[Senate Hearing 106-66]
[From the U.S. Government Publishing Office]
S. Hrg. 106-66
SATELLITE/CABLE COMPETITION: AN EXAMINATION OF THE ECHOSTAR/MCI DEAL
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
BUSINESS RIGHTS, AND COMPETITION
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
EXAMINING THE COMPETITIVE IMPLICATIONS OF ECHOSTAR'S PROPOSED PURCHASE
OF THE MCI ORBITAL SATELLITE SLOT
__________
Serial No. J-106-1
__________
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
57-581 CC WASHINGTON : 1999
COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
Manus Cooney, Chief Counsel and Staff Director
Bruce A. Cohen, Minority Chief Counsel
______
Subcommittee on Antitrust, Business Rights, and Competition
MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania ROBERT G. TORRICELLI, New Jersey
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
Louis Dupart, Chief Counsel and Staff Director
Jon Leibowitz, Minority Chief Counsel and Staff Director
(ii)
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
DeWine, Hon Mike, U.S. Senator from the State of Ohio............ 1
Kohl, Hon Herbert, U.S. Senator from the State of Wisconsin...... 3
Leahy, Hon. Patrick J., U.S. Senator from the State Vermont...... 3
CHRONOLOGICAL LIST OF WITNESSES
Statement of Charles W. Ergen, chief executive officer, Echostar
Communications Corporation, Littleton, CO...................... 6
Statement of Decker Anstrom, president, National Cable Television
Association, Washington, DC.................................... 12
Statement of Gene Kimmelman, co-director, Washington Office,
Consumers Union, Washington, DC................................ 32
ALPHABETICAL LIST AND MATERIAL SUBMITTED
Anstrom, Decker:
Testimony.................................................... 12
Prepared statement........................................... 15
DeWine, Hon. Mike: Prepared statement of the National Association
of Broadcasters................................................ 5
Ergen, Charles W.:
Testimony.................................................... 6
Prepared statement........................................... 7
Kimmelman, Gene:
Testimony.................................................... 32
Prepared statement........................................... 33
APPENDIX
Additional Submission for the Record
Letter to Senator DeWine from the Association of Local Television
Stations, dated Feb. 2, 1999................................... 51
SATELLITE/CABLE COMPETITION: AN EXAMINATION OF THE ECHOSTAR/MCI DEAL
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WEDNESDAY, JANUARY 27, 1999
U.S. Senate,
Subcommittee on Antitrust, Business Rights,
and Competition,
Committee on the Judiciary,
Washington, DC.
The committee met, pursuant to notice, at 8:33 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine
(chairman of the subcommittee) presiding.
Also present: Senator Kohl.
OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE
STATE OF OHIO
Senator DeWine. Good morning. Let me welcome all of you to
the Antitrust Subcommittee hearing, which we have entitled
``Satellite and Cable Competition: An Examination of the
EchoStar/MCI Deal.''
I would like to apologize in advance for the unusual hour.
At least, this is early by Washington standards. I am not sure
it is early by the time when most people go to work, but by
Washington standards, an 8:30 a.m. hearing is pretty unusual.
As you know, the Senate has been occupied with a few other
matters, and we will continue that today, so we felt when we
scheduled this hearing the safest thing to do would be to
schedule it for 8:30 a.m. We do not anticipate it will last
much more than an hour, so that will give us plenty of time to
get back to the other business of the Senate. Even as the trial
moves forward, we do continue to work on important policy
issues before this subcommittee.
As you can tell from the title of the hearing, we are going
to discuss today the competitive implications of EchoStar's
proposed purchase of the MCI orbital slot. The satellite
industry is on its way towards being an important competitor to
cable television. Technological changes, falling prices for
satellite dishes, and market consolidation are changing the
face of this industry and making it a stronger player in the
video services market.
Many people, including myself, believe that this proposed
purchase will enhance EchoStar's ability to compete with cable
in markets all over our country. We will take the opportunity
today to explore the details of this transaction and see just
what opportunities it will provide for EchoStar.
The backdrop for all of this, of course, is the Satellite
Home Viewer Act, which will allow the satellite industry to
provide the so-called local-into-local service which is so very
important to consumers. As you know, the Satellite Home Viewer
Act is a joint product of the Judiciary Committee and the
Commerce Committee, and Senator Kohl and I are pleased to be
among the original cosponsors of this legislation. We both look
forward to continuing to work with Senator Hatch, Senator
Leahy, Senator McCain, and Majority Leader Lott to move this
legislation forward.
We will also continue to work with the various industries
and consumer groups involved in the provision of television and
video services, and on that point, I would like to thank our
witnesses who are here today, Charlie Ergen of EchoStar, Decker
Anstrom of the National Cable Television Association, and Gene
Kimmelman of Consumers Union. Mr. Ergen has been an industry
leader for years now, and Mr. Kimmelman has been an important
voice for consumers, and we know that both will continue their
hard work in this industry. We are also very grateful for all
the hard work put in by Decker Anstrom and the National Cable
Television Association, which has represented the position of
the cable industry very effectively.
All legislation is arrived at through a process of
discussion, negotiation, and give and take. The Satellite Home
Viewer Act, of course, will be no exception. As we move to mark
up the bill, I note this same spirit of cooperation will
continue to prevail. We will work with the broadcasters, with
the cable and satellite industries to pass legislation that
will lead to fair and reasonable competitive terms for the
satellite industry.
We had hoped to have a representative from the National
Association of Broadcasters here today, but unfortunately, they
ran into some scheduling difficulties and decided not to
attend. They have submitted a statement for the record, which I
will, in a moment, make a permanent part of the record, and we
will continue to work with them as this process moves forward.
Before I turn to the ranking minority member on the
committee, Senator Kohl, let me just reiterate something which
I think this subcommittee has made clear many times before.
Competition is the best way to provide efficient delivery of
video to consumers. The more video choices that American
consumers have, the better. We have seen this in my own home
State of Ohio, where Ameritech has provided competition to
local cable companies by overbuilding in certain markets.
Wherever Ameritech has entered the cable market, choice has
expanded and service has improved for all consumers.
It is the goal of this subcommittee to ensure that
consumers all through the country benefit from that sort of
tough, fair competition, whether it is from satellite
providers, phone companies, or any other source. The Satellite
Home Viewer Act will help promote the competition we all want
to see, and we look forward to hearing from our witnesses today
whether they think the EchoStar deal is also a step in that
direction.
Let me now turn to Senator Kohl, and let me just say that I
am delighted that Senator Kohl and I will be able to team up
again for this session of Congress. We have worked very closely
together in a very bipartisan way. I think we have made some
great progress, Herb, in the last Congress, and I look forward
to working with you in this Congress.
Senator Kohl.
STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE
OF WISCONSIN
Senator Kohl. Thank you, Mr. Chairman. As I begin, let me
say how delighted I am to begin the 106th Congress just as we
concluded the 105th, working again with my colleague, Senator
DeWine, on antitrust issues. It is a tribute to his leadership
that we have done so much on telecommunications, airlines,
computers, and other matters. It just goes to show how much
more we can do when Democrats and Republicans work together.
That said, as we try to balance our legislative agenda with
our impeachment obligation, it is good to kick off with a
significant consumer issue, namely promoting real competition
to cable. Today, we are looking at EchoStar's proposed purchase
of MCI's satellite slot. The benefit of this deal is simple and
straightforward. By gaining MCI's satellite space, EchoStar can
serve more folks with more programming in more places and do
this with just one dish, a so-called one-dish solution.
But in order to make satellite a truly viable competitor to
cable, we need to pass the Hatch-McCain-Leahy-DeWine-Kohl
Satellite Home Viewer bills that allow local-to-local
broadcasting. It is simply unconscionable and anticompetitive
for Congress to continue the prohibition that bans satellite
companies from broadcasting local stations to local consumers.
Ultimately, that is what this hearing and this deal and
these measures are all about--creating more choice for
consumers--because if this acquisition is combined with a
balanced local-to-local bill, one that phases in ``must
carry,'' we will all have lower prices, improved service, and
better quality for consumers of both cable and satellite, and
that is across the Nation, not just in Los Angeles and New York
but also in places like Milwaukee and Columbus. Finally, we
will be doing all of this in the best and most politically
viable way: by promoting competition and not regulating rates.
Of course, do not take my word for the promise of this
purchase or the benefits of these bills. Ask Decker Anstrom of
the National Cable Television Association and Gene Kimmelman of
the Consumers Union. When these two people agree on something--
and that does not happen very often--it has to be a good idea.
So we look forward to hearing what they, as well as Charlie
Ergen, have to say, and it is nice to have you with us today,
gentlemen.
Senator DeWine. Senator Kohl, thank you very much.
Let me invite our panel to come up, and let me ask at this
point unanimous consent that the opening statement by Senator
Leahy be admitted into the record, and it will be admitted
without objection.
[The prepared statement of Senator Leahy follows:]
Prepared Statement of Patrick J. Leahy, a U.S. Senator From the State
of Vermont
I deeply regret that the impeachment trial is continuing. In light
of my responsibilities in connection with that pending proceeding, I am
unable to attend today's hearing in person. Accordingly, I ask that my
prepared written statement be included in the record.
Over three years ago I started raising serious concerns about the
need to increase competition between cable and satellite TV providers.
I felt then, and I feel now, that the best way to reduce the recent
cable and satellite rate increases is to have satellite television be
able to compete on a level playing field with cable.
That does not happen in most of the country under current
circumstances. The Satellite Television Improvements Act, S. 247 which
I introduced with Senators Hatch, McCain, Kohl and Lott, leads the way
to promote head-to-head competition between cable and satellite
providers--and lower rates and more services for consumers.
In November of 1997, we held a full Committee hearing on satellite
issues and Senator Hatch and I agreed to work together on a bill to try
to avoid needless cutoffs of satellite TV service while, at the same
time, working to protect the local affiliate broadcast system and
increase competition.
In March of last year we introduced a bill, S. 1720, which was
reported out of the Judiciary Committee unanimously on October 1, 1998,
and which was designed to permit local TV signals, as opposed to
distant out-of-state network signals, to be offered to viewers via
satellite; to increase competition between cable and satellite TV
providers; to provide more PBS programming by also offering a national
feed as well as local programming; and to reduce rates charged to
consumers. Unfortunately, the Senate did not act on our bill before
adjourning.
In the meantime, a Federal District Court Judge in Florida (CBS v.
PrimeTime 24, S.D. Florida) found that PrimeTime 24 was offering
distant CBS and Fox television signals to over a million households in
the U.S. in a manner inconsistent with its compulsory license that
permits such satellite service only to households who do not get at
least ``grade B intensity'' service.
Under a preliminary injunction, satellite service to thousands of
households in Vermont and other states was to be terminated on October
8, 1998, for CBS and Fox distant network signals for households signed
up after March 11, 1997, the date the action was filed.
Mr. Chairman I was pleased that we worked together, along with
Senators DeWine, Kohl and Lott, to avoid immediate cutoffs of satellite
TV service in Vermont and other states. The parties agreed to request
an extension which was granted until February 28, 1999. This extension
was also designed to give the FCC time to address this problems faced
by satellite home dish owners.
In December of last year, I sent a comment to the FCC and
criticized their proposals on how to define the ``white area''--the
area not included in either the Grade A or Grade B signal intensity
areas. My view was that the FCC proposal would cut off households from
receiving distant signals based on ``unwarranted assumptions'' in a
manner inconsistent with the law and the clear intent of the Congress.
I complained about entire towns in Vermont which were to be
inappropriately cut off when no one could receive signals over the air.
I am anxiously awaiting for the FCC final rule in this matter.
