congressman Green. You know, I keep
hearing about this must carry and how they have all of these 37
Home Shopping networks, but my question as a local guy is what
about Chemeketa College, which is out of Salem, Oregon, which
provides local educational programming off premises to students
who can't get into college or get in to the site?
What about the college programming tat we send down to a
casino in Grand Ronde, Oregon so that people can go in there
and learn because they cannot make the trip to Portland?
I mean, those kinds of things, the local broadcaster in
Salem who is not in that Portland market, you know, these guys,
they want to cherry pick off the ABC, the NBC, the CBS in
Portland, but they do not want to bring the local programming
that is important to our communities.
You know, we are talking about are we going to bring these
in and how come they do not want to put them on. Mr. Upton
asked before why do they not do that. Well, Chairman, I will
tell you why they do not want to do it. It does not make them
any money. It is all about the dollars.
You know, I keep hearing this there are 36 channels of Home
Shopping. Well, there might be that out there, but what about
Chemeketa College? What happens to them? They just get lost?
Mr. Ergen. Well, I might add that we do carry it. If it
complies with the must carry law, we will be carrying it
January 1st, No. 1.
And second, we are a national service. There is a
difference between a local broadcaster who sends a signal out
for 30 miles and a national broadcaster from a satellite that
goes to every square inch. We carry about 30 channels of public
service, which include almost all of them are educational
channels, universities, high schools, public education, Head
Start on a national basis for people for education.
We do a great job of that, and we do that. Our company did
that voluntarily. The SHVIA law did require us to do 4 percent,
but we did a lot of that voluntarily, and we do not make money
on that, but we are happy to do that as a public service.
Mr. Green. Let me ask a follow-up though for the
broadcasters. Mr. Fiorile, if you can answer the question, do
you think that the proposed merger between EchoStar and
DIRECTV, if it did not go through, could each company still
comply with the must carry requirements under the Satellite
Home Viewer Act?
And more specifically, do you believe that each currently
possess sufficient spectrum to comply when taking their Ka-Band
into account, as well as the ability to use spot band
technology?
Mr. Fiorile. In answer to your first question, yes, I do
believe there is enough capacity.
And the second question, in particular, I am not an
engineer. I cannot. To get into all of the particulars of that
piece of the spectrum, I would be happy to get you that answer,
but currently I believe there is room.
Furthermore, you know, the comment that other CBS
affiliates would not allow them to carry the signal, as Mr.
Ergen suggested, they are a national program service. The
interest of local broadcasters is in providing the local news
and information that come with the local network affiliation:
emergency weather, emergency broadcast systems. That is what we
miss by providing service only to New York and Los Angeles.
Mr. Green. Mr. Chairman, I know I am out of time, and I
agree. I have a station in Houston that I would much rather
have than the New York or the L.A. affiliate.
Thank you, Mr. Chairman.
The Cubs play well down in Texas as well.
Mr. Upton. Mr. Ergen and Mr. Hartenstein, if this merger
goes through, you have got millions of Americans that have one
system and not the other. As you convert to one system, who is
going to cover the cost of that conversion? And which one is it
going to be or is it going to be a combined of the two? Will
everyone get a new system?
I mean, you have got encryption. You have got a whole
number of things that have to be evaluated.
Mr. Hartenstein. In the interest of time, we have not yet
decided which platform and which aspects of which platform we
will combine, but we made a pledge when we made this merger as
part of the contractual agreement that no existing consumer
would be disadvantaged or inconvenienced or incur any cost to
get to a combined system. That is a cost that we would cover as
combined, and I believe Chairman Dingell asked that and I am
glad to answer that in the affirmative.
Mr. Upton. Mr. Phillips, you indicate in your testimony, in
regard to the nationwide pricing proposal that is on the table
that there was no price guarantee, no enforcement, and no
service quality type of issue.
Let me just ask a quick question on service quality. You
know, when we did the Cable Act a number of years ago, it was
prompted in large part because of service problems which I have
to say is a credit to the cable industry. They have addressed
and addressed it well a number of complaints, the time that it
takes for a consumer to get to a cable company to make sure
that that complaint is registered and, in fact, make sure that
that's fixed.
What does your system have? If someone has got a problem,
if they want to watch HBO, if they want to watch ESPN and there
is some problem, how quickly are you able to address that in
terms of service quality? What are your standards that you
impose on yourself?
Mr. Ergen. Well, first of all, I am going to point out that
both DISH Network and DIRECTV are normally rates No. 1 and two
in all the surveys for customer service, and I agree with you.
Cable has made vast improvements, and they are a very tough
competitor on customer services where they were not, you know,
3 or 4 years ago.
But one of the advantages of putting the companies together
is that we both have service technicians in rural America that
has to respond to you when you have a service call, that's
awfully expensive for us obviously with one service technician
we will now be able to respond to the platform.
So we are committed to customer service. We will go out of
business if we do not have it. The cable companies have made
great progress there, but we are still rated at the high end of
the scale on that, and we want to continue to do that.
Mr. Upton. Mr. Hartenstein, that same answer?
Mr. Hartenstein. Yes.
Mr. Upton. Mr. Phillips, how do you judge the guarantee in
terms of nationwide pricing?
Mr. Phillips. I would like to respond to that, and I
appreciate the opportunity.
As a competitor today to EchoStar, who knows them in the
marketplace, respects them for their competition and someone
who helped DIRECTV by putting money up to launch the service, I
would suggest to you that the inquiry you have had so far is
not sufficient to really nail that point down.
EchoStar and DIRECTV each have somewhat like 50 packages
and a la carte services that they offer. So there are multiple
offerings here that are made available to consumers, first of
all.
Second, the way that price varies is by coupons, by
rebates, by products which are offered with the service to
consumers.
There are differences in service cost. He just indicated
that today there are two sets of technicians. They each hire
competing people in the field so that they can race to your
home to get service.
Their answer on everything today that you have heard is by
getting more efficient having one is better. I would suggest to
you that is not the case. By having one technician out there
and one provider, you have got one place to go to get service,
one place to go to get support.
Now, to your point, when EchoStar goes to compete with
Charter Communications, what they do is they offer a $100
coupon or rebate, and the relevant question is: is that going
to be available to rural customers?
And I would suggest to you, no, there is no need to anymore
because they do not have any other choice but to take EchoStar
once the company merges with DIRECTV.
What I have sat here and listened to today I am alarmed by
because as a competitor in the marketplace the way the
satellite industry developed where it is today is through
competition. Mr. Ergen and Mr. EchoStar--excuse me. When we
launched the business with DIRECTV, satellite equipment cost
$700 to $800. That price did not come down until Mr. Ergen
launched his service. Suddenly we all started subsidizing the
cost of the equipment to make it cheaper.
There was no local in the local service initially because
DIRECTV chose not to offer it. It was only when Mr. Ergen
offered local into local that DIRECTV responded and offered it.
I am suggesting to you that if you remove the competition, the
intense competition that exists in our satellite market today
that you will leave one provider, and Mr. Ergen will get to
choose what he provides, when he provides it, and who is going
to service and take care of that system.
So I think there is a lot of exploration here that needs to
be done that we have not talked about today.
Mr. Upton. Mr. Pagon.
Mr. Pagon. Mr. Chairman, if I could just add or elaborate a
little bit on the point that Mr. Phillips was making, one of
the concerns that I would have, Mr. Ergen and Mr. Hartenstein
have talked about the virtues of standardizing equipment as a
recommendation for the merger going through, and that if that
were to happen perhaps other providers in the future, NRTC,
Pegasus or others might take the cost of putting up additional
services like local-to-local that they are not doing and
provide it over standard equipment.
The defect with that, I think, is that to do that we would,
of course, be dependent upon securing an agreement from the
merged company to allow us to do that, and I would say from my
personal experience I would have concern that that would happen
on terms that would be attractive to consumers, and I can just
give you one specific anecdotal experience that relates to
local-to-local.
Fifteen months ago I proposed to Mr. Hartenstein that if
DIRECTV would allow us a license to combine programming from
least Ku transponders with the program that they offered over
their 101 satellites, we would undertake the cost and the
expense of leasing transponders and to negotiate agreements
with broadcasters to provide local-to-local in smaller markets
beginning with markets like Burlington, which is the 92nd
market, and Jackson, Mississippi, which I believe is the 85th
market, and perhaps as many as ten or 20 more at no cost to
DIRECTV and no risk to DIRECTV.
