```

[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

 
   THE STATUS OF COMPETITION IN THE MULTI-CHANNEL VIDEO PROGRAMMING 
                        DISTRIBUTION MARKETPLACE
=======================================================================

                                HEARING

                               before the

          SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 4, 2001
                               __________

                           Serial No. 107-77
                               __________

       Printed for the use of the Committee on Energy and Commerce

 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________

                        U.S. GOVERNMENT PRINTING OFFICE
                                WASHINGTON : 2002
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida                 JOHN D. DINGELL, Michigan
JOE BARTON, Texas                          HENRY A. WAXMAN, California
FRED UPTON, Michigan                       EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida                     RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                      RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania           EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California                FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                       SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma                    BART GORDON, Tennessee
RICHARD BURR, North Carolina               PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky                     BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                          ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia                   BART STUPAK, Michigan
BARBARA CUBIN, Wyoming                     ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois                     TOM SAWYER, Ohio
HEATHER WILSON, New Mexico                 ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona                   GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING, Mississippi    KAREN McCARTHY, Missouri
VITO FOSSELLA, New York                    TED STRICKLAND, Ohio
ROY BLUNT, Missouri                        DIANA DeGETTE, Colorado
TOM DAVIS, Virginia                        THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee                       BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland           LOIS CAPPS, California
STEVE BUYER, Indiana                       MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California              CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire             JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

          Subcommittee on Telecommunications and the Internet

                     FRED UPTON, Michigan, Chairman
MICHAEL BILIRAKIS, Florida                  EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                           BART GORDON, Tennessee
CLIFF STEARNS, Florida                      BOBBY L. RUSH, Illinois
  Vice Chairman                             ANNA G. ESHOO, California
PAUL E. GILLMOR, Ohio                       ELIOT L. ENGEL, New York
CHRISTOPHER COX, California                 GENE GREEN, Texas
NATHAN DEAL, Georgia                        KAREN McCARTHY, Missouri
STEVE LARGENT, Oklahoma                     BILL LUTHER, Minnesota
BARBARA CUBIN, Wyoming                      BART STUPAK, Michigan
JOHN SHIMKUS, Illinois                      DIANA DeGETTE, Colorado
HEATHER WILSON, New Mexico                  JANE HARMAN, California
CHARLES ``CHIP'' PICKERING, Mississippi     RICK BOUCHER, Virginia
VITO FOSSELLA, New York                     SHERROD BROWN, Ohio
TOM DAVIS, Virginia                         TOM SAWYER, Ohio
ROY BLUNT, Missouri                         JOHN D. DINGELL, Michigan,
ROBERT L. EHRLICH, Jr., Maryland            (Ex Officio)
LEE TERRY, Nebraska
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Abbruzzese, Jared E., acting CEO, WSNet......................    45
    Ergen, Charles W., CEO, EchoStar.............................    77
    Fiorile, Michael J., President and CEO, Dispatch Broadcast 
      Group......................................................    59
    Hartenstein, Eddy W., Chairman and CEO, DIRECTV..............    72
    Pagon, Marshall W., President and CEO, Pegasus Communication.    55
    Phillips, Bob, President and CEO, National Rural 
      Telecommunications Cooperative.............................    33
    Sachs, Robert, President and CEO, National Cable and 
      Telecommunications Association.............................    20
    Schnog, Neal, President, Uvision, on behalf of American Cable 
      Association................................................    28
Material submitted for the record by:
    Collier, Sophia, President and CEO, Northpoint Technology, 
      Ltd., prepared statement of................................   114
    Kelly, Shaun P., Representative, Commonwealth of 
      Massachusetts, letter dated December 4, 2001...............   118

                                 (iii)

  

   THE STATUS OF COMPETITION IN THE MULTI-CHANNEL VIDEO PROGRAMMING 
                        DISTRIBUTION MARKETPLACE

                              ----------                              

                       TUESDAY, DECEMBER 4, 2001

              House of Representatives,    
              Committee on Energy and Commerce,    
                     Subcommittee on Telecommunications    
                                          and the Internet,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2123, Rayburn House Office Building, Hon. Fred Upton 
(chairman) presiding.
    Members present: Representatives Upton, Barton, Gillmor, 
Deal, Shimkus, Terry, Tauzin (ex officio), Markey, Green, 
McCarthy, Harman, Boucher, Brown, and Dingell (ex officio).
    Staff present: Jessica Wallace, majority counsel; Jon 
Tripp, deputy communications director; Hollyn Kidd, legislative 
clerk; Andy Levin, minority counsel; and Courtney Johnson, 
research assistant.
    Mr. Upton. Good afternoon. Years ago when driving through 
the more rural areas of my district, I would see a few big 
satellite TV dishes dotting the landscape, and nowadays they 
are significantly smaller, more prevalent, and in more urban 
and suburban areas as well.
    In fact, in the old days if a person ever got lost, all 
they had to do is wait until nightfall to navigate by the North 
Star. Now satellite dishes are so prevalent that they can also 
navigate during the day by the dishes which chart a 
southwesterly course.
    But much more than a navigational tool, satellite TV, more 
specifically direct broadcast satellite, DBS, has become a 
solid and formidable competitor with cable in the multi-channel 
video programming distribution marketplace, primarily in urban 
and suburban areas, and DBS and its predecessor technologies 
have for the first time brought multi-channel video programming 
to certain rural areas where the laws of physics preclude over-
the-air broadcast signals, and economics make cable service 
impractical.
    By and large, all of this has been great new for the 
consumer, unleashing waves of innovation and expansion of 
services in both DBS and cable.
    In addition, almost 1 in 5 households continue to receive 
their television signals through free, over-the-air local 
broadcasts. So while not a multi-channel video programming 
platform, free, over-the-air local broadcast remains a 
critically important piece of our Nation's TV fabric.
    Moreover, DBS carriage of a local broadcast signal in a 
subscriber's local market remains an important public policy 
objective embodied in the Satellite Home Viewer Improvement Act 
of 1999, SHVIA. Today's hearing is on the status of competition 
in the MVPD marketplace for it is the vitality of that 
competition which will have a direct bearing on the quality, 
price, array of viewing options, and other services which 
Americans will have in their living rooms with respect to cable 
and/or DBS, not to mention other emerging and aspiring 
competitors.
    What do we know about the MVPD marketplace today? Well, 
recent surveys suggest that cable has about 80 percent market 
share, while DBS has about 18 percent. We also know that both 
cable and DBS have experienced significant consolidation in 
past years, and we all know that more consolidation may be upon 
us or may be right around the corner as EchoStar and DIRECTV, 
America's two largest DBS providers, seek to merge, while AT&T 
Broadband, America's largest cable company, might merge with 
another cable giant like Comcast, Cox or even AOL Time Warner.
    But as we seek to define the status of competition in the 
MVPD marketplace today and to try to understand the impact of 
proposed or imminent mergers on that marketplace, we first need 
to define that marketplace. Do we look narrowly in isolation at 
the DBS market as separate and distinct from the cable market, 
or do we look at one, big, multi-channel video programming 
distribution marketplace where DBS and cable and perhaps 
aspiring and emerging technologies are going head to head.
    Intuitively as a consumer I think that choice, where there 
is a choice, is between cable and DBS. If I am unhappy with my 
cable provider, as my folks were, I am going to switch to DBS. 
If I am unhappy with DBS, I am going to switch back to cable, 
and perhaps I will unplug altogether and rely solely on free, 
over-the-air broadcasts as many Americans do today.
    In an event, what this suggests is that those in the areas 
where there is a choice, the relevant market is the whole MVPD 
marketplace.
    However, in examining the status of competition in the MVPD 
marketplace, what is more difficult to grapple with is that 
there are parts of the marketplace where there is no choice 
between cable and DBS, principally those areas in which 
approximately 9 million rural Americans live, where cable has 
not reached or practically speaking cannot be reached.
    These folks rely solely on DBS, and many are served through 
the resale of DIRECTV by virtue of agreements with the National 
Rural Telecommunications Cooperative and its affiliated 
members, such as the Bloomingdale Telephone Company in my 
district. It is a unique but important part of the marketplace 
which, no doubt, adds some complexity to our examination of the 
overall picture.
    Part of today's hearing focuses on the proposed merger of 
EchoStar and DIRECTV and its potential impact on competition in 
the MVPD marketplace. Today EchoStar and DIRECTV are with us. 
While I have not yet seen their filings with the FCC and DOJ, 
which will begin to provide the necessary details for a 
thorough examination of their proposed merger, I generally 
understand what they are trying to accomplish through this 
proposed merger.
    And preliminarily, I would say this: What they bring to the 
table cannot be easily dismissed in terms of competing against 
cable, who have shown themselves to be fierce and worthy 
competitors and continue to possess the overwhelming lion's 
share of the MVPD marketplace.
    Moreover, the companies state that once merged, they would 
expand into local, from 36 and 41 markets probably to about 
100, and perhaps a merged entity eventually could serve all 
markets. As I mentioned earlier, carriage of local TV signals 
is an important policy objective embodied in SHVIA, which must 
be pursued on behalf of the consumer.
    Certainly we will need to closely examine the aspects of 
the proposal. Also, the companies state that the merger would 
permit more efficient use of the company's combined spectrum, 
enabling them to more robustly bring a host of non-video 
services, like broadband, high speed Internet access, to market 
more vigorously and competitively.
    Moreover, the company suggests that more efficient use of 
the spectrum would enable increased HDTV programming carriage, 
which would certainly help the digital transition.
    Thus, all in all these companies bring much to the table, 
but in addition, as I indicated earlier, we will have to look 
very closely at the implications of the merger for folks in the 
rural areas where there is no cable service and, thus, DBS is 
the only true competitor.
    That is the issue that I look forward to learning about 
more from our distinguished panelists this afternoon, and more 
generally, the exclusivity portion of the program access rules, 
which are said to sunset next year. Moreover, the cable 
ownership limits proceedings are also important issues 
potentially impacting on the competition in the MVPD 
marketplace.
    I know that our witnesses are prepared to discuss these 
topics as well. I look forward to their testimony and recognize 
my friend, the ranking member of the subcommittee, Mr. Markey.
    [The prepared statement of Hon. Fred Upton follows:]
   Prepared Statement of Hon. Fred Upton, Chairman, Subcommittee on 
                  Telecommunications and the Internet
    Good morning. Years ago--when driving through the more rural areas 
of my district--I would see a few big satellite tv dishes dotting the 
landscape. Nowadays, they are significantly smaller, more prevalent, 
and in more urban and suburban areas, too. In fact, in the old days, if 
a person ever got lost, he used to have to wait until nightfall to 
navigate by the North Star. Now, satellite dishes are so prevalent, he 
can also navigate during the day by the dishes--which chart a 
southwesterly course.
    But much more than a navigational tool, satellite tv--more 
specifically Direct Broadcast Satellite (DBS)--has become a solid and 
formidable competitor with cable in the multi-channel video programming 
distribution (MVPD) marketplace, primarily in urban and suburban areas, 
and DBS, and its predecessor technologies, have for the first time 
brought multi-channel video programming to certain rural areas where 
the laws of physics preclude over-the-air broadcast signals and 
economics make cable service impractical. By and large, all of this has 
been great news for the consumer--unleashing waves of innovation and 
expansion of services in both DBS and cable. In addition, almost one in 
five households continue to receive their television signals through 
free, over-the-air local broadcast, so--while not a multi-channel video 
programming platform--free, over-the-air local broadcast remains a 
critically important piece of our nation's television fabric. Moreover, 
DBS carriage of a local broadcast signals in a subscriber's local 
market remains an important public policy objective, embodied in the 
Satellite Home Viewer Improvement Act of 1999 (SHVIA).
    Today's hearing is on the status of competition in the MVPD 
marketplace, for it is the vitality of that competition which will have 
a direct bearing on the quality, price, and array of viewing options, 
and other services, which Americans will have in their living rooms 
with respect to cable and/or DBS, not to mention other emerging and 
aspiring competitors.
    What do we know about the MVPD marketplace today? Recent surveys 
suggest that cable has about 80% marketshare, while DBS has about 18% 
marketshare. We also know that both cable and DBS have experienced 
significant consolidation in past years--and we all know that more 
consolidation may be upon us or may be right around the comer as 
EchoStar and DirecTV, America's two largest DBS providers, seek to 
merge--while AT&T Boradband, America's largest cable company, might 
merge with another cable giant like Comcast, Cox, or AOL Time Warner.
    As we seek to divine the status of competition in the MVPD 
marketplace today and try to understand the impact of proposed or 
imminent mergers on that marketplace, we first need to define that 
marketplace. Do we look narrowly, and in isolation, at the DBS market 
as separate and distinct from the cable market? Or do we look at one 
big multi-channel video programming distribution marketplace where DBS 
and cable, and perhaps aspiring and emerging technologies, are going 
head-to-head? Intuitively as a consumer, I think the choice--where 
there is a choice--is between cable and DBS. If I am unhappy with my 
cable provider, I will switch to DBS. If I am unhappy with my DBS, I 
will switch back to cable. Perhaps, I will unplug altogether and rely 
solely on free over-the-air broadcast? Or, as my mother always urged, 
perhaps I will turn off the tv and just read a book! In any event, what 
this suggests to me is that, in those areas where there is a choice, 
the relevant market is the whole MVPD marketplace.
    However, in examining the status of competition in the MVPD 
marketplace, what is more difficult to grapple with is that there are 
parts of the marketplace where there is no choice between cable and 
DBS, principally those areas in which approximately 9 million rural 
Americans live--where cable has not reached or, practically speaking, 
cannot be reached. These folks rely solely on DBS, and many are served 
through resale of DirecTV--by virtue of agreements with the National 
Rural Telecommunications Cooperative (NRTC) and its affiliated members, 
such as the Bloomingdale Telephone Company in my district. This is a 
unique, but important, part of the marketplace which no doubt adds some 
complexity to our examination of the overall picture.
    Part of today's hearing focuses on the proposed merger of EchoStar 
and DirecTV and its potential impact on competition in the MVPD 
marketplace. Today, EchoStar and DirecTV are with us. While I have yet 
to see their filings with the FCC and the DOJ (filed last night)--which 
will begin to provide the necessary details for a thorough examination 
of their proposed merger--I generally understand what they are trying 
to accomplish through their proposed merger. Preliminarily, I would say 
this: what they bring to the table in this regard cannot be easily 
dismissed in terms of competing against cable--who have shown 
themselves to be fierce and worthy competitors and continue to possess 
the overwhelming lion-share of MVPD marketplace. Moreover, the 
companies state that, once merged, they would expand local-into-local--
from 36 and 41 markets, respectively, to over 100. Perhaps, a merged 
entity eventually could serve all markets? As, I mentioned earlier, 
carriage of local television signals is an important policy objective--
embodied in SHVIA--which must be pursued on behalf of the consumer. 
Certainly, we will need to closely examine this aspect of the proposal. 
Also, the companies state that the merger would permit more efficient 
use of the companies' combined spectrum, enabling them to much more 
robustly bring a host of non-video services, like broadband, to market 
more vigorously and competitively. Moreover, the companies suggest that 
more efficient use of spectrum would enable increased HDTV programming 
carriage, which would certainly help the digital transition. Thus, all 
in all, these companies are bringing a lot to the table today.
    But in addition, as I indicated earlier, we will have to look very 
closely at the implications of this merger for folks in those rural 
areas where there is no cable service and thus DBS is the only truly 
viable competitor. This is an issue which I look forward to learning 
more about today from our distinguished panelists.
    More generally, the program access rules, which are set to sunset 
next, and the cable ownership limits are also important issues 
potentially impacting on competition in the MVPD marketplace. I know 
our witnesses are prepared to discuss these topics as well.
    I want to thank all of our witnesses for being here today. I now 
recognize my good friend, the Ranking Member of the Subcommittee, for 
an opening statement.

    Mr. Markey. Thank you, Mr. Chairman, very much, and I want 
to commend you for calling these very important hearings today 
on the current status of video competition and to explore the 
impact of the proposed DIRECTV-EchoStar merger on the multi-
channel video marketplace.
    It is clear that competition to the cable industry has not 
materialized for most consumers in any significant way after 
passage of the Telecommunications Act. We have ceased to expect 
and no longer wait for the Bell Companies to mount a large 
scale assault of cable markets across the country.
    We do have RCN in a number of markets, and in the Boston 
area the mere presence of RCN has had a positive effect upon 
cable rates.
    Yet the cold reality for the overwhelming majority of 
consumers is that an alternative wire line competitor is not 
going to show up in their neighborhood any time soon to provide 
competition to the incumbent cable company.
    I say all of this in an environment where AT&T will be 
raising cable rates for millions of consumers in Massachusetts 
in excess of 8 percent this year. Many other cable consumers 
around the country will also see rate increases well over the 
rate of inflation.
    That is why we have increasingly looked to satellite 
competition as a way to foster choice and competition. Although 
it has not been a price competitor to cable, our Nation's two 
direct broadcast satellite providers certainly offer many 
consumers a needed choice.
    I was the author in this committee of the local-to-local 
amendment to the Satellite Home Viewer Improvement Act of 1999. 
I worked with the gentleman from Louisiana, Mr. Tauzin, as we 
have partnered over the past 12 and 15 years in this area as in 
many others to insure that there would be additional 
programming choices for consumers.
    Permitting satellite providers to bring local broadcast 
stations back into central, certain, local markets a part of a 
seamless satellite service has helped to make DBS a more 
realistic and a comparable alternative for many consumers in 
the top 40 media markets, markets that include approximately 70 
million households.
    I commend the satellite industry for the competitive 
inroads they have made in the marketplace and for their efforts 
to deploy broadband access to the Internet by way of satellite 
as well.
    The proposed DIRECTV-EchoStar merger, however, absent other 
regulatory intervention or action would eliminate the current 
DBS versus DBS competition, which provides all consumers with a 
choice of either DIRECTV or EchoStar.
    A merger of the two would also lock up for the benefit of a 
single company the preponderance of orbital assets presently 
allocated to direct-to-home satellite services, including he 
spectrum utilized to provide ubiquitous coverage to the 48 
contiguous States.
    Moreover, there are media reports and rumors of yet further 
consolidation in the cable marketplace, as AT&T attempts to 
spin off its cable assets most likely to other incumbent cable 
companies. Cable pioneer Ted Turner recently predicted that the 
cable industry will essentially be reduced to just two large 
providers as well.
    Does anybody else see the irony in calling this a hearing 
on the status of video competition? It should be entitled a 
status check on video consolidation. In my view, the challenge 
for policymakers is to assess rapidly what we can do to jump 
start competition across the board and to encourage the FCC to 
explore ways to actively promote additional competition in our 
telecommunications marketplace.
    In addition, we need to extend the access to cable 
programming rules that are up for renewal at the FCC, as well 
as explore other issues about building access, must carry 
obligations, and ever increasing cable programming fees if we 
endeavor to increase the prospects for robust cable competition 
in the future.
    Finally, I believe the recent debacle involving shutoffs of 
Excite-at-Home subscribers underscores the need for the FCC to 
insure that cable modem consumers have choices over that cable 
wire. I continue to believe that current law compels such 
action because broadband access to the Internet is a 
telecommunications service.
    It is time for the FCC to act not only to foster open 
competition consistent with the intent of the 
Telecommunications Act, but to do so with haste so that the 
consumers are no longer left vulnerable to an inside the 
Beltway battle over semantics that only a telecommunications 
lawyer could delight in.
    And, by the way, I will note that every lawyer in the room 
just nodding their head as I said that.
    Which is every person in the room.
    Again, I thank the chairman for putting this hearing 
together today so that we can assess the implications of this 
merger and look forward to future hearings where we can explore 
other issues related to promoting cable and programming 
competition.
    I look forward, Mr. Chairman, to hearing from our 
witnesses.
    Mr. Upton. Thank you.
    I would recognize chairman of the full committee, Mr. 
Tauzin.
    Chairman Tauzin. Thank you, Mr. Upton.
    I, too, want to thank you for the hearing, sir.
    As we proceed on these matters, I believe we must look 
forward to insure that consumers are able to reap all the 
tangible benefits that flow from healthy, vigorous competition. 