The Florida District Court filed a final order which will also
require that households signed up for satellite service before March
11, 1997, be subject to termination of CBS and Fox distant signals on
April 30, 1999, if they live in areas where they are likely to receive
a grade B intensity signal and are unable to get the local CBS or Fox
affiliate to consent to receipt of the distant signal.
Our bill S. 247, sets the stage to avoid all of these complicated
signal intensity issues, all of this finger pointing and the ``white
area'' mess. Our bill can avoid all these problems because local
network affiliate signals will be offered over satellite--along with a
full range of programming. Home dish owners in Vermont will be able to
choose what is best for them. If cable is offered in their community
they would be able to decide which--satellite or cable programming is
best, and cheapest--for them.
Thousands of Vermonters, for the very first time, will be offered
satellite television which will include all the Vermont full power
stations.
I look forward to the testimony of Charles Ergen of EchoStar
regarding how EchoStar can help provide competition. My concern has
been that EchoStar is unable to offer such ``local-into-local'' service
to most of the rural United States including Vermont. I am worried that
much of rural America might be left behind as the more concentrated
markets are served. I know that many Vermonters would prefer to receive
local stations rather than imported, distant, signals from other states
so I am fighting to get them this service.
I want to note briefly that the Justice Department has been
generally supportive of EchoStar's acquisition of the MCI/NewsCorp's
DBS license but I certainly want to see how helpful this proposal will
be for rural America. I am also interested in the views of Mr. Decker
Anstrom of the National Cable Television Association on this issue.
My goal, as I have said many times in the past, is to offer
Vermonters more choices, more TV selections, but at lower rates. In
areas of the country where there is this full competition with cable
providers, rates to customers are considerably lower.
Thus, over time this initiative will permit satellite TV providers
to offer a full selection of all local TV channels to viewers
throughout most of Vermont, as well as the typical complement of
superstations, weather and sports channels, PBS, movies and a variety
of other channels. This means that local Vermont TV stations will be
available over satellite dishes to many areas of Vermont currently not
served by satellite or by cable.
To take advantage of the bill, satellite carriers over time will
have to follow the rules that cable providers have to follow. This will
mean that they must carry all local Vermont TV stations and not carry
distant network stations that compete with local stations.
I want to make clear, as I did in my recent comment to the FCC,
that I strongly believe in the local affiliate television system. Local
broadcast stations provide the public with local news, local weather,
local informational programming, local emergency advisories, candidate
forums, local public affairs programming, and high quality programs.
Local broadcast stations contribute to our sense of community.
I strongly believe that when the full local-into-local satellite
system is in place, this system will enhance the local affiliate
television system and provide consumers with more services.
Senator DeWine. Let me also ask that the statement that was
submitted to our committee by the National Association of
Broadcasters be submitted as a part of the record, and it will
be so without objection.
[The prepared statement of the National Association of
Broadcasters follows:]
Prepared Statement of the National Association of Broadcasters
Broadcasters have, and continue to, support measures to bring
competition to local cable monopolies. Broadcasters were among the
strongest proponents of the 1992 Cable Act, which included the must
carry law designed to prevent misuse of cable's gatekeeper facilities,
and the program access provisions that have made the satellite industry
and other new multi-channel video distributors viable.
We believe that satellites can also be an effective competitor to
cable and help to keep cable's ever-spiraling rate increases in check.
We have supported, therefore, the adoption of provisions authorizing
local-to-local satellite service by which satellite operators will be
able to offer program line-ups that are fully competitive with cable.
The desire to promote competition for cable, however, should not
lead Congress or the FCC to abandon the fundamental commitment to local
broadcasting. Thus, satellite operators offering local signals should
be subject to must carry and retransmission consent, although
broadcasters have agreed that--because of short-term capacity
limitations--full must carry obligations can be delayed.
Just as significantly, making satellite a viable competitor to
cable should be done at the expense of enforcing the law. Congress must
not reward satellite operators who have callously disregarded current
law governing satellite distribution of distant market broadcast
network signals. Doing so would harm local broadcasters whose audiences
have been wrongfully diverted, and would create a disincentive for
satellite operators and others to work for competition to cable that
strengthens and maintains--rather than weakens--our system of local
broadcasting.
Senator DeWine. Charles Ergen is the founder, CEO, and
chairman of EchoStar Communications Corporation, one of the
leading satellite television companies in the United States. He
also cofounded the Satellite Broadcasting Communications
Association and served on its first board of directors.
Decker Anstrom is the president and chief executive officer
of the National Cable Television Association. He joined NCTA in
1987 and served as executive vice president until becoming
president and CEO in January 1994. We welcome him back to our
subcommittee.
Gene Kimmelman is, of course, the co-director of the
Washington, DC, Office of Consumers Union, publisher of
Consumer Reports magazine. He is a recognized expert on
deregulation and consumer protection issues, particularly in
the area of telecommunications. He has testified before this
subcommittee on dozens of occasions, and we welcome him back.
Let us start from my left to right. We will start with Mr.
Ergen. Good morning.
STATEMENT OF CHARLES W. ERGEN, CHIEF EXECUTIVE OFFICER,
ECHOSTAR COMMUNICATIONS CORPORATION, LITTLETON, CO
Mr. Ergen. Thank you, Mr. Chairman, and thank you for
allowing me to be here. My name is Charlie Ergen and I was
fortunate enough in 1980 to help start EchoStar Corporation. We
only had one goal in mind, which was to offer consumers a
choice in video and compete against cable. Now, back in those
days, the dishes were 10 feet in diameter and cost over $10,000
and we were able to sell over a million systems over the next
16 years. But in 1996, we started a high-powered business with
very inexpensive dishes. In the last little less than 3 years,
we now have over two million subscribers. So we have a start in
competing with cable.
This is the fifth time I have actually testified in the
last year in the Senate and on the House side to answer
questions on how we can create video competition. We have now
launched four satellites in the last 2 years and invested over
$2 billion to compete with cable. In late November, we
announced a deal to invest another $1 billion to acquire the
assets of MCI/News Corporation, their satellite assets in the
last remaining full CONUS orbital slot at 110 degrees. That
spectrum, along with two satellites which we plan to launch
this year, will allow us to continue to compete and get
stronger against cable.
We still need FCC approval and we would encourage this
committee to encourage the FCC to act very promptly because we
are ready to go when the FCC approves us.
We have a history of competing with cable. I think we
certainly have a reputation of being a very aggressive
competitor both in the DBS industry and against cable. For
example, when we entered the market in 1996, we dropped the
price of a satellite system, to own a system, to below $200 at
a time when systems were selling for in excess of $700. We
instituted a low monthly fee option for consumers of less than
$20 a month, far less than cable companies were charging and
still are charging.
We also allowed customers to do something very unique, pick
any 10 channels, basic channels, they wanted for a low monthly
fee of $10 to $15 so they did not have to buy channels that
they did not want. And finally, last year, we guaranteed that
our prices would not increase until the next millennium, until
March 2000, something the cable industry has never done in
terms of a price guarantee.
The acquisition of the MCI/News Corp. assets, of course,
will allow us to be more competitive. If approved, it will
allow us to keep pace with many of the changes that are taking
place in the telecommunications industry and many of the things
that cable are now doing to be competitive in the future.
With the new spectrum, we will be able to solve the biggest
problem in DBS, which is to offer customers their local network
channels, which they watch about 65 percent of the time. We
also plan to offer data services and high-definition
television. These new services are going to be very critical
when you see the potential acquisitions of AT&T and TCI in
terms of merging. We know that video alone is not going to be
competitive in the future. We are excited about the ability to
do HDTV because we know on a national basis, we can roll that
out tomorrow and get that new technology started.
But all this has not been enough for our industry and our
company to be truly competitive with cable, as evidenced by the
fact that cable has raised prices consistently over 300 percent
to 400 percent the rate of inflation, and that is really
because current law has not kept up with our technology.
Current law today, for example, says we cannot provide
local channels to people who can receive network signals with
an off-air antenna, our so-called Grade B areas. That
eliminates about 95 percent of the country. Current law says we
cannot deliver network signals to people who have subscribed to
cable in the last 90 days, thus eliminating, from a practical
point, 65 million people from having the choice of DBS. Current
law says we cannot broadcast local channels right here in this
chamber because we are not allowed to broadcast network signals
through satellite to public places, as cable can do.
So we cannot compete under these conditions, so we need a
change to the Satellite Home Viewer Act, and we are very
pleased that this committee, along with Senator Hatch and
Senator McCain, have introduced legislation in the last several
weeks that we think is very encouraging and look forward to
working with you to pass that legislation.
We also hope that in your capacity to oversee antitrust
that you will be sensitive to the overwhelming power that cable
has on programming. They own most of the programming and
program access rules and pricing are very, very important to
us. We also know that we need help in getting retransmission
consent from the broadcasters on fair and equitable terms.
But as I said, we are off to a good start and we appreciate
the hard work that you and your colleagues and committees and
staff have done to give your constituents a choice over cable
and make DBS competitive. So we look forward to continuing to
work with you and answer any questions you might have here
today.
Senator DeWine. Mr. Ergen, thank you very much. Your timing
is within about 10 seconds. You are very concise. Thank you
very much.
[The prepared statement of Mr. Ergen follows:]
Prepared Statement of Charles W. Ergen
Mr. Chairman and distinguished members of this Committee, thank you
for inviting me to testify before you today on competition in the
subscription video marketplace and the effect our company's pending
acquisition of the MCI/News Corp. assets will have on competition in
that market. EchoStar is a Direct Broadcast Satellite (DBS) Company
that began service in March of 1996. Currently we have 2 million
subscribers nationwide. Our company led the way to bring down the price
of a DBS dish to under $200, making it relatively more affordable for
consumers nationwide. We have taken numerous other measures to make our
product competitive with cable.
EchoStar's acquisition of the MCI/News Corp. assets, if approved by
the Federal Communications Commission (FCC), will make DBS more
competitive with cable EchoStar seeks authorization to use the
100}+ W.L. orbital location full-``CONUS'' (Continental
United States) slot, two satellites to be launched in 1999, and an
uplink center located in Gilbert, Arizona which will act as backup to
our existing uplink facility in Cheyenne, Wyoming. For the MCI/News
Corp. assets, EchoStar will give the two companies non-controlling
equity stakes.
The Department of Justice has already provided ``early
termination'' of the EchoStar/News Corp. deal and has urged the FCC to
give prompt approval of the deal in order to promote competition in the
video marketplace. The FCC in its 5th Annual Report on video
competition, found that there is still not enough competition to cable
and that cable prices have soared by 7.3 percent compared with an
inflation rate of only 1.7 percent.
The additional spectrum, combined with EchoStar's existing full-
CONUS and half-CONUS spectrum, will alleviate the capacity handicap
that currently hampers DBS and will enable us to compete vigorously
against cable on a more equal footing. Among other things, consumers
cite the lack of local signals on DBS packages as the number one reason
why they choose to stick with cable or not pick DBS. The additional
spectrum will allow us to offer more local programming in more areas of
the country.
While essentially moving forward, we believe that transaction alone
is not enough to promote competition to cable. Congressional action is
key to true competition. We must have reform of the Satellite Home
Viewer Act, giving us an unequivocal and full-fledged copyright license
to retransmit local signals back into the station's local market. We
will also need provisions in the law that directs local television
stations to give us their entrance consent, to the extent needed, on
fair and equitable terms. And finally, we must have more rigorous
enforcement by the FCC of the Program Access laws designed to prevent
vertically integrated cable companies from discriminating against DBS
and other MVPD providers.
We look forward to working with you, your staff, the members of the
full Committee and with the Senate Commerce Committee on the
legislation introduced by Senator Hatch (S. 247) that would reform the
Satellite Home Viewer Act. Both proposed bills relieve some of the
unfair restrictions on DBS.