And we have an exclusive right to provide DIRECTV in our
territories. We do not unfortunately have a right to combine
programming offered from other facilities with that
programming. We need DIRECTV's agreement to allow us to do
that. They declined to allow us to do that.
So my point is very simple. There may be virtues in
standardizing equipment, but if one company is the party that
is the gatekeeper for delivery through standard equipment, you
have the issue of competition versus monopoly and will that one
company allow services to be offered and on what terms?
Mr. Upton. Mr. Hartenstein, do you want to respond? Then I
am going to yield to Mr. Boucher.
Mr. Hartenstein. Sure. I guess it was about 18 months ago
that the proposal that Mr. Pagon referred to was part of a
larger context of issues that time probably does not permit
here, but there is not a single service on the DIRECTV
platforms across all of the satellites that DIRECTV has today
that we have not made provision for the NRTC and its members
and affiliates, which include Pegasus, to offer to their
consumers, and we certainly would be willing to entertain that
as part of an overall solution to this, to provide that
continued competition going forward.
Mr. Upton. Mr. Boucher.
Mr. Boucher. Thank you very much, Mr. Chairman.
Mr. Ergen, I was pleased to note the several comments that
you have made during the course of our hearing today in which
you have committed to have national pricing so that the price
that is charged to all of your subscribers is the same on a
nationwide basis, and that price would be the price that is set
in the competitive market, where you are competing directly
with cable, and so it is a market based rate.
I would assume that extends not only to your basic package
structure, but also to any special responses you might have to
make to cable on a market-by-market basis as cable offers
particular attractive packages within that market. You would
then agree to match that offer or respond to it in some way and
then carry the benefits of that response you've made into your
entire national subscriber basis; is that correct?
Mr. Ergen. Yes. We typically do that today, and I think
that part of anything that we might talk about with the
regulatory agencies would be to look at those kinds of things
to make sure that you do, in fact, get the benefits in rural
America of the most intense competition.
In just relation to Mr. Pagon's comment, I think it is a
great idea if somebody wants to put up the local channels in
Jackson, Mississippi and we could not do it. You know, I think
those are the kind of things that if you want to bring true
competition, you have to get people to work together. You have
to make some compromises, and I think that those are the kind
of things that as a satellite industry we have to do to compete
against the entrenched cable companies.
Because, you know, a lot of people that have gone up
against cable are not around today, and we don't want to be one
of those companies.
Mr. Boucher. Let me ask you about the non-price elements of
the service that is provided to your customers and just get
your response to these particular matters. I would assume that
the same national programming would be available through your
service everywhere in the United States, urban areas and rural
areas alike.
I would also assume that in response to the question raised
by the chairman, every subscriber to EchoStar's service would
have access to your 800 number through which technical support
or other customer service could be provided.
And I would also assume that the on premises installation
of equipment to initial subscribers, which is competitively
provided today by the retailers who are in competition with
each other locally, would continue to be competitively provided
and there would be no change in that.
Could you simply respond to those three non-price elements
of your service?
Mr. Ergen. Well, I think all three of those would be true,
and again, the reason is because you have a nationwide system,
but, again, I have mentioned we have high fixed costs of
several billion dollars. The only way we can grow as a
business, the only way we can pay for the satellites is to
continue to get new subscribers. We have to get them from cable
because they have them.
So that is why you are going to do all of those things on a
nationwide basis.
Mr. Boucher. And so I have correctly stated your intention
with regard to those non-price elements of service?
Mr. Ergen. Yes, you have I think more succinctly put, it is
beyond just the price of your service or a la carte channels,
which of course is easy to do.
Mr. Boucher. Let me ask you, Mr. Ergen, and also Mr.
Hartenstein about what might happen if this merger is not
consummated. Your companies have been very successful. You have
acquired on the order of 17 million customers. You have about
17 percent of the national multi-channel video market, and that
is a commendable performance for the period of time that both
companies have been in business.
But I also understand that at the present time neither
company is profitable, and in the absence of profits, it is
hard to be a viable competitor to cable over the long term.
And so my question to you is in the absence of this merger,
what is the basic outlook for both companies? And what would
the effect of the merger not being approved be upon your
ability to continue to offer new services, such as local-into-
local, HDTV, and that high speed Internet access?
Mr. Hartenstein. I guess it's a compound question. You are
right. Well, I cannot speak for Charlie's numbers, but we're
yet to be profitable, notwithstanding the fact that we are
serving with DIRECTV some 10 million homes.
Clearly we would not be able to stay competitive, as I
indicated in my oral and written testimony. The world has
changed. Digital cable has come. We have a lot more things that
we have to be competitive with today. We are truly competitive
in only about 60 percent of the country today even with the new
spot beam satellite we launched.
We are not going to be able to offer more than the couple
of high definition channels. Expanded capacity for other
interactive services would not be possible.
The subscriber acquisition costs have gone up from where
they began in the business where we started in 1994. It's a
different world. It's not as good an outlook. We would
obviously have to, after a long time coming to this conclusion,
you know, look at another path, but this is the best path that
we saw given the capital markets that were in today and where
we feel we need to go with the market power there as defined
by, you know, the business that we are in, namely, the cable
industry.
Mr. Boucher. Excuse me, Mr. Hartenstein. Let me ask just
one follow-up question before I turn to Mr. Ergen. Would you
agree that the ability of DIRECTV to offer enhanced services,
to continue to be a strong and viable competitor to cable is
better if you combine with EchoStar than if DIRECTV's business
were sold to someone else, such as Murdoch or some other
individual or party?
Mr. Hartenstein. We looked at all of the possibilities
there, and the answer to your question is, yes, this is the
merger that made the most sense for us, our shareholders and,
we believe, for consumers.
Mr. Boucher. Thank you.
Mr. Ergen.
Mr. Ergen. Yeah, I think that General Motors has made the
decision to sell the company. If not EchoStar, it would
ultimately be, you know, somebody else. It clearly would not
have the synergies because they would not be in the satellite
business. They would probably be in the programming business
where you would have vertical integration issues and costs
going up to consumers.
Mr. Abbruzzese. Excuse me, Congressman.
Mr. Ergen. I would hope that we would, as a company, be
able to survive and go it alone, but I think that might be
difficult, and I think that ultimately a broadcaster might buy
us or a cable company might buy us. I mean, because I think
that ultimately we might have a longer row to hoe.
But if we could go it alone, we certainly would try to do
that. That would be my goal, but I hope we didn't come to that.
Mr. Abbruzzese. If I could interject for one quick second,
please, I just want to point out that traditionally in cable
TV, the business of cable TV, very few of the largest cable
companies have ever been profitable. They've operated on a
cash-flow basis. That is not unique in this industry. They go
decades without being profitable.
TCI went decades without being profitable. It is not unique
that EchoStar and DIRECTV operate on an unprofitable basis, and
I would submit that we pose that they have grown by 400 percent
in the last 5 years. That is astounding growth, and that has
occurred at a time when there are two providers.
You have here at least three entities that are in the
satellite business today who would like to compete going
forward and just do not have the space because through the
merger of these two entities, there is not going to be any
space left for anybody to operate on.
You have people willing to provide that second entity in
the marketplace to insure that there is competitive pricing
without relying on promises of national pricing policies. We
will have the ultimate in pricing policy, which is a
competitor, if we are provided access to some limited assets
out of this merger in order to operate going forward. That is
good policy. That is good business, I would submit.
And I do not think there is anything unique about them
operating on a nonprofitable basis at this point in time. It is
standard business in this industry.
Mr. Boucher. Well, I would only note, Mr. Chairman, in
closing that the companies against which they are competing are
profitable today. The large cable MSOs are doing quite well.
They have deep cash reserves. They have the ability to attract
capital. These are all problems that both EchoStar and DIRECTV
have pointed to in order to roll out new services, such as high
speed Internet access. They're having trouble attracting the
capital because of the narrowness of the subscriber base of the
individual companies and the high cost of providing that
service for each company. By merging they can spread that cost
out over a larger subscriber base. It becomes economical. They
are then in a position to attract capital. They can be a much
more viable competitor against the very profitable multi-
channel video operators.