They are easy to identify. Lower prices, increased programming 
options, new, improved services, better attitudes. That is the 
way it works: One store in town; you are stuck with bad prices, 
bad service, bad product, bad attitudes. A second store in town 
shows up, and all of these things improve dramatically. If you 
get 3 or 4 stores in town, it really gets good.
    And so the question is: how do we make sure consumers enjoy 
these benefits?
    And perhaps the biggest issue, of course, today is the 
proposed merger of EchoStar and DIRECTV. This union, if 
approved by regulators, would create a satellite company larger 
than the largest cable MSO today, AT&T.
    So the hearing, among other things, has to examine whether 
this proposed merger's impact on competition in the MVPD 
marketplace, the multi-channel video programming marketplace, 
is, in fact, good for consumers. I want to look at its impact 
on the broadband market place obviously as that develops and as 
that new marketplace becomes one where hopefully competition 
will rule.
    In my mind, the question of whether the merger should go 
forward comes down to three tests: (1) will the combined 
EchoStar-DIRECTV increase the likelihood of the DBS and cable 
industries will remain formidable competitors, as they are 
becoming today?
    (2) will a combined EchoStar-DIRECTV yield real benefits to 
consumers? Will it insure that DBS and cable continue to prod 
each other to serve an increasing number of markets, to offer 
increasingly competitive prices and improved services through 
technological innovation?
    And finally, (3) will a combined EchoStar-DIRECTV result in 
a multi-programming marketplace that will accommodate new and 
aspiring multi-video programming competitors.
    And as most of you know, Mr. Markey and I have worked long 
and hard to insure that there is a vibrant DBS industry to 
provide head-to-head competition with the incumbent cable 
industry. They make each other better and consumers win.
    Moreover, as the cable industry continues to undergo its 
own consolidation, we see a number of cable companies looking 
to buy AT&T's cable unit. The committee has to decide whether 
or not the satellite industry needs this merger if it is going 
to survive and thrive as one of the several competitors in the 
video services of the future.
    EchoStar and DIRECTV need to demonstrate clearly the 
consumer benefits that will come from this merger. We are very 
interested in the 9 million rural consumers who do not enjoy 
access to cable. Today they can choose between EchoStar and 
DIRECTV, but should the merger be approved by DOJ and FCC, 
these consumers would be left with the Hobson's choice of 
obtaining video services from the merged company or from no one 
at all. We have to ask how will this merger increase or 
diminish consumer choice in these video services, particularly 
for these 9 million folks. Indeed, enabling the creation of a 
vibrant and viable satellite TV industry was to create more 
choices for consumers.
    Will, for example, consumers get the guarantee of national 
pricing so that they can have the benefits of consumers who do 
face--who do live in a market where there is true competition.
    We know the merger will also have an impact on the 
broadband marketplace. If satellite is going to be a competent 
competitor in the broadband world, providing video services 
along with interactive high speed data services and Internet 
services, it obviously needs to do a better job than it does 
today.
    Cable has a superior broadband product. Let's face it, and 
the local phone companies need regulatory relief if they are to 
unleash their potential as broadband competitors. That is why, 
I am working so hard in trying to pass Tauzin-Dingell.
    A merged DBS entity with more financial strength may, 
indeed, be more capable of developing and providing competitive 
broadband products. We need to think about that.
    And while there has been much talk regarding this merger, 
there is other activity in the marketplace I certainly expect 
we are going to address other activity this afternoon, Mr. 
Chairman.
    For example, in 1992, Congress was concerned that a 
majority of cable operators enjoyed a monopoly in program 
distribution at the local level and concluded that the use of 
exclusive contracts between vertically integrated program 
vendors and cable operators served to thwart development of 
competition among distributors.
    So Congress absolutely prohibited exclusive contracts 
between vertically integrated program vendors and cable 
operators in areas unserved by cable, and we generally 
prohibited exclusive contracts within areas served by cable 
unless the FCC determined that such a contract was in the 
public interest.
    We did it because we recognized in these instances some 
exclusive contracts do provide countervailing benefits for the 
programming market or the development of competition among 
distributors.
    The general prohibition on exclusive contracts, Mr. 
Chairman, expires, sunsets on October 5 2002, and unless the 
FCC determines that the prohibition continues to be necessary, 
it goes out of the law.
    So while I have come to no absolute conclusions yet as to 
whether or not the rule has served its purpose, we ought to 
talk about that today.
    Another issue, Congress passed the Satellite Home Viewers 
Improvement Act of 1999, which granted DBS authority to provide 
local broadcast stations, television stations, in their local 
markets without obtaining a copyright permit to do it.
    For the first time, the DBS industry would be able to 
compete on comparable footing with the local cable company 
operators because it could provide all of the video 
programming, local as well as cable programming.
    However, SHVIA requires satellite carriers by January 1, 
2002, to carry upon request all local TV broadcast stations in 
the local markets in which the satellite carriers carry at 
least one TV broadcast station. That rule is know as the 
``carry one, carry all'' rule.
    The DBS industry has now sued, claiming that this law 
violates their constitutional rights. We ought to ask today, 
Mr. Chairman, how this lawsuit dovetails with EchoStar's 
commitment to serve more local markets, and I look forward to 
discussing this issue with both EchoStar and DIRECTV today.
    And last but not least, the hearing will cover the FCC's 
recently initiated proceeding to reexamine its horizontal and 
vertical limits on cable companies. The FCC rules were remanded 
because the court determined that the FCC's prior cable 
ownership limits had not been adequately supported and that the 
FCC had not sufficiently considered changes in the multi-video 
programming marketplace.
    Just yesterday the Supreme Court declined to review that 
ruling. So we are anxious to hear from these witnesses today 
and what do you think about it and where do we stand.
    Mr. Chairman, we have got a lot of good issues to talk 
about, and not just EchoStar and DIRECTV, but the whole issue 
is are we really going to have good competition out there or 
are all of these movements in some way going to diminish what 
we tried to accomplish over all of these many years.
    There is some thought that maybe if done correctly we can 
make a few changes in policy that can make sure it all happens 
right, and if we just sit back and watch it, we might see some 
of the progress we created diminish.
    We have got some work to do, Mr. Chairman. Thank you.
    [The prepared statement of Hon. W.J. ``Billy'' Tauzin 
follows:]
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    I would like to commend Chairman Upton for holding this hearing 
today, which will allow us to examine important changes taking place in 
the multi-channel video programming (``MVPD'') marketplace. As we 
proceed on these matters, I believe we must look to ensure that 
consumers are able to reap the tangible benefits that flow from 
healthy, vigorous competition: lower prices, increased programming 
options, and new services.
    Perhaps the biggest issue in this market today is the proposed 
merger of Echostar and DIRECTV. This union, if approved by regulators, 
would marry the nation's two DBS providers, creating a satellite 
company larger than the largest cable MSO today, AT&T. This hearing, 
among other things, will examine this proposed merger's impact on 
competition in the MVPD marketplace, its impact in the broadband 
marketplace, and most importantly, its impact on consumers.
    In my mind, the question of whether this merger should go forward 
comes down to three tests: (1) will a combined Echostar/DIRECTV 
increase the likelihood that DBS and cable industries will remain the 
formidable competitors they are today?; Test 2: will a combined 
Echostar/DIRECTV yield real benefits to consumers? Will it ensure that 
DBS and cable continue to prod each other to serve an increasing number 
of markets. offer increasingly competitive prices, and improve service 
offerings through technological innovation? And finally Test Three: 
will a combined Echostar/DIRECTV result in an MVPD marketplace that 
will accommodate new, aspiring MVPD competitors?
    As most of you know, I strongly believe that it is absolutely vital 
to have a vibrant DBS industry to provide head-to-head competition with 
the incumbent cable industry. They make each other better and consumers 
win. Moreover, as the cable industry continues to undergo its own 
consolidation--indeed a number of cable companies want to acquire ATT's 
cable unit--this committee must consider whether or not the satellite 
industry needs this merger if it is going to survive and thrive as one 
of several competitors for video services in the future.
    Echostar and DIRECTV need to demonstrate clearly the consumer 
benefits that would result from this merger. In particular, I am 
interested in the nine million rural consumers who do not have access 
to cable. Today, they can choose between Echostar or DIRECTV. Should 
this merger be blessed by DOJ and the FCC, these consumers will be left 
with what some believe to be a Hobson's choice of obtaining video 
services from the merged company or from no one at all. Because 
enabling the creation of a viable and vibrant satellite TV industry was 
to create more choice for consumers, I must ask: how would this merger 
increase or diminish consumer choice in video services?
    This merger also will have a tremendous impact on the broadband 
marketplace. If satellite is going to be a competent competitor in the 
broadband world, providing video services along with interactive high-
speed data services and Internet services, it needs to do a better job 
than it does today. Cable has a superior broadband product, and the 
local phone companies need regulatory relief to unleash their great 
potential as broadband competitors (which is why I am working hard to 
bring HR 1542 to the floor). A merged DBS entity, with more financial 
strength, may indeed be more capable of developing and providing 
competitive broadband products.
    While there has been much talk regarding this merger, there is 
other activity in this marketplace I hope will be addressed this 
afternoon.
    For example, in 1992 Congress was concerned that the majority of 
cable operators enjoyed a monopoly in program distribution at the local 
level, and concluded that the use of exclusive contracts between 
vertically integrated programming vendors and cable operators served to 
thwart the development of competition among distributors. So Congress 
absolutely prohibited exclusive contracts between vertically integrated 
programming vendors and cable operators in areas unserved by cable.
    However, we generally prohibited exclusive contracts within areas 
served by cable, unless the FCC determined that such a contract was in 
the public interest. We did this because we recognized that in these 
instances. some exclusive contracts provide countervailing benefits to 
the programming market or to the development of competition among 
distributors. This general prohibition on exclusive contracts in areas 
served by cable will sunset on October 5, 2002, unless the FCC 
determines that the prohibition continues to be necessary. At this 
point I have come to no absolute conclusions on whether or not this 
rule has served its purpose so I hope to learn more today.
    On another issue, Congress also passed the Satellite Home Viewer 
Improvement Act of 1999, which granted DBS providers the authority to 
distribute local broadcast television stations in their local markets 
without obtaining copyright permission to do so. For the first time the 
DBS industry would be able to compete on comparable footing with local 
cable operators when it comes to the availability of broadcast 
programming. However, SHVIA requires satellite carriers, by January 1, 
2002, to carry upon request all local TV broadcast stations in local 
markets in which the satellite carriers carry at least one TV broadcast 
station, also known as the ``carry one, carry all'' rule. The DBS 
industry has brought suit saying that this law violates their 
constitutional rights. How does this lawsuit dovetail with Echostar's 
commitment to serve more local markets? I look forward to discussing 
this issue with Echostar, DIRECTV and NAB today.
    Last but not least, this hearing will cover the FCC's recently 
initiated proceeding to re-examine its horizontal and vertical limits 
for cable companies. The FCC's rules were remanded because the court 
determined that the FCC's prior cable ownership limits had not been 
adequately supported and that the FCC had not sufficiently considered 
changes in the MVPD marketplace. Just yesterday, the Supreme Court 
declined to review that ruling.
    I am anxious to hear from our witnesses on these and other issues.
    Thank you.

    Mr. Upton. Thank you.
    Mr. Boucher.
    Mr. Boucher. Well, thank you very much, Mr. Chairman, for 
convening the hearing today on competition in the multi-channel 
video marketplace.
    I am going to focus my comments today on the proposed 
acquisition of DIRECTV by EchoStar and note that the focus of 
the debate about whether the acquisition is in the public 
interest is whether it is in the interest of rural America.
    I represent one of the largest stretches of rural America 
of any Member of Congress in the eastern U.S., and in the area 
that I represent, there are tens of thousands of constituents 
who do not have access to cable. The only means of obtaining 
multi-channel video programming in these homes is through a 
satellite service.
    And today I clearly want to say that in my opinion this 
acquisition is definitely in the interest of my constituents 
and in the interest of rural Americans who will receive 
expanded services and better service offerings as a consequence 
of this merger being consummated.
    It takes a lot of satellite capacity to compete effectively 
with cable TV, an industry that has horizontal breadth and 
vertical integration. I have no doubt that the proposed merger 
will benefit consumers by making the surviving satellite 
company a far stronger competitor to cable TV.
    I am going to spend just a few minutes this afternoon 
addressing the rural matters that are at the core of this 
debate.
    First, it is absolutely clear that as a result of the 
merger, services to rural residents will improve. My 
constituents in the western part of Virginia do not have access 
at the present time to local television stations delivered by 
satellite, and under present circumstances, they are not likely 
to have this new local-into-local service for several years at 
best.
    The merger will lead to a far more efficient use of 
satellites, and as a consequence, enable EchoStar to more than 
double the number of local television markets that are served 
with local-into-local service. That number today is 
approximately 40, and upon a consummation of this merger that 
number could be increased to approximately 100.
    The merger will also enable the more rapid launch of 
satellite delivered, high speed Internet access services by 
significantly lowering the per subscriber cost of the service 
and making the service truly economical on a large scale for 
the first time.
    That service will also broadly benefit my rural 
constituents who have no cable access by making broadband 
available to them for the first time through any delivery 
mechanism.
    But what about the argument that some have put forward that 
reducing two major service providers to one provider simply 
cannot be in the interest of consumers? I, frankly, think that 
EchoStar has answered these questions in a way that is more 
than satisfactory.
    As a first matter, the company will commit to uniform 
national pricing so that the prices charged where there is no 
cable competition in rural areas is the same price that is 
charged in the markets with cable where I would note the 
satellite customers derive most of their subscribers at the 
present time.
    Other elements of the service will also be the same. The 
same national programming will be offered everywhere, in urban 
areas and in rural areas alike with no difference. The same 800 
number for customer service can be accessed by any subscriber 
to the service in rural areas or urban areas alike just as it 
is today with no difference.
    An on premises installation of the set top box and the 
satellite dish is currently performed by local independent 
retailers who compete with each other in offering that service. 
That would not change with this merger, and there would still 
be the same competition in the installation of on premises 
customer equipment.
    And so rural residents who are the focus of the antitrust 
debate will receive valuable new services from the merger, 
broadband opportunities they don't have, local-into-local 
services they don't have, and they will have no disadvantages 
arising to them as a consequence of the merger.
    I think this merger is broadly in their interest, and 
because it will create a far stronger cable competitor 
nationally, it is in the greater American national interest as 
well.
    So, Mr. Chairman, I want to thank you for holding this 
hearing and convening this very impressive panel of witnesses. 
There are broader issues in terms of multi-channel video 
competition that I would personally like to address at a future 
time, and I share with Mr. Markey, for example, the desire to 
have open access over all Internet transport platforms. I think 
it is broadly in the national interest to do that.
    That is a subject, I might suggest, that deserves its own 
day of hearings, and I would commend that to the subcommittee 
at the proper time.
    But I want to thank you for organizing this hearing. It is 
an important subject, and I look forward to this testimony.
    Mr. Upton. Thank you.
    Mr. Terry.
    Mr. Terry. Thank you, Mr. Chairman.
    Just to add to some redundance, I will state my opening 
statement here. First of all, let me state or tell you, Mr. 
Chairman, as we have talked in the past, before I came to 
Congress 3 years ago now, I spent 8 years on the Omaha City 
Council where I chaired what would be the companion committee 
to this at the local level, and we had an unprecedented run for 
about 8 years in Omaha. We had three cable companies competing 
against each other, and it was fantastic.
    We had incredible service provided to its customers. We had 
what was unheard of in the industry, and that is falling prices 
and adding channels.
    But something started to happen in the late 1990's. First 
of all, U.S. West decided its experiment into the cable field 
was a failed experiment and stopped competing, and then 
Cablevision and Cox decided to stop competing by swapping 
territories, and we were left with one cable company and no 
competition.
    And what have we seen? Increasing prices.
    So as we talk here today about competition in the field, I 
have to wonder how we're going to define and look at 
competition. Fortunately within the city limits, DIRECTV has 
made some inroads. They've been somewhat aggressive in their 
marketing.
    So now Cox got a little fat for a while, but now they 
actually have someone they have to pay attention to in Omaha, 
although I will state Cox has done a fantastic job in the city 
of Omaha providing their cable services.
    But once you step out of the city limits, you don't have a 
cable company anymore. All you have is satellite TV. so as 
there is at least some semblance of competition within the city 
limits, there is maybe soon no competition once you step 
outside of those city limits.
    So how do we define competition? Is it simply territories? 
As long as there are some territories where there is 
competition and ignore the areas that there are not?
    And I wonder out loud that if cable companies have 
eliminated competition by swapping territories, if in essence 
we sit here and flex our muscles and talk about competition 
today, whether some time the, quote, unquote, just nature of 
the business isn't going to do the same thing between satellite 
and your cable companies, that is, cables get the inner cities; 
satellites get everything else, and no competition anymore.
    And I can see that. I can see it moving in that direction. 
We have already seen semblances and evidences of that occurring 
within the industry.
    So we have this blue ribbon panel of witnesses today. I 
would like to hear about not only the state of competition 
today, but what will it be for a rural consumer in the future? 
How are those people in my district in Valley, Nebraska that do 
not have access to cable but only have satellite, how will they 
fare 2 years from now? How will they be insured that they will 
have some semblance of TV service?
    And, yes, Mr. Chairman, one of our options is simply to go 
back to antenna, but you have children as well. And as we moved 
into our new home in Valley and have neither cable nor 
satellite yet, an hourly request for, ``Will you turn it to 
Cartoon Network? Will you turn it to Nickelodeon?'' and I have 
to explain then the mechanics of antenna versus cable, that is 
really not an option for some families.
    I yield back my time.
    Mr. Upton. It sounds like you have a problem.
    Mr. Terry. Yes.
    Mr. Upton. I recognize Ms. Harman.
    Ms. Harman. Thank you, Mr. Chairman.
    And thank you for holding this important hearing and this 
timely hearing on competition in the direct broadcast satellite 
and cable television markets.
    Like you, I remember the world before satellite dishes. I 
even vaguely remember the world before television.
    Of course, like Mr. Boucher, I am very interested in the 
proposed merger between EchoStar and DIRECTV. As you know, this 
committee, and the Nation's telecommunications policies have 
wisely been guided by the principle that the consumer and the 
marketplace are best served by vigorous competition. I believe 
that principle must guide us in this case, as well.
    Of course, as we have just heard from Mr. Boucher and Mr. 
Terry, who gets my sympathies for having young children who are 
so TV oriented, the arguments about competition are 
complicated. One argument has to do, as Mr. Terry was saying 
about competition between the DBS and the cable industries. 
Another argument has to do about access to service in the DBS 
industry. That is what Mr. Boucher was talking about.
    But I would put out there a third argument or maybe an 
additional argument that has to do not with the effect of 
competition on service, but the effect of competition on 
innovation.
    It is critically important that going forward we not only 
have competition in service, but we have innovation in the 
television transmission and the broadband industries. If we do 
not continue to have innovation, we will never solve the tough 
problems of service access to rural areas.
    Let me mention one additional point that, of course, is of 
extreme interest to me, and that is that DIRECTV is my 
constituent, and so, of course, it has been very well 
represented.
    But the truth is that DIRECTV employs about 1,200 people in 
El Segundo, California, and 150 more at its antenna farm in 
Marina del Rey, California, both of them in the 36th District.
    El Segundo, as some of you may know, is just south of Los 
Angeles International Airport, which of course, like all other 
major airport hubs has been hard hit by job losses since 
September 11th.
    Two weeks ago, for example, I visited a major company in El 
Segundo that prepares food for the airlines. It has laid off 
half its work force. The South Bay in California in which these 
cities are located has lost about 41,000 jobs in the last 3 
months. So I am very concerned about reports that a merger 
between DIRECTV and EchoStar could result in substantial 
additional job cuts and the closing, the possible closing of 
DIRECTV's California facilities.
    Let me point out that DIRECTV also plays a broader role in 
the aerospace sector and in the regional economy of Los 
Angeles. DIRECTV, as I think we all know, had its origins in 
Hughes Electronics, which was the original developer of the 
geosynchronous satellite. That satellite, the first of which 
was built in 1961, was built in Culver City, California, and 
our commercial satellite system that grew from that has been a 
mainstay of the California economy.