__________
Mr Chairman. and distinguished members of this Committee, thank you
for providing me the opportunity to testify before you today on
competition in the subscription video marketplace and the effect we
hope our company's pending acquisition of the MCI/News Corp. assets
will have on competition in that market. We would also like to take the
opportunity to talk briefly about S. 247, co-sponsored by some of the
members of this Committee and introduced last week by Senator Hatch.
Passage of that legislation, combined with Commerce Committee
legislation, is critical to the success of DBS as a competitor to
cable.
My name is Charlie Ergen and I am the founder and Chief Executive
Officer of EchoStar Communications Corporation, a Direct Broadcast
Satellite (``DBS'') company based in Littleton, Colorado. I started
EchoStar in 1980 as a manufacturer and distributor of C-Band satellite
dishes and grew the company, by the mid-1980's into the largest
supplier of C-Band dishes worldwide. I realized, however, that my
vision of a dish in every home, school and business in the United
States, and true, effective competition to cable, could not be realized
with large dishes. Consequently, in 1987, EchoStar filed an application
for a DBS permit with the Federal Communications Commission (the
``FCC''). EchoStar has launched four DBS satellites since December 1995
and has invested approximately $2 billion into this technology, working
to give consumers a choice to cable.
EchoStar was the first company to drop the price of a dish to below
$200 when the competition was charging $800 for its product. EchoStar
was the first to allow subscribers to pay a low monthly fee as they do
with cable. EchoStar was the first to allow consumers to choose the 10
channels they watch the most, then pay for those ``a la carte'' without
having to ``buy through'' programming they did not want, to get
programming they did want. EchoStar was the first company, this past
Fall, to say that it guarantees it will not raise prices until the next
millennium. These are just some of the measures we have taken to
compete vigorously in the marketplace.
echostar's planned acquisition will make the dbs more competitive with
cable now and in the future
This past December, EchoStar announced its intentions to acquire
from MCI/Worldcom and News Corp. an FCC authorization to use the
100}+ W.L. orbital location (from which a satellite system
can serve the entire continental United States, or ``full-CONUS''), two
satellites to be launched in 1999, and an uplink center located in
Gilbert, Arizona which will act as backup to our existing uplink
facility in Cheyenne, Wyoming. For the MCI/News Corp. assets, EchoStar
will give the two companies non-controlling equity stakes.
The spectrum at the 110 W.L. slot, combined with EchoStar's
existing full-CONUS spectrum (21 channels at 119 W.L.), and the
frequencies at our haIf-CONUS locations (11 transponders at 61.5 W.L.
and 24 transponders at 148 W.L.) will alleviate the capacity handicap
that currently hampers DBS companies and will enable us to compete
vigorously against cable on a more equal footing. As I will testify,
however, while the transaction is necessary to introduce more
competition in the subscription video marketplace, it is not enough.
Action by Congress is also necessary in the areas of network signal
retransmission and program access.
More specifically, with the new spectrum, we hope our company can
finally break down what, in the consumer's mind, has been the single
greatest obstacle to choosing DBS over cable or switching from cable to
DBS. We plan to offer local-into-local service, on a single dish, to
between 40 to 50 percent of the U.S. population. Currently, EchoStar
offers limited local-into-local service in thirteen markets. The local
service we offer, even if we could make it available to all
subscribers, is not perfect. It is a tough sell because it requires
customers to put a second dish on their roof. With the new orbital
location, consumers in the 20 major or metropolitan centers would
receive local programming on one dish while consumers in many smaller
markets (now unserved with local signals) will be offered a two-dish
solution.
Of course, our ability to provide full-fledged local-into-local
service is now inhibited not only by our spectrum limitations, but also
by regulatory factors--the Satellite Home Viewer Act as it is
interpreted by some parties. The need for reform of that legislation is
still acute.
With the new spectrum, we will also offer access to the Internet
and other data services. The rollout of cable modems and the cable
companies' success with this service demonstrates to us that
convergence is here. If a company is to be a full service provider, it
is no longer enough to offer only video service. The subscriber expects
more. The AT&T/TCI merger is a perfect example. AT&T's aim is to be a
one stop solution for the customer--providing television, telephony and
data services to the home. While the new spectrum does not allow
interactivity, and thus we would still be disadvantaged compared to the
mammoth cable companies, the additional capacity will greatly enhance
our ability to provide Internet access and data broadband services.
With the additional spectrum, we will also offer High Definition
Television (``HDTV'') and believe the broader availability of HDTV from
satellite will mean a speedier rollout of HDTV service nationwide. The
spectrum given to broadcasters for HDTV is a valuable resource and the
quick return of the analog spectrum is a worthy public policy goal
Congress has set for the nation. DBS is the perfect medium for HDTV.
Our boxes are already digital thus eliminating the need for the
consumer to buy or lease a costly digital converter box.
antitrust authorities recognize that this deal would create competition
On December 17th, just over two weeks after filing the Hart-Scott-
Rodino pre-merger notification, the Department of Justice (``DOJ'')
provided ``early termination'' of its review of the EchoStar/MCI/News
Corp. deal, and the license transfer application is now under review
only by the FCC. Just two weeks ago, in comments filed by the
Department of Justice Antitrust Division, the DOJ urged prompt approval
of the deal, saying that approval of our request ``promises to
facilitate new and potentially significant competition between DBS and
cable providers, thereby benefiting consumers of MVPD services.''
The DOJ comments also stated:
The relevant market for our service is the MVPD market. DOJ
has found extensive evidence of customers switching from cable
to DBS, contrasted to the early days of DBS, when subscribers
most often came from uncabled areas.
Approval of the EchoStar/News Corp. deal would eliminate
capacity restraints that limit EchoStar's ability to compete
with cable because our company would be able to offer more
programming in the form of local news, weather and popular
network programming.
DOJ emphatically pointed out that EchoStar should not be
required to divest of its holdings at 119}+ W.L.
because market conditions have changed since the FCC enacted a
one time only rule at the time MCI and News Corp. bought the
110 deg. W.L. spectrum at auction four years ago.
DOJ found that EchoStar, which serves 2 million customers,
representing a miniscule 2.5 percent of the MVPD market, lacks
market power in the market.
We have requested that the approval process be put on a fast track
and we are optimistic that the FCC will approve our license transfer
deal quickly, consistent with DOJ's recommendations. With quick
approval we can secure an early launch window and put our plan into
action by the middle of the year. With quick approval we can begin to
provide the kind of competition the consumer is hungry for. It is
important to remember, however, that this transaction will not be a
panacea for all the competitive problems of the subscription video
market.
currently there is no effective competition to cable
In its Fifth Annual Report to Congress, the Federal Communications
Commission reconfirmed that, despite the efforts of competitors such as
DBS, cable operators continue to possess bottleneck monopoly power in
the distribution of multichannel video programming.\1\ Among the
Commission's findings were the following:
---------------------------------------------------------------------------
\1\ In the Matter of Assessment of the Status of Competition in
Markets for the Delivery of Video Programming, in CS Docket No. 98-102
(rel. Dec. 17, 1998) (``Annual Report'').
Cable prices soared by 7.3 percent between June 1997 and
June 1998. This compares with an inflation rate of only 1.7
---------------------------------------------------------------------------
percent.
85 percent of Multichannel video subscribers continued to
grow, reaching 65.4 million.
The number of cable subscribers receive service from their
local franchised cable operator.
97.1 percent of homes are passed by cable.
Cable penetration in passed homes grew to 68.2 percent.
A trend towards regional clustering of cable television
operations continued during the course of last year.
Cable industry ownership remains concentrated at the
national level.
Despite marginal decline in vertical integration in terms of
a percentage of cable-affiliated national satellite delivered
services, cable MSO's in 1998 owned 50 percent or more of 78
networks and had minority stakes in many others.
echostar's local into local plan
I will now give a more detailed account of our local-into-local
plans. Independent studies and our experience as a company match the
conclusions of the FCC: 8 of 10 people who walk into a satellite
dealer's showroom don't buy anything because they cannot get a product
they really want.\2\ They can't get their local stations. Surveys show
seventy percent of the time watching television is spent watching local
TV.
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\2\ See In the Matter of Assessment of the Status of Competition in
the Markets for the Delivery of Video Programming, in CS Docket No. 97-
141 (rel. Jan. 13, 1998) (``Annual Report'') at para. 58 n. 201.
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In 1998, EchoStar began offering satellite-delivered local network
stations to qualified consumers in the Washington, D.C., New York,
Atlanta, Dallas, Boston and Chicago, Los Angeles, San Francisco,
Phoenix, Salt Lake City, Denver, Miami, and Pittsburgh markets. With
the additional spectrum and the two new satellites to be launched in
1999, we will expand to Sacramento, Portland, Seattle, Las Vegas, St.
Louis, Minneapolis, and San Diego, as well as offer service to Alaska
and Hawaii. In each of these markets we offer the four network
stations, and in some cities a couple of independents as well. While we
would love to offer even more local signals, we strongly believe our
plan will serve the public interest by offering for the first time to
many consumers in those markets a true choice between our service and
cable. At the same time, while the additional spectrum we propose to
acquire will allow us to serve many more markets, this would not be
possible if DBS distributors were to become subject to unreasonable,
and probably unconstitutional, must-carry obligations.
How many markets we are able to serve will ultimately depend on how
and when must-carry rules are implemented. We believe must-carry if
imposed at all should be pegged to penetration test in each market.
Must-carry should not apply to a satellite provider until it gains a
larger share of the MVPD market.
Of course, we wish we had the capacity to serve all markets and
carry all local stations in each market. As a business, we would never
want to exclude a programming channel that would gain us yet another
subscriber. But even with the additional spectrum, we will not have the
space. On the other hand, we believe that the service we offer will
give the customer enough of a choice to allow consumers to consider us
an adequate substitute to cable. The marketplace will determine whether
we are right but it cannot determine so until the law makes it fully
possible.
shva reform is another critical component to creating competition to
cable
Assuming we are successful in winning approval at the FCC, there is
another key component to DBS's ability to become competitive with
cable. We need you and your colleagues to take legislative action. A
single dish solution is no good if only a small fraction of viewers are
qualified to receive the local channels, as would be the case under
some parties' interpretation of the law. Indeed, EchoStar's ability to
retransmit local signals to customers is currently subject to several
limitations. We wholeheartedly endorse the legislation Senator Hatch
introduced last week that would give DBS a permanent compulsory license
to retransmit local signals. That legislation would also eliminate a
blatantly unfair provision of the current law: that consumers must wait
until 90 days after they have disconnected cable to subscribe to
network signals.
I'd like to take this opportunity to thank you, the members of this
Committee, and the dedicated staff that serves you for all of the hard
work you have done to move legislation forward last year. The Senate
Judiciary Committee, working closely with the Senate Commerce
Committee, made a valiant effort at the end of last session in the face
of the intense competing interests of a number of different industries
and factions within those industries. Early passage of legislation is
more critical than ever for our industry our company.