Mr. Chairman, time has expired.
Mr. Abbruzzese. But, Mr. Chairman, can I just answer one
quick thing on that? They are mature companies, the other
capital operators, at this point in time. They are profitable
because they have experienced their highest growth period.
When you are in a growing mode in cable, you are always
losing money no matter whether it is NMDS, cable TV or a
satellite. That is just a fact of life in the business. They
are growing so fast; they are doing such a good job; they are
losing money.
Mr. Pagon. Mr. Chairman, if I could just make one comment.
The implication would be that the companies have fared poorly
in the capital markets. I think if you look at the record of
appreciation for shareholders of all of the pay TV companies,
satellite and cable, you will find that the No. 1 performing
stock over the past 6 years is EchoStar, and that with respect
to Hughes, I think Hughes has created in DIRECTV almost $20
billion of value in a company that did not exist 7 years ago.
Mr. Boucher. Mr. Chairman, if I can indulge you just for a
moment.
Mr. Pagon, the problem that has been presented is that in
order to deploy the infrastructure that is necessary for new
series, which themselves are necessary to compete with cable,
including the high speed Internet access service that EchoStar
is determined to make more robust and more affordable to
consumers, in order to attract the capital to do that, a merger
is really necessary because the capital markets have simply
said to the companies, ``You have got too few subscribers to
make a $2 billion per company investment in this
infrastructure. Bring your infrastructure costs down by merging
to 2.5 billion, and then the money will be available in order
to finance the deployment of these facilities.''
And that would enable the company to offer high speed
Internet access and be a more viable competitor with cable.
Now, I acknowledge the accuracy of many of the things that
you have said about this market, but this fact remains, and
there are needs to have a larger subscriber base under a merged
company if capital is going to be attracted for additional
services and those additional services are absolutely necessary
to be a viable competitor.
Mr. Chairman, I am going to yield back.
Mr. Upton. The gentleman's time has expired some time ago.
Mr. Boucher. I have taken up too much time.
Mr. Upton. Mr. Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman.
Mr. Sachs, you have been sitting at the end very patiently,
and I know in the opening statement you did not come out in
support or in opposition to a merger, but based upon your
position, do you feel that the merger would create a larger
competition to the industry you represent than the two
competing elements presently?
Mr. Sachs. Let me go back to what I tried to say. We regard
both EchoStar and DIRECTV as very formidable competitors today,
and the prospect of a 17 million subscriber satellite company
will probably look more like a 19 or 20 million subscriber
satellite company at the time this merger would close is no
less daunting.
This company, both companies have excellent track records,
and if their energies are combined and if they achieve certain
efficiencies, they will certainly be as competitive as they are
today, and they have given you reasons why they believe they
will be more competitive.
Mr. Shimkus. Thank you.
Mr. Ergen, based upon the announcement today that Comcast
and AT&T could merge, and based upon the arguments for your
efficiencies based upon your merger, could I assume that you
would be supportive of that?
Mr. Ergen. We certainly will compete against anybody that
we can in a level playing field, and we certainly think that
from a regulatory point of view that would be a hard merger to
stop.
The ownership cap limits which would have stopped perhaps
that kind of merger was 30 percent. Those were thrown out by
the courts. The Supreme Court, I believe, just announced they
are not going to hear an appeal of that. So there is no
ownership cap today against, I guess, cable companies becoming
really one company.
So it is a scary thought, but we are up to the challenge to
compete as long as we can on a level playing field. I think our
concern would be program access there where Time Warner owns, I
mean, or AT&T or Comcast own programming. Comcast, for example,
does not sell its sports channel today in Philadelphia.
Therefore, it cannot compete in Philadelphia. That would be our
big concern.
Mr. Shimkus. Let me go to one more question, and I am not
an attorney. I do not even pretend to be one, but for those who
are, tell me how viable consent decrees are and if they are
worth the paper they are written on.
Does anyone have an opinion on that?
Mr. Ergen. Well, I am certainly not an attorney either, but
they certainly have been done many, many times in mergers and
so forth. And the Justice Department obviously is proficient at
that.
We can get some information to you in the committee. AOL
Time Warner is the most recent one where I think there were
similar concerns with AOL Time Warner.
Mr. Shimkus. Does anyone have a dissenting view?
Mr. Schnog. You know, the consent decrees are great and
wonderful, but I think that you also have to think about kind
of the reality in the marketplace of what is going to go on if
this merger is approved.
Kind of the reality is this as I see it. You are going to
create this 900 pound gorilla with 1,200 channels, or God knows
what it is, that they control, that no one else will ever be
able to touch.
They are going to be able to compete with cable. For folks
who say they are not competing with cable now, look at Classic
Cable who is in bankruptcy because they cannot compete with the
satellite dish competition as it is today. That is 350,000
customers in this country.
There are lots of other small cable companies like my own
who are in trouble because of this, and I think what you are
going to see happen is if this 900 pound gorilla comes out of
the closet, all of the small cable companies or a great number
of them are going to disappear. You are not going to have 9
million homes or 3 million without cable. You are going to have
maybe close to 18 million. That is the 8 million customers that
we have.
And in those markets where they are used to paying $2 for a
hamburger, and you guys here in Washington, I bought one
yesterday for $9; they will be paying that same $9 for their
cable TV or their satellite dish, and it is the same price as
the big cities.
And the big cities, do you know what? They will still have
the cable competition because those major operators who have
those economies of scale will be able to compete and put on
1,200 digital channels.
What you will end up having is this huge, huge digital
divide. You know, I see Congressman Boucher has gone out, and I
hate to disagree with the Congressman, and I appreciate him
wanting to get services into his market for high speed Internet
and what have you, but I might suggest that he has kind of
thrown the baby out with the bath water, you know, saying,
``Let's get them in here.''
But remember when you get them in here, you are creating a
900 pound gorilla, and these guys, these big companies, they
are after the dollars. They are after making money, and that is
what they are going to do.
If you think any different, I mean, you look at Charlie
Ergen's testimony to the courts when somebody else was going to
buy DIRECTV and when they were going to merger Primestar, and
as soon as it suits his way it changes when he gets before you
here.
I mean, Id o not blame him. He is a tough businessman. He
knows what he is doing. He is trying to make money for his
investors. No problem.
But if you are really thinking about the consumer, think
about what a 900 pound gorilla will do.
Mr. Phillips. Mr. Shimkus, could I respond to your
question?
Mr. Shimkus. My time is out, if the chairman would be so
diligent.
Thanks.
Mr. Phillips. I do have a law degree. I do not practice
anymore, and I am not an antitrust expert, but I am advised by
some good attorneys, and they indicate to me that the
Department of Justice's preference is to have competition and
not to eliminate it. If there is to be a consent decree, I
think the department generally favors a scenario where they can
create competition with a provider that has some staying power.
For example, facilities. You will remember the United Air
case where essentially Robert Johnson's company was set up to
be facilities based, to compete in certain routes so that there
was two providers. It ultimately failed, but I think that is
the way the Department of Justice would tend to go.
They do not like to accept promises. There is no regulatory
scheme really that has been set up to enforce Mr. Ergen's
promises about national pricing. As I tried to point out, it is
very complicated because it involves more than just 50 packages
and what you charge. It invites rebates and other things that
are shoved through the distribution channel that affect
consumer price.
And so those are generally not the kind of remedies that
the Department of Justice favors.
I would suggest, as a participant in the industry having
experience with these people, that if there are to be these
kinds of consent decrees based on promises, they are going to
have to be very thorough. They are going to have to be very
clear. They are going to have to be very enforceable and
swiftly, not through the courts or any other, you know, delayed
mechanism if we are really going to protect consumers.
Mr. Fiorile. Mr. Chairman, I think it would be foolish to
suggest that the combination of these companies would not help
the profitability. Of course it would.
This industry, because of the competition, has grown by
close to 20 percent in the last year, which I would submit
there is probably not a whole lot of businesses that have grown
close to 20 percent in the last 12 months.