    In the early 1990's, when California's aerospace industry 
was headed to depression, Hughes and other aerospace companies 
diversified into many new industry sectors, and that 
diversification saved them and saved our economy.
    Part of that diversification was the development of 
DIRECTV. Today both the private and public sectors benefit from 
the coexistence and interaction of commercial, military, and 
intelligence satellite applications which have benefited from 
the formation of companies like DIRECTV.
    And I would be very, very worried if a merger of DIRECTV 
with any other company put some of those synergies at risk.
    So in conclusion, Mr. Chairman, these days I spend most of 
my time talking about the need to develop digital capacity to 
counter a digital terrorist threat. As we think about that, we 
have to think about the need for a robust commercial satellite 
industry and a strong high tech software and hardware sector.
    This merger and these issues are about a lot more than 
channel surfing, even though Mr. Terry's kids may think that is 
the issue. They are really about our survival.
    I yield back the balance of my time. Thank you.
    Mr. Upton. The gentleman from Illinois, Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman.
    I will be brief. I appreciate the hearing. We are all 
interested in what is going on in the multi-channel video 
programming marketplace and to access the direction that we as 
a Nation through public policy want to move.
    I want to focus on a couple of things. I also represent a 
large rural district that we have the fear of being 
disenfranchised based upon maybe the major markets being 
covered in local into local and the smaller markets being left 
out. And I do not know if the proposed merger will do anything 
to help that, and I have heard comments that it will not.
    So I am a very strong supporter of the benefits of free, 
over-the-air broadcasts for community service and safety 
issues, and I have seen it work in my district with floods and 
hurricanes and the like, and I want to make sure that that is 
protected and available.
    One provider could, in essence, even if they were going to 
provide it, could make that cost exorbitant for the local 
broadcaster, which is another concern.
    So we are looking at this closely. We want to be open 
minded, but the promise of or a guarantee of high quality DBS 
service being available to all my constituents not just for the 
benefits of entertainment, but really the growth of rural 
America is really dependent upon a vibrant broadband access, 
whether that is from direct satellite or whether that is from 
cable or that cellular or even on the telephone wire.
    So I will be focusing on that. I appreciate the hearing, 
Mr. Chairman, and I yield back my time.
    Mr. Upton. Thank you.
    The Chair will recognize the ranking member of the full 
committee, Mr. Dingell.
    Mr. Dingell. Mr. Chairman, thank you, and I want to commend 
you for the hearing today.
    This is an important hearing. It may very well be the only 
one, which we have on this particular subject for some time 
into the future, and it relates to the state of competition in 
the multi-channel video marketplace, and I believe that it is 
not only timely, but as I have said, important, given the 
recent merger announcement by the two national satellite 
television companies, EchoStar and DIRECTV.
    Separately these two companies are the third and the sixth 
largest multi-channeled video programming distributors in the 
United States. If approved, the combined company will become 
No. 1 in the country with nearly 17 million subscribers.
    Questions relative to consumer service, competition, and of 
course, antitrust matters are raised by this event, but in this 
age of rapid consolidation, one must observe that the vaunted 
position which will be achieved by this newly merged company 
may not last long. AT&T, which instantly became No. 1 when it 
swallowed the cable giants TCI and Media One just a few years 
ago, is also on the auction block. AT&T suitors include AOL 
Time Warner and Comcast, currently the second and fourth 
largest industry players, respectively.
    And whoever succeeds in pursuit of AT&T will quickly 
leapfrog a newly merged EchoStar to occupy the No. 1 position, 
at least until the next merger.
    Now, having said these things, I have enormous respect for 
my friends in the satellite and cable industries. They provide 
a necessary and widely accepted service to the American people, 
and I look forward with great fascination to hearing all of 
them and everybody else explain how this consolidation will 
actually increase competition in the MVPD market.
    Certainly we will hear how these mergers will result in 
additional consumer welfare. It may well be that in a year or 
so we will hear differently from the consumers.
    Increased efficiencies, it is said, lead to lower prices 
and better service for the American public. These arguments are 
occasionally true, but they presume that effective competition 
in the market will remain after the merger is completed, and 
that a number of questions which need to be answered prior to 
that merger are, in fact, both asked, responded to, and 
understood.
    I am not prepared to make any judgments today as to whether 
the EchoStar transaction will substantially lessen competition 
in the MVPD market. That determination will be made by the 
antitrust authorities after more intensive analysis.
    But I am concerned about some of the practical effects of 
this combination on the consuming public. While I am heartened 
by the public statements of EchoStar expressing its intent to 
expand local-into-local service to more markets nationwide, I 
understood that both EchoStar and DIRECTV have recently 
requested a judicial stay of the must carry requirements that 
the Congress imposed as a condition of providing this service.
    I note that EchoStar indicated support of those at a prior 
time, but now raises questions as to constitutionality.
    In my view, a full ``must carry'' obligation beginning 
January 1, 2002, was an integral part of the compromise struck 
in the Satellite Home Viewer Improvement Act of 1999. That 
considered not only the concerns of the viewing public, but 
also of others in the different parties of the industry, 
including those parts which provide free viewing to the 
American public of over-the-air broadcasting, something which I 
regard as being very necessary for this country to continue to 
sustain. The law gave the satellite companies a compulsory 
copyright license free of charge entitling them to carry 
broadcast of local stations so that they could compete more 
effectively with cable, something I applaud. The condition was 
that satellite companies, like their cable competitors, must be 
subject to the same set of rules, i.e., ``must carry.''
    The Congress believed in 1999 that EchoStar must bear the 
burden of complying with the law and receive the benefit which 
they had sought rather than to litigate one half of the bargain 
struck. I hope that the good intentions expressed by EchoStar 
more recently in the context of this merger will, in fact, 
stand the test of time and will not confront this committee 
with any sudden changes of view or position by EchoStar.
    Specifically EchoStar has stated that it will absorb the 
cost of replacing any consumer equipment made obsolete by the 
merger. I hope we will learn more about the content and the 
extent of this commitment today, and to understand what it will 
really mean to the consuming public, to the industry, and to 
the Congress.
    I also hope that we will learn more about the extent of the 
commitment today. Does it include new satellite dishes, new set 
top boxes, professional installation, which can be expensive, 
and/or positioning or repositioning of satellite receivers? 
Does it cover replacement of high end equipment, including high 
definition satellite tuners and the combination of set top 
boxes containing personal video recorders? I believe that 17 
million of our constituents expect us to find the answers to 
these questions, and I join them in thinking that they have a 
right to know exactly and precisely what will become of their 
stranded investment as a result of this merger.
    Finally, I hope to hear more about EchoStar's plan for the 
future of uniform national pricing. Will rural communities have 
access to the same pricing plans as urban consumers for all 
programming, including premium and a la carte services? I have 
heard that it is the intention of EchoStar to assure this. I 
want to hear that assurance here, but I also want to hear what 
that assurance means and whether or not there might be some 
change in that subsequent to enactment of legislation or 
actions by the regulatory agencies.
    Now, other questions. Will marketing promotions and special 
offers continue to be available to consumers in communities 
that are no longer served by a cable competitor? An important 
question to many who live in rural areas and elsewhere in this 
country.
    Mr. Chairman, these are critical questions. There probably 
are others. It is my view they must be answered satisfactorily 
in the very near future if we are to be sure that we are 
carrying out our responsibilities to consumers and that we are 
protecting them and assuring that competition continues to 
survive and to provide broad benefits to the American public in 
the multi-channel video marketplace.
    I commend you for these hearings, Mr. Chairman, and I thank 
you for recognizing me and making this statement possible.
    [The prepared statement of Hon. John D. Dingell follows:]
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Thank you, Mr. Chairman. Today's hearing on the state of 
competition in the multichannel video marketplace is particularly 
timely, given the recent merger announcement by the two national 
satellite television companies, EchoStar and DIRECTV.
    Separately, these two companies are the third and sixth largest 
multichannel video programming distributors, or ``MVPDs,'' in the 
United States. If approved, the combined company will become number one 
in the country with nearly 17 million subscribers.
    But in this age of rapid consolidation, that vaunted position may 
not last long. AT&T, which instantly became number one when it 
swallowed cable giants TCI and Media One just a few years ago, is also 
on the auction block.
    AT&T's suitors include AOL Time Warner and Comcast, currently the 
second and fourth largest industry players, respectively. And whoever 
succeeds in its pursuit of AT&T will quickly leapfrog a merged EchoStar 
to occupy the number one position--at least for a time.
    Now I have enormous respect for my friends in the satellite and 
cable industries, and I look forward with great fascination to hearing 
them explain how all this consolidation is actually increasing 
competition in the MVPD market.
    Certainly we will hear how these mergers result in additional 
consumer welfare. Increased efficiencies, they say, lead to lower 
prices and better service for the American public. And these arguments 
are often true. But they presuppose that effective competition in the 
market will remain after the merger is completed.
    I am not prepared to make a judgment today as to whether the 
EchoStar transaction will substantially lessen competition in the MVPD 
market. That determination will be made by the antitrust authorities 
after more intensive analysis. But I am concerned about some of the 
practical effects of this combination on the consuming public.
    While I am heartened by the public statements of EchoStar 
expressing its intent to expand ``local into local'' service to more 
markets nationwide, I understand that both EchoStar and DIRECTV 
recently requested a judicial stay of the ``must carry'' requirements 
that Congress imposed as a condition of providing this service.
    In my view, a full ``must carry'' obligation beginning January 1, 
2002, was an integral part of the compromise struck in the Satellite 
Home Viewer Improvement Act of 1999. That law gave satellite companies 
a compulsory copyright license, free of charge, entitling them to carry 
local broadcast stations so they could compete more effectively with 
cable. The condition was that satellite companies--like their cable 
competitors--would be subject to must carry rules.
    The Congress believed in 1999 that EchoStar would bear both the 
burden and the benefit of that law, rather than litigate one half of 
the bargain struck. I hope the good intentions expressed by EchoStar 
more recently in the context of this merger will, in fact, stand the 
test of time.
    Specifically, EchoStar has stated that it will absorb the cost of 
replacing any consumer equipment made obsolete by this merger. I hope 
we will learn more about the extent of this commitment today. Does it 
include the cost of new satellite dishes, new set top boxes, 
professional installation and/or repositioning of satellite receivers? 
Does it cover replacement of higher-end equipment, including high 
definition satellite tuners, and combination set-top boxes containing 
personal video recorders? I believe that 17 million of our constituents 
have a right to know precisely what will become of their stranded 
investment as a result of this merger.
    Finally, I hope to hear more about EchoStar's plan for the future 
of uniform national pricing. Will rural communities have access to the 
same pricing plans as urban consumers for all programming, including 
premium and ala carte services? Will marketing promotions and special 
offers continue to be available to consumers in communities that are 
not served by a cable competitor?
    Mr. Chairman, I believe these are some of the critical questions 
that must be answered satisfactorily if we are to make sure consumers 
are protected and competition continues to survive in the multichannel 
video marketplace.

    Mr. Upton. Thank you.
    Mr. Gillmor.
    Mr. Gillmor. Pass, Mr. Chairman.
    Mr. Upton. Mr. Brown.
    Mr. Brown. The issues today are obviously very complex. 
They have significant implications for the future of the multi-
channel video programming marketplace. Both large and small 
companies play a very important role in this enterprise, and it 
is important to continue to promote competition and protect 
consumers.
    I wanted to take this opportunity to welcome Michael 
Fiorile, the President and CEO for the Dispatch Broadcast Group 
in Columbus, Ohio. Dispatch Broadcast Group includes WBNS-TV 
and AM-FM in Columbus; the Ohio News Network, WTHR-TV in 
Indianapolis; and Dispatch Interactive Television. WBNS-DT is 
the only digital signal in the Columbus market.
    Mike's credentials are impressive. He served as Vice 
President and General Manager of TV stations in Sacramento and 
Ashville and Flint, in Scranton. He currently serves as Vice 
Chairman of the National Association of Broadcasters' 
Television Board and is Vice Chairman of the NAB Digital 
Television Task Force.
    Thank you for joining us today, and thank you to all of the 
panel.
    I yield back, Mr. Chairman.
    Mr. Upton. Ms. McCarthy.
    Ms. McCarthy. Mr. Chairman, there has already been a whole 
lot of wisdom shared by members more senior than I about what 
today is all about and about what the future must determine, 
and so I am going to submit my remarks for the record.
    I am thankful that you are holding this hearing. I suspect 
it will be one of many. I know that I, too, share the concern 
raised by the chairman and ranking member about how the 
consumer will benefit, how the spectrum will be divided, but we 
make sure that we provide local channels, at least 100 of them 
across this Nation. You know, we are only at 42 right now.
    All of these probably will come out in the testimony from 
the experts we have here before us, and so I am going to yield 
back so that we can proceed to hear from them.
    [The prepared statement of Hon. Karen McCarthy follows:]
Prepared Statement of Hon. Karen McCarthy, a Representative in Congress 
                       from the State of Missouri
    Thank you Chairman Upton and Ranking Member Markey for holding this 
hearing on the status of competition in the multichannel video 
programming marketplace. I look forward to the testimony of all of the 
witnesses regarding the merger between DirecTV and EchoStar as well as 
program access rates, cable ownership limits, cable pricing, and local 
content providers.
    Cable and satellite television send a variety of programming to 
more than 80 percent of households nationwide. Consumers now have 
hundreds of channels to choose from due to advances in digital 
technology. While the number and variety of services offered by these 
programming distributors is increasing, including broadband Internet 
and digital music channels, the number of competitors in the industry 
is decreasing, potentially providing consumers less choice.
    In Missouri, only \2/3\ of the households are accessible by cable. 
Nearly 850,000 families had no option for multichannel programming 
before Direct Broadcast Satellite (DBS) came to the marketplace. 
Because of the efforts of many of these companies with representatives 
before us today, consumers in rural areas can now watch 150 channels of 
digital programming and download files from the Internet at broadband 
speeds which were previously unattainable.
    I am concerned the merger of the two companies which provide these 
services, DirecTV and EchoStar may remove competitive incentives from 
improving services while maintaining low prices. We need to ensure that 
if this merger is approved, benefits will be passed on to consumers, 
not just the companies involved. While mergers frequently lead to 
increased efficiencies and economies of scale, I would like to ensure 
the consolidated companies will pass on savings to consumers. I hope to 
learn how the single merged company plans to continue to expand 
competitive services and offer competitive prices to the 9 million DBS 
subscribers who do not have the option to subscribe to cable. We cannot 
allow a monopoly satellite company to take advantage of rural 
consumers.
    DirecTV and EchoStar are currently the third and sixth largest 
multichannel video programming distributors, respectively. If the 
merger proceeds, the new entity would become the largest in the 
country. As a proponent of competition, I would like to know how 
consolidation in the industry will increase competition in this market.
    I also look forward to hearing how the merger will ensure that all 
local channels will be provided to 100 localities, when currently the 
two separate companies only serve 42 unique markets. I am interested in 
the witnesses' views of the implementation of this proposal as well as 
their opinions of the current lawsuit to overturn the Satellite Home 
Viewer Improvement Act of 1999 in which Public Law 106-113 required all 
local channels must be provided by the DBS system if one is, the 
``carry one, carry all'' policy.
    Furthermore, I am concerned how the spectrum will be divided to 
contain the new high definition signals while continuing to provide 
local content. Local content requires a great deal of capacity 
consideration each local signal is sent to the entire country but only 
viewable in certain areas. This is a large waste of spectrum, and I 
look forward to hearing how more this can be more efficiently used.
    I eagerly anticipate the testimony of the distinguished panelists 
so we can gather more insight into the state of competition in this 
high tech industry which is so vital to the economic livelihood of 
America.
    Thank you Mr. Chairman. I yield back the balance of my time.

    Mr. Upton. Thank you.
    I would note that all members by unanimous consent will 
have their opening statement as part of the record.
    [Additional statement submitted for the record follows:]
 Prepared Statement of Hon. Eliot Engel, a Representative in Congress 
                       from the State of New York
    Mr. Chairman: I truly appreciate your calling this hearing. The 
multi-channel video programming distribution (MVPD) marketplace is 
certainly an exciting and growing industry. New technologies and 
capabilities for existing ones are being introduced all the time.
    My primary concern for today's hearing is the merger of Echostar 
and DirecTV. In the days following September 11th, as awful as I felt, 
I was strengthened by the outpouring of assistance from across the 
nation. From the millions of dollars in donations to the construction 
companies who are now cleaning up Ground Zero--without a written 
contract I would add, and an issue our full committee should be looking 
into--I was amazed at the response by individuals and companies.
    Thus, I must admit my amazement at the reaction to a simple request 
from WNET Channel 13, my local PBS station in New York. DirecTV was 
asked for temporary space on its system because Channel 13 was no 
longer broadcasting. Instead of DirecTV leaping at the chance to assist 
a gravely wounded partner in the world of television, DirecTV chose to 
act in a inconsiderate manner and deny this request. Considering the 
numerous channels on their system, 225 or so, I was quite frankly 
stunned at the reaction. Now DirecTV is asking the federal government 
to approve the creation of a national monopoly in the satellite home 
viewer market. I am forced to wonder if DirecTV, with a competitor in 
the industry, was so unresponsive, what would the reaction of a 
megacompany be to future requests.
    As we are the subcommittee that directly oversees the FCC, and the 
FCC oversees the merger, I am very interested in learning more about 
this proposal. As it stands, these companies must prove to the FCC--and 
us--why such a merger is in the public interest. These companies, after 
being a party to the SHVIA, have now sought to overturn the must carry 
rules in court and even now are seeking an injunction to prevent the 
laws requirement's from taking force on January 1, 2002.
    Beyond my own parochial concerns, I believe this has direct 
implications for a number of issues that Mr. Tauzin and others have 
regarding program access rules. I also think we should be aware that an 
alternative technology presented by Northpoint is trying to break into 
the MVDP market, which is opposed by EchoStar and DirecTV.
    I have many, many concerns, Mr. Chairman. I look forward to 
learning the answers to them.

    Mr. Upton. At this point we are going to go to the panel. 
We have an impressive list of witnesses led by Mr. Charlie 
Ergen, CEO of EchoStar; Mr. Eddy Hartenstein, Chairman and CEO 
of DIRECTV; Mr. Robert Sachs, President and CEO of the National 
Cable and Telecommunications Association; Mr. Neal Schnog, 
President of UVISION on behalf of the American Cable 
Association; Mr. Bob Phillips, President and CEO of National 
Rural Telecommunications Cooperative; Mr. Jared Abbruzzese--how 
do I get closer?--Abbruzzese, Acting CEO of WSNet; Mr. Marshall 
Pagon, President and CEO of Pegasus Communications; and Mr. 
Michael Fiorile, president and CEO of the Dispatch Broadcast 
Group and represented by the National Association of 
Broadcasters.
    Gentlemen, we appreciate your testimony coming in advance. 
It is all made part of the record, and we will start, Ms. 
Sachs, with you. If you could limit your remarks to 5 minutes, 
at which point when we are doing with the panel we will 
entertain questions from those members that are here.
    Thank you, Mr. Sachs.
    We are getting an upgrade. I want you to know when this 
calendar year is over, we are going to be at least as wired as 
the Education Committee. I have made that pledge.
    We are going to start your time over as well. So go ahead. 
I am not going to be like the Michigan State timekeeper.

 STATEMENTS OF ROBERT SACHS, PRESIDENT AND CEO, NATIONAL CABLE 
  AND TELECOMMUNICATIONS ASSOCIATION; NEAL SCHNOG, PRESIDENT, 
UVISION, ON BEHALF OF AMERICAN CABLE ASSOCIATION; BOB PHILLIPS, 
     PRESIDENT AND CEO, NATIONAL RURAL TELECOMMUNICATIONS 
 COOPERATIVE; JARED E. ABBRUZZESE, ACTING CEO, WSNet; MARSHALL 
W. PAGON, PRESIDENT AND CEO, PEGASUS COMMUNICATION; MICHAEL J. 
 FIORILE, PRESIDENT AND CEO, DISPATCH BROADCAST GROUP; EDDY W. 