We respectfully urge you to work with Senator McCain and others on
the Commerce committee on the necessary companion legislation that
would set out the rules for the local into local license.
fair retransmission consent agreements are essential
Our hope is that when we unequivocally win the full-fledged right
to provide local stations to the local market, the stations we seek to
carry in each of these markets will give us retransmission consent
agreements to the extent required. We have been seeking those
agreements with broadcasters nationwide. We believe the broadcaster
has, to the extent required, the right to control over its signal, but
our lack of market power as an industry and a company means
broadcasters have no incentive to give us fair terms. Conversely, the
cable industry's market power translates into great leverage over
whether the broadcasters deal with us enthusiastically or not. In
seeking agreements with the broadcasters, we have had numerous
executives tell us that they would like to give us agreements, but they
have declined because they fear angering the cable companies they deal
with. We urge you in your capacity as antitrust overseers to make sure
there are provisions, in any legislation and all legislation passed,
that will make sure that DBS is able to get retransmission agreements
on terms that are comparable to those enjoyed by cable operators, terms
that are fair and equitable.
distant network signals
While EchoStar hopes to serve close to half the population with its
local-into-local service, consumers who cannot get a signal over the
air from their local broadcast station will continue to rely on distant
network signals. The FCC is scheduled to release guidelines on who can
and cannot receive a signal over the air and we look forward to having
a more clear delineation of who is eligible for distant network signals
and who is not. We believe it is very important for these guidelines to
ensure distant service for every consumer that cannot be confidently
predicted to receive an adequate signal over the air most of the time,
and for every consumer who cannot receive such a signal at the
television set with his/her actual equipment as opposed to an
extravagant antenna system.
program access
Access to programming is the third leg of the stool critical to the
support of our business. Without access--on fair and consistent terms--
to the popular channels that are controlled, produced or otherwise
heavily influenced by cable EchoStar will not have a chance to be
price-competitive with cable. Unfortunately, problems with the conduct
of cable-affiliated vendors show no sign of abating, and the
Commission's enforcement of the program access rules may in fact have
become even weaker than it was.
In the six months since I last testified before Congress, and
shortly after EchoStar and MCI/News Corp. announced this deal,
Speedvision, a cable-affiliated programmer, withdrew its two
programming channels from the DISH network and caused the screens of
23,000 EchoStar subscribers to go dark. Speedvision based its
withdrawal on the pretext that EchoStar breached its contract with
Speedvision. EchoStar has sued Speedvision before the Commission,
requesting access to programming.
In October, the FCC's Cable Services Bureau ruled, in a proceeding
brought by another DBS company, that the cable operator, Comcast was
not subject to the Congressional prohibition on refusal to deal,
following its decision to switch to Congressional prohibition on
refusals to deal, following its decision to switch to terrestrial
transmission of Comcast's valuable Philadelphia sports programming. The
Commission made a perfunctory determination, without much of the
necessary evidence, that Comcast's decision to withhold its
programming, which had been described by Comcast itself as a
``purposeful decision related to competition,'' was a legitimate
business decision, not subject to the program access law. Furthermore,
more than one year after EchoStar had filed a discrimination complaint
against Fox Sports, the Commission dismissed the complaint on the
ground that it was ``time-barred.'' The Bureau's decision chose to
narrow the Commission's rule on the one year statute of limitations and
made it more difficult for competitors to sue on discrimination,
particularly when they cannot know the terms enjoyed by cable
operators.
We hope the Antitrust Subcommittee and staff will continue to keep
a watchful eye on program access violations as DBS continues to grow.
summary
DBS as an industry has to be able to say to potential subscribers
``pull out the cable because we can give you what they can give you.''
We urge you and your colleagues in the house to tell the FCC it
must act quickly on the EchoStar/MCI license transfer so competition to
cable be enhanced this year. We think you should let the consumer
decide whether our local into local service--limited though it is--is a
product that makes DBS an adequate substitute to cable. Where local
signals are not available, customers who cannot get their local
channels off air must continue to receive distant network signals. And
finally, please encourage the FCC to enforce the program access laws so
that the lifeblood of competition, programming, can be offered to
consumers at a price that is comparable to cable.
Thank you again for all of your hard work, and that of your staff,
and for affording me the opportunity to testify before you today.
Senator DeWine. Mr. Anstrom, good morning.
STATEMENT OF DECKER ANSTROM, PRESIDENT, NATIONAL CABLE
TELEVISION ASSOCIATION, WASHINGTON, DC
Mr. Anstrom. Thank you, Mr. Chairman and Senator Kohl. This
morning, I would like to emphasize three points. First, the
video marketplace is increasingly competitive. Second, we do
not object to EchoStar's acquisition of MCI's DBS assets. And
third, as we have said consistently, we do not oppose so-called
local-to-local legislation that would allow DBS companies to
retransmit local broadcast signals and we can agree to a
phased-in ``must carry'' rule in such legislation if there is a
date certain when full ``must carry'' obligations would take
effect. These points are discussed in our formal written
testimony.
At this point, I would like to focus for a minute on the
increasingly competitive nature of the video marketplace.
Today, more than 12.5 million consumers purchase multichannel
video programming from one of cable's competitors. The FCC
reported just a few weeks ago these competitors added nearly
two million customers between June 1997 and June 1998.
DBS, in particular, has rapidly become a competitive
substitute for cable. Last year, DBS companies captured two out
of every three--that is two out of every three--new
multichannel video customers, and earlier this month, DirecTV
and EchoStar predicted they will gain another two million or
more new customers this year, 1999.
This growth, of course, is easily explained. DBS companies
offer many channels. Dish prices have plummeted in 5 years,
from around $700 to as low as zero today in terms of some of
EchoStar's offerings. DBS offers all the most popular cable
networks as well as sports programming, like the NFL game
package, that is not available to cable operators. DBS is
widely marketed. In many areas, it is now marketed and
installed by local phone companies, and DBS prices for
programming are generally comparable with local cable
operators.
All of this led the Department of Justice last year to
reach this conclusion about cable and DBS's relative
multichannel video programming offerings.
While the programming services are delivered via different
technologies, consumers view the services as similar, and to a
large degree, substitutable.
Now, EchoStar's agreement to purchase MCI's assets, along
with DirecTV's acquisition of USSB and PrimeStar, will only
strengthen DBS companies' competitive position.
As I indicated, we do not object to EchoStar's plans, and,
of course, EchoStar already has more than two million customers
and recently struck a major new alliance with Microsoft.
EchoStar's MCI deal will increase its channel capacity
dramatically and make EchoStar even more competitive with cable
companies, as the Department of Justice just recently
concluded. Interestingly, Justice was quite clear that this
enhanced local competition will occur even if EchoStar does not
begin to retransmit local broadcast signals right away.
But I want to emphasize again, Mr. Chairman and Senator
Kohl, we agree with the kind of procompetitive local-to-local
satellite legislation the Judiciary and Commerce Committees are
beginning to consider that would stimulate even more
competition in the video marketplace. That is the right
approach that will best serve consumers.
Cable companies are already responding to this increased
competition by increasing channel capacity, by upgrading
technology, and by improving customer service. As the
Department of Justice again observed just last month,
In short, the views and actions of consumers, statements
and strategic actions by cable firms, and the views of other
industry participants convincingly demonstrated that DBS and
cable compete against each other in local markets throughout
the country.
Now, in addition to DBS, as you all know, telephone
companies, utilities, and others are also entering the video
marketplace with no legislative or regulatory barriers to slow
their development. And, of course, fully 25 percent or more of
American homes rely on free over-the-air television and do not
subscribe to any multichannel service.
My fundamental point is this morning, there is no monopoly.
This is a vibrant, increasingly competitive marketplace. We are
prepared to compete in this marketplace. We ask for no special
advantages. We will, however, strongly oppose new intrusive
government regulatory micromanagement that will surely stifle
investment and slow innovation.
So in conclusion, I want to reaffirm what I believe we have
demonstrated for the past several years, that we in cable are
prepared to work constructively with you and other Members in
Congress on procompetitive measures that will encourage
companies to compete in the marketplace for consumers' loyalty.
Thank you very much.
Senator DeWine. Mr. Anstrom, thank you very much.
[The prepared statement of Mr. Anstrom follows:]
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Senator DeWine. Mr. Kimmelman, welcome back.
STATEMENT OF GENE KIMMELMAN, CO-DIRECTOR, WASHINGTON OFFICE,
CONSUMERS UNION, WASHINGTON, DC
Mr. Kimmelman. Thank you. Thank you, Mr. Chairman. I want
to thank you and Senator Kohl, Chairman Hatch, and Senators
Leahy and McCain for moving forward on legislation to reform
the Satellite Home Viewer Act to begin to put satellite on
equal footing with the cable industry in the law, and I
appreciate your efforts to work together with the Commerce
Committee. This is a very important piece of legislation and it
needs speedy consideration.
Just listening to Decker, I think we have run out of things
to agree on real fast here with your introduction, Senator
Kohl. [Laughter.]
As you well know, I do not have my tricks here today on
consolidation, but from my many appearances here, it is very
unlikely for you to see the consumer movement come before you
and say it is a good idea to concentrate a market. It may
surprise you to see our points of view on concentrating
ownership in the satellite industry involving the EchoStar
transaction with MCI and News Corp's assets and the DirecTV
transaction pending with PrimeStar, but there is a very simple
reason for that. We have no choice.
This is a result of numerous policy making mistakes, I
believe, by the Congress and regulators in how the cable
industry has been dealt with over the years, starting with the
mistake of not making cable the equivalent of a telephone
common carrier, subject to the same rules of separating content
from transmission, which will soon come back to haunt us again
in the online services area, so stay tuned, and the failed
effort to deregulate cables rates in a monopolistic situation,
first in 1984 when rates shot up, and again through the 1996
Act when we have seen rates shoot up again. Rates are up 21
percent since passage of that Act.
I guess, based on Decker's comments, we do not need to be
here today, but given that where there is another wire
competing with a cable company, on average, the FCC finds that
consumers are paying about 10 percent less, it is sort of hard
to understand these 21 percent rate increases as reflecting a
truly competitive market. I would suggest they do not.
So with these policy mistakes, we are left with little
choice other than to say that the potential dangers of
concentrating through consolidation ownership of satellite
assets is substantially less than the potential benefit of
bringing competition to an adjacent market, the cable market,
if the satellite companies will truly compete on price and if
Congress will move swiftly to pass your legislation and
companion legislation that begins to create common rules, or
more similar rules under copyright law and similar
communications laws for cable companies and satellite and other
potential challengers.
But I do not believe that is enough, Mr. Chairman. I think
we have a problem here that will not go away overnight. Mr.
Ergen has made tremendous efforts to try to reduce the price
gap between the cost of buying a dish, installing a dish,
having a second antenna for local signals. Now, hopefully, at
least in some communities, through this transaction, it could
be integrated through one dish. But it does not compare in
price to the average cable installation for the first set and
the second set that most consumers want and need.
It is attractive to consumers at the higher end of the
market who want a lot of channels, who want specialized
programming like sports and movies. That is where it has been
most successful. It has not been successful at constraining
cable on price for the most popular programming services. It is
not a direct substitute--I just turn you to marketplace
statistics--and we want it to be.
Therefore, I urge you to move quickly with your legislation
to speedily combine efforts with the Commerce Committee to make
sure satellite has every opportunity to move forward, and in
conjunction with these transactions, I think we need more. We
need to exert pressure on the satellite industry to offer
consumers a price competitive package with cable, to look at
the installation costs, the dish costs, combine it together,
take a little more risk--they do a lot already--and provide an
upfront price that is price competitive with cable and a
package of programming that is price competitive, and I think
if they do that and you see them offering what other wire line
carriers have offered, consumers could get the 10 percent price
cut that they have seen from other forms of competition. Thank
you.
[The prepared statement of Mr. Kimmelman follows:]
Prepared Statement of Gene Kimmelman
Consumers Union \1\ believes that the need to promote more
competition in the cable industry could not be more obvious. Cable
rates have risen about 21 percent since passage of the 1996
Telecommunications Act \2\ and continue to climb three to four times
faster than the rate of inflation (see Attachment A). Even the chairman
of the Federal Communications Commission (FCC) admits that rates are
going up excessively under his agency's ``liberal''--in other words,
meaningless--regulatory structure (see Attachment B). As a
Congressionally mandated prohibition on regulating the most popular
cable channels approaches (March 31, 1999),\3\ now is the time to act.