So let's look at what has caused it to grow by 19 percent,
which is exactly, I think, the number. Some of cable's
nonresponsiveness to service, and this industry has done a
marvelous job with service. They have an excellent reputation.
So what kind of promises are we hearing that are going to
happen with the combined companies?
We are going to be able to reduce our service departments
and save a lot of money. No question. Who is it going to
impact? It is going to impact consumers. Where there were two
service people in an area, there is going to be one, and, yes,
it will be more profitable.
What else has driven the growth of DBS recently is the
competitiveness between pricing and programming, and there is
no question that that has helped this industry. And what we
have heard a little bit about today is we are a national
program service, and some of these services are redundant, and
I would suggest the redundant is another way of saying
competitive.
And last, what has driven largely the growth of DBS in the
past year has been local-into-local. People no longer have to
go out and buy a local television antenna in addition to their
satellite dish. Now they can get both, and where we are today
is local-into-local is being challenged in the courts.
And last but not least certainly is we have also heard not
even a promise with regards to the other 110 markets in this
country.
So it will be profitable? Yes, it will be more profitable,
but let's face it. The consumers are the ones that are going to
pay for it.
Mr. Upton. Mr. Markey.
Mr. Markey. Thank you, Mr. Chairman, very much.
First I want to say to Mr. Shimkus and to the audience I am
a lawyer.
And I just wanted full disclosure.
Actually I ran into Gregory Peck about 20 years ago, and I
said to him, ``Mr. Peck, I just wanted to let you know that I
saw `To Kill a Mockingbird' when I was 15 years old, and I have
wanted to be a lawyer from that moment on.''
And he looked at me and he said, ``Young man, you are the
100,000th lawyer to tell me that.''
``And I do not want the responsibility.''
So I appreciate, you know, the conditions under which I am
about to begin my questioning.
When you look at any merger, especially from an antitrust
perspective, the key decision always is to define what market
we are talking about. Are we talking about solely the DBS
marketplace or are we assessing the impact on the entire multi-
channel video market including cable? Define the market.
In this case, I am not sure it makes a difference because
in the former we would go from two current competitors, DBS and
EchoStar, down to one, and in the latter, that is, including
cable, we would go from three competitors, including cable plus
DBS or, I mean, plus both of the companies that are here, down
to two, moving to a duopoly.
It is hard to see how either scenario would be in the
consumer's interest in the long term.
In addition, fewer distribution platforms may have a
negative effect on programmers, especially programmers who are
neither owned by cable operators nor major broadcast networks.
Obviously those players would bring some leverage to the
negotiation at that point with either the cable industry or the
remaining satellite company.
Fewer competitors may also have negative consequences for
manufacturers and retailers. We are still waiting on this
committee to see the fulfillment of the Telecom. Act mandate
that the FCC assure that consumers can purchase their own set
top boxes and modems and other equipment not of the cable
industry's choosing, but of the consumer's choice. We still do
not have that from the FCC. The cable industry continues to
lobby that they decide what cable boxes each American gets, and
that is wrong.
The leading argument for approving the merger is that
although quantitatively we would have fewer competitors, the
merged satellite company would represent qualitatively better
competition in the marketplace.
This notion is supported by the assertion that the merged
company would do local to local into more markets. So on that I
have a question that I would like Mr. Ergen and others to
answer.
Why shouldn't we believe that instead of merging the
spectrum between these two companies, that instead, with
digital compression and with new spot beam technologies that
would be driven by the paranoic competition between your two
companies, that we would not wring much more efficiency out of
the existing spectrum rather than having the spectrum of both
companies put together, but having a dramatic reduction then in
the intensity of the investment in new technologies that would
insure that we would wring more efficiencies out of that
spectrum which we do have?
Mr. Ergen.
Mr. Ergen. Well, as a business person, I have to make those
decisions every day, and I wish I could wave my magic wand,
snap my fingers and suddenly double the amount of capacity or
spectrum.
But one thing. I am not an expert in law, but I am an
expert in the satellite side of the business, and just the
spectrum, the technology does not exist to do that today.
Something like MPEG-4 that was mentioned, the chip sets are not
available, the thousands of dollars in tests today. MPEG-4s for
steel frames is not there yet, and by the time 5 or 10 years
from now we get advances, and I think we will get advances, it
is going to require we replace the equipment that is out there
just like digital cable has upgraded their plant to digital.
But we cannot snap our fingers and turn our signal off for
3 years while we are building these satellites and this
technology. We have to continue to do an ongoing business.
So just from a practical point of view it is not possible,
but believe me, as a business guy, for my shareholders if I
could spend $250 million, as Mr. Pagon suggested, and put up a
satellite that broadcast to every local city, 210 markets, I
would be crazy not to do it.
But I spent my $250 million on a satellite that was state-
of-the-art that we believe can do 40 markets.
Mr. Markey. All right. Let's go to Mr. Pagon then. What do
you have to say, sir, quickly?
Mr. Pagon. Well, I recall 10 years ago going to Fleet Bank,
and I was then in the cable business, and asking them to lend
me money to get in the DBS business, and they said, ``Well, it
will not work. Everybody knows that.'' And 7 years later we
have 17 million customers who are served by technology which
was unproven then. I think MPEG-4 is here. It is not generally
deployed, but over the next, I think, 5 or 6 years, you will
see it deployed commercially, and MPEG-4 will allow compression
rates, a standard definition digital channel to be delivered in
a third of the current bandwidth that MPEG-2 does.
So it will be here. Spot beam satellites are here. Mr.
Hartenstein referred to the launch of their 4-S satellite,
which went up 2 or 3 weeks ago. Spot beam technology is
something that would allow potentially a four to sixfold
increase in the intensity of use of the current spectrum, which
is not very useful for national channels, but very, very useful
for delivery of channels like local TV stations which you do
not have a legal right to offer outside of their home markets.
So I think it is here.
Mr. Markey. Now, let me move on now. The way I see all of
these hearings is that it is kind of like the segment in ``Who
Wants to Be a Millionaire'' where the key part of all of these
and, I think, the most fun for everyone is ask the audience.
For Congress that segment is really ask the consumer. You
know, ask your constituents what would they want So they are
being told that cable rates are rising. DBS rates rise, but it
is because of these programming costs that are just out of
their control. And so the question would be here if this merger
goes through, would this give you any more leverage over the
programmers so that you could extract lower rates from the
programmers and as a result see the consumer pay less for the
service overall?
Mr. Ergen. Well, two things would happen. One is you
probably from a practical point of view would get some
leverage, and certainly the NAB has testified that they are
worried about us having leverage on the retrans. side where
they pay for their channels, but I think the consumer benefits
from that.
But mostly what you have is contracts where you have
something called a most favored nation clause, and so let's
say, for example, AT&T pays 20 cents for a channel because they
have 14 million subscribers, and because we have 6 million
subscribers we pay 30 cents. By combining the companies, we
would go to the bottom of the rate card as AT&T and Time Warner
are, and most of these contracts are up in those numbers where
we just do not get to and probably will not get to in our
lifetime without the merger.
So that is how you get the lower costs. Those are then
passed on to the consumers.
Mr. Markey. Would you then commit here today that if those
prices to you lowered that you would lower rates for consumers?
Mr. Ergen. I will commit that I will pass on a substantial
portion of programming rates that we save on to consumers. And
the reason we do that is because then we become a----
Mr. Markey. Is a substantial portion more than 50 percent,
more than 75 percent?
Mr. Ergen. Yes, more than 50 percent. Substantial, more
than 50 percent.
And the reason we would do that is because as we lower our
costs to consumers for programming, we get more subscribers to
pay our fixed cost of satellites. So there is an economic one
on one analysis here that says whether we guaranteed you we
would do that or not, we would do it because it makes practical
business sense and improves our bottom line.
Mr. Markey. I have read reports that the synergies that are
created through this merger will save $5 billion between the
two companies. Now, will you pass that $5 billion on to the
consumer in the form of lower rates?
Mr. Ergen. We would pass some of that on. Some of it would
go----
Mr. Markey. How much would you pass on to the consumer?
Mr. Ergen. I do not know exactly. It would not be----
Mr. Markey. Because here is the problem from our
perspective.