 HARTENSTEIN, CHAIRMAN AND CEO, DIRECTV; AND CHARLES W. ERGEN, 
                         CEO, EchoSTAR

    Mr. Sachs. Thank you.
    Mr. Upton. Welcome to the big house.
    Mr. Sachs. That is the equivalent of does your TV turn to 
Channel 3.
    Mr. Chairman, members of the subcommittee, my name is 
Robert Sachs, and I am President and CEO of the National Cable 
and Telecommunications Association.
    Thank you for providing us with the opportunity to testify 
before your subcommittee on the subject of video competition.
    Mr. Chairman, competition in the video marketplace is 
vigorous and well established. Today consumers can choose from 
a variety of multi-channel video providers, including direct 
broadcast satellites, alternative broad band providers like 
RCN, phone companies and utilities. Indeed, most consumers have 
a choice of at least three multi-channel video providers.
    Last year in its seventh annual report on competition in 
the video marketplace, the FCC found that ``competitive 
alternatives and consumer choice continue to develop.'' 
Subscribership to satellite and terrestrial competitors to 
cable has jumped nearly tenfold from an aggregate of 2.3 
million non-cable, multi-channel video customers at the time of 
the 1992 Cable Act to almost 21 million in September 2001.
    That is correct, and the number may surprise you. But 
nearly 21 million consumers, almost one out of every four 
subscription television customers, today obtain multi-channel 
video programming from a source other than a cable operator.
    Mr. Chairman, as these results demonstrate, we believe that 
the goal of fostering video competition set by Congress in the 
1992 act has been met. While cable operators are clearly facing 
competition from a variety of sources, DBS, in particular, has 
proven itself as a competitive substitute for cable.
    With the passage of the Satellite Home Viewer Improvement 
Act, DBS companies can now retransmit local broadcast signals 
into their market of origin. The total number of DBS 
subscribers jumped from 14 million to 17 million between 
September 2000 and this past September, a 19 percent annual 
growth rate. DIRECTV now has 10.4 million subscribers, more 
than all but two cable companies, AT&T Broadband and AOL Time 
Warner.
    The No. 2 DBS provider, EchoStar, has 6.4 million 
subscribers, more than all but four cable companies. By any 
measure EchoStar and DIRECTV are formidable competitors to 
cable.
    Moreover, with the additional channels and operating 
efficiencies that would result from combining these two 
companies, there is no reason to believe that a 17 million 
subscriber satellite company will be any less formidable.
    NCTA does not take a position with regard to the proposed 
EchoStar-DIRECTV merger. We do not seek to gain competitive 
advantage by imposing regulatory conditions on competitors, and 
we believe that any antitrust issues raised by the merger are 
best left to resolution by expert agencies.
    Our position, however, is that multi-channel video 
competition is already fierce, leading our industry to respond 
by embarking on a massive effort to upgrade facilities and 
launch new services. Since 1996, our industry has invested 
approximately $55 billion of risk capital to deploy broadband 
plant in order to offer new advanced digital services, 
including digital video, high speed Internet, and cable 
telephony.
    Mr. Chairman, consumers are benefiting from this rapid and 
unabated growth of competition in the video market, and the 
convergence of video, voice, and data services in the digital 
broadband marketplace will only accelerate this trend.
    Cable will continue to be a leader in providing consumers 
with choice not only in video services, but also in high speed 
Internet and cable telephony.
    At the same time, consumers will be able to choose from 
among multiple vendors when making their purchases. In this 
highly competitive environment, companies that succeed will be 
those who offer consumers the best quality, value, and service.
    It is not possible to forecast which companies will be most 
successful, but one thing that can be said with certainty is 
that American consumers will be the ultimate winners.
    Thank you very much.
    [The prepared statement of Robert Sachs follows:]
Prepared Statement of Robert Sachs, President and CEO, National Cable & 
                     Telecommunications Association
                              introduction
    Mr. Chairman, members of the Subcommittee, my name is Robert Sachs 
and I am President and CEO of the National Cable & Telecommunications 
Association. Thank you for providing us with the opportunity to testify 
before your subcommittee regarding competition in the multichannel 
video market.
    Mr. Chairman, competition in the multichannel video marketplace is 
vigorous and well established. Today, consumers can choose from a 
variety of multichannel video providers, including direct broadcast 
satellites (DBS), alternative broadband providers like RCN, phone 
companies, like Qwest and utilities, like Sigecom. Indeed, most 
consumers have a choice of at least three multichannel video providers. 
As a result of this competition, nearly 21 million consumers--almost 23 
percent of subscription television customers--today obtain multichannel 
video programming from a source other than a cable operator.
    To determine whether competition exists, one only need look at 
what's been happening in the marketplace since the passage of the 1996 
Telecommunications Act. With respect to the marketplace for the 
delivery of video services, the answer to that question is clear. Video 
competition is fierce, leading to service enhancements and product 
innovation that inure to the benefit of consumers.
    The cable industry responded to this competition and the regulatory 
stability created by the passage of the 1996 Act by embarking on a 
massive effort to upgrade facilities and launch new services. Since the 
passage of the 1996 Act, the cable industry has invested roughly $55 
billion to deploy broadband plant in order to offer a wide array of new 
advanced digital services, including digital video, high speed Internet 
access, cable telephony and interactive applications. The DBS industry, 
seeking to maintain its lead position in subscriber growth has 
responded to cable's investment by launching its own satellite 
delivered broadband services and obtaining exclusive sports 
programming.

Competition in the Video Market Is Well Established And Growing Steadily
    Market Share of Multichannel Video Program Distributors (MVPDs)--
                             September 2001
------------------------------------------------------------------------
                                               Subscribers
                    MVPD                           (in       Percent of
                                                Millions)    MVPD Market
------------------------------------------------------------------------
DBS.........................................        16.73         18.05
C-Band......................................         0.94          1.01
MMDS........................................         0.62          0.67
SMATV.......................................         1.50          1.62
Local Telephone Companies...................         0.43          0.46
Broadband Competitors.......................         0.66          0.71
Total Non-Cable.............................        20.87         22.53
Cable.......................................        71.79         77.47
Total Multichannel Subscribers..............        92.66        100.00
------------------------------------------------------------------------
Source: NCTA Research Department estimate based on data from A. C.
  Nielsen, Paul Kagan Associates, Cable World, SkyREPORT, and public
  reports of individual companies.

    Today, cable competes with a wide range of satellite and 
terrestrial providers. Last year in its Seventh Annual Report on 
Competition in the Video Marketplace, the FCC found that ``competitive 
alternatives and consumer choice continue to develop.'' Customers have 
increasingly flocked to these alternatives, with non-cable 
subscribership growing nearly ten-fold from an aggregate of 2,330,000 
non-cable MVPD customers at the time of the 1992 Cable Act to more than 
20,876,000 in September 2001.
[GRAPHIC] [TIFF OMITTED] T7116.001

    While cable operators are clearly facing competition from a 
variety of sources, DBS in particular has proven itself as a 
competitive substitute for cable. With the passage of the 
Satellite Home Viewer Improvement Act (SHVIA) in November 1999, 
DBS companies can now retransmit local broadcast signals into 
their market of origin (``local-into-local''). As of November 
2001, DirecTV and EchoStar made available local TV signals in 
42 markets with over 65 million television households. When 
combined with their ability to offer hundreds of channels of 
digital video and CD quality sound, DBS companies compete 
vigorously with cable. The total number of DBS subscribers 
jumped from 14 million to 16.73 million between September 2000 
and September 2001--a 19 percent annual growth rate. DirecTV 
now has more subscribers (10.4 million) than all but two cable 
operators--AT&T and AOL Time Warner--making it the third 
largest multichannel video provider in the U.S. The number two 
DBS provider, EchoStar, is the fifth largest MVPD and has more 
customers than all but three cable companies. Furthermore, 
DirecTV predicts that it will add 1-1.2 million new subscribers 
in 2002.1 EchoStar forecasts net subscriber 
additions to total between 1.5 and 1.75 million in 2001, with 
similar gains predicted in 2002.2
---------------------------------------------------------------------------
    \1\ Video Business Online, ``DirecTV parent sees 10% growth next 
year,'' www.video
business.com/news/111401.
    \2\  ``EchoStar reports Q3 profit on subscriber growth,'' 
biz.yahoo.com/rf/011023/n23236477-

                   TOP 12 MULITCHANNEL VIDEO PROVIDERS
------------------------------------------------------------------------
                                                              Number of
                          Company                            Subscribers
------------------------------------------------------------------------
AT&T Broadband.............................................   13,750,000
Time Warner Cable..........................................   12,654,000
DirecTV....................................................   10,341,000
Comcast....................................................    8,437,000
Charter....................................................    6,970,000
Echostar...................................................    6,430,000
Cox Communications.........................................    6,206,737
Adelphia...................................................    5,693,035
Cablevision Systems........................................    2,988,590
Mediacom...................................................    1,585,000
Insight....................................................    1,275,500
CableOne...................................................      760,000
------------------------------------------------------------------------
Source: NCTA Research based on Company 3Q reports

    Clearly, EchoStar and DirecTV are formidable competitors to cable 
and enjoy a number of competitive advantages. For example, DBS has been 
all digital from the start, giving it greater channel capacity than 
many cable systems, and has been able to achieve greater efficiencies 
in advertising and promotion with uniform national pricing. In 
addition, DBS companies are not subject to local franchise fees and 
taxes which can add so much as 15% to a cable customer's monthly bill, 
as they do in the District of Columbia. Also, DBS companies are not 
saddled with the costs of public access studios, institutional networks 
and free municipal cable hook-ups which are required by most cable 
franchise agreements.
    On cable's side of the competitive ledger, upgraded cable systems 
can match the programming variety and choice that DBS companies offer, 
and provide consumers with 7 by 24 local customer service, interactive 
digital video, cable modem and cable telephony products.
    The marketplace will determine which MVPD offers the better package 
of services with the best price and customer care. And individual 
consumers will determine which service offering best suits their 
particular needs. But what is undeniably clear is that consumers have 
multiple choices and are deciding among them with their pocket books.
    NCTA does not take a position with regard to the proposed EchoStar/
DirecTV merger. As indicated earlier, cable operators see the Dish 
Network and DirecTV as very formidable competitors, and compete 
vigorously with these satellite companies everyday. Moreover, with the 
additional channel capacity and operating efficiencies that would 
result from combining these two companies, we have no reason to believe 
that a 17 million subscriber satellite company will be any less 
formidable. Charlie Ergen is a fierce and respected competitor, as his 
track record amply demonstrates.
    We believe that antitrust and public policy issues that have been 
raised about the proposed EchoStar/DirecTV merger are best left to 
resolution by expert agencies like the U.S. Department of Justice and 
Federal Communications Commission. NCTA represents cable operators 
serving over 90% of the nation's cable television customers and more 
than 200 cable program networks, as well as equipment suppliers and 
providers of other services to the cable industry. Many of these 
companies are also suppliers to the satellite industry. Individual 
member companies may choose to submit comments to the expert agencies, 
however, the cable industry, as an industry, does not plan to take a 
position on the merger.
    Total dish subscribership (C-Band and DBS) now exceeds 15 percent 
in 41 states. According to SkyREPORT, Direct-to-Home (DTH) subscribers 
(all dish customers, including DBS and C-Band) grew from 15.3 million 
to 17.9 million between September 2000 and September 2001, an increase 
of 15.6 percent (versus 1 percent for cable). In 41 states, DTH 
satellite subscribership now exceeds 15 percent of all television 
homes. As of July 2001, DTH penetration exceeded 20 percent in 31 
states, 25 percent in 16 states, 30 percent in 5 states, and 40 percent 
in 1 state. As mentioned, today most consumers have the choice of two 
DBS providers in addition to cable, and some have other multichannel 
video choices as well.

 States with Direct-To-Home (DTH) Dish Penetration of Fifteen Percent or
                            More (July 2001)
------------------------------------------------------------------------
                                                             % OF TVHH w/
                           STATE                                 DTH
------------------------------------------------------------------------
Vermont....................................................       41.62
Montana....................................................       38.86
Wyoming....................................................       34.23
Mississippi................................................       32.97
Arkansas...................................................       30.79
Idaho......................................................       29.26
North Carolina.............................................       28.34
North Dakota...............................................       28.10
Missouri...................................................       27.12
Kentucky...................................................       27.11
Utah.......................................................       26.96
South Carolina.............................................       26.26
West Virginia..............................................       26.22
Texas......................................................       25.68
Indiana....................................................       25.14
New Mexico.................................................       25.11
Georgia....................................................       24.93
South Dakota...............................................       24.59
Tennessee..................................................       24.43
Alabama....................................................       24.15
Virginia...................................................       23.82
Oklahoma...................................................       23.48
Maine......................................................       23.21
Colorado...................................................       22.89
Iowa.......................................................       22.68
Arizona....................................................       22.29
Wisconsin..................................................       21.96
Nebraska...................................................       21.38
Oregon.....................................................       20.97
Minnesota..................................................       20.67
Kansas.....................................................       20.65
Michigan...................................................       18.86
Florida....................................................       18.75
Louisiana..................................................       18.55
Washington.................................................       17.82
Ohio.......................................................       16.76
Nevada.....................................................       16.49
California.................................................       16.47
New Hampshire..............................................       16.45
Illinois...................................................       16.37
Delaware...................................................      15.05
------------------------------------------------------------------------
Source: SkyTRENDS SkyMAP July 1, 2001; www.skyreport.com

    While DBS has clearly become the chief competitor to cable, a 
growing number of new competitors have entered the marketplace. 
Companies like RCN, Knology, WideOpenWest, and others are providing 
consumers with competitive video and broadband services. Some utilities 
and incumbent local exchange carriers are also adding video programming 
to their product line-ups.
    Mr. Chairman, the goal of multichannel video competition set by 
Congress in the 1992 Cable Act has been accomplished.
The Cable Industry's Response to Burgeoning Competition
    Cable companies have responded to competition in the video market 
by aggressively upgrading their facilities and launching new services. 
Since passage of the Telecommunications Act of 1996, the cable industry 
has invested nearly $55 billion to deploy broadband plant in order to 
offer a wide array of advanced services, including digital video, 
digital music, high speed access to the Internet, and telephony. These 
upgrades involve rebuilding more than a million miles of cable plant 
and by year-end 2001, they will be approximately 80 percent complete. 
As of September 30, 2001, cable had 13.7 million digital video 
customers, 6.4 million high-speed data customers, and 1.5 million 
residential cable telephone customers.
    Among the new options that cable customers have are digital video 
services. Cable program networks have already launched some 60 new 
digital channels, offering consumers additional choice and further 
program diversity. Examples include the Biography Channel and History 
Channel International (from A&E); Science, Civilization, and Kids (from 
Discovery); Noggin, Nick Too, and Nickelodeon Games & Sports (from 
Nickelodeon); and style. (from E!). There are six new Hispanic channels 
from Liberty Canales, new music channels from MTV and BET, and separate 
channels targeting Indian, Italian, Arabic, Filipino, French, South 
Asian and Chinese viewers from The International Channel. There are 
also many new premium offerings from HBO (HBO Family, ActionMAX, and 
ThrillerMAX), Showtime (Showtime Extreme, Showtime Beyond) and Starz 
Encore (Family, Cinema, Movies for the Soul, and Adventure Zone).
Prices for Cable Programming Services
    Despite escalating programming costs (especially higher sports 
rights fees) and billions spent on system upgrades, cable prices have 
remained relatively stable on a per-channel basis. For example, in its 
most recent report the Federal Communications Commission found that 
cable rates stayed unchanged in the year 2000 on a cost-per-channel 
basis (Report on Cable Industry Prices, FCC 01-49, MM Docket No. 92-
266, released February 14, 2001). According to the same report, during 
the 12-month period ending July 1, 2000, average monthly prices for 
basic service tiers (BST), cable programming service tiers (CPST), and 
equipment increased by 5.8 percent. This represents a very slight 
increase (from 5.2 percent) for the year ending July 1, 1999--during 
which CPST prices were subject to FCC regulation from July 1, 1998, to 
March 31, 1999.
    Industry critics will cite the fact that average monthly cable 
prices increased 5.8 percent compared to the inflation rate of 3.7 
percent during the 12-month period ending July 1, 2000. But their 
criticism fails to take into account the fact that cable subscribers 
also received an average of three additional channels of BST and/or 
CPST programming. In fact, it is the competition from direct broadcast 
satellite services and other competitive broadband providers that has 
driven cable operators to upgrade their plant and add the new channels 
of programming consumers want.
    Year-to-year comparisons which fail to consider the increased 
number of channels that operators provide to customers therefore create 
a misleading picture. In fact, data from the FCC and General Accounting 
Office show that the price per channel of cable's video services has 
declined since 1986 when adjusted for inflation:

                   Price Per Cable Channel, 1986-2000
------------------------------------------------------------------------
                                      12/1/86   4/1/91  7/31/97  7/31/00
------------------------------------------------------------------------
Nominal Price per Channel...........    $0.44    $0.53    $0.63    $0.66
Price Per Channel Adjusted for          $0.69    $0.68    $0.68   $0.66
 Inflation (in 2000 dollars)........
------------------------------------------------------------------------
Source: GAO Survey of Cable Television Rates and Services, July 1991;
  FCC Reports on Cable Industry Prices, released 12-15-97 and 2-14-01;
  Bureau of Labor Statistics, CPI-U.

    This drop in real per-channel cable prices has occurred even though 
programming costs have skyrocketed since 1986. For example, between 
1996 and 2001, the cable industry spent over $46 billion on basic and 
premium programming--nearly twice the $23.8 billion it spent during the 
previous six years.

           Cable Systems' Programming Expenditures: 1986-2001
------------------------------------------------------------------------
                                                            Expenditures
                           Year                                  (in
                                                              Billions)
------------------------------------------------------------------------
1986......................................................       $2.030
1987......................................................       $2.289
1988......................................................       $2.599
1989......................................................       $2.918
1990......................................................       $3.195
1991......................................................       $3.463
1992......................................................       $3.811
1993......................................................       $4.000
1994......................................................       $4.370
1995......................................................       $4.963
1996......................................................       $5.656
1997......................................................       $6.413
1998......................................................       $7.466
1999......................................................       $8.000
2000......................................................       $8.882
2001......................................................      $9.800
------------------------------------------------------------------------
Source: NCTA Research Department estimate, based on data from Paul Kagan
  Associates, Inc. and the U.S. Copyright Office.

    Cable customers today are receiving more channels and better value 
for their dollar than ever before. And consumers are using their cable 
service more than ever. During primetime, ad-supported cable viewership 
increased from a 7.5 share during the 1985-1986 television season to a 
41.7 share during the 2000/2001 television season, according to a 
Cabletelevision Advertising Bureau analysis of Nielsen data.
Expiration of Restrictions on Exclusive Contracts
    Finally, I know this subcommittee has a particular interest in a 
provision of the 1992 Cable Act that imposed a 10-year restriction on 
the ability of vertically-integrated satellite cable programming 
networks to enter into exclusive contracts with cable operators. That 
restriction is scheduled to sunset in October 2002, unless the FCC 
finds that ``such prohibition continues to be necessary to preserve and 
protect competition and diversity in the distribution of video 
programming.''
    The prohibition on the ability of vertically integrated programmers 
to enter into exclusive contracts was enacted in a very different 
environment. As my testimony indicates, the competitive landscape in 
the multichannel video market place has changed dramatically since 
then. In 1992, DBS had no subscribers. Today, DBS serves more than 17 
million customers. In 1992, cable operators served 95% of all MVPD 
subscribers. Today, cable serves less than 78% of multichannel video 
customers.
    And, in a total turnaround of circumstances, the most valuable 
exclusive rights in subscription television--to the NFL's Sunday 
afternoon football package--are held by DirecTV, the third largest 
MVPD. Regulations that were established during a period when there were 
significantly fewer multichannel video programming alternatives for 
consumers should be allowed to expire in a competitive environment. In 
limiting the restriction on exclusive contracts for 10 years, Congress 
recognized that a competitive marketplace is preferable to regulation. 
Prolonging the ban disserves competition and diversity by disincenting 
cable operators and their competitors to develop differentiated 
programming services.