As the following massage we received from a cable consumer indicates,
people are ticked off:
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\1\ Consumers Union is a nonprofit membership organization
chartered in 1936 under laws of the State of New York to provide
consumers with information, education and counsel about good, services,
health, and personal finance; and to initiate and cooperate with
individual and group efforts to maintain and enhance the quality of
life for consumers. Consumers Union's income is solely derived from the
sale of Consumer Reports, its other publications and from noncommercial
contributions, grants and fees. In addition to reports on consumers
Union's own product testing, Consumer Reports with approximately 4.5
million paid circulation, regularly, carries articles on health,
product safety, marketplace economics and legislative, judicial and
regulatory actions which affect consumer welfare. Consumers Union's
publications carry no advertising and receive no commercial support.
\2\ Public Law 104-104, 110 Stat. 56 (1996).
\3\ 47 U.S.C. Sec. 543 (c)(4), Public Law 104-104 Section 301.
What I find truly amazing about the cable industry,'' says
Joseph Verduci of Oakland, California, ``is that there is no
real competition. Satellite TV is still priced out of the reach
of most consumers, and the choice of cable providers is limited
to the town's decision board that they should be the sole cable
---------------------------------------------------------------------------
providers for that town.''
So far, despite rapid growth at the high end of the market,
satellite television has failed to offer true price competition to
cable. With up-front costs (for the satellite dish and related
installation charges) running three to five times the cost of
installing cable, and lacking carriage of local broadcast channels,
satellite TV has been unable to discipline pricing for the most popular
cable services.
In contrast, FCC data show that where cable faces head-to-head
competition from another transmission ``wire,'' cable rates are about
10 percent lower than where cable faces only satellite TV
challenges.\4\
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\4\ In the Matter of Annual Assessment of the Status of Competition
in Markets for the delivery of Video Programming, FIFTH ANNUAL REPORT,
CS Dkt. No. 98-102, Dec. 23, 1998, at F-4, footnote 18.
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The failure of federal policy to ensure reasonable cable rates
makes it necessary for policymakers to devote greater attention to
promoting increased competition to the cable industry. Legislation that
puts cable's potential competitors on the same legal footing as cable
companies, and appropriate antitrust/regulatory conditioning of
satellite mergers, could open the door to more choice and lower prices
in cable TV market.
Recent deals that combine Echostar Communications Corporation's
Direct Broadcast Satellite (DBS) business with DBS facilities owned by
News Corporation and MCI/WorldCom, and DIRECTV's combination with
United States Satellite Broadcasting and PRIMESTAR, dramatically
consolidate the satellite industry. However, these deals also could
offer consumers more choice and lower prices if the consolidated
satellite companies more aggressively compete against cable.
We believe it is critical to both enable and require these
satellite companies to become head-to-head competitors with cable for
the core TV services that consumers watch the most. This requires:
Passage of legislation, like Senator Hatch's S. 247, the
``Copyright Compulsory License Improvement Act'' and companion
proposals, which begin to give satellite and other potential
competitors comparable treatment under our nation's copyright
laws;
Expansion of previous laws designed to hold down cable rates
and make popular TV channels available to cable's potential
competitors;
Aggressive regulatory oversight of potential competitor's
access to cable-owned programming or programming that cable
companies exert monopolistic influenced over; and
Strong antitrust/regulatory review of satellite mergers to
ensure that satellite companies continue to reduce up-front
costs and eliminate other market impediments to direct price
competition with the cable industry.
Because of the highly concentrated nature of the cable marketplace,
policies designed to foster increased competition throughout the market
require giving potential competitors breathing room as they seek to
enter the market and expand their businesses. The two largest cable
companies, Telecommunications Inc. (TCI) and Time Warner, own a
substantial stake in cable systems serving about one-half of all cable
customers, and TCI has an ownership stake in 67 national programming
channels while Time Warner has a stake in 30 national channels.\5\ In
addition TCI owns about 9 percent of Time Warner. Most importantly, 29
of the 50 most subscribed-to channels, and nine of the top 15 prime-
time watched channels are substantially owned by the largest cable
companies.\6\
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\5\ FIFTH ANNUAL REPORT, op cit, at Appendixes C and D.
\6\ Id.
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Beginning with S. 247 and other pro-competitive measures, Congress
can ensure that satellite and other potential cable competitors have an
opportunity to challenge cable's dominance and gain a large enough
market presence to offer a mass-market alternative to cable.
Unfortunately, experience under the 1996 Telecom Act and its
predecessor, the 1992 Cable Act \7\ demonstrates that market entry does
not always translate into mass-market competition. The satellite TV
industry has been enormously successful by focusing on high-end
consumers who are willing (and able) to pay hundreds of dollars for a
dish, want hundreds of channels, desire specialized programming (e.g.,
sports, movies) and are interested in higher quality (digital) signals.
While recent satellite industry efforts to reduce up-front cast to
consumers are promising, they are not likely to promote rapid price
competition with cable.
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\7\ Public Law 102-385, 106 Stat. 1460 (1992).
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Consumers Union therefore believes that, as policymakers open the
cable market to more competition from satellite TV providers, the
satellite companies must be responsive to the public's demand for
competition to the most popular cable offerings. Efforts to promote
price competition by reducing up-front costs and adding local broadcast
signals to popular cable programming packages must be encouraged, to
jump-start mass market rivalry with cable. Only when satellite TV
offers the vast majority of cable subscribers an alternative that meets
their needs will cable companies be forced to bring down prices.
Immediate, forceful public policy measures designed to promote
mass-market competition to the cable industry and block cable's
monopolistic practices can offer consumers relief from spiraling cable
rates. It is time for Congress, antitrust and regulatory bodies to
ensure that potential competitors like satellite TV companies have a
fair chance to compete on price with the cable television industry.
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[GRAPHIC] [TIFF OMITTED] T7581.019
Senator DeWine. Let me start with Mr. Anstrom. Mr. Anstrom,
do you want to respond to Mr. Kimmelman's comments,
particularly in the area of competition? We see continued
increase. Mr. Ergen is getting a bigger percent of the market,
or at least his subscribers are significantly going up, and yet
cable rates are not going down. Do you want to respond to that?
Mr. Anstrom. Yes, Mr. Chairman. I mean, I think that what
we see going on in the cable marketplace is what we see in
other markets from time to time, which is that we are steadily
increasing the quality of our product, frankly, to compete with
what Mr. Ergen and DirecTV offer.
Currently, if one looks at the offerings of the direct
broadcast satellite companies offering 100 or more channels,
the average cable system has 61 channels. They have digital
technology, good pictures. It is a very competitive product.
And what we have been doing since the 1996 Act is investing
more than $20 billion in our infrastructure to upgrade, offer
more channels, more reliability, better picture quality. We
have been making substantial investments in programming. We
have been making substantial investments in better people and
better customer service. All that costs money, and those costs
are reflected in our prices.
The important thing, I think, as the FCC observed in its
competition report just a few weeks ago, is that those
investments are reflecting higher value for our customers. How
do we know that? First of all, there has been a major
transition going on in terms of how people vote with their
eyeballs every day. People are now voting for cable networks
and cable programming over broadcast programming. That is a
direct reflection of the substantial investments that we are
making in that program. And people, notwithstanding the
competition we have from Mr. Ergen and others, are also
continuing to subscribe to cable companies. So we think they
are voting with their dollars and their eyeballs for the
investments we are making.
One other point, if I might, Mr. Chairman. If one looks at
the range of competitive offerings that are out there, whether
from an Ameritech or a GTE or an EchoStar or a DirecTV, you
will find that our prices are very much in the midrange of
those offerings, and as much as Mr. Kimmelman maybe does not
want to acknowledge it, the fact is that it may just be that
the price that we are charging is a very competitive price. We
really have not known until these competitors have emerged, but
the facts are that our prices are very competitive and
comparable to all of our competitors out there in the
marketplace and we think offering higher value over the last
several years.
Senator DeWine. Mr. Ergen, do you want to respond to Mr.
Kimmelman's comments that, at least so far, you have not been
able to compete at the lower end of the spectrum or at the
lower end of the cost, in other words, basically so that you
all are providing a service at the higher end, if I have higher
income and I want many, many choices. What about at the other
end?
Maybe you could take me through an example and tell me, if
I want some of your services but I want them on the lower end,
I do not want to spend a lot of money, what is out there? What
can you give me today? Let us start with today, what you can
give me, and then you can project that into the future if this
bill passes and other things happen.
Mr. Ergen. Well, Mr. Kimmelman is partly right. I think
that DBS subscribers tend to be a little higher-income, tend to
average a little older, but the reason that we have not gotten
more on the low end, on the middle-income and lower-income
individuals, again, in my opinion, has been our inability to
offer local network broadcast signals. It has not been that we
do not have a compelling offering.
For example, we do offer a system, the top 40 channels, the
top 40 cable channels for $19 a month. That would compare very
favorably with the average cable bill. Maybe this is wrong, but
it is probably $28, $29, $30, so it is considerably lower.
Senator DeWine. How does that work? I get my choice of 40,
or how does that work? Would you give me a package?
Mr. Ergen. No, we would give you--in that particular
package, it is the top 40 rated cable channels. The problem is,
we do not have ABC, NBC, CBS, and FOX and you typically would
watch that two-thirds of the time or 60 percent of the time. So
if we do not give you what you are watching two-thirds of the
time, no matter what our price is on the low end, we are not
competitive. It does not make sense to charge you $20 for
channels that you watch 30 percent of the time and not offer
you--and cable is able to offer the network signal.
So with this legislation that we are all talking about from
the committees, from Senator McCain and Senator Hatch's
committee that you guys have supported, we will be able to
offer those local broadcast stations in the majority of the
country on a single dish. That will allow us, then, to compete,
and then we do not have a problem with the cable industry from
a regulation point of view as far as we are concerned, because
if we can compete on a level playing field, the marketplace
will determine the winners and losers. We may be a winner or we
may be a loser, but at least the marketplace will decide it and
not some antiquated laws, legislation that never anticipated
that a satellite could actually deliver broadcast signals.
Senator DeWine. Explain to me how the ``must carry''
requirement is going to work. I know this legislation is a work
in progress, but you know what has been introduced. We have a
phase-in. How is that going to impact, let us say, the consumer
in Cedarville Township, Greene County, OH, where I live?
Basically most of the township is a rural area where we cannot
get cable. You are the option, and today, of course, many
people are not, as you point out, getting your services, or
comparable service, because we cannot get the Dayton TV market.
We are in the Dayton TV market. Where I live, I am 20 miles
from Dayton, and I am probably 50 miles from Columbus and
probably 60 miles from Cincinnati. How is that going to impact
me, people who live in that township?
Mr. Ergen. Well, the ``must carry'' is where I think the
Congress has to balance the very problem that you just
mentioned for a rural constituent versus the rights of a local
broadcaster. If we had ``must carry'' today for satellite, for
example, we would be able to carry about five cities on
satellite from an economic point of view.
Senator DeWine. Five cities nationwide?
Mr. Ergen. Nationwide. Today, without ``must carry'', we
can do about 20 cities with the current capacity that we have.
So we can----
Senator DeWine. Wait a minute. Say that again.
Mr. Ergen. Without ``must carry'', under the current law,
we could do about 20 cities with the current capacity that
EchoStar has for satellite. If we had ``must carry'', we would
only be able to do five or six cities. So you have to balance
our ability to go to more of the population. It makes no sense
to us today to carry multiple home shopping channels, multiple
religious stations that we carry on a national basis but do not
have local content, do not have local sports, do not have local
news and weather just to satisfy the needs of the local
broadcasters.