Mr. Ergen. Whatever it is, it is more than it is today.
Mr. Markey. Well, from the perspective of Congress, from
the consumer looking at these industries, the multi-channel
video marketplace seems to be the only place where prices
always go up and they never go down.
So since September 11th, automobiles, they are like giving
them away. You go into the stores, and they are like giving you
the suit. Please, take it, you know. Thirty percent is not
enough? I will give you 50 percent of, and they are giving away
everything in our society.
And yet AT&T is announcing they are increasing cable rates
by 8 percent, and there is no reduction in DIRECTV or EchoStar
rates to consumers. It is the only product area that is
completely immune to everything else that is going on within
the economy.
So here we have a moment in time where a merger promises so
much savings, $5 billion a year, that you would want the
consumer to see a dramatic lowering of his rates maybe in a way
that actually allows you to be price competitive with the cable
industry.
And so it is important for us to hear the actual kind of
percentage reduction in your rates that you might promise. Is
it a 5-percent reduction, a 10-percent reduction, a 20 percent
reduction in your rates for consumers that kind of brings it
more in line with a product that the cable industry might have
to fear in price competition?
Mr. Schnog. Congressman Markey.
Mr. Markey. Just wait a second.
Mr. Schnog. Oh, I am sorry.
Mr. Ergen. Well, I can only tell you that we have been 6
years in the business. We have raised our rates of our basic
channel one time without these efficiencies. Nobody has fought
harder against cable than our company in terms of trying to be
the most competitive we possibly can.
You certainly balance that with investing in new
technologies and so forth as a business person. You have to
balance your shareholder needs, but because this merger brings
$5 billion in savings a year, as you say, a large part of that
will be passed on to consumers to go from a practical point of
view, because of our high fixed costs, but I have not done the
analysis, and I am certainly there. I do not know what interest
rate we pay on our debt today to finance the acquisition. I do
not know a lot of different things. We have to finance the box
switchout, which will be a couple billion dollars, I think
about $2 billion. So it will be a large part of it, but it
probably will not be all of it. It will not be all of it. That
is for sure.
And certainly as we get farther into this, we will have
more detail for you on that, but as we sit here today, I
certainly do not have an exact answer for you.
Mr. Markey. See, this committee is----
Mr. Ergen. Oh, by the way, the $5 billion synergy is, I
think, 4 years after the merger is completed. It is not $5
billion the first year. It is $5 billion the fourth year.
Mr. Markey. How much is it the first year?
Mr. Ergen. In 2005, it would be about $5 billion a year.
Mr. Markey. How much is it the first year?
Mr. Ergen. I think it is about a billion.
Mr. Markey. A billion? And that keeps rising to the point
where it is $5 billion?
Mr. Ergen. Yes, yes.
Mr. Markey. Does it get bigger as each year goes on?
Mr. Ergen. No, it stops at about $5 billion unfortunately.
Mr. Markey. Five billion. That is still a lot of money
after you make the initial, you know, investment in trying to
help on the converter boxes and everything.
Mr. Ergen. It is a lot of money, and I am very excited
about passing those costs or some of those savings on to
consumers and keeping our prices lower than cable so we can go
get their customers.
Mr. Markey. Right. So would you commit? In other words, I
need a commitment from you that it would be a minimum of 10
percent. That is a lot of money.
Mr. Schnog. I will give you ten.
Mr. Markey. In the total universe of revenues here, in the
entire multi-channel video industry, that is a lot of money, $5
billion.
Mr. Ergen. No, we would definitely be more than 10 percent.
We would definitely be more than 10 percent of the savings.
That would be a low number in my opinion. I believe it would be
in our best interest to do materially more than 10 percent.
Mr. Markey. What would be a median number?
If 10 percent is low, what do you think is a median number?
Mr. Ergen. I think 100 percent would be high.
Mr. Upton. Is that your final answer?
Mr. Ergen. So somewhere between 10 percent and 100 percent.
I am not trying to be evasive here, but you are asking me a
very technical question without me knowing the circumstances a
year from now when the merger is completed.
Mr. Markey. Okay. We have got a Mr. Schnog on the line.
Mr. Schnog. Yes.
Mr. Markey. Mr. Schnog, I would like to ask you what do you
think about what we have here with prices?
Mr. Schnog. I am glad you asked, Congressman Markey. I have
looked at your face in many trade magazines, and all the time I
think in the cable TV business, ``Boy, oh, boy, what does this
guy know?''
And what you do not know and what I need to tell you is
that I do not----
Mr. Markey. All you think of is what I do not know.
That is why we have you on the line.
Mr. Schnog. That is right. That is right. I have got to let
you know.
Everybody complains about the high rates and what you do
not know is honest to goodness, it is not my fault, and it is
not Mr. Ergen's fault. You see, in this country people think
there are only two things that are certain, death and taxes. It
is death, taxes, and paying Disney $5 a month per consumer.
Something you do not know. Right now I have Disney on one
of my systems. It is a pay channel. If people want it, they can
pay for it. If they do not, they do not have to.
Disney came to me 6 months ago, actually about a year ago
and said, ``We want you to put it on your basic service, and
you are going to pay us about a buck for every single one of
your customers now.''
And I said, ``I cannot do that. I cannot afford it. I do
not have any way to pay for this.''
They said, ``No problem. Raise your rates.''
I said, ``I cannot raise my rates. I have got competition
from satellite.''
Mr. Markey. Let me frame the question for you.
Mr. Schnog. Okay.
Mr. Markey. What impact do you think the merger between
DIRECTV and EchoStar will have on the programming costs to you,
Mr. Schnog, a small cable operator?
Mr. Schnog. I think they are going to go much higher.
Mr. Markey. Much higher? Not lower?
Mr. Schnog. Much, much higher. Here is what is going to
happen. They are going to be that giant gorilla out there with
the other five gorillas, G.E., Disney, CBS and Fox, and when
they go to make a deal, they are going to say, ``We are a giant
gorilla. We want you to charge the rural operators more,'' and
they will be because we are smaller. I have only got 8,300
customers, and charge us less because we have got this large
area, and we will not go out and compete for the programming
with you.
And they will have their nice, cozy, little I do not know
what you would call it, but they will keep the monopoly there,
and you will see a lot of these smaller operators. Their costs
continue to rise, and we will not be able to do much but go out
of business.
And for these guys, all of a sudden again that market will
go from 9 million people who do not have cable TV now available
as a competitor to maybe around 18 million.
The worst part of it is or the thing that is most
important, if you would commit to me to say I will sit down and
help you with this programmer problem, help me with the fact
that ESPN raised it rates last year 20 percent just like that,
and it had to get passed along someplace. I mean, my difference
in what my cost for programming today and 10 years ago, in 1991
I was paying $3.85 for my programming for basic. Today I am
paying about $10.
My rates have gone from $24 to $27. That is the truth.
So where are the rate increases coming from? A lot of that
money is going straight on back to the programmers who now with
two competitors?
Mr. Markey. Can I say this?
Mr. Schnog. Go ahead. I am sorry.
Mr. Markey. No, we are talking about selling the most
precious asset that we have in New England, the Boston Red Sox.
We have this shrine, Fenway Park. We have all of these
wonderful players. We have everything else that is attached to
it. But do you know what the bottom line is in the business
section? It is that everyone says it is a cable play.
Mr. Schnog. It is all about money.
Mr. Markey. It is a cable play, and it is all about how
much higher you can raise these rates to consumers because no
matter what you are going to pay for Nomar Garciaparra or for
Pedro Martinez to make sure that they are not ultimately free
agents that are purchased by the Yankees and you want to keep
them in Boston, well, do you know what the key is? We are going
to raise cable rates.
So we obviously are increasingly conscious on this
committee, you know, as is the American consumer, that this is
a spiral that seems to continue to go out of control. And so we
would like out of this conversation, amongst other things, to
figure out ways in which it starts to get under control.
Because if it does not, with all due respect, because I
think that, you know, Mr. Ergen is a technological and business
genius, but I think there are certain other inevitable
inexorable forces that are built into this process that run
counter to any and all promises which you might try to make
here, and they may be well intentioned promises, but ultimately
illusory promises made to the committee because of the
essentially uncontrollable nature.
