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Testimony of Marshall Pagon
Committee on Commerce
Sub-Committee on Telecommunications and the Internet
United States House of Representatives
December 4, 2001
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 ‘80’s and early ‘90’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 ‘94, 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 ‘’70’s and ‘80’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 ‘80’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:
Ø Eddy Hartenstein, whose vision brought DBS technology into existence;
Ø 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;
Ø 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
Ø 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:
Ø Eliminate facilities based competition in the DBS industry;
Ø Eliminate choice in multi-channel service providers for as many as 20 million rural homes;
Ø Reduce choice for another 95 million homes from two satellite providers and one cable company to just one of each; and
Ø 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. § 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.
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