Having said that, obviously, a local broadcaster has an
investment in the community. They certainly have long, hard-
fought battles with cable, where cable opposed the ``must
carry'' and certainly opposes digital ``must carry''. So you
balance it out, and I think the compromise that we can live
with is a phased-in approach that would be 3 years from the
date of enaction so that we can build a new technology, so-
called spot beam satellite, where we can actually reuse
frequencies and we can then put spot beams down on every city,
and in doing so, then with technology, and it takes about 3
years to build this technology, we can actually go out and
cover the vast majority of the country with ``must carry'' and
satisfy most people and give them true competition.
Senator DeWine. So again, as a practical matter, if I am in
Toledo, OH, let us say, and I am in a rural area and I want to
get your service, or if I am not in a rural area and I want to
get your service, wherever I am, are you telling me that in 3
years, you are going to be able to deliver to me in Toledo, OH,
my local Toledo stations?
Mr. Ergen. We think that technology exists. We might be
able to start as soon as this legislation is enacted with
Cleveland, obviously a major city, one of the top 20 cities. We
could start with Cleveland.
Senator DeWine. Right.
Mr. Ergen. But we could not get to Toledo. Toledo might be
the 50th or 60th or 70th biggest city. We will not have the
capacity to do it until we can build a spot beam satellite.
Senator DeWine. OK; but what is your best guess about the
time to do that? I mean, you are the expert. How long do you
think that that is going to take, assuming the bill passes,
assuming that you progress on your technology, just 3 years? I
mean, in 3 years, you will be able to do it?
Mr. Ergen. In my opinion, in my best guess, it will take 3
years to build and launch a so-called spot beam satellite, and
our company is looking into that. There is another company
called Capital Broadcasting, which you may be aware also has a
business plan with the support of many of the broadcasters to
do a very similar thing----
Senator DeWine. This is a separate satellite?
Mr. Ergen. A separate satellite, and Capital Broadcasting
would launch a satellite not only for EchoStar but for also
DirecTV, so the entire satellite industry could use their
satellite for the so-called spot beam. So that is a technology
cure. It is one of those things where it is not a linear
progression, where you can just add more channels. It happens
overnight, where you can perhaps do 20 cities without a ``must
carry'' with the capacity we have today and then when the spot
beam satellite is launched, you suddenly can leap-frog to maybe
60 or 70 cities.
Senator DeWine. So in Ohio, for example, you are saying the
first phase of this, without the satellite, you might not have
any city. You might have Cleveland.
Mr. Ergen. In Ohio, in my opinion, Cleveland would qualify
as one of the top 20 cities, but Columbus or Cincinnati would
not make it.
Senator DeWine. The rest of them would not, so we are
looking at 3 years, probably, until we have that option.
Mr. Ergen. That is correct. I think that our numbers are
that with the top 20 cities, we can do about 50 percent of the
country, so about 50 percent of the homes----
Senator DeWine. Population.
Mr. Ergen [continuing]. The population homes, we could get
immediate competition to cable on a fair and equitable basis.
It would take another 3 years to go out and do the rest of the
country.
Senator DeWine. What are your marketing studies, if you are
willing to share them with us, or your best estimate as far as
what will happen once you can actually go in and offer that
local station to me as a consumer? I mean, it seems to me, just
as a consumer, that it would make a phenomenal difference. I
just know a lot of people who say, yes, if I could--they do not
go into all the technology, and they do not know what the laws
are, but they say, I do not want to purchase this technology
because I cannot get my local station, and I have got to switch
back and forth. I have got to have an aerial, or I have got to
have something. I do not want to fool with it, so I just won't
buy it. It seems to me it is going to make a phenomenal
difference once you are able to compete on that basis with that
local as part of your total package.
Mr. Ergen. I have not personally done a marketing study,
but we have certainly seen the marketing studies which show 8
out of 10 people who look at a satellite dish do not buy it
because it cannot get local. In my 18 years of experience in
this industry where I have talked to consumers day in and day
out, whether it be in a taxicab, an airplane, in a restaurant,
the conversation always, when I say, why do you not own a dish,
it inevitably starts out with, because you do not give me my
local signals. There may be other reasons, but that is always
the number one reason.
If we can eliminate that as an obstacle, then we have a
fair shot at providing competition to cable, and I think cable,
obviously, as Mr. Anstrom has said, is getting better. They
have cable modems. They will offer new services and true
competition will take place and I think the prices will come
down.
Senator DeWine. Before I turn to Senator Kohl, let me ask
one last question and it goes back to something that Mr.
Kimmelman said in his testimony. What is my startup cost today?
What does it cost if I want your services and I say, look, I
want to get by as cheaply as I can. Put me in business. What is
my cost?
Mr. Ergen. The absolute least expensive system from us
today is the whole entire system is free. That would assume
that you would subscribe to our America's top 100 channels and
two of our premium services, so you would agree to subscribe
for $48 a month for 1 year. That would be the least up-front
cost.
If you decided to subscribe to our lowest package, which is
$15 a month, you pick any ten channels for $15----
Senator DeWine. Fifteen?
Mr. Ergen [continuing]. That system starts at $149.
Senator DeWine. So I can walk in, give you $149, buy it for
$15 a month.
Mr. Ergen. That is right.
Senator DeWine. That is your cheap end today.
Mr. Ergen. That is correct. In fact, I take that back. You
could actually buy--in the 13 cities where we do local today,
you could actually buy the local service for $4.99 and $149 for
the complete system. That is only in 13 cities today that that
is offered.
Senator DeWine. Now, on your low option, do I choose my 10
or do you choose the 10?
Mr. Ergen. No, you choose your 10.
Senator DeWine. I choose my 10.
Senator Kohl.
Senator Kohl. Thank you. A question for all of you. Let us
say Congress passed the Satellite Home Viewer legislation that
permits local-to-local broadcasting by satellite companies and
includes, let us say, a 3-year phase-in of ``must carry.'' Mr.
Ergen, overall, would that be good for consumers?
Mr. Ergen. I think absolutely. Again, I do not know what
consumers will choose, but we are making our bet with $3
billion of our own money that at least a fair number of those
consumers will choose the satellite. The picture quality, the
audio quality, the on-screen interactive guide, and the number
of channels and choice of those channels and price that we
charge, they will choose that over their cable company.
Senator Kohl. Mr. Anstrom, did you say before you support
it?
Mr. Anstrom. Senator Kohl, to respond to both of your
questions, I think there is no doubt that legislation would
strengthen both EchoStar and DirecTV's competitive position. I
think that creates the right kind of incentive in the
marketplace. We can agree with that legislation, yes, sir.
Senator Kohl. But why would you agree with it? If it
strengthens your competition and makes your life more
difficult, why would you agree with it?
Mr. Anstrom. Senator, we have taken, beginning in 1994, and
maybe this comes with having learned the lessons of the 1992
Cable Act in terms of this industry's behavior and posture with
the Congress, we have taken this lesson to heart, which is that
we believe that having the Government managing every detail of
our business has very predictable results that have been
demonstrated in the marketplace. It will affect investment,
innovation, our ability to serve our customers. We very much
would hope that the Government will reduce its role in the
video marketplace.
If we are going to come and ask you to keep the government
out of managing our business, we cannot come to you and say,
but keep our competitors shackled. We took that position in the
1996 Act in which we agreed to allow the phone companies on day
one, no 14-point checklist, no FCC rules, no barriers when
competing with us. We supported that legislation. We will
support this legislation. We believe in the marketplace,
Senator Kohl.
Senator Kohl. OK; Mr. Kimmelman, do you agree that this
will help create competition for cable and that robust
satellite competition would help to discipline cable rates?
Mr. Kimmelman. Given that cable rates are going up almost
four times faster than inflation, there is no question about
the fact this legislation will help. But I want to reflect on
how much it would help based on what you just heard from my
colleagues.
Even if I leave the price issue aside, which I do not think
is insignificant, and take Mr. Ergen's comments, I think he has
done tremendous things to push his industry to bring cost down.
But we are talking about from date of enactment beginning with
20 cities to see some competition with local broadcast signals
coming in, and then we are talking about 3 years to launch, 4
years, maybe 5 years to be not too optimistic, possibly, before
everyone else in Dayton and surrounding areas get this option.
That is a generation-plus in technology in this area. That is a
long time of cable rate increases in the interim that people
face.
So it is definitely movement in the right direction, but it
is not all there. When 80 percent of people in the surveys that
Charlie mentioned talk about--these are not people who are
sitting on the couch responding to a survey. These are people
who went into Radio Shack, Circuit City, whatever, looking for
a dish and then did not buy it. It may be mostly because of
local broadcast signals. I suggest it is partly price, and the
best deal you can get is still $149 compared to a cable
installation of, I think, on average around $40 now, and then a
small channel lineup.
It is tremendous improvement over where satellite was and
it should be commended for the entrepreneurial zeal to bring
these prices down, but we have got a ways to go. It is still
quite a bit more. And when you get to the second hook-up and
think about how many people have two TV sets now--they do not
want multichannel video on just one, they want it on two--the
price differential is even more enormous. We have a way to go.
One final comment. Mr. Anstrom reminded me that I should
maybe go back to the syllogism of your former colleague,
Senator Bumpers, quoting Mencken. If they say it is not money,
it is money. If they really want competition, that means they
do not have competition. I mean, the lack of opposition from
the cable industry to telephone company entry was pretty much
signed and sealed with court decisions prior to the 1996 Act.
I think the desire to have regulation out of the way is
understandable, but the best of all worlds for the cable
industry is a regulatory environment in which no one is
controlling their prices and a competitive environment which is
not price competing against them.
I suggest that is about where we are today, and so I do not
think they are very unhappy with it. But I do not think they
are really expressing a true zeal for head-to-head price
competition because whatever Decker says about where he thinks
his prices lie, the FCC data shows that where there are two
wires there, the prices of his company go down and the
challenger's are lower, and that is the deal we want for
consumers.
Mr. Ergen. By the way, I think that--I mean, I agree with
Mr. Kimmelman except that we do not need two wires. It is
obviously OK, and certainly we do not care if people overbuild,
but the fact of the matter is that if we have two DBS
providers, that essentially, from a practical point, have a
wire to every home in the United States today. So we actually
have three wires to every home in the United States for video,
one cable wire and we have two DBS providers that have wires to
those homes, even though we do it in a wireless manner.
The problem is, our wires do not carry your network signals
and theirs do and that is the problem. It has been the problem.
I have 18 years' experience. I would love to find out what
happens when we can actually do this on the same competitive
field that cable can. It is my personal opinion and my personal
money that says we can be competitive and that cable can be
deregulated under those circumstances.
Mr. Anstrom. Senator Kohl, I do not want to belabor this
discussion, but if I could just add a point here, I think,
again, to underscore the point you made, there is no doubt that
if you all passed the Satellite Home Viewer Act and authorized
DBS companies to retransmit local broadcast signals, that DBS
companies will become more competitive.
But I think it is very important to step back and recognize
what is already happening in this marketplace. There have been
12.5 million customers who have already subscribed to one of
our competitors. In the last year, more than two million people
picked DBS. Two of every three new multichannel homes last year
picked DBS, not cable. Mr. Ergen and Mr. Hartenstein from
DirecTV predict they will add another two million new customers
in 1999, presumably whether you pass the local-to-local bill or
not. The Department of Justice, with all due respect to Mr.
Kimmelman, has said quite plainly that DBS is a substitutable
product for cable.
