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.

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 ¶ 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]

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]

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] 

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.

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.

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.

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. § 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]

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. § 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.

4.      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.

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.

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.

1.  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. § 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]  

            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] 

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]

            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, ¶ 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, ¶¶ 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., ¶ 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, ¶ 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.

2.      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-à-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  ¶ 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. 

3. 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.

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 99º, 101º and 103º and EchoStar at 113º and 121º) 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.