    The dramatic growth over the last decade in the number of 
multichannel customers subscribing to alternatives to cable is only 
part of the picture. The increase in diverse program services in which 
cable operators have no ownership interest has totally changed the 
landscape from 1992. In 1992, there were only 45 non-vertically 
integrated satellite-delivered services. Today, there are more than 200 
national satellite delivered services that have no cable ownership. 
These networks compete with vertically-integrated networks for viewers, 
offering a variety of programming genres, such as news, children's, 
music and general interest programming, among others. While nearly half 
of all program services were vertically integrated in 1992, that 
percentage has dropped to 26% today. And no single cable company has 
ownership interests in more than 10% of these satellite delivered 
programming services.

----------------------------------------------------------------------------------------------------------------
                                                                                                   Total Number
                                     Number of      Percent of    Number of Non-  Percent of Non-  of Satellite
              Year                  Vertically      Vertically      Vertically      Vertically       Delivered
                                    Integrated      Integrated      Integrated      Integrated      Programming
                                     Services        Services        Services        Services        Services
----------------------------------------------------------------------------------------------------------------
1992............................              42             48%              45             52%              87
1994............................              56             53%              50             47%             106
1995............................              66             51%              63             49%             129
1996............................              67             46%              80             54%             147
1997............................              68             40%             104             60%             172
1998............................              95             39%             150             61%             245
1999............................             104             37%             179             63%             283
2000............................              99             35%             182             65%             281
2001............................              73             26%             208             74%             281
----------------------------------------------------------------------------------------------------------------
Source: 1999-2000 FCC Annual Competition Reports; NCTA Research

    In contrast, major media conglomerates like Disney, General 
Electric, Viacom, and News Corp (who respectively own the ABC, NBC, CBS 
and Fox broadcast networks), are increasing their ownership of cable 
networks. Each of the major commercial broadcast TV networks today is 
owned by a media company that has financial interests in 10 to 20 cable 
networks. Some are nationally distributed channels like CNBC, while 
others are regional channels like Fox Sports Net. And, as the following 
chart shows, the stable of broadcast-owned cable networks includes some 
of the most powerful brands in television, among them ESPN, The Disney 
Channel, MTV, VH-1, Nickelodeon, Lifetime, the History Channel, and 
Showtime Networks.
                             November 2001
            Broadcast Network Investments in Cable Networks
General Electric/NBC: CNBC
Partial Ownership: A&E; AMC; Biography Channel; Bravo; Fox Sports Net 
(regional sports networks); History Channel; History Channel 
International; Independent Film Channel; MSNBC; MuchMusic; Valuevision; 
WE: Women's Entertainment

Viacom/CBS/UPN: BET Holdings: BET, BET Action Pay-Per-View, BET on 
Jazz, BET Gospel; The Box; CMT (Country Music Television); Flix; MTV; 
MTV2; Nickelodeon/Nick at Nite; TV Land; VH1; Showtime; The Movie 
Channel; TNN: The National Network; The Suite (digital networks): 
Noggin, Nickelodeon GAS, Nick Too, M2, MTV X, MTV S, VH1 Smooth, VH1 
Country, VH1 Soul
Partial Ownership: Comedy Central; Sundance Channel

News Corporation/Fox: Fox Movie Channel; Fox News; Fox Sport Americas; 
Fox Sports World; FX
Partial Ownership: Discovery Health; Fox Sports Net (regional sports 
networks); National Geographic; Speedvision

Walt Disney/ABC: ; ABC Family; Disney Channel; SoapNet; Toon Disney
Partial Ownership: A&E; Biography Channel; E!; ESPN; ESPN2; ESPNews; 
ESPN Classic; History Channel; History Channel International; Lifetime; 
Lifetime Movie Network; style
                               conclusion
    Mr. Chairman, consumers are benefiting from a rapid and unabated 
growth of competition in the video market. The convergence of video, 
voice, and data services in the digital broadband marketplace will only 
accelerate this trend. Cable will continue to be a leader in providing 
consumers with choice--not only in video services, but also in high 
speed Internet services and telephony. At the same time, consumers will 
be able to choose from among multiple vendors when making their 
purchases. In this highly competitive environment, companies that 
succeed will be those who offer consumers the best quality, value, and 
service. It is not possible to forecast precisely which will be most 
successful. But one thing that can be said with certainty is that 
American consumers are sure to be the ultimate winners.
    Thank you again for this opportunity to present the cable 
industry's views. I would be happy to answer the Subcommittee's 
questions.

    Mr. Upton. Thank you.
    Mr. Schnog.

                    STATEMENT OF NEAL SCHNOG

    Mr. Schnog. Thank you, Mr. Chairman.
    My name is Neal Schnog, and I am the President and part 
owner of Uvision. We are a small cable TV company with 8,300 
customers in rural Oregon.
    I am also a board member of the American Cable Association 
and represent more than 900 independent cable businesses 
serving more than 7.5 million customers in mostly smaller, 
rural markets across the United States.
    Unlike some larger companies you will hear about, ACA 
members are not affiliated with program suppliers, but 
satellite, cable, telephone companies, major ISPs or other 
media companies. We are little guys.
    As a first generation American whose family was given 
shelter and prosperity by the shores of our great Nation, I 
cannot express how proud I am to take part in this hearing. But 
being on this panel, I do not just feel like a regular 
constituent. I feel like an extra in a movie called ``Clash of 
the Titans.''
    The American Cable Association represents no goliaths. We 
speak for the millions of small town customers who are 
represented by nearly every member of this committee. 
Competition really means customer choice. No choice; no 
competition.
    The irony here is that the competition and customer choice 
today, especially in rural areas, are endangered because they 
are governed by an unlikely cast of players that do not live in 
rural America and do not care what happens out in our small 
towns.
    Unless there is significant congressional and regulatory 
review of these issues, the situation is not likely to improve. 
There are three very important issues that threaten consumer 
choice in smaller markets and rural America and that will 
derail the progress to provide advanced services in smaller 
markets. That is the digital divide we all talk about.
    First, vastly increasing control over content, pricing, 
terms, conditions, and placement requirements by just a few 
programming giants; Second, the adverse effect in the smaller 
rural marketplace of the proposed EchoStar-DIRECTV merger which 
will limit competition in these markets; and Third, the burden 
of regulation on small or independent cable companies compared 
to the free regulatory ride enjoyed by the satellite companies.
    So who controls what your constituents see? You probably 
think it is me, but surprisingly enough, it is not. While 
customers and local franchise authorities do not see it, their 
choices on what they watch are controlled by five companies or 
programming cartels. I call them America's own OPEC, the 
organization of programming extorting companies.
    We have seen an explosive consolidation in the programming 
industry that has led to sharply increased prices, less freedom 
to offer popular content, and little customer awareness as to 
why they are forced to buy the channels they do and why their 
rates go up so much.
    For example, ESPN has raised its rates to our members by up 
to 20 percent each year for the past 5 years. Our customers 
want ESPN. Fine, but ABC-Disney will not just let us buy ESPN. 
Oftentimes in order to get the local ABC affiliate, Disney will 
force us through retransmission consent to take other channels, 
such as SoapNet and the same for Fox, GE, and CBS.
    This might not be so bad if we could offer the programming 
on an a la carte basis to allow the consumer to choose what 
they want, but all of the cartel programming companies, like 
Independent Cable, make us pay for every customer and pay 
punitive prices if we do not carry many of their services in a 
bundle, just like they won.
    Even more appalling is the fact that these programmers also 
imbed into their contracts various nondisclosure terms. These 
provisions prohibit cable operators from telling any customer 
and even Congress what the terms or rates are for their 
programming.
    Customers will also face less choice as a result of 
satellite monopoly that would be created from the EchoStar 
deal. The merger of EchoStar and DIRECT will create the world's 
largest programming distributor with nearly 17 million 
customers and give the merged companies nearly 90 percent of 
the full power, full CONUS satellite transponders that exist.
    These two facts, along with the possible sunsetting of the 
programming access rules would give EchoStar the ability to 
control access to programming, thereby limiting customer choice 
and providing enough forward bandwidth that small cable 
companies would never be able to compete, and many of us have 
already gone out of business with the satellite as it is.
    Already DIRECTV has exclusive contracts for certain 
sporting events, meaning that Americans can only purchase this 
programming by buying it from DIRECT. Now imagine what happens 
if they have the power of the two companies and they start to 
buy things on an exclusive basis. Millions of consumers would 
be forced to pay higher rates to get the same programming they 
used to have.
    EchoStar says Congress and the Federal Government should 
support its merger because it will help satellite compete 
against cable. However, two facts are clear. EchoStar will have 
a complete monopoly in the direct broadcast satellite industry.
    And, second, my company is not a monopoly in rural America. 
Rather, we are the competitor to satellite, the monopoly that 
already exists.
    But it is more than that. If the merger is approved, 
EchoStar will have succeeded in escaping any meaningful 
regulation whatsoever. They'll go on to be like all the other 
Goliaths.
    So I ask Congress, one, please act to remedy the problems 
that plague the programming industry.
    Two, the EchoStar merger does not advance the interests of 
rural consumers. So stop it.
    And, three, effective competition requires Congress to 
reduce the regulatory inequities between satellite and cable.
    I would like to sincerely thank you, and if you have any 
questions, we would love to talk.
    [The prepared statement of Neal Schnog follows:]
    Prepared Statement of Neal Schnog, Board Member, American Cable 
        Association, President and General Manager, Uvision, LLC
                              introduction
    Thank you, Mr. Chairman.
    My name is Neal Schnog, and I am the president, general manager and 
part owner of UVISION, an independent cable business currently serving 
8,300 customers in rural Oregon.
    I also serve as a board member of the American Cable Association, 
which represents more than 900 independent cable businesses serving 
more than 7.5 million customers primarily in smaller markets and rural 
areas across the United States. In fact, our American Cable Association 
members serve customers in every state and U.S. territory and also in 
nearly every congressional district represented by the members of this 
committee.
    Unlike some larger companies you hear about, ACA members are not 
affiliated with program suppliers, big satellite, cable and telephone 
companies, major ISPs or other media conglomerates. We focus on smaller 
market cable and communications services, often in markets that the 
bigger companies choose not to serve. Because we live and work in these 
rural communities, we know how important it is to have advanced 
telecommunications services available to us.
    Just for the record, my small company is not the ``giant entrenched 
cable monopoly'' that others talk about so frequently. We're simply a 
small business in cable that happens to serve customers in rural 
America. Quite frankly, we're the competitor to what may soon become 
the ``giant entrenched satellite monopoly.''
    Like other ACA members, my company, UVISION, specializes in serving 
customers in smaller markets and more rural areas. Our company today is 
on the forefront of providing advanced telecommunications services to 
customers in these markets. In fact, my small company is now providing 
digital cable services and high-speed cable modem Internet services to 
the majority of our customers.
    As a first-generation American whose family was given shelter and 
prosperity by the shores of our great nation, I cannot express how 
proud I am to take part in this hearing. I hope my testimony will help 
you serve your constituents by understanding the critical issues facing 
the multi-video programming and distribution industry. These issues 
will have a significant impact on all Americans and could have a 
devastating effect on rural communities. I therefore ask for your 
consideration and hope you will agree that the industry is in need of 
congressional and regulatory review.
    As you know, most of today's headlines in the communications world 
are about the large companies--the EchoStar-DirecTV merger, the 
potential merger of AT&T and Comcast, and the media giants created by 
the mergers of the 1990s. Being on this panel, I feel like an extra in 
the movie, Clash of the Titans. But, the American Cable Association 
represents no Goliaths. We here to speak for the millions of small-town 
customers who are represented by nearly every member of this committee.
    To me, the real benefit of this hearing is the opportunity to 
highlight the current status of customer choice in the multiple-video 
services market, because competition really means customer choice. No 
choice, no competition. However, the irony here is that the status of 
competition and customer choice today, especially in rural areas and 
small towns, is already significantly limited because it is governed by 
an unlikely cast of players that do not live in rural America, do not 
focus on rural Americans' needs, and who have found anti-competitive 
means to extract monopolistic earnings from all Americans.
    Unless there is significant congressional and regulatory review of 
these issues, the situation is not likely to improve. Consumer choice 
and competition may be wiped out in the wake of the mighty merged 
communications giants. Let me tell you why.
    There are three very important issues that threaten consumer choice 
in smaller markets and rural America and that will derail the progress 
to provide advanced services in smaller markets:

 The vastly increasing control of content, pricing, terms, 
        conditions and placement requirements by just a few programming 
        behemoths that truly control what the consumer sees.
 The adverse effect in the smaller, rural marketplace of the 
        proposed EchoStar-DirecTV merger, which will limit current 
        competition in these markets from three current providers 
        (EchoStar, DirecTV, and independent cable) to just one--the 
        merged EchoTV monopoly.
 The disproportionate burden of regulation on smaller, 
        independent cable companies, like mine in rural America, 
        compared to the free regulatory ride enjoyed by the satellite 
        monopoly.
I. Programming
    So, who does control what your constituents' see on their TV sets? 
Surprisingly enough, it isn't a small cable operator like me. While 
customers and local franchise authorities don't see it, their choices 
on what they watch are controlled by five companies, or programming 
cartels. I call them America's own OPEC--the Organization of 
Programming Extorting Companies. In an unforeseen development, over the 
past five years we have seen an explosive consolidation in the 
programming industry that has led to sharply increased prices, less 
freedom to offer popular content, and little customer awareness as to 
why they are forced to buy the channels they do.
    For example, ESPN has raised its rates to our members by up to 20% 
each year for the past five years. This while their viewership is 
declining. Our customers want ESPN. Fine. But ABC-Disney will not let 
us just buy ESPN. Oftentimes, in order to get the local ABC affiliate, 
Disney will force us through retransmission consent to take other 
channels, such as SoapNet. Same for Fox-News Corp., GE-NBC and CBS-
Viacom.
    This might not be so bad if we could offer the programming on an a 
la carte basis to allow the consumer to choose what they want. But all 
of the cartel programming companies make independent cable pay for 
every customer and pay punitive prices if we do not carry many of their 
services in a bundle, just like they want.
    Consolidation has turned retransmission consent into extortion. 
These same programming cartels also dictate channel locations and other 
terms. Even more appalling is that fact that these programmers also 
embed into their contracts various ``non-disclosure'' terms. These 
provisions prohibit cable operators from telling any customer, even the 
local franchise authority, what the terms or rates are for their 
programming. Thus, rate increases and unfair bundling practices are 
kept hidden from the public and even from you, the key federal policy 
makers who have created this industry. That is not the definition of an 
open and fully competitive marketplace.
    I am sure you all watched the retransmission consent showdown 
between Time Warner and Disney over this very issue. Imagine the odds 
that a small system like mine has when negotiating with the programming 
cartels.
    The four or five major programming cartels control the broadcast 
networks and at least 50 other of the most popular stations. More than 
90% of cable systems offer 30 to 90 channels, which, as you can see, 
are monopolized by the programming cartels.
II. The EchoStar-DirecTV Merger
    Customers will also face less choice as a result of the satellite 
monopoly that would be created from an EchoStar-DirecTV merger.
    The merger of EchoStar and DirecTV will create the world's largest 
multi-video programming distributor with nearly 20 million subscribers 
and give the merged companies nearly 90% of the full power, full-CONUS 
satellite transponders that exist. These two facts along with the 
possible sunsetting of the programming access rules, would give 
EchoStar the ability to control access to programming, there by 
limiting customer choice and providing enough forward bandwidth that 
small cable companies would never be able to compete on an economic 
basis.
    Already, DirecTV has exclusive contracts for certain sporting 
events, meaning that Americans can only purchase this programming by 
buying it from DirecTV. Now imagine what would happen after the sunset 
of the program access rules if the combined DirecTV/EchoStar used its 
huge leverage to buy hundreds of sporting events and other programming 
on an exclusive basis. Millions of consumers would be forced to pay 
higher rates to get the same programming they used to have.
    Of course, many would argue that this would not happen because the 
current programming cartels would not let it happen. After all the 
programming cartels already control their own distribution arms. But 
what if the cartels are ready to admit a new member? Deals could be cut 
so that all the cartel members have access to programming at the 
expense of small cable. The current cartel members could shut off 
programming to small cable companies effectively giving our customers 
to EchoStar/DirecTV in order to bring EchoStar into the cartel. Or 
worse the cartel could save face by providing access, but charging 
independent companies usurious rates meaning that there was no real 
access to programming.
    This would give every giant player access to programming but small 
cable companies and upstart distributors like telephone companies could 
never again get access to the programming market, further securing the 
monopolies of the giant communication companies.
    The monopoly over satellite slots would further secure EchoStar/
DirecTV's new position by allowing them to deliver over 400 channels 
with no real competition. In order for a small cable company to deliver 
this number of channels, they would have to spend millions of dollars. 
This is not economically reasonable where most of our members have less 
than 1,000 customers. Without being able to provide the same number of 
channels, many small operators would soon be out of business leaving 
only one provider in many rural areas.
III. Regulatory Parity
    In recent days we have increasingly heard representatives of the 
EchoStar company saying how Congress and the federal government should 
support its merger with DirecTV because it will help the satellite 
monopoly compete against the giant, cable monopoly.
    However, contrary to EchoStar's story, two facts are clear:
    One, as we have already outlined, EchoStar will have a complete 
monopoly in the direct broadcast satellite industry and will have the 
ability to leverage this massive power to the detriment of choice, 
competition and consumers in rural America.
    Second, my company and the nearly 1,000 other small, independent 
cable businesses in the American Cable Association are not the monopoly 
in rural America that EchoStar claims. Rather, we are and will be the 
competitor to the satellite monopoly that will exist in rural America 
if the merger is approved. We will be the ``Southwest Airlines'' to the 
merged satellite giant's ``United.'' And that's why preserving 
competition in rural markets is vital.
    But it's more than that. Right now direct broadcast satellite 
enjoys favored regulatory treatment that gives it a great advantage in 
the rural marketplace. If the merger is approved, the giant satellite 
monopoly will have succeeded in rural markets to escape any meaningful 
regulation that benefits consumers while ensuring that small business 
competitors to the giant, like my company and the members of the 
American Cable Association, have to bear it all. Look at the following 
list and ask why the following are not required of all providers in the 
marketplace, particularly if the goal is to promote fairness in 
competition and the application of fair, public interest regulation to 
all customers of cable or satellite alike.

                   Regulatory Burdens on Cable vs. DBS
------------------------------------------------------------------------
                   CABLE                                 DBS
------------------------------------------------------------------------
Must-Carry                                  Must-Carry (1/102)
Retransmission Consent                      Retransmission Consent
EAS                                         Limited Public Interest
                                             Obligations
Tier Buy-Through
Franchise Fees
Local Taxes
Signal Leakage/CLI
Rate Regulation
Mandatory Broadcast Basic
Privacy Obligations
Customer Service Obligations
Public Interest Obligations
Service Notice Provisions
Closed Captioning
Billing Requirements
Pole Attachment Fees
Public File Requirements
------------------------------------------------------------------------

    In smaller markets and rural areas, the regulatory disparity that 
exists between independent cable and dbs must be addressed if Congress 
and federal policymakers want to ensure that multiple providers of 
video service are there to provide choice to consumers.
                               conclusion
    Each one of the foregoing issues directly affect the ability of 
independent cable companies to (1) provide competition and choice in 
the smaller markets and (2) to provide advanced new services in the 
marketplace. If there is no viable competitor to the new giant 
entrenched satellite monopoly, then there is no chance for consumers in 
rural America to receive advanced digital services or high-speed cable 
service as so many of our companies are providing now.
    The irony here is that the impact of these issues, if not 
addressed, will do exactly the opposite of what Congress wants--
providing competition and choice for consumers in the smaller and rural 
marketplaces from multiple providers of video services, digital, high-
speed data and more. Instead, these markets may be left with just one 
provider--the satellite monopoly.
    The American Cable Association and its members are committed to 
working with the Committee to solve these important issues.
    I would like to sincerely thank the Committee again for allowing me 
to speak before you today.

    Mr. Upton. Thank you.
    Mr. Phillips.