So this is already a very competitive marketplace. There is
no monopoly here, and I think that it is very important to
recognize that this marketplace will become more competitive,
but it already has all the manifestations of a marketplace in
which consumers have lots of choices today that they did not
have 5 years ago.
Senator Kohl. As you all know, a main reason for enacting
the Satellite Home Viewer bill is for the local satellite
companies to do local-to-local broadcasting. Mr. Ergen,
assuming a version of Satellite Home Viewer passes, in how many
markets will you be able to provide local-to-local service and
how soon?
Mr. Ergen. Well, as soon as the FCC approves our
transaction of the acquisition of News Corp./MCI assets, then
we can launch, and we are ready to launch as soon as they
approve that transaction, and so it takes about 2 months after
you launch for your satellite to be ready, so about 2 months
after we launch, and we launch probably a month after the FCC
approves it, then we are able to offer local-to-local service
on a single dish in up to 20 markets, assuming we have a
phased-in ``must carry''. So about half the country, if we
could get FCC approval in the next 2 months, we could be up and
operational by the end of this summer. It will take about 3
more years to, in my opinion, to provide competition to the
other part from our company's perspective.
Now, realize DirecTV, another DBS provider out there, is
also acquiring additional spectrum with their USSB acquisition
and potentially a PrimeStar acquisition. I cannot speak for
them. They may also be able to pick up part of the country.
Senator Kohl. At the very least, should Congress get rid of
``must carry'' for home shopping networks?
Mr. Ergen. I will jump on that one. Yes. I think it is
ridiculous that you would have ``must carry'' to broadcast the
same signals, 20 home shopping channels, and then take away a
channel from a very deserving local broadcaster in another
city. That, to me, seems ridiculous.
The Home Shopping Channel--I used to own a TV station in
Denver. I carried the Home Shopping Channel. I carried no local
commercials. I had no local news. I had no local presence. I
just carried advertisements, the Home Shopping Channel 24 hours
a day and they paid me an hourly rate to do that and it was
very profitable for me. But I already carried the Home Shopping
Channel on the dish network nationwide. I carried that exact
same signal to all 20 cities that I would be doing local, so it
makes no sense.
Senator Kohl. Just before I turn it back to Senator DeWine,
did you make a comment or suggest that sometimes these dishes
are at no cost? Did you say that, Mr. Anstrom?
Mr. Anstrom. That is correct. We have a plan where you can
actually, if you sign up for 1 year to our top 100 channels,
along with two premium channels, we actually provide the
satellite system for free, and I know that PrimeStar in the
past has leased the satellite system to you so there was no
cost up front.
Mr. Kimmelman. And that means you pay $600.
Mr. Anstrom. Well, it makes you competitive with cable in
terms of the $40 installation fee, on average. That is about
what it costs up front if you are a credit-worthy customer and
if you are willing to subscribe to a certain amount of
programming.
Mr. Kimmelman. Senator Kohl, I am not critical here of
this. This is an important step forward. But, I mean, look at
what is happening here. If we really want to get a straight
choice for people, you are saying you have to dig in--50
percent of consumers do not have $1,000 in their bank account,
50 percent, an astounding number. To dig in and find $600 up
front, even to get a dish for free, is hard.
Now, we are talking about multibillion dollar transactions
here, and I am not saying it is Mr. Ergen's responsibility. I
am just suggesting that as we go through a policy trade-off
process here of saying we are going to consolidate power in the
satellite industry, a lot of public policy concerns get traded
off, ``must carry'' gets phased in, a lot of values get
compromised.
Would it not be nice if we could find some set of
entrepreneurs who would take that risk up front and say, for
about the price that you pay up front for cable installation,
we will offer you the dish, the installation, of course
incumbent upon Congress to make sure local broadcast signals
are available, spread it out over time so that the price you
are looking at, this $15 a month or this $20 for 40 channels
really is head-on the same alternative you can look at for
cable, that you do not have to go deep into your bank account
before you ever get to that price. That is what I am looking
for, and I think that is what would really spur competition for
quality, choice, and price.
Senator DeWine. Mr. Ergen, your written testimony mentions
that program access is one of your concerns. Although this
hearing is not meant to focus specifically on that particular
issue, it is interesting that you raise it because some people
in the cable industry have expressed concern about the
possibility that FOX will provide certain programming, such as
sports programming, to EchoStar and not provide it to certain
cable systems. I know that you have a nonexclusive agreement
with FOX News Channel now. Do you have any plans to make any
exclusive arrangements with FOX?
Mr. Ergen. No, we do not. In fact, we only have one
exclusive channel on all of our channels, 250 channels. We have
something called Charlie Chat, where I actually take questions
from my customers once a week, and that is exclusive, but----
Senator DeWine. Charlie Chat?
Mr. Ergen. It is called Charlie Chat. We let our customers
call in and ask any questions.
Senator DeWine. Is that a lot of fun?
Mr. Ergen. That is a lot of fun. [Laughter.]
That is one reason we know local legislation, and I am sure
you have heard from some of our customers from time to time in
terms of phone calls or letters because they let--we are not
real sophisticated as a company. We do not have a lot of time
and money to spend on very sophisticated market studies, but we
do talk to our customers, listen to our customers, read our
mail, and they tell us what they want, and they love satellite
television, they love the quality, and they just want their
local channels.
Senator DeWine. Mr. Anstrom, Mr. Ergen and others are
concerned that cable companies may use their market position to
negotiate exclusive deals with networks so that companies such
as EchoStar are prevented from retransmitting broadcast
signals. First, let me just ask you, do you think that is a
reasonable concern, and second, does the cable industry as a
whole have any position on exclusive contracts with broadcast
stations?
Mr. Anstrom. Let me say that I read Mr. Ergen's testimony
and I was a little puzzled by his statement. First of all, I
cannot look into the future that clear, but we have FCC rules
currently in place that specifically prohibit a broadcaster
from having an exclusive retransmission consent agreement.
Second, I think, as this subcommittee knows, the experience
certainly that other competitors with the cable industry have
had, for example, Ameritech or other companies, certainly they
have had no trouble in getting arrangements with broadcasters
to retransmit their carriage. So I would assume that once the
DBS industry is lawfully allowed to retransmit local broadcast
signals, that broadcasters would want their signals to be
available to as many homes as possible. That, after all, is how
the broadcaster maximizes their advertising revenue. But as a
specific policy question, the FCC rules prohibit exclusive
retransmission consent agreements.
Senator DeWine. Mr. Kimmelman?
Mr. Kimmelman. I think Decker is right, but I think Mr.
Ergen has a very valid concern here for the very reason that
Decker just stated. Because local broadcasting is this valuable
to a potential competitor, to cable, with the retransmission
arrangements that already exist between broadcast and cable and
arrangements related to carrying broadcast network channels,
MSNBC, CNBC, and the like, I think it is a valid concern that
there could be a financial basis for an exclusive arrangement,
in the top 20 cities, for example, that are obviously crucial
to EchoStar's business.
So I would suggest in your legislative deliberations that
you would look to basically codify this FCC rule. I will tell
you that I think the FCC rule is fine except I cannot figure
where it comes from legally. Maybe the Commission has a valid
base for it, but I have not found it statutorily. So I think if
it is fine with the cable industry, if they have no problem
with it, let us make sure the FCC does have the full legal
basis. We certainly have seen plenty of litigation around
telecommunications in terms of what is and is not legal and I
would hate to see this one end up in court.
Mr. Ergen. Our concern there----
Senator DeWine. Mr. Ergen.
Mr. Ergen [continuing]. Just to follow up, is that while
the FCC does prevent nonexclusive, they do not specifically say
they have to sell it to a DBS provider. So what the cable
industry has done in the past is they may find a wireless
provider and sell it to them and say, see, we are not
exclusive.
They do this in Philadelphia, as a matter of fact, with the
sports channel in Philadelphia. A company called Comcast
decided to buy the sports teams in Philadelphia, then decided
that they would take the signal off of a satellite where the
law required them to sell it to DBS operators like DirecTV and
EchoStar and then they said, we are not exclusive. We sell to a
couple of wireless people. Of course, I think they have since
gone out of business in Philadelphia. They now are exclusive,
from a practical point of view, and do not sell to DBS
operators, and, in fact, in FCC comments have said they did it
for competitive reasons now.
So pardon me if I do not have a little skepticism of Mr.
Anstrom's good naturedness here today. We know that cable will,
in fact--this is America. They are smart people. They are very
smart. They have built their businesses. They are not going to
do things they do not have to do to help their competitors.
Senator DeWine. Mr. Anstrom.
Mr. Anstrom. Two things just for the record. First of all,
the FCC had a very different view of the facts in Philadelphia.
In fact, just yesterday, they ruled in favor of Comcast and
against EchoStar.
And second, just again to come back to the question about
the broadcasters and the retransmission consent rights, those
are decisions broadcasters make, not us, in terms of their
programming, and again, there is a rule on the books, and
beyond that, I certainly hope that Mr. Ergen and Mr. Kimmelman
are not suggesting that this Congress should extend the
regulatory authority of the Congress and, for example, begin
regulating the contracts of CBS affiliates. Maybe that is where
they want to go, but I suspect the absent witness at the table
today would have some things to say about that.
Mr. Kimmelman. I am just curious if Mr. Anstrom would state
for the record that the cable industry believes that those FCC
rules are fully statutorily supported.
Mr. Anstrom. I am not a lawyer, but we have not challenged
those rules in court. They have been on the books since 1993,
as you know.
Mr. Kimmelman. I think the ruling yesterday vis-a-vis
Comcast is a legitimate ruling under the telecommunications
law, because also the FCC has stated an interest in wanting to
make sure programming is broadly available, the law is quite
explicit that it is for satellite transmitted programming. So
this is, in effect, a loophole that has arisen in a new
transmission mechanism for the programming. I do not think that
is a statement about the Commission's policy views about
whether programming should be made more available.
Senator DeWine. Senator Kohl.
Senator Kohl. The white area issue, as you know, is
currently the subject of an FCC proceeding. If you all could
advise the Commission on the proper course of action, what
would you recommend?
Mr. Ergen. Well, we have filed comments, but it has been my
experience that the current rules as written are not valid in
reality, that about half the people out there cannot really
take a traditional off-air antenna, put it on the roof, and get
a good signal. Rules that were written in the 1950's did not
take into account multipath and the number of transmitters.
There are probably 10 times more transmitters than there were
back then, and all the interference and trees and so forth. So
it became a technical problem.
I would advise the FCC that, one, that physical obstacles
such as trees, mountains, hills, electrical obstacles, and
multipath obstacles should be taken into consideration to
determine whether somebody gets a Grade B intensity signal, No.
1.
No. 2, that a valid test for those people who then are
predicted to get a Grade B signal, a test, a standard test
could be done at the home by qualified engineers, qualified
installers, and determine whether the person really, in fact,
does get the Grade B signal, because RF, radio frequencies, one
side of the street can get a good signal and you could
literally walk across the street and get no signal at all. So
it is a very tough problem.
Mr. Anstrom. Mercifully, Senator Kohl, the cable industry
does not have a direct interest in that white area dispute.
That is really a dispute between the broadcasters and the
satellite companies and consumers, so I will take a pass on
that one, mercifully. Thank you.
Mr. Kimmelman. I certainly hope that whatever the
Commission does and Congress does in overseeing it, that at
this point in time we do not strip away channels from people
who are currently getting them on whatever basis it occurred.
It is a small population. I think the broadcasters have vastly
overstated the financial impact at this point in time. We are
moving to a world of digital signals where this should not be
the same kind of a problem.
I think we need a commonsense solution here, which if Mr.