And my own feeling is that--and it is why I think it is
important to study this issue--is that if there is no real
competition in the marketplace because that is a proxy;
competition is a proxy for regulation to within an inch of your
life government intervention into the marketplace. It is the
only thing you can substitute, is real competition, and it is
the only way in which you get the conversation with all
players, including programmers.
I am just a little bit apprehensive about what could happen
if it gets reduced down to two from three because it is already
so bad at three, and I am not sure that this kind of provides
us with a road map to the consumer not putting aside 10 percent
of their monthly budget just to watch programming, not a 10-
percent savings, but an ever increasing share of the limited
discretionary income average families have in our country.
Mr. Sachs, I appreciate it.
Mr. Sachs. If I can just speak to your observation about
cable rates and automobiles, if I might for a second, I think
the anomaly in part is that cable is not a static product, and
that with most rate adjustments cable operators are offering if
it is part of the basic package new services that are coming on
the market.
I mean, in the last year National Geographic launched.
Oxygen for Women launched, and so if you look at it simply in
absolute terms about if the product had not changed, then the
rate increases look a lot more substantial.
If you look at it as the Bureau of Labor Statistics does
and look at it for the period since cable rates were
deregulated, which is mid-1999, cable rates have gone up
approximately 1 percent over inflation, if you take account of
the fact that the product itself has expanded, and I think that
is the anomaly.
Mr. Markey. Well, if I may just for a second, you know, one
of the things that I think we have to take note of is that
DIRECTV is owned by General Motors.
Mr. Sachs. They should sell Charlie the car division, not
the satellite company.
Mr. Markey. The question here is: what is the market cap
today for DIRECTV? What would you say it would be worth?
Mr. Hartenstein. The market cap for Hughes is on the order
of about $20-some billion.
Mr. Markey. And what is the market cap for General Motors
minus Hughes?
Mr. Hartenstein. It is a little bit difficult because
General Motors owns 100 percent of the asset, but it is a
tracking stock.
Mr. Markey. No, now I am only talking about General Motors,
the automotive branch. What is that market cap worth?
Mr. Hartenstein. I am not sure I can do where the stock
price is today, but it is probably about 25, 30 percent above
that of what the market cap is of Hughes. I would have to
confirm that form you.
Mr. Markey. The point is that the automotive industry is
static. We know that they have not really improved fuel economy
standards for 16 years.
But at the same time this is not static. The asset which
General Motors owns is really quite dynamic. It is growing
exponentially year after year after year. It is now worth $20
or $25 billion, and the entire automotive division of General
Motors might only be worth $30 or $35 billion. Think about that
in our society.
Now, if we were having a hearing on whether or not General
Motors should be allowed to purchase Chrysler, it would almost
be understandable at this point. Look at that market just
shrinking.
Here, however, we are having a hearing on the largest
growth sector of the American economy that are picking up 1.5,
you know, 1.8 million customers per company per year. So that
is why it causes us some concern, because obviously the
consumer is a beneficiary of that robust competition.
And while the cable industry over the years has been a
beneficiary of policies on this committee, the Cable Dereg. Act
of 1984, and the broadcast industry has been a beneficiary of
acts on this committee, the Spectrum Allocation Act of 1996.
So, too, the satellite industry has been a beneficiary of the
1992 programming access provisions and the local-into-local
provisions of 3 years ago.
So obviously each industry has been nurtured by this
committee trying to create many more players that are more
robust, and so what we are really trying to do here today is to
find a route that insures that the consumer is the beneficiary
of the wise decisions this committee has made in creating a
blueprint that has allowed the geniuses of these industries to
go out there and create, to innovate, and that we do not want
to invoke the law of unintended consequences whereby we
decrease the incentive to innovate, decrease the incentive for
more technological breakthroughs.
We know that the satellite industry is driving the digital
revolution in the cable industry. We know that, and the more
successful you are is the more they are going to have to move
because it is all about paranoia, and the broadcasting industry
and every other industry that is represented here is all driven
by the same phenomenon.
And I am looking forward to working with you because I do
not come to this with any preconceived judgment as to what is
the right route out, except that it has to at the end of the
day benefit the consumer, the viewer at home with lower prices
and more choices, which I believe is the promise of all of your
industries.
I thank you, Mr. Chairman.
Mr. Upton. Thank you.
I want to thank all of the panelists for being here. I know
we asked a lot of good questions. We look forward to the
decisions that are going to be made downtown.
Thank you.
[Whereupon, at 5:25 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of Sophia Collier, President and CEO, Northpoint
Technology, Ltd.
Mr. Chairman, members of the Committee, I applaud you for holding
today's hearing on the status of competition in the Multi-Channel Video
Programming Distribution Marketplace.
the need for facilities-based competition
The fact of the matter is that the state of competition in this
marketplace is dismal, and Echostar's acquisition of DirecTV can only
make matters worse.
As disclosed in its most recent annual report on competition in
video markets, the FCC has certified only one percent of all
communities in the United States have effective
competition.1 EchoStar's acquisition will simply match
today's local cable monopoly with tomorrow's national satellite
monopoly.
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\1\ 7th Annual Report on Competition in Video Markets, Jan. 8,
2001, paragraph 138.
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When Congress passed the 1996 Telecommunications Act, many hoped
that cable overbuilders would enter the marketplace and create new
competition. That, unfortunately, has not come to pass. In fact, these
overbuilders have failed to materialize. And if this merger occurs we
will see the total elimination of facilities-based competition in
satellite service.
DBS has never been a price competitor to cable. If it were, the
entry of DBS service should have tempered the rise of cable rates. Yet
for the last five years cable prices have increased at 2.2 times the
rate of inflation. Remarkably, the cable rate increases appear to have
increased at a faster pace after DBS service began in December
1994.2 Clearly, a form of competitor to cable other than DBS
is needed if consumers are ever going to enjoy the higher quality and
lower prices that have been realized in other areas such as personal
computers, long distance services, and consumer electronics.
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\2\ Bureau of Labor Statistics, comparison of monthly cable prices
and consumer product index.
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For almost eight years now, our company has stood ready to offer
consumers a new, facilities-based alternative to cable and DBS service.
We can provide a uniform high quality of service in all 210 local
markets in the country. We would offer your consumers access to 96
channels of video programming for $20/month and high speed access to
the Internet for just another $20/month.
Some may recall that nearly three years ago I testified before this
very subcommittee, then under the leadership of Chairman Tauzin. Let me
repeat to you a commitment I made then, which still holds true today:
``Once regulatory approval is achieved, our service can be deployed in
the first markets in as little as six months, with nationwide coverage
within two years.'' 3
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\3\ Statement of Sophia Collier before the House Commerce
Subcommittee on Telecommunications, Trade and Consumer Protection,
February 24, 1999.
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In the period of time since I last addressed this panel, we could
have fully built out our entire network, offering all of your
constituents the choice of a low-cost alternative to cable and
satellite.
satellite opposition to new competition
The only reason that our service is not deployed today is because
the satellite incumbents have used the regulatory process to slow our
progress toward approval to a crawl. Initially they tried to turn our
licensing process into a Catch 22--we can't be licensed until we can
prove that we won't cause interference to DBS, but we shouldn't be
given any experimental licenses to demonstrate our abilities. With
strong support from Members of Congress, we have been able to
successfully demonstrate our technology in Kingsville, TX, Austin, TX,
and Washington, DC.
But rather than invest in the infrastructure of our system, we've
invested millions in legal fees.
Few small companies with new technologies could sustain the kind of
multi-year assault from entrenched incumbents that we've experienced.
In the end, when incumbents are permitted to abuse the regulatory
process to keep out new competition, its not the prospective
entrepreneurs that suffer the greatest loss, its consumers who are
denied the opportunity to select from alternative providers who can
offer better service and lower prices.
Northpoint is not concerned about our ability to compete
effectively against New EchoStar. What we do fear, however, is that the
new satellite monopoly will leverage its power to ratchet up the
satellite industry's eight-year campaign to keep us out of business.
EchoStar's continued opposition to our service--at a time in which
EchoStar desperately needs to demonstrate to antitrust and FCC
regulators that there will be sufficient competition in the MVPD
marketplace after its merger--attests to the depth of its commitment to
keep us out.