                    STATEMENT OF BOB PHILLIPS

    Mr. Phillips. Good afternoon, Mr. Chairman and members of 
the committee.
    It is a privilege to appear before you today to present the 
position of the National Rural Telecommunications Cooperative, 
NRTC, regarding the state of competition in the cable and 
satellite industry and the most critical issue, which is the 
proposed impact of the DIRECTV-EchoStar merger in the 
marketplace.
    From our founding in 1986, it has been NRTC's primary 
mission to bring state-of-the-art telecommunications services 
to those who live and work in rural America. NRTC has been 
involved in every facet of this business, from large dish 
satellite or C-Band to delivering more than $100 million to 
used communications to help launch the DIRECTV service.
    Today, NRTC, through its participating members, which are 
rural electric cooperatives and rural telephone systems, as 
well as private affiliates, such as Pegasus Communications, 
serves more than 1.8 million rural consumers with DIRECTV 
service.
    First, I would like to urge the committee to continue its 
fight for program access by carefully monitoring the 
developments of the FCC. We have formally just urged the 
Commission to exercise its statutory authority and to extend 
the October 5th, 2002 sunset of the program access rules that 
bar exclusive contracts in areas served by cable operators.
    Turning to the merger, NRTC believes that this merger as 
proposed is bad for competition in rural America. It creates a 
rural monopoly. It eliminates choice, and it eliminates 
competition. Literally millions of homes in rural America have 
no access to cable television or digital cable services, making 
satellite TV their own option for video programming.
    I did bring a map today which is included as a chart in my 
testimony, which shows how there are tens of millions of people 
who have no choice for video programming other than by 
satellite, and I would call attention to particularly the red, 
blue, and the green States on that map which have the lowest 
penetration of cable, from 30 to 50 percent in some cases.
    NRTC's mission is to serve these rural consumers, and today 
these rural consumers can choose between EchoStar's dish 
service or DIRECTV. If this merger is approved, their choices 
go from two providers to one.
    Now, the proponents of this merger would argue to you that 
their promises are going to suffice for competition and that 
the overall benefits of the merger outweigh the lack of choice 
in providers which is going to result from this combination.
    So instead of a vibrant and competitive satellite TV 
marketplace which protects competition and choice, EchoStar 
would promise to protect rural Americans by charging them the 
same price as urban consumers.
    I suggest to you that no price guarantee is going to solve 
the monopoly problem that this merger creates. It would be 
hard, if not next to impossible, to enforce any such promise, 
and in fact, price is not the only issue when you do eliminate 
choice. What about service quality or what about the choice in 
content?
    The proponents of this merger would also suggest that a 
benefit will be increased delivery of local TV channels by 
satellite, and with the approval of the merger EchoStar has 
offered to increase its capacity dedicated to delivering local 
markets, but nowhere near the total 210 TV markets.
    A Department of Justice expert has testified, and a copy of 
his testimony is attached to my statement, that each of these 
merger applications in and of themselves have sufficient FCC 
licenses and capacity to separately deliver all 210 markets.
    Approving this merger will remove all competitive pressure 
to expand coverage, and it is going to leave one company with 
the sole power to decide whether or not to deliver all 210 
markets.
    This merger does also have far-reaching implications for 
rural America with respect to satellite delivered, broadband 
Internet service. Rural America is going to be threatened by 
this proposed merger in that regard. Currently there are 
already two providers of satellite Internet broadband. DIRECTV 
offers a service owned by Hughes, which is called DirectWay and 
EchoStar offers a service which they control called StarBand.
    Again, the merger applicants are suggesting to you that 
forming one broadband satellite provider by creating a monopoly 
is in the best interest of rural Americans, and I fail to see 
how that is going to benefit consumers.
    Just a few years ago there were four competitors in the 
satellite market. First Hughes bought Primestar. Then Hughes 
bought USSB, and now if EchoStar is permitted to buy Hughes, 
there will be only one. And I suggest that one supplier is a 
very lonely number for a rural consumer.
    As currently proposed, the merger of two highly successful 
DBS companies with huge market value is so anti-competitive 
with respect to rural America that it should not be permitted 
in its current form. If this merger is permitted in its current 
form, then it would appear to me that there is little left or 
nothing left, in fact, to antitrust policy and enforcement in 
the first years of this 21st Century.
    I'm grateful for your attention, and I look forward to 
answering your questions.
    Thank you.
    [The prepared statement of Bob Phillips follows:]
        Prepared Statement of Bob Phillips, CEO, National Rural 
                     Telecommunications Cooperative
    Good afternoon, Mr. Chairman and Members of the Subcommittee. I 
appreciate very much the opportunity to discuss the state of 
competition in the multi-channel video program distribution (MVPD) 
market.
    My name is Bob Phillips, and I am the President and CEO of the 
National Rural Telecommunications Cooperative (NRTC). NRTC has been 
fighting for fair access to programming since our founding in 1986. We 
were proud to represent rural American during the ``Program Access 
Wars'' in the early 90's, which set the stage for MVPD competition 
today.
                      executive summaryabout nrtc.
    The National Rural Telecommunications Cooperative (NRTC) is a non-
profit national cooperative comprised of more than 1,000 rural 
utilities and affiliates located in 46 states. For the last 15 years, 
our primary mission has been to bring rural Americans the same state-
of-the-art telecommunications services that are commonplace in more 
populated urban areas. To this end, NRTC and its members invested more 
than $100 million toward launching DIRECTV, one of the two dominant DBS 
operators in the country.
    NRTC delivers to rural America the full benefits of competition in 
the Multi-Channel Video Programming Distribution (MVPD) market, 
including a diversity of programming choices, service options, and 
lower prices. Today, NRTC members and affiliates serve more than 1.8 
million rural consumers, nearly 20 percent of all DIRECTV subscribers. 
As the leading distributor of DIRECTV's programming services to rural 
Americans, NRTC's customers have a strong interest in--and serious 
questions about--the proposed merger of DIRECTV and EchoStar. Extend 
the FCC's Program Access Rules.
    Given the continued vertical integration and dominant status of the 
cable industry, continued fair access to programming remains essential 
for the development of truly robust and viable competition to the 
heavily entrenched cable industry. To that end, just yesterday NRTC 
urged the FCC to exercise its statutory authority and to extend the 
October 5, 2002 sunset of the Program Access rule that bars exclusive 
contracts in areas served by cable operators.
The Proposed Merger Threatens Viable Competition in the MVPD Market.
    Currently, EchoStar and DIRECTV provide competing MVPD programming 
services to rural Americans. In approximately 20 percent of the U.S., 
they are the only sources of multi-channel video programming. If the 
merger is permitted to go ahead, there will be no competition for MVPD 
services in any household where comparable digital cable services are 
not available.
There are no Viable Alternatives to DBS in Much of America.
    Only three orbital slots for satellites have a signal footprint 
that allows a high-power DBS satellite to transmit programming to the 
entire continental United States, so-called full-CONUS slots. 
Collectively, EchoStar and DIRECTV control all three of these slots.
    In addition, in those areas only passed by analog cable, there is 
no competition for DBS. Analog cable has fewer channels, lower quality, 
fewer or no pay-per-view movies, significantly higher per-channel cost, 
and an inability to use new technologies, such as interactive 
television. Most analysts believe that many rural cable operators will 
go out of business because they cannot afford to upgrade to digital and 
cannot effectively compete with EchoStar and DIRECTV using an analog 
signal.
    The other, most-commonly mentioned MVPD alternatives to DBS are 
also inadequate to compete with EchoStar, should the merger be 
approved. The C Band ``backyard dish'' business is dying out. The 
medium-power DBS provider, Primestar, was purchased by DIRECTV, and is 
also losing subscribers. Multichannel Multipoint Distribution Service 
(MMDS) has a shrinking subscriber base that is now around 700,000, and 
will likely be converted to broadband delivery over time. Satellite 
Master Antenna Television (SMATV) only serves multiple dwelling units 
(MDUs), like apartment buildings, which rarely exist in rural America. 
Not only does Northpoint's terrestrial-based technology interfere with 
EchoStar's and DIRECTV's DBS signal, there are serious doubts that 
Northpoint will ever obtain a license or launch service, especially if 
it is required to pay for its spectrum. Suffice it to say, if this 
merger is approved, rural Americans will only be able to see what the 
new EchoStar chooses to deliver.
Promises of ``National Pricing'' are Insufficient to Protect Rural 
        Customers.
    Prices of digital video services will go up in rural America 
because of this merger. Whether it be video or broadband service, if 
there is no effective competition, prices will be set by the monopoly 
provider. The claim has been made that the new monopoly will choose to 
sell its video service in urban areas such as Manhattan, Chicago and 
Los Angeles at the same price as rural Missouri, Texas, Virginia and 
Wisconsin. But this half-made promise raises important questions: Will 
the proposed merged entity promise to set rural prices at the level of 
its lowest urban prices? Will the proposed merged entity provide rural 
consumers new services, such as broadband services, at the lowest urban 
price? If the proposed merged entity provides urban America with free 
installation for a thirty day promotion, will rural Americans benefit 
from the offer?
    Currently the set top box technologies used by DIRECTV and EchoStar 
are incompatible, and the customers' dishes are pointed towards 
different satellites. We have estimated that the cost of this switchout 
will be in excess of $5-6 billion, although we have seen much smaller 
cost estimates proposed. We believe having accurate cost estimates here 
is critical, because promises to pay without a direct or indirect 
contribution from the consumers will become increasingly unrealistic as 
the cost goes up. Does anyone really think the consumers will not be 
charged, directly or indirectly, for these multi-billion dollar merger 
related costs? We believe enforcement of the half promise about pricing 
is a potentially insurmountable problem. No agency of this government 
is currently enforcing such a promise.
Price Isn't Everything.
    But even if some form of ``national pricing'' can meet the 
requirement for enforceability and realism, it is only one issue of 
many that concerns consumers. We know our customers. They are not 
solely concerned with price alone. Quality of service is equally 
important. If a subscriber's system is broken, he wants it fixed. If a 
subscriber has a question about his billing, he wants it fixed. Service 
under monopolies traditionally declines because of the lack of 
competition. If you can't go anywhere else, there is no economic 
imperative to provide good service. No promise solves this problem.
Local-into-Local Service Could be Provided More Efficiently Without a 
        Merger.
    EchoStar and DIRECTV have claimed that redundant programming could 
be eliminated, thus allowing the merged entity to provide local-into-
local service in more markets if the merger is approved. If the merger 
goes forward as proposed, it is unlikely that local-into-local will 
ever be provided to rural Americans. Today, EchoStar and DIRECTV are 
fierce competitors. When one offers local-into-local in a particular 
market, the other usually follows shortly thereafter. Absent the 
merger, we believe that this competition will likely cause the 
companies to provide local-into-local to all--or almost all--DMAs. If 
the merger occurs, we fear that EchoStar will simply stop providing 
local-into-local after they have reached the top 100 markets because 
the competition, which is currently forcing them to launch newer and 
better satellites and to improve compression technology, will cease to 
exist.
    When compared to the cost of the set-top box change out required by 
the merger, the two non-merged companies could provide local-into-local 
for a fraction of the cost. On November 26, 2001, DIRECTV launched a 
satellite able to transmit all 500 or so channels eligible for 
transmission in markets 41-100. We believe that a fleet of these 
satellites--enough to meet each company's must-carry obligation--could 
be ordered, built, and launched for less that the $5-$7 billion that we 
estimate the swap-out will cost. It could also be completed in less 
time than we estimate it will take to swap out every subscriber's 
incompatible set-top box and satellite dish.
Broadband Internet Access Would Be Severely Impacted by Merger.
    MVPD and broadband Internet access are inextricably linked. MVPD 
providers are providing access to the Internet now, and the roles will 
soon reverse: Americans will receive their MVPD access from the 
Internet. The proposed merger not only threatens competition in the 
MVPD market, it also threatens rural Americans' chance to bridge the 
digital divide.
    There are three possible sources of broadband services in rural 
America: satellite, cable and telephone companies. Because of the 
sparse population density in much of rural America and the projected 
failure of many small rural cable providers, satellite is the only 
economically viable option.
    EchoStar and Hughes each owns or controls both Ku-band broadband 
satellite service providers currently operating. The next generation of 
broadband satellite services, Ka-band, is just developing, but already, 
EchoStar is acquiring one potential Ka-band competitor, Visionstar.
    The proposed merger would leave control of most broadband satellite 
services in the hands of a single company, which would be free to 
charge as much as it wants for the provision of broadband Internet 
access--as well as video services. As MVPD and broadband continue to 
converge, this issue will become even more important.
                           nrtc's background.
    NRTC is a not-for-profit cooperative comprised of 705 rural 
electric cooperatives, 128 rural telephone cooperatives and 189 
independent rural telephone companies located throughout 46 states. For 
the last 15 years, our primary mission has been to bring to rural 
America the same state-of-the art telecommunications services that are 
commonplace in more populated urban areas.
    The National Rural Electric Cooperative Association (NRECA) and the 
National Rural Utilities Cooperative Finance Corporation (CFC) created 
NRTC to bring valuable telecommunications services to rural 
communities, just as the rural electric cooperative members of NRECA 
and CFC brought electric and telephone services to rural America in the 
1930's and 40's.
    NRTC's family of products and services for rural America includes 
dial-up and high-speed Internet services, power quality products, 
utility power quality monitoring system, a nationwide wireless 
communications network, and e-business applications. But much of our 
effort to date has been devoted to delivering to rural America the full 
benefits of competition in the MVPD market, including a diversity of 
programming choices, service options and lower prices.
congressional support is the critical element in the fight for program 
                       access in the mvpd market.
    As early as 1989, NRTC supported efforts by the Federal 
Communications Commission (FCC) and Congress to provide fair and non-
discriminatory access to satellite delivered programming.1 
At that time, NRTC complained that as a C Band home satellite dish 
(HSD) distributor to rural America, it was required to pay 400%, 500% 
or even 800% more than cable operators were required to pay for the 
same programming.2
    NRTC was pleased to work with members of Congress to help obtain 
passage over a Presidential veto of the Program Access provisions in 
the Cable Television Consumer Protection and Competition Act of 1992 
(``the 1992 Cable Act'').3 ``Persons in rural areas'' were 
specifically targeted by Congress to benefit from the Program Access 
rules.4
    When the FCC implemented the1992 Cable Act, NRTC continued to 
highlight the fact that as a rural HSD distributor it was unfairly 
required to pay substantially more than cable operators for the 
identical programming. To resolve this and related problems, the 
Commission implemented the Program Access rules, which have at their 
heart the objective of releasing programming to the existing or 
potential competitors of traditional cable systems so that the public 
may benefit from the development of competitive distributors.
    On April 10, 1992, NRTC moved beyond the HSD business and forged an 
important partnership with DIRECTV, Inc., a unit of Hughes Electronics 
Corporation. NRTC, its members and affiliates invested more than $100 
million toward launching the nation's first and most successful high-
power direct broadcast satellite (DBS) system. NRTC's early financial 
commitment to DBS was absolutely critical to the introduction of this 
new service across the country.
    With its members and affiliates--including Pegasus Communications--
NRTC has become the leading distributor of satellite television service 
to rural America. Today, NRTC members and affiliates serve more than 
1.8 million rural consumers, nearly 20 percent of all DIRECTV 
programming subscribers. This is a responsibility to rural America that 
we do not take lightly.
    The growth of the DBS industry is in large part a result of the 
FCC's successful implementation of the Congressionally mandated Program 
Access rules. Particularly in rural America, where DBS is necessarily 
more popular because cable alternatives are often not available, the 
Program Access rules have been necessary to preserve and protect 
competition and diversity in the distribution of video 
programming.5
continued congressional oversight of the cable industry and programming 
                             is necessary.
    The National Cable & Telecommunications Association (NCTA) 
maintains that cable faces a robust, fully-competitive video 
marketplace.6 Notwithstanding these claims, cable operators 
and vertically integrated programmers continue to wield an inordinate 
amount of power over potential competitors in the MVPD industry.
    Since the Program Access rules were first adopted by the 
Commission, the cable industry has maintained its stranglehold on 
programming necessary for the non-cable MVPD marketplace to develop as 
a competitive force.
    The Commission's latest Cable Competition Report shows that 
vertically integrated programming services continue to dominate the 
MVPD market.7 More than \1/3\ of all national programming 
services are currently vertically integrated with at least one cable 
Multiple System Operator (MSO). While the cable industry has cited this 
percentage as a measure of its decreasing influence,8 the 
actual number of vertically integrated programming services has almost 
doubled from 56 in 1994 to 99 in 2000.9
    Continued access to vertically integrated programming remains 
absolutely necessary for DBS to continue developing and flourishing as 
a viable competitive force to cable.10 Given the continued 
vertical integration and dominant status of the cable industry, 
continued access to programming on fair and reasonable terms remains 
essential for the development of truly robust and viable competition. 
To that end, just yesterday NRTC urged the FCC to exercise its 
statutory authority and extend the October 5, 2002 ``sunset'' of the 
Program Access rule that bars exclusive contracts in areas served by 
cable operators.
to properly evaluate the status of competition and the proposed merger, 
     the percentage of homes passed by cable needs to be confirmed.
    At the direction of Congress, the FCC has issued an Annual Report 
in each of the last seven years describing the status of competition in 
the video programming market.11
    One of the foundations of the FCC's Annual Reports, and the most 
widely used measurement of cable availability, is the number of ``Homes 
Passed'' by cable.12 The cable Homes Passed number is 
intended to reflect the percentage of American consumers who have 
access to cable services. Conversely, the remaining percentage reflects 
those consumers who likely have access to MVPD services only through 
DBS.
    In previous Cable Competition Reports, the FCC has unfortunately 
accepted without review or challenge the cable industry's claim that 
approximately 97% of homes across the country are passed by 
cable.13 However, a joint report released in April of 2000 
by the National Telecommunications and Information Administration 
(NTIA) and the Rural Utilities Service (RUS), titled Advanced 
Telecommunications in Rural America: the Challenge of Bringing 
Broadband Service to All Americans (``NTIA/RUS Report''), questions the 
manner in which the percentage of cable Homes Passed has typically been 
calculated. The NTIA/RUS Report found that the actual percentage of 
Homes Passed could be as low as 81%.14 The Report discusses 
apparent flaws with the cable industry's long-standing numbers and 
suggests remedies for a more accurate determination.15
    A recent New York Times article also shows that the percentage of 
homes with access to cable could be as low as 78.4%, with more than 
25,000,000 households unserved.16 It graphically illustrates 
that in approximately 20 states, less than 70% of homes have access to 
cable.
    These facts are beginning to generate concerns on the part of state 
antitrust officials and others impacted by the potential merger. For 
example, Missouri's Attorney General, Mr. Jay Nixon, has recently 
written to U.S. Attorney General Ashcroft, expressing his office's 
concern that nearly 850,000 homes in his state--fully one-third of 
Missouri's population--must rely solely upon the proposed merged 
company for multi-channel video services if the merger is permitted.
    As NRTC pointed out to the FCC, 17 widespread acceptance 
of the flawed 97% Homes Passed number has vastly overstated the status 
of video competition in rural America. We are particularly concerned 
about the accuracy of this number, because it is being widely used to 
describe competition in the MVPD market--and to minimize the impact of 
the proposed EchoStar/DIRECTV merger on rural America. Proponents of 
the merger have been quick to embrace the incorrect number. For 
example, according to a transcript of a ``Charlie Chat'' on November 
12, 2001, Mr. Ergen, CEO of EchoStar, stated that ``I don't agree in 
these kind of circumstances there would be any kind of monopoly at all. 
We compete against cable companies across the country (. . .) over 96% 
or 97% is passed by cable so probably almost nobody watching this 
tonight (via satellite) doesn't have the opportunity to subscribe to 
cable if they'd like to.'' 18
    To evaluate the status of MVPD competition, as well as the proposed 
merger, the number of ``Homes Passed'' by cable must be established 
accurately and conclusively--and it must be done on both the nation and 
the local level. We urge this Subcommittee to require the FCC to 
independently verify the actual percentage of Homes Passed, and for the 
U.S. Department of Justice Antitrust Division to also demand careful 
analysis of this critical question.
  serious concerns are raised by the proposed echostar/directv merger.
