The Status of Competition in the Multi-Channel Video Programming Distribution Marketplace

Subcommittee on Telecommunications and the Internet
December 4, 2001
2:00 PM
2123 Rayburn House Office Building

Mr. Jared Abbruzzese, Acting CEO, WSNET; Mr. Marshall Pagon, President and CEO, Pegasus Communication; Mr. Michael Fiorile, President and CEO, Dispatch Broadcast Group; Mr. Eddy Hartenstein, Chairman and CEO, DIRECTV; and, Mr. Charlie Ergen, CEO, EchoStar

 

Mr. Bob Phillips
President and CEO
National Rural Telecommunications Cooperative
2121 Cooperative Way
Herndon, VA, 20171-4542

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 Summary

About 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 Subcommitee 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^o W.L. orbital position, at 110^o W.L., and at 119^o 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^o, 148^o, 157^o, 166^o and 175^o 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^o 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.

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 §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.

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