I hope members of the Committee share Northpoint's frustration at
our slow progress towards the marketplace. As you consider the merits
of the EchoStar consolidation of the satellite industry, I ask that you
examine how that company has been treating this would-be competitor.
local channels
The proponents of the merger have asserted that they need to
consolidate so that they can deliver local channels to more markets.
This statement further confirms our long-standing assertion that
satellites are ill-suited to carry local TV stations.
Even though a single company will control 100% of the spectrum
allocated to DBS service, the proponents of the merger themselves
concede they will still lack the capacity to serve even a majority of
the 210 local television markets. But even assuming the merger goes
through, the public must wonder if it can count on EchoStar to make
good on its claim to serve 100 markets. EchoStar's record is one of
seeking to avoid local carriage, not foster it.
Recall that EchoStar supported enactment of legislation to enable
it to carry local channels, but later led an industry lawsuit seeking
to over turn the must carry component of the law, a compromise that was
critical to ensuring the legislation's passage.
Earlier this year the satellite industry ridiculed my prediction,
published in Broadcasting & Cable magazine, that on January 1st--just
in time for the college Bowl games--the DBS companies would likely drop
local television stations in dozens of markets in order to comply with
the must carry law.4 Now comes word--from none other than
EchoStar CEO Charlie Ergen himself--that EchoStar will be forced to
take down local programming in several markets.5
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\4\ See ``Technology validated: Northpoint asks FCC to proceed with
license--at last,'' Sophia Collier, Broadcasting and Cable, June 11,
2001; ``Fears of interference: DBS `fights tooth and nail' to protect
customers, investment,'' Chuck Hewitt, Broadcasting and Cable, June 25,
2001.
\5\ ``ECHOSTAR SURPRISES WITH RECORD-BREAKING QUARTER,''
Communications Daily, October 24, 2001: ``Ergen said EchoStar `may be
forced to take down' local TV programming in several markets to comply
with must-carry rules because EchoStar 7 won't be launched in time to
meet increased demand. He indicated eliminating service was last
resort, but finances would be major determinant in decision. `We have
some markets where we offer 22 channels and there are only a couple of
thousand' subscribers. [`]We are going to make sure' where service is
offered `makes economic sense . . . We're going to have to make some
tough choices.' ''
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Many fans of the hit show ``Survivor'' won't be able to see the
next contestant to be eliminated because EchoStar will have eliminated
their ability to watch the local CBS affiliate.
Which markets will be exiled in this EchoStar version of
``Survivor''? Stay tuned for the answer on January 1st.
Nevertheless, if the public is still willing to assume that New
EchoStar will try to serve 100 markets, this won't come about until it
addresses the incompatibility between the existing DirecTV and EchoStar
set top boxes. This lengthy process will slow the provision of local
channels.
Finally, these 100 markets that New EchoStar claims it will serve
with local channels leave behind the people who would benefit most from
getting local channels via satellite. That is, the states with the
highest penetration of DBS service (and usually the lowest penetration
of cable service) are least likely to get local channels via New
EchoStar.
specious claims of interference
The satellite industry says it has no problem with Northpoint's
terrestrial service--so long as it operates in another spectrum band.
The FCC has rejected this specious, self-serving excuse.6
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\6\ First Report and Order, ET Docket No. 98-206, paragraph 168
(November 29, 2000): ``These [other] bands either do not offer the same
amount of spectrum, are encumbered by existing operations, impose
higher equipment costs, or have significant propagation constraints.
The use of innovative spectrum sharing techniques will facilitate a
high level of frequency reuse in this [12 GHz] band and provide a
variety of broadband services to a vast number of consumers.''
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DBS satellites today share the 12 GHz band with each other,
enabling a tremendous amount of spectrum to be reused over and over
again. DBS satellites in the 12 GHz Ka Band are stationed nine degrees
apart over the equator; in the Ku Band, similar satellites are
stationed just two degrees apart.
Northpoint's patented technology brings satellite spectrum sharing
principles down to earth. We avoid interference by transmitting in a
southerly direction, right into the back end of DBS subscribers'
reception dishes, which serves as a shield to our transmissions.
The FCC has noted that in all of the tests of our system, not a
single DBS subscriber has suffered an outage,7 despite the
satellite industry's dire predictions that interference was
``unavoidable'' for ``tens of thousands'' of subscribers.8
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\7\ FCC First Report and Order, paragraph 215.
\8\ DirecTV ex parte filing urging the FCC to reject Northpoint's
experimental testing in Washington, DC, June 23, 1999.
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Based on these successful tests, the FCC established the
Multichannel Video Distribution and Data Service (MVDDS). The FCC found
that it would be in the public interest for the DBS industry to share
the 12 GHz band with terrestrial services such as ours.9
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\9\ First Report and Order, paragraph 167.
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Clearly, the FCC would not have established MVDDS unless it was
confident that satellite-terrestrial spectrum sharing is indeed
feasible. Congress sought and obtained further confirmation that
terrestrial operations would not harm DBS customers when it directed
the FCC to commission an independent test.10 The FCC
selected the MITRE Corporation, which unequivocally concluded, and I
quote, ``MITRE believes that with implementation of the licensing
process and other policy recommendations outlined above, spectrum
sharing between DBS and MVDDS services in the 12.2-12.7 GHS band is
feasible.'' 11
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\10\ Public Law 106-553, Title X, ``Launching our Communities'
Access to Local Television Act of 2000,'' Section 1012--``Prevention of
Interference to Direct Broadcast Satellite Services.''
\11\ Analysis of Potential MVDDS Interference to DBS in the 12.2-
12.7 GHz Band, MITRE Corporation, page 6-8 (April 23, 2001).
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dbs: hold auctions, but not for satellites
The satellite industry's latest line of attack is to subject us to
a burdensome licensing process to which satellites are not required to
endure. They say we should have to pay for the right to share the
spectrum they were given for free.
Here are the facts:
The FCC awarded DBS operators in the 12 GHz Ku Band almost 6,000
MHz of spectrum without an auction.12 In contrast, we are
seeking just 500 MHz. True, EchoStar did buy some extra spectrum, but
that was in addition to the 3,075 MHz of spectrum it had already
obtained for free.13 DirecTV has never participated in an
auction for its spectrum.
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\12\ ``DBS Orbital/Channel Assignments,'' http://wireless.fcc.gov/
auctions/data/maps/dbs.pdf. (Based on FCC's assignment of 185
transponder channels without an auction. Each orbital slot allocates
1,000 MHz of spectrum to 32 transponder channels, i.e., 31.25 MHz/
transponder channel times 185 = 5,781.25 MHz.)
\13\ Northpoint ex parte letter to Chairman Powell, Appendix C
(November 28, 2001).
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While the FCC did auction two partial orbital slots 14,
this must now be viewed as an anomaly. Just a few months ago, the FCC
awarded 66,000 MHz of auction-free spectrum to 11 satellite companies--
including EchoStar, DirecTV and Pegasus--who will provide DBS-type
service in the Ka Band.15
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\14\ January 25-26, 1996, 24 channels at 148 degrees; 28 channels
at 101 degrees.
\15\ FCC Ka Band ``Second Round'' Order, DA 01-1693 (August 2,
2001).
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We are in a proceeding at the FCC with eight non-geosynchronous
orbiting satellites (NGSOs) who applied on the same day as us to use
the same spectrum.16 The FCC determined that we can all
share the spectrum safely with one another and with DBS incumbents, but
only our application is being contemplated for an auction.17
To put this in perspective, the NGSOs seek 25,400 MHz of spectrum; we
seek just 500 MHz--more than a 50:1 ratio!
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\16\ ET Docket No. 98-206.
\17\ First Report and Order and Further Notice of Proposed
Rulemaking, paragraphs 331-339.
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How is this so? Why would the FCC discriminate against applications
solely on the basis of technology? The answer is, with respect to the
satellite applications, federal statute prevents the FCC from
conducting an auction.18 (While our applications were
pending, the satellite industry sought and obtained an exemption from
auctions as a rider to the ORBIT Act, the legislation which privatized
Intelsat and Inmarsat.)