    Mr. Chairman, let me begin by saying that I have a great deal of 
respect for Mr. Ergen. He has built a successful business in EchoStar. 
We compete with his company every day as it provides different 
programming than our DIRECTV product. EchoStar has aggressively priced 
and provided a strong and competitive service to consumers. But if this 
merger is successful, EchoStar would become our exclusive wholesale 
supplier, and the choice in satellite providers throughout rural 
America would be cut from two to one. That is a serious concern for the 
rural consumers we represent.
   programming decisions would be made by a single company for rural 
                                america.
    Currently EchoStar and DIRECTV provide competing digital video 
programming services. If the merger is permitted to go ahead, there 
will be no alternative MVPD provider in any household in the U.S. where 
comparable digital cable services are not available. As discussed 
above, the number of households unserved by any type of cable is far 
more than the 3% mentioned by Mr. Ergen. It could as high or higher 
than 20% of the homes across the country--or more than 25,000,000 
households.
    In all of these homes, EchoStar would decide what programming to 
provide and how much to charge for it. For instance, just last week 
EchoStar announced that it would no longer offer ESPN Classic or ABC 
Family channel over its DISH network. If the merger is approved, rural 
homes that previously enjoyed that programming simply won't see it 
again. EchoStar could reach a similar decision regarding CNN or Disney 
or any other programming service that it chooses not to carry.
in those areas not served by digital cable (the vast majority of rural 
            america), there is no viable alternative to dbs.
    The latest generation of DBS services operates in the high-power 
portion of the KuBand and delivers video programming directly to a 
pizza-sized dish antennas located at the subscriber's home. 
International treaties limit the KuBand spectrum allocated for DBS 
service, and the FCC is responsible for assigning all U.S. satellite 
orbital positions and frequencies. Only three U.S. orbital slots have a 
signal footprint that allows a high-power DBS satellite to transmit 
programming to the entire continental United States. These three slots 
are referred to as full-CONUS slots, and they are located at the 
101 deg. W.L. orbital position, at 110 deg. W.L., and at 119 deg. W.L. 
There are 32 frequencies available at each of the three full-CONUS 
orbital slots. Collectively, DIRECTV and EchoStar control all of these 
frequencies at all of these slots.
    There are non-full-CONUS orbital slots at 61.5 deg., 148 deg., 
157 deg., 166 deg. and 175 deg. W.L. To the extent these slots have 
been assigned by the FCC, they are either controlled by DIRECTV or 
EchoStar or are used to provide ``niche'' programming, such as 
Dominion's Christian programming from the 61.5 deg. slot. We are 
unaware of anyone intending to use a combination of non-full-CONUS 
slots to compete with DIRECTV or EchoStar. Moreover, effective 
competition from multiple slots would be unlikely because it would take 
twice the number of satellites to cover the same amount of the country, 
a huge competitive disadvantage.
    In those areas passed only by analog cable (as opposed to digital 
cable), there is no real competition aside from DIRECTV and EchoStar. 
Analog cable has far fewer channels (often only 50 or 60), poor picture 
quality, few or no pay-per-view movies, significantly higher per 
channel cost, and an inability to use new technologies, such as 
interactive television. Most analysts believe that many rural cable 
operators will slowly go out of business if they cannot afford to 
upgrade to digital and effectively compete with DIRECTV and EchoStar.
    We discuss below some of the inadequacies of the most commonly 
mentioned MVPD alternatives to high-powered DBS service.
1. C Band.
    Beginning in the late 1970's, C Band frequency satellites delivered 
programming directly to households. C Band's low-power signal requires 
enormous backyard receiving dishes, usually measuring six to eight feet 
in diameter. C Band services have traditionally been marketed 
exclusively to rural areas. The price of the dish plus installation 
generally runs into the thousands of dollars, while the cost of an 
entry-level DIRECTV or EchoStar system is typically less than $200. 
Because of C Band's high cost and the unsightly large dishes, the 
consensus in the industry is that the C Band business will continue to 
diminish as existing customers replace their larger dishes with 
smaller, less expensive DBS equipment.
    The FCC's recent Cable Competition Reports support this conclusion. 
The FCC found that between June 1999 and June 2000, the number of C 
Band subscribers declined from 1.8 million to 1.5 million (a decrease 
of 17%), probably due to subscribers switching to DBS. Since the 
release of the Commission's Report, the number of C Band subscribers 
has further decreased to 850,000, or approximately 1% of the total MVPD 
market.
2. Medium-Power Satellites.
    The next satellite TV technology to emerge after C Band was medium-
power DBS. Medium-power providers operated in a different Ku-Band range 
than high-power DBS. Because this technology operated at a lower power, 
it was unable to deliver as many channels as high-power DBS, yet its 
overhead costs were at least as high. In addition, it required 
satellite dishes approximately 27'' to 39'' in diameter. With the rise 
of DIRECTV and EchoStar, medium-power DBS was unable to compete. The 
last medium-power DBS provider offering service directly to consumers 
was Primestar, which was purchased by DIRECTV. The Primestar 
subscribers have been converted to DIRECTV's high-power DBS service. 
There currently is no medium-power DBS company providing service 
directly to consumers.
3. MMDS.
    Multichannel Multipoint Distribution Service (MMDS) is another 
dying video technology. MMDS is a ground-based, fixed wireless 
technology, with its signal transmitted from a large antenna on a high 
tower to nearby households. Many video systems are analog and do not 
offer many channels. In addition, and most importantly, MMDS is 
unavailable in much of rural America because it is not cost effective 
to build large towers that serve comparatively few rural households. In 
recent years, MMDS operators have been converting their systems from 
video to broadband delivery, and in the last few months the FCC 
authorized mobile uses of the spectrum. Like C Band, MMDS has also 
shown drastic decreases in the Commission's Cable Competition Reports. 
The number of subscribers has decreased from 1.1 million in December of 
1996 to 700,000 in June of 2000. MMDS holds only .83% of the total MVPD 
market.
4. SMATV.
    Satellite Master Antenna Television (SMATV) Systems serve only 
multiple dwelling units (MDUs). Generally, an apartment building or 
other MDU complex has one or more large C Band or medium-power dishes, 
which the provider then transmits, often through cables, to all of the 
dwelling units in the complex. SMATV only serves MDUs and thus is not a 
viable alternative for the vast majority of rural Americans, who tend 
not to live in multiple dwelling complexes.
5. Northpoint.
    Northpoint is a start-up company that does not even have an FCC 
license. It is seeking a terrestrial license to operate in the same Ku-
Band DBS spectrum as EchoStar and DIRECTV, which have opposed the 
request. It would operate somewhat similarly to MMDS, using large 
antenna towers to serve nearby households with a clear line of sight to 
the antennas. There are a number of significant impediments to 
Northpoint ever coming to market.
    One main impediment is that its technology interferes with 
DIRECTV's and EchoStar's DBS signal. An independent study commissioned 
by the FCC at the direction of Congress was performed on Northpoint's 
technology by the MITRE Corp.19 That study found that 
Northpoint's technology caused interference to DBS reception. It 
further found that the interference could be reduced if certain 
mitigation measures were undertaken, some of which were quite costly. 
It is unclear whether Northpoint has sufficient financing to undertake 
these remedial measures.
    Another significant impediment is that Northpoint's FCC application 
seeks a license for free, instead of under the FCC's Congressionally-
mandated method of auctioning terrestrial spectrum. Northpoint's CEO 
has intimated that the company cannot afford to roll out its product if 
it has to pay for the spectrum like other applicants. It is unlikely 
that the FCC will, or should, give away valuable spectrum.
    Even if Northpoint obtained a license and made it to market, which 
is speculative at best, it would not be a significant competitor in 
rural America because of economics. Northpoint's technology, like MMDS, 
will not be practical in rural America because of the high costs for 
building numerous large antenna towers that would serve very few rural 
households.
 local-into-local service could be provided more efficiently without a 
                                merger.
    EchoStar and DIRECTV have claimed that as a benefit of the merger, 
redundant programming could be eliminated, allowing the merged entity 
to provide local-into-local service in additional markets, instead of 
just the top 40 markets (DMAs) they are serving today. However, we 
believe that both DIRECTV and EchoStar could provide local-into-local 
programming in these additional markets for a fraction of what it would 
cost to change-out the set-top boxes in connection with the merger.
    In the ``Must-Carry'' litigation filed by DIRECTV, EchoStar and 
others against the FCC, the Department of Justice filed a declaration 
by its expert witness Roger J. Rusch.20 Mr. Rusch stated 
that it is technically feasible to build a single satellite that could 
deliver all 1475 local television stations in all 210 DMAs using 
available ``spot-beam'' technology. He further added that a single 
satellite, using existing technology, could be designed that would 
deliver 1,114 channels (or enough to cover every local station outside 
of the top 40 markets being carried by DIRECTV and EchoStar) without 
any modifications to existing set-top boxes.
    To deliver local-into-local only in markets 41-100 (and not 41-
210), the cost would be even less. While Mr. Rusch believes existing 
satellites could provide these resources, this could probably be 
alternatively accomplished by launching only one additional spot-beam 
satellite, similar to the spot-beam satellite launched by DIRECTV on 
November 26, 2001. Such a satellite should be able to transmit all 500 
or so local television channels eligible for transmission in DMAs 41-
100.21 We estimate the cost of a spot-beam satellite 
(including launch and insurance) to be less than $250 million.
    The proposed merger makes it less likely that local-into-local will 
ever be provided to the far reaches of rural America. Today, DIRECTV 
and EchoStar are fierce competitors. When one offers local-into-local 
in a particular market, the other usually follows shortly thereafter. 
Without the merger, we believe that this competition will likely cause 
the companies to provide local-into-local to all, or almost all, DMAs. 
With the merger, we fear that the companies will simply stop providing 
local-into-local after they have reached the top 100 markets because 
the competition, which is forcing them to launch newer and better 
satellites and to improve compression technology, will cease to exist.
 the proposed merger would require disruptive and expensive efforts to 
      replace and re-point millions of existing satellite dishes.
    As DIRECTV and EchoStar have acknowledged, their set-top boxes use 
incompatible technology and one of the company's set-top boxes will 
have to be switched out. They have estimated that the cost of the 
change out to the merged company will be $2.5 billion and that the 
change out could be accomplished in 2-4 years. DIRECTV and EchoStar 
have stated that the rest of the cost of the change out would be borne 
by consumers. They have not stated what the total cost of the change 
out will be or how it will be financed.
    We think that the cost of the change out will be approximately $5 
to $6 billion. In the near future, experts will be able to provide the 
most accurate estimate of these amounts. Currently, DIRECTV transmits 
almost all of its programming from the 101 degree orbital slot. Almost 
all of its subscribers receive that programming on an 18'' round dish. 
Some DIRECTV subscribers also receive limited programming from 
DIRECTV's 3 frequencies located at the 110 degree orbital slot. These 
subscribers cannot use the 18'' round dish (which can only receive 
programming from one orbital slot), but must instead use a slightly 
larger oblong dish, which allows them to receive programming from two 
orbital slots.
    EchoStar has many subscribers with 18'' round dishes, which are 
generally pointed at the 119 degree orbital slot; however, a 
significant percentage of EchoStar's subscribers use oblong dishes, 
which are capable of receiving programming from both the 110 and 119 
orbital slots. EchoStar has stated that the merged company will likely 
have the core cable programming transmitted from the middle, 110 degree 
orbital slot, with local signals and niche programming transmitted from 
the 101 degree and 119 degree slots.
    For a number of reasons, most analysts believe that DIRECTV boxes 
and not EchoStar boxes will be changed out: EchoStar uses a standard 
which is generally considered better than DIRECTV's; security for 
EchoStar's boxes is designed by a company 50% owned by EchoStar; and 
EchoStar Technologies would then be the dominant player in set-top box 
manufacturing.
    Assuming that DIRECTV boxes are changed out, we estimate the cost 
of the change out to be between $5.275 billion to as much as 
approximately $6.9 billion. We reach this by estimating that there will 
at least 11.5 million DIRECTV subscribers when the merger is set to 
close. We further estimate that the cost of the change out would be 
$450-$600 per subscriber (including cost of box, oblong dish and 
labor). We also estimate that the cost of repointing EchoStar's 18'' 
dishes from 119 degrees to 110 degrees will be upwards of $100 million. 
(Note: if the EchoStar boxes are changed out, the costs would likely be 
more than $4 billion because almost every DIRECTV subscriber would 
require a service call either to repoint the dish or to receive an 
oblong dish.)
    We also believe that the 2-4 year estimate is optimistic at best. 
The logistics of having 15 million or so service calls by trained 
technicians are daunting. Until the change out is complete, both sets 
of the redundant programming will have to be transmitted (because 
otherwise existing subscribers using the ``old'' technology would be 
``cut-off'').
  promises of ``national pricing'' are insufficient to protect rural 
                               consumers.
    Recognizing that the merger would create a monopoly in rural 
America, DIRECTV and EchoStar contend that the lack of competition 
created by the monopoly can be ameliorated through pricing their 
product on a national basis. We believe that enforcement of this 
promise would be an insurmountable problem. There is no agency in this 
government currently enforcing such a promise or equipped to regulate 
the proposed monopoly.
    We believe this promise has been made for its appealing nature, not 
because it offers meaningful protection for rural Americans. This 
proposed national price ``fix'' does not work for at least three 
reasons, each of which is discussed in more detail below:
1. Prices Actually Will Be Higher.
    Since the merged company will be able to charge monopoly prices in 
rural America, it will likely raise prices significantly in order to 
benefit from the monopoly. Because DBS monthly subscriber rates are 
much lower than analog cable on a per channel basis, the merged company 
could raise prices substantially without hurting subscriber growth in 
those areas. Similarly, in areas served by competitively priced digital 
cable, DBS subscriber rates are still generally lower on a per channel 
basis for anything except basic service. Hence, the merged entity could 
substantially raise prices for all of its expanded packages (sports, 
HBO, etc.) while still keeping its price advantage over cable.
    Today, prices for DBS services are generally below cable because of 
intense price competition between EchoStar and DIRECTV. With the 
merger, this competition would cease and prices would likely go up for 
every DBS subscriber--rural and non-rural alike.
2. ``National Pricing'' is Easy To Evade.
    There are numerous ways that the merged company could use its 
monopoly power to charge rural America non-competitive prices, even 
with national pricing. For example, it could undercharge (or give away) 
local-into-local programming, which will apparently only be provided to 
urban America, and offset this subsidy by charging more for basic 
service that must be purchased by rural households. Urban households 
would be paying the same for basic plus local-to-local, while rural 
households would be paying monopoly prices for basic service.
    Similarly, the merged company could determine, through its 
subscriber database, that rural subscribers are much more likely to 
purchase a particular programming package and then charge non-
competitive prices for that package. The merged entity also could 
subsidize the set-top box or subsidize installation only in urban 
America, either overtly or covertly (such as through promotions with 
companies that only have stores in urban America). Rural consumers 
could be charged more ``shipping and handling'' for products purchased 
through the e-commerce function in the set-top box. The list is 
endless.
3. ``National Pricing'' Fails To Address Service and Other Problems 
        Inherent In A Monopoly.
    Not only will national pricing fail to prevent the merged company 
from charging rural America non-competitive prices, it will also not 
eliminate any of the other problems inherent in a monopoly. In 
particular, as discussed above, there will be no competition spurring 
the monopoly to provide local-into-local service to rural America or 
other advanced services. Similarly, there will be no competition 
regarding customer service. Now, if a DBS provider fails to send a 
technician to a remote place, the subscriber can change service to the 
other DBS provider. After the merger, there will be no financial 
incentive for the monopoly to provide good customer service to rural 
America. In addition, advances in technology spurred by competition, 
such as compression technology or the launching of additional 
satellites, will likely slow greatly. In sum, the merged company will 
behave like a typical monopoly.
delivery of broadband internet satellite services to rural america also 
               would be severely impacted by the merger.
    Mr. Chairman, I know that your focus today is on MVPD competition. 
But the availability of broadband services is inextricably linked to 
the offering of video programming. Without a companion video offering, 
the prospects for a successful broadband offering are weak.
    Broadband Internet access--which many in Congress and elsewhere 
recognize as a key to the future economic development of rural 
America--is seriously threatened by this proposed merger. There are 
three possible sources of broadband services in rural America--
satellite, cable and telephone companies. Because of the low population 
density and rough terrain in much of rural America, satellite is the 
only universally available broadband provider.
    There are currently two providers of KuBand broadband satellite 
services: DIRECWAY, owned by Hughes, and Starband, controlled by 
EchoStar. The merger of the two companies would create a monopoly in 
the KuBand broadband market.
    More importantly, it also would create a monopoly in the next 
generation of KaBand broadband market. The KaBand is just developing as 
a new, emerging market, and it is expected to have greater capacity, 
faster speeds and lower costs than KuBand.
    In a post-merger world, however, the emerging KaBand market would 
be absolutely dominated by EchoStar. For all practical purposes, other 
competitors would be frozen out. That effect was felt immediately after 
the announcement of the merger, when one of the most promising of the 
potential KaBand providers shut down and funding for others dried-up. 
Meanwhile, EchoStar is completing its acquisition of Visionstar, 
another potential KaBand provider.
    Rural America will remain on the wrong side of the digital divide 
if broadband Internet is not available at reasonable, competitive 
rates. This proposed merger, if approved, would leave EchoStar 
controlling the availability, breadth and cost of nearly all satellite 
broadband Internet (and video) services. That's a major problem for 
rural America.
 past monopoly claims by echostar against its proposed merger partner 
                         merit careful review.
    As recently as two months ago, EchoStar was engaged in a lawsuit 
which accused DIRECTV of being a monopoly that repeatedly abused its 
monopoly power. Attached to my testimony you will find a copy of 
EchoStar's complaint against DIRECTV. I believe you will be 
particularly interested in reviewing EchoStar's characterization of the 
uniqueness of the DBS marketplace 1 and their allegations of 
DIRECTV's abuse of its power which permeate the document. Of course, 
the proposed merger partners dismissed this suit when they decided to 
marry their corporations. But if DIRECTV constituted a monopoly, please 
think carefully about the resulting single entity's overwhelming market 
power.
---------------------------------------------------------------------------
    \1\ Of particular interest are paragraphs 26, 28, 34, 52, 56 and 
57.
---------------------------------------------------------------------------
          antitrust law should block this merger as proposed.
    Claims that a merger will generate efficiencies in one market 
cannot justify or offset anti-competitive effects created by that 
merger in a separate market. This conclusion follows from the language 
of Section 7 of the Clayton Act, which prohibits mergers or 
acquisitions which may substantially lessen competition ``. . . in any 
line of commerce or . . . in any section of the country . . .'' Thus, 
Section 7 presents a legislative conclusion that one section of the 
country will not be sacrificed to anti-competitive effects in order to 
generate a benefit for a different section of the country. This hearing 
reaffirms that conclusion in its own way.
    This statutory language was relied upon by the United States 
Supreme Court in United States v. Philadelphia National Bank, 374 U.S. 
321 (1963), where the Court explained that a merger leading to anti-
competitive effects in one portion of the country could not be 
justified by arguable pro-competitive benefits to another section of 
the country. The Court stated: ``If anti-competitive effects in one 
market could be justified by procompetitive consequences in another, 
the logical upshot would be that every firm in an industry could, 
without violating Sec. 7, embark on a series of mergers that would make 
it in the end as large as the industry leader.'' The Supreme Court 
enjoined the proposed merger.
    The area of effective competition is the geographic area where 
customers can practically turn for alternative sources of the product. 
Anti-competitive effects in one market, such as rural America, cannot 
be shrugged off or disregarded, even if there is allegedly a benefit in 
another market.
                              conclusion.
    Mr. Chairman, members of this Subcommittee, the proposed merger of 
EchoStar and DIRECTV offers bleak options to rural America. Much of 
rural America has no access to MVPD programming except through high 
powered DBS services. Just a few years ago there were four competitors 
in the satellite market. Then Hughes bought Primestar. Then Hughes 
bought USSB. If EchoStar is permitted to buy Hughes, there will be only 
one provider--and no competitors.