Ergen is anywhere near right, that people want their local
broadcast signals, it is just illogical to assume that they are
going out and purchasing satellite transmission to get somebody
else's local broadcast channel. It just does not make sense
that people are doing that when they are getting a great
picture of their local broadcast network. So the whole Grade B
contour thing has been wrapped around into a big pretzel here
and I do not think it accurately reflects the reality of what
pictures people are seeing on their television sets. So I hope
there is just a commonsense solution to hold harmless current
subscribers and move forward, given the technological changes,
with a logical set of rules that ought to be fair to both
broadcast and satellite providers.
Senator Kohl. Mr. Ergen, what is the cost of your dish now
to the consumer?
Mr. Ergen. It can be as low as free if you subscribe to a
year of programming at $48 a month, or it can be as low as $149
and you can subscribe to a package of programming that can be
as low as $4.99 for your local channels.
Senator Kohl. You buy these dishes?
Mr. Ergen. And we buy them, yes.
Senator Kohl. You buy them? And what do they cost you?
Mr. Ergen. We subsidize each of our systems approximately
$300. So the day we put it in your home, we have lost $300, so
we have to take care of you as a customer and it takes us about
2 years to break even on you as a customer. So we hope that our
customers stay with us for the rest of their life. That is the
only way we can make a profit.
It is very similar to cable. I do not know exactly, but
cable builds a lot of plant and equipment and when they hook
you up for $40, they have subsidized you, as well. Decker, you
would probably know better than I would.
Senator Kohl. OK; you founded your company?
Mr. Ergen. Yes, I did.
Senator Kohl. Is it a public company or a private company?
Mr. Ergen. No, we are a public company.
Senator Kohl. A public company? What were your sales and
profits last year?
Mr. Ergen. Well, we have not announced our fourth quarter,
so through the third quarter, I think we were about a $700
million company through three quarters and we lost about $200
million, we lost, and again, that is because we have a $2
billion investment and all our startup costs to launch
satellites. So we have to get probably three to four million
subscribers to break even as a company, and again----
Senator Kohl. Do you have a cash flow?
Mr. Ergen. We have a negative cash flow. We have a cash
flow. It is just negative.
Senator Kohl. Negative?
Mr. Ergen. Negative, yes. We spend more each year than we
take in, and we need about 3 million subscribers to have a
positive cash flow, and that is the reason that--and again, we
are very confident of that with local-to-local legislation, and
while we have been fighting for local-to-local legislation now
for 3 years, I have never lost hope that, ultimately,
ultimately, people would look at it from a consumer's point of
view, and when they do that, they will ultimately be
successful----
Senator Kohl. Have you ever made money?
Mr. Ergen. What is that?
Senator Kohl. Have you ever made money?
Mr. Ergen. We did make money when we were selling big
dishes, before we invested, because in the big dish business,
we had a very small investment because we only had to buy a
system for $10,000 and sell it for $12,000. We made probably in
our first 15 years of existence about $100 million in profit
over those 15 years, and we took that $100 million and invested
$2 billion to try to put a dish in every home. So we have two
million homes now that have our satellite dishes. We have 98
million homes left to go. [Laughter.]
Senator Kohl. Thank you.
Senator DeWine. I want to thank our panel very much. I
think the testimony has, again, brought home how unfortunate it
is that the National Association of Broadcasters was not here.
I think if they would have been at the table, they would have
been able to engage in this discussion, so I think that is
unfortunate.
Let me again thank our witnesses for making this appearance
to testify on this very important issue. We are seeing
significant changes in the satellite marketplace and it is
important to understand those changes as we continue to work
for video competition.
Based on the testimony that we have heard today, it appears
that the EchoStar purchase of MCI's orbital slot will help us
move towards that goal. We look forward to seeing real progress
by EchoStar in the near future.
As we move forward toward passage of the Satellite Home
Viewer Act, Senator Kohl and I are going to continue to work
with Senator Hatch and Senator Leahy, Senator McCain, and
Majority Leader Lott to craft legislation that will give
satellite providers a fair, competitive opportunity to provide
video service. This sort of competition will provide better
prices, better service, and more choices for consumers, which,
of course, is our ultimate goal.
Senator Kohl and I both thank you all again very much.
[Whereupon, at 9:36 a.m., the subcommittee was adjourned.]
A P P E N D I X
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Additional Submission for the Record
----------
Association of Local Television Stations,
Washington, DC, February 2, 1999.
The Hon. Mike DeWine, Chairman,
Subcommittee on Antitrust, Business Rights, and Competition,
Committee on the Judiciary, U.S. Senate, Washington, DC.
Re: EchoStar--Acquisition of MCI/NewsCorp assets S. 247; S. 303
Dear Mr. Chairman: We appreciate the opportunity to express our
concerns regarding EchoStar's ``local-into-local'' plans and pending
legislation which would allow satellite carriers to retransmit the
signals of local television stations to subscribers in the stations'
home markets. The Association of Local Television Stations, Inc.
(``ALTV''), represents the interests of the competitive edge of the
broadcast television industry--full service local television stations
affiliated of the now established Fox Network, the emerging UPN and WB
networks, and the new family-oriented PaxTV network. Our membership
also includes independent stations, which often provide innovative and
unique program services like foreign language and religious programming
to their communities. More than any of the popular cable networks,
these stations have stimulated competition and enhanced program
diversity for all viewers in local markets throughout our country.
As much as we appreciate the need for more competition in a video
marketplace still dominated by cable television, we must resist efforts
which attempt to promote competition in one market via means which
distort competition and impede new competitors in a critical segment of
that market. From the perspective of most of our member stations, the
approach embodied in this legislation offers only a vain hope of
satellite carriage in their local markets. At this point, only one DBS
carrier, EchoStar's Dish Network, has begun providing local signals to
viewers in a small, but growing number of markets. So far, EchoStar
generally has offered only the signals of local television stations
affiliated with the ABC, CBS, NBC, and Fox networks.\1\ Stations in
those markets affiliated with the UPN, WB, and PaxTV networks have been
excluded, as have the independent stations in those markets. Under S.
303, which on its face defers any must carry rules for as much as three
years, these local television stations will continue to suffer from
lack of access to an increasing number of DBS subscribers in their home
markets. Meanwhile, their direct competitors, affiliates of the three
entrenched networks and Fox, will gain a competitive advantage in
satellite homes.
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\1\ We understand that EchoStar also is providing the signals of
local PBS affiliates in some markets.
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This would come at a particularly bad time for emerging networks
like UPN, WB, and PaxTV. Their struggle to compete with more
established networks, the affiliates of which benefit from local
satellite carriage, would be hampered. Excluded stations would enjoy
none of the benefits of digital picture quality, none of the benefits
of inclusion in the on-screen program guides, and none of the benefits
of seamless surfing. Furthermore, they likely also would be subject to
competition from distant affiliates of their networks, which will enjoy
all the benefits of picture quality and tuning ease on the satellite
system.\2\ This would undermine the ability of new networks, their
affiliates, and innovative independent stations to compete toe-to-toe
with the ever expanding array of nonbroadcast program networks and
services, as well as with their entrenched big three network
competitors in their local markets. Thus, any delay in the imposition
of must carry requirements on satellite carriers (once the compulsory
license is amended to permit retransmission of local signals) is likely
to injure competition and compound the difficulties inherent in
establishing new competitive broadcast networks.
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\2\ A passage from the CARP decision, which EchoStar has cited in
its recent comments to the Copyright Office, states that:
Local retransmission of broadcast stations benefits the
broadcast station. * * * If a local broadcast station is
not available on a satellite carrier service, subscribers
to that station are less likely to view that station. The
viewer may not wish to install an A-B switch/antenna or
additionally subscribe to a cable service or may find the
system too inconvenient for regular use.
Moreover, we are far from confident that must carry rules ever will
come to their competitive rescue. Under S. 303, the mandatory carriage
provisions would apply no later than January 1, 2002. Such deadlines
can slip and often do. For example, when Congress enacted the original
satellite Home Viewer Act in 1988, it contemplated termination of the
satellite compulsory license in 1995. However, once the public began to
receive broadcast television station signals on their satellite
systems, Congress essentially forfeited the ability to eliminate the
compulsory license. It was extended in 1994, and no one seriously
expects Congress to let it expire at the end of this year. The public
simply would not stand for being deprived of signals they have received
for years under the compulsory license.\3\ The same result is
predictable under S. 303. If (we dare say ``when'') satellite carriers
protest that compliance with must carry requirements would be
impossible and threaten to withdraw all broadcast signals from their
services to sidestep the must carry requirements, Congress will find
itself in the same untenable position.\4\ Indeed, the testimony of
EchoStar CEO Charles W. Ergen at the hearing last week confirms that
EchoStar ``will not have the space'' to carry all local stations in
each market. In the face of readily predictable public outrage at the
threatened reduction in their satellite program options, Congress,
rather than adhere to the deadline, would have no choice, but to extend
it. Meanwhile, the selective and discriminatory exclusion of many ALTV
member stations would continue unabated. Such a result mocks
competition by placing the latest entrants into broadcast network
television at a distinct disadvantage vis-a-vis their established
network competitors.
\3\ We distinguish here between the equities in favor of satellite
subscribers who have long enjoyed superstation and network signals on
their satellite systems in a manner consistent with the law and those
that have taken advantage of satellite distributors' willingness to
blink the restrictions on providing network signals in other than
unserved areas.
\4\ Section 337(b) of the bill (page 7, lines 9-10) subjects only
``satellite carriers retransmitting television broadcast signals'' to
the must carry requirement. Thus, a satellite carrier could escape the
must carry rule by carrying no broadcast signals.
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We do look forward to supporting legislation which permits
satellite carriage of local signals, but only if it also requires
satellite carriers to carry all local signals without delay. ALTV does
not propose that satellite carriers be forced to carry local signals in
every market (as is required of cable systems). However, if a satellite
carrier retransmits the signal of one local television station in a
market to subscribers in that market, then it should be required to
carry all local stations in that market or at least provides a
satellite subscriber with the same local signals a comparably situated
cable subscriber would have available from its cable system. This would
maintain parity between competing media by assuring that the satellite
carrier were subject to no more rigorous obligations than a directly
competitive cable system. At the same time, independent stations and
stations affiliated with new and emerging networks would suffer no
competitive disadvantage in their home markets.
Satellite carriers may complain that requiring nondiscriminatory
carriage of local signals might overtax their capacity and impose
additional unwanted costs on their operations. ALTV respectfully
suggests that these concerns are overblown and myopic. The practical
effect of imposing such a requirement on satellite providers would be
marginal. Again, like cable systems, satellite carriers would be likely
to carry some local stations voluntarily. Therefore, such a requirement
typically might require a satellite carrier to add only a few
additional local signals, such as those of newer stations or stations
affiliated with newer networks like UPN, WB, and PaxTV. Thus, the
practical effect often would be not a ``carry one, so carry seven,''
but a ``carry four, so carry six or seven'' rule. At worst, under
current technological limits on capacity, compliance might require a
satellite carrier to forego local signal carriage in a few markets in
order to accommodate all local signals in other markets. ALTV submits
that this result is preferable to a regime which invited and tolerated
discrimination among local stations in the same market.
Therefore, we respectfully urge you to reconsider S. 303 and S. 247
with respect to the delayed must carry provision. Historically--and
rightly--the cable and satellite compulsory licenses have carried with
them the complementary obligation to use broadcast signals in a manner
consistent with preserving the many benefits of free broadcast
television service. We ask no more than that. Therefore, ALTV must
oppose the S. 247/S. 303 package in its present form, but does look
forward to making a positive contribution to efforts to draft and enact
sound legislation to permit satellite carriers to carry the signals of
local television stations in their home markets.
Very truly yours,
James B. Hedlund,
President.