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\18\ Public Law 106-180, Section 647--Satellite Auctions:
``Notwithstanding any other provision of law, the Commission shall not
have the authority to assign by competitive bidding orbital locations
or spectrum used for the provision of international or global satellite
communications services.''
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We firmly believe that this statutory exemption should apply to the
spectrum used by satellites and not just to the satellites themselves.
Certainly a statutory clarification is needed to end the obvious
competitive advantage it bestows upon satellites at the expense of
terrestrial competitors that would use the same spectrum.
Putting aside the need for parity, the FCC still lacks the
authority to hold a spectrum auction in our case because there are no
mutually exclusive applicants before it. Northpoint Technology alone
submitted technology for the independent MITRE test, a statutory
requirement. Another company, MDS America, has advocated an auction,
but apparently because of its foreign ownership, the company has not
filed an application.
Northpoint's technology is patented and has been licensed only to
its Broadwave affiliates. To wait for new and unknown innovators to
come forward with a non-infringing technology, just for the purpose of
holding a spectrum auction, cannot be considered good public policy.
American consumers need new service now.
set top box standardization
If the merger is approved, at a very minimum conditions must be
imposed to ensure that customer set top boxes are open to competitive
services.
These conditions would replicate the ``open access'' and
``interoperability'' regulations now required of cable operators and
cable boxes. They would allow new terrestrial providers to offer
competitive services to EchoStar customers to either complement (e.g.,
local channels and high speed Internet) or completely replace EchoStar
service. Consumers should be free to choose to switch providers without
losing their investment in equipment.
The FCC reached a similar conclusion with respect to the new
satellite radio service, for which it has ruled that all Digital Audio
Radio Service (DARS) operators must design their receiver for
interoperability with all other DARS operators.19
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\19\ 47 CFR Sec. 25.144 (a)(3)(ii)
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In practical terms the new regulations should be implemented at the
same time that EchoStar standardizes its set top boxes. Instead of
providing a closed set top box that can only receive its service,
EchoStar should be required to provide all of its customers a box that
is open to competition. All future set top boxes should be required to
be designed according to these regulations.
In order for this to be effective the following three principles
should be observed.
All DBS boxes must conform to an open (non-proprietary)
standard such as the DVB protocol or other open-standards based
(freely available) transmission protocol so that these boxes
can be connected to new terrestrial providers.
All DBS boxes must have separate conditional access, as the
rules require for cable boxes.
Add on or proprietary features should be allowed but must be
designed as removable modules (similar to PC cards, for
example) such that the basic functionality of the set top box
is not disturbed by adding or removing proprietary features.
program access
Before concluding, I would like to comment on an important matter
on which I believe we share common views with the DBS industry and that
is program access.
Section 628 of the Communications Act prohibits exclusive contracts
between vertically integrated programming vendors and cable operators.
Congress recognized that cable operators enjoyed a monopoly in program
distribution at the local level and concluded that exclusive contracts
would further inhibit competition and diversity. This provision will
sunset on October 5, 2002, unless the Commission determines it
continues to be necessary.
The Commission has noted that the purpose of the restrictions on
exclusive contracts for this ten year period were intended to foster
development of emerging competitors to cable, allowing a transition to
a competitive market for the distribution of programming.
Regrettably the transition to the competitive market envisioned by
Congress in 1992 has not occurred, as cable still maintains its 80%
monopoly in the MVPD marketplace.
Instead of seeing greater diversity of programming, industry
consolidation threatens to limit consumer choice. Through its TCI and
Media One mergers, AT&T became the largest cable operator. AOL, which
already dominated the ISP landscape, acquired Time Warner, becoming the
second largest cable operator. Now, number 3 Comcast, poised to merge
with AT&T Broadband, would overtake AOL/Time Warner and become the
largest vertically integrated cable operator. Nearly a decade after
Congress insightfully prohibited exclusive contracts, programming
content and distribution is even more firmly entrenched in the hands of
a few powerful cable companies.
Content is crucial in order for competitors to attract and retain
viewers. Given the recent and substantial industry consolidation, it's
even more critical today to maintain the prohibition on exclusive
contracts. If incumbent cable providers are permitted to use their
market dominance to inhibit competitors' access to programming,
competitors will not survive. The ultimate loser will be the American
people who will be denied the benefits of competition and diversity.
conclusion
Northpoint has been seeking approval for almost eight years. It has
invented and proven a new technology that can provide low cost services
to consumers who currently lack service and/or competition. Although
entrenched incumbents such as the DBS industry have opposed Northpoint,
we have continued to seek licenses and strongly believe our services
are now needed more than ever.
I would like to conclude by reiterating my offer, made nearly three
years ago, to fully deploy our system throughout all 210 television
markets within two years.
______
The Commonwealth of Massachusetts
State House, Boston
December 4, 2001
The Subcommittee on Telecommunications and the Internet
2125 Rayburn House Office Building
Washington D.C. 20515
Dear Chairman Upton, Ranking Member Markey and Members of the
Subcommittee on Telecommunications and the Internet:
I apologize that my schedule does not permit me to attend the
Committee's public hearing today on the status of competition in the
multi-channel video programming distribution marketplace. However, my
absence does not in anyway indicate less than full support for
mandating satellite and cable providers operating across the country to
provide local news channels to all of their subscribers.
As you know, since the events of September 11, 2001 it is more
important than ever for people across the country to be informed as to
what decisions are being made, and what actions are being taken by
government officials regarding public safety and public health on both
the state and federal level. It is essential for people to have
immediate access to not only national news but also a local news source
that can provide up to the minute accounts of the events of the day.
With that said, I represent the Second Berkshire District in the
Massachusetts House of Representatives. It is a large, rural district,
encompassing parts of Berkshire and Franklin Counties. I write to
inform you that most of my constituents are unable to receive local
news coverage from Massachusetts' network stations. As much of my
district is rural, cable service is not available in all areas and
consequently most of my constituents rely on satellite providers to
receive television signals. Additionally, due to the rural nature and
mountainous terrain of the area, a standard roof top antenna will not
service homes with local channels almost without exception. I can
without hesitation make the assertion that this is a problem in other
parts of the country as well.
The problem of not having access to the local Boston channels in
Western Massachusetts stems from the Satellite Home Viewer Improvement
Act of 1999 (SHVIA). This legislation permitted satellite providers to
offer local broadcast TV to subscribers, however, SHVIA also gave
satellite companies the authority to decide whether or not to provide
local coverage to subscribers. Currently, none of the satellite
companies are providing local coverage in western Massachusetts.
Nevertheless, even if the satellite providers decided to provide local
TV coverage, Berkshire County is considered to be in the Albany, NY
local market, and Franklin County is in the Springfield, MA market.
Western Massachusetts still would not receive news from Boston, our
state's political and economic capital.
At a time when public safety and public health are of major concern
across the country, it is imperative that people know of government
decisions that are being made that affect them. Everyone across the
country deserves to know immediately breaking news on public health and
safety, regardless of where they live. On October 2, 2001,
Massachusetts Governor Jane Swift addressed the citizens of
Massachusetts on the issue of public safety, which was carried on all
three local network news stations in Boston; however, most of my
constituents did not have the means to watch this address.
This problem is not endemic to Massachusetts. Across the United
States our own government is not allowing access to local news
channels; channels that will provide people with the best source
information at a time when news and information is crucial. The recent
events in our country illustrate the great need for people to have
immediate access to news and information. By not mandating that
satellite and cable providers offer access to local network stations,
the Government is limiting the public's ability to make timely
decisions regarding public safety and health in the event of a crisis.
People need access to local TV news stations and they need it now.
As this information needs to be provided without delay, I respectfully
request that you seek to mandate satellite and cable providers
operating across the country to provide at least one local news channel
from the political capital of all of their subscribers' respective
states. On a matter as important as this, politics should not be able
to trump the dissemination of vital information to citizens.
Thank you for your time and attention on this matter. If you have
any questions or require additional information that would assist you
in the consideration of this issue, I would be more than willing to
discuss this matter at your convenience. I can easily be reached at
617-722-2240 or 413-684-5133.
Sincerely,
Shaun P. Kelly
State Representative