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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.
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.
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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]
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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]
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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.
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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.
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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 TODOSÔ
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,
as well as to our own customers.
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.
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.”
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.
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 SCHOOLÔ,
a public service initiative that provides public and private schools around the
country with free access to our SCHOOL CHOICEÔ
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
GuideÔ,
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
I appreciate the opportunity to share my views.
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