    Rural America deserves a diversity of programming choices and a 
wide variety of advanced telecommunications services, not a single, 
monopoly satellite provider. We firmly believe that the merger of two 
highly successful DBS companies into one monopoly provider is so 
inconsistent with the interests of rural America that it should not be 
permitted in its current form.
    I appreciate your interest in this important issue and welcome the 
opportunity to address any questions.
    Thank you.

                                Endnotes

    1 Notice of Inquiry, Inquiry Into the Existence of 
Discrimination in the Provision of Superstation and Network Station 
Programming, 4 FCC Rcd 3833 (May 1, 1989).
    2 Report, Inquiry into the Existence of Discrimination 
in the Provision of Superstation and Network Station Programming, 67 RR 
2d 675, 5 FCC Rcd 523, para. 58, fn. 82 (December 29, 1989).
    3 47 U.S.CA. Sec. 628 See also First Report and Order, 
Implementation of Sections 12 and 19 of the Cable Television Consumer 
Protection and Competition Act of 1992, 72 RR 2d 649, 8 FCC Rcd 3359 
(April 30, 1993) (``Cable Act Report'').
    4 47 U.S.C.A. Sec. 548(a); See also 135 Cong. Rec. 
S1215202 (discussing the benefits of the statute to rural consumers).
    5 The highest DBS penetration rates ``averaging almost 
32%--have occurred in states with substantial rural populations (See, 
Satellite Broadcasting & Communications Association web site /
www.sbca.com/mediaguide/factsfigures.htm>). Although the Program Access 
rules benefit all American consumers, their loss would 
disproportionately affect rural Americans.
    6 Comments of the National Cable & Telecommunications 
Association at pages 6-26, 37-40 (``NCTA Cable Comments''), filed in 
response to Notice of Inquiry, Annual Assessment of the Status of 
Competition in the Market for the Delivery of Video Programming, CS 
Docket No. 01-129, FCC 01-191 (Released June 25, 2001) (``2001 Cable 
NOI'').
    7 Seventh Cable Competition Report, para. 181.
    8 NCTA Cable Comments, at page 39-40 (discussing general 
decrease in vertical integration); See Also, NCTA Press Release, The 
Program Access Laws of 1992 are Working: No Further Congressional 
Action is Needed, May 2001, obtained from, /www.ncta.com/pdf--
files/D-Program--access.pdf> (visited November 20, 2001) (stating that 
vertical integration of cable program networks declined to 35%).
    9 First Annual Report, In the Matter of Annual 
Assessment of the Status of Competition in the Market for the Delivery 
of Video Programming, 9 FCC Rcd. 7442, ]161, fn. 434 (Released 
September 24, 1994) (``First Cable Competition Report''). See also 
Seventh Cable Competition Report at para. 173.
    10 The Commission noted that ``large cable operators, 
because of their size and market share, have overwhelming buying power 
in the programming market that restricts access to independent 
programming as well as to vertically integrated programming.'' Report 
to Congressional Committees Pursuant to the Rural Local Broadcast 
Signal Act, FCC 00-454 (rel. Jan. 2, 2001), at para. 26 (citing 
observations by EchoStar).
    11 See Communications Act of 1934, as amended, 47 U.S.C. 
Sec. 548(g).
    12 ``Homes Passed'' is defined as the total number of 
households capable of receiving cable television service (see Seventh 
Cable Competition Report, n. 12.
    13 See First Annual Report, In the Matter of Annual 
Assessment of the Status of Competition in the Market for the Delivery 
of Video Programming, 9 FCC Rcd. 7442, 7451, para. 18 (stating that 96% 
of homes were passed by cable); See, Third Annual Report, In the Matter 
of Annual Assessment of the Status of Competition in the Market for the 
Delivery of Video Programming, 12 FCC Rcd. 4358, 4368, para. 13 
(stating that 96.7% of homes were passed by cable); See, Fourth Annual 
Report, In the Matter of Annual Assessment of the Status of Competition 
in the Market for the Delivery of Video Programming, 13 FCC Rcd 1034, 
para. 14 (stating that 97.1% of homes were passed by cable). See also 
Fifth Annual Report, In the Matter of Annual Assessment of the Status 
of Competition in the Market for the Delivery of Video Programming, 13 
FCC Rcd 24284, para. 16 (stating that 96.5% of homes were passed by 
cable); See Also, Sixth Annual Report, In the Matter of Annual 
Assessment of the Status of Competition in the Market for the Delivery 
of Video Programming, 15 FCC Rcd 978, para. 19 (stating that 96.6% of 
homes were passed by cable); And See, Seventh Cable Competition Report, 
para. 18 (stating that 96.6% of homes were passed by cable).
    14 National Telecommunications and Information 
Administration and Rural Utilities Service, Advanced Telecommunications 
In Rural America: The Challenge of Bringing Broadband Service to All 
Americans, April, 2000, fn. 62 (``NTIA RUS Report'').
    15 As the NTIA/RUS Report points out, the calculation of 
cable passage rates can be dramatically impacted by three basic, 
different sets of statistics: 1) Housing Units; 2) Households; and 3) 
TV Households. A ``Housing Unit'' is defined as a house, apartment, 
mobile home, group of rooms, or single room, that is occupied (or, if 
vacant, is intended for occupancy) as separate living quarters. A 
``Household'' is a currently occupied ``Housing Unit.'' A ``TV 
Household'' is defined as a home with at least one television. In 
arriving at its 97% figure, the cable industry may by comparing 
``apples to oranges,'' by counting Housing Units--not TV Households--as 
a percentage of TV Households. The NTIA/RUS Report points out that when 
a cable provider does not serve a house, it has no easy way to 
distinguish among a household without a TV, a household with a TV, or 
an unoccupied housing unit. The cable provider knows only that a 
Housing Unit is passed. The NTIA/RUS Report concludes, therefore, that 
a comparison of Homes Passed to Housing Units is especially useful in 
determining cable passage rates. NTIA/RUS Report, at fn. 62.
    16 Look, Up in the Sky! Big Bets on a Big Deal, N.Y. 
Times, October 30, 2001, at C-1. The article states that 115.9 million 
households have access to DBS programming, whereas only 90.9 million 
households have access to cable services. With a 78.3% passage rate, 
the number of unserved households equals more than 25,000,000. Sources 
for the article are cited as: NCTA, the Census Bureau, SkyRESEARCH, 
Satellite Broadcasting and Communications Association of America, and 
Kagan World Media.
    17 Comments and Reply Comments of NRTC, filed in 
response to 2001 Cable NOI. NRTC also addressed the accuracy of the 
Homes Passed statistic in its Comments filed in the Commission's Sixth 
Annual Cable Competition Report (See, Comments of the National Rural 
Telecommunications Cooperative, CS Docket No. 00-132, para.para. 8-15 
(submitted September 8, 2000)).
    18 Rule 425 filing by EchoStar with Security Exchange 
Commission, November 16, 2001, p.5.
    19 MITRE Technical Report, Analysis of Potential MVDDS 
Interference to DBS in the 12.2-12.7 GHz Band, the MITRE Corporation 
(April, 2001).
    20 Declaration of Robert J. Rusch, Satellite 
Broadcasting and Communications Association of America, et al, v. 
Federal Communications Commission et al., Civil Action No. 00-1571-A 
(U.S.D.C., E.D. Va., May 23, 2001).
    21 On November 29, 2001, the President authorized 
funding for the administration of the Launching Our Communities Access 
to Local Television Act of 200 (the ``LOCAL Act''), Pub. L. No. 106-553 
(2000), which created a loan guarantee program for the provision of 
local service to unserved and underserved areas.

    Mr. Upton. Thank you.

                STATEMENT OF JARED E. ABBRUZZESE

    Mr. Abbruzzese. Hi. Good afternoon, Mr. Chairman. Thank you 
for the opportunity to testify before the committee.
    My name is Jared Abbruzzese, and I am Chairman and Acting 
CEO of WSNet, a satellite facilities based wholesale provider 
of digital video programming services, headquartered down in 
Austin, Texas.
    Today what I will try and do is briefly touch on a lot of 
the subjects that were brought up today by the committee.
    WSNet offers satellite facilities-based wholesale 
programming and technology services to over 1,200 small, 
private cable and rural cable TV companies nationwide, 
representing almost 4,000 local cable TV systems. WSNet's role 
is that of an enabler. We enable these small operators to 
deploy advanced video service technologies that they otherwise 
would not have access to because of the unique demographics 
that are associated with the rural market.
    These multiple services include prepackaged, pre-digitized 
video services, new technologies that allow small rural cable 
operators to upgrade their service offering so that they can 
provide more channels developed over their existing cable plant 
at a fraction of the cost than they would otherwise be able to 
do if they had to incur the cost of upgrading their plant 
directly.
    In addition, WSNet offers its cable operators a satellite 
delivered direct to the home service of more than 200 digital 
video channels.
    The 1992 Cable Act was successful in creating an 
environment that allowed for the number of households with 
access to pay TV services to go to 87 million households that 
are served today. The act was also helpful in greatly expanding 
the availability of new upgraded digital video and data 
services.
    The act, however, was less than successful in creating the 
desired goal of increasing the number of competitive multi-
channel TV service providers and slowing the increased cost of 
cable TV services.
    These shortcomings can mainly be attributed to two factors, 
the first being the restructuring, consolidation, ongoing 
consolidation of the programming industry, and the second being 
the consolidation of the cable TV industry.
    In response to the 1992 Cable Act, most vertically 
integrated programming companies immediately de-vertically 
integrated themselves. After a series of divestitures, 
restructurings, and consolidation, there now exists 5 to 7 
major programming companies. Most of these operate free of the 
1992 act restrictions governing program access and pricing.
    These programmers can now decide when, for how much, and to 
whom they wish to sell their commercially critical programming 
content. In effect, those entities who do not have millions of 
customers worth of buying power can sometimes find that the 
access to critical programming is delayed; it's overpriced; 
it's packaged with unwanted services, or even denied.
    In light of these concerns, WSNet would respectfully ask 
this committee and the Congress to consider imposition of 
expanded program access rules.
    Regarding the status of MVPD, in 1996, the approximate 72 
million households that were pay TV customers, the largest 
seven cable TV companies had 42 million, or 58 percent of the 
overall customer base. The three DBS providers at the time 
controlled about 3.9 million customers, or 5 percent.
    And during that time local private cable and rural cable TV 
companies--and the smaller operators controlled about 26 
million or 36 percent of the total market.
    Since 1996, there has been a massive consolidation effort 
on the part of the largest TV cable companies. Not only have 
these cable TV companies become dramatically larger, but just 
as importantly, as Mr. Terry indicated, they have 
systematically consolidated franchise assets around large 
metropolitan areas through acquisitions and trade amongst each 
other.
    In prior years, a large metropolitan area may have several 
cable TV companies operating adjacent franchise areas. Today 
you will generally find one dominating the area. This gives 
them tremendous pricing power and control over the content of 
the area.
    The results of this industry consolidation since 1996 are 
impressive. Of the approximately 87 million households today 
that are currently paid TV customers, the largest seven 
companies now control 65 percent, or almost 57 million 
customers, an increase of 35 percent in 5 years.
    The two remaining high powered DBS companies now control 19 
percent of 17 million customers, a staggering 356 percent 
increase in 5 years. This is with two large DBS competitors 
competing against each other. Obviously their respective 
service offerings are quite vibrant.
    During this same period of explosive growth in the market 
share for both the large cable providers and the DBS guys, the 
smaller rural and local cable TV companies have seen their 
market share shrink by almost 48 percent, to about 13.4 million 
customers. Clearly since 1996 the smaller cable TV operators 
have been steadily losing both market share and customers. The 
decline, again, can be contributed to the lack of ability to 
upgrade their services and increase the number of channels.
    Typically rural cable companies have 30 to 40 analogue 
channels. There are currently three companies that provide 
satellite, facilities based digital video operating today in 
the U.S. The two largest are EchoStar and DIRECTV. They operate 
high powered DBS satellites. The third is WSNet utilizing 
medium powered KU band satellites.
    If the announced merger or the announced EchoStar and 
Hughes DIRECTV merger goes through, the combined entity will 
control 100 percent of all three U.S. licensed high powered DBS 
full CONUS, which means it sees all 48 States, contiguous 
States, in the U.S.
    In addition, it will also control more than 55 percent of 
the two remaining usable high powered DBS semi-conus locations. 
In short, the merged entity will control virtually all of the 
U.S. high powered capacity available and licensed.
    Clearly the merged entity will be a daunting giant with 
vast competitive weapons at its disposal. WSNet has not been 
able to and cannot find commercially viable, high powered DBS 
capacity in the United States, and it is the much preferred 
technology.
    Largely in response to this extraordinarily controlled that 
a merged EchoStar and DIRECTV entity will enjoy, WSNet has 
sought the only high powered alternative in existence in North 
America recently, and filed for landing rights to the FCC from 
two Canadian high powered DBS lots. It should be noted that 
that capacity is currently committed to Canadian companies and 
it's highly questionable as to whether we will ever be able to 
use it.
    Mr. Chairman, even considering the intimidating realities 
posed by a merged entity, we believe at WSNet that the 
EchoStar-DIRECTV combination can be good for competition in the 
larger markets, but I think I have to underscore at this point 
in creating an entity that can compete in the larger markets, 
we will also be creating or allowing the creation of an entity 
that will be a de facto monopolist in that role in the smaller 
markets unless certain conditions and modifications are 
attached to this to assure that there is competition not only 
in large markets, but also in the rural and small markets in 
America, and that's the only way that these people, the 20-some 
odd million households in rural America enjoy the same 
competitive benefits as those people that live in the large 
urban markets.
    Thank you, Mr. Chairman.
    [The prepared statement of Jared E. Abbruzzese follows:]
Prepared Statement Jared E. Abbruzzese, Chairman and Acting CEO, World 
                        Satellite Network, Inc.
    World Satellite Network, Inc. (``WSNet'') a satellite based, 
wholesale provider of digital video programming services headquartered 
in Austin, Texas and its Chairman and Acting CEO, Jared E. Abbruzzese, 
submits the following written statement in response to a request to 
testify before the hearing on The Status of Competition in the Multi-
Channel Video Programming Distribution Marketplace by the Subcommittee 
on Telecommunications and the Internet on Tuesday, December 4, 2001.
    As a satellite-facilities based wholesale provider, WSNet serves 
small private cable and rural cable television companies nationwide. 
WSNet competes in multichannel video markets by offering a variety of 
programming services and technologies to these operators. First, WSNet 
operates the third, and newest, nationwide direct-to-home (``DTH'') 
television platform in the United States. Aside from Echostar and 
DIRECTV, WSNet is the only other satellite facilities based multi-
channel video programming distributor (MVPD) in operation today. Using 
the WSNet digital satellite platform, small cable operators can provide 
multi-channel video service to households within their service area not 
currently reached by their wired facilities by installing a satellite 
dish on their subscriber's home allowing them to receive approximately 
200 channels of video and music. In addition small system operators 
(typically less than 150 homes passed) may upgrade their existing wired 
service with all-digital satellite channels and continue to provide 
local channels via their wired facilities.
    Second, WSNet's satellite platform also is used to provide a 
unique, cost-effective, digital upgrade for smaller cable systems, 
particularly in rural areas. By taking advantage of WSNet's all-digital 
satellite platform, small cable system operators (including Satellite 
Master Antenna Television [SMATV] operators) can upgrade their systems 
by replacing all of their analog cable channels (excluding local 
channels) with a digital format, dramatically expanding the number of 
channels offered. Each analog channel replaced can then be used to 
deliver ten to twelve digital channels. This means that systems with 
limited bandwidth (i.e 330 MHz) can move from offering 35 channels to 
over 200 channels, and still have bandwidth available to eventually 
support high speed data. By taking advantage of Quadrature Amplitude 
Modulation (QAM) technology and taking advantage of an all-digital 
satellite delivery and authorization, the capital expense of existing 
plant can be significantly reduced. This eliminates a major barrier 
that rural cable companies have faced in trying to compete with DBS 
providers over the last six years. This enables them to deliver 
approximately 200 channels of high quality, digital video and audio 
programming to cable system operators at a fraction of the capital cost 
of traditional video delivery mechanisms.
    Additionally, WSNet continues to be a leading wholesale provider of 
analog television programming and equipment to private cable operators 
and wireless cable operators in the United States. As of May 31, 2001, 
WSNet served approximately 1,200 operators who collectively served over 
750,000 video subscribers.
    The 1992 Cable Act and the 1996 Telecommunications Act were 
successful in increasing the number of households with access to pay-TV 
services to about 87 million households today. The environment that the 
Acts created was also helpful in expanding the availability of new 
upgraded digital video and data services.
    These Acts however, were less than successful in creating the 
desired goal of increasing the number of competitive multi-channel TV 
services providers and in slowing the increasing cost of cable TV 
services. These shortcomings can mainly be attributed to two factors; 
the first being the restructuring and consolidation of the programming 
industry and the second being the consolidation of the cable TV 
industry.
                 consolidation of programming providers
    In response to the '92 Act, most vertically integrated companies 
de-vertically integrated themselves. After a series of divestitures, 
restructurings, and consolidations, there now exists seven major 
programming companies (AOL/Time Warner, Liberty Media, News 
Corporation, Viacom, GE/NBC, Disney, and Vivendi) most of these now 
operate free of '92 Act restrictions governing pricing and program 
access. A list of the core programming services and their ownership 
structure is included in Appendix A. After beginning as affiliates of 
the large Multiple System Operators (MSOs), the recent restructurings 
by AT&T and other cable companies have now created independent 
companies. However a major shift that has occurred now has the major 
broadcasters owning significant positions in many of the cable 
programmers. Thus, these programmers can decide how, when, for how 
much, and to whom they wish to sell their commercially critical 
programming content. In effect, those entities who do not have millions 
of customers worth of buying power, can sometimes find that access to 
critical programming is delayed, over-priced, packaged with unwanted 
services or even service maybe denied. In light of this, WSNet would 
ask this Committee to consider the imposition of expanded program 
access rules.
                   consolidation of mvpd distribution
    Regarding recent consolidation of the cable TV distribution 
industry, in 1996, of the approximately 72 million households that were 
pay TV customers at the time, the 7 largest cable TV companies had 42.1 
million or 58% of the overall customer base. The 3 DBS satellite 
service providers at the time controlled about 3.9 million customers or 
about 5% of the total market. During this period, the remaining cable 
companies, consisting of primarily local private cable, rural cable TV 
and smaller operators controlled about 26 million customers or about 
36% of the total market at that time.

                                    Table 1: 1996 MVPD Subscriber Summary \1\
----------------------------------------------------------------------------------------------------------------
                                                                                 1996                 Cumulative
                    Rank                             MVPD Providers          Subscribers  % of Total  % of Total
----------------------------------------------------------------------------------------------------------------
1..........................................  TCI...........................         15.9       22.1%       22.1%
2..........................................  Time Warner...................         10.8       15.0%       37.1%
3..........................................  Continental/US West...........          4.4        6.1%       43.1%
4..........................................  Comcast.......................          3.9        5.4%       48.6%
5..........................................  Cox...........................          3.0        4.2%       52.8%
6..........................................  Cablevision...................          2.5        3.5%       56.3%
7..........................................  DirecTV/USSB (DBS)............          2.1        3.0%       59.3%
8..........................................  Adelphia......................          1.6        2.2%       61.4%
9..........................................  Primestar (DBS)...............          1.5        2.1%       63.5%
10.........................................  Jones Intercable..............          1.4        1.9%       65.4%
11.........................................  HSD...........................          2.3        3.2%       72.2%
12.........................................  MMDS..........................          1.2        1.7%       68.9%
13.........................................  SMATV.........................          1.1        1.5%       67.3%
14.........................................  Echostar (DBS)................          0.3        0.4%       65.8%
15.........................................  Other Cable Operators.........         20.1       27.8%      100.0%
                                               Total.......................         72.0      100.0%
----------------------------------------------------------------------------------------------------------------
\1\ Figures based on 1996 and 1997 FCC Annual Assessment of the Status of Competition in the Market for the
  Delivery of Video Programming and WSNet estimates using Skyreports.

    Since 1996, there has been a massive consolidation effort on the 
part of the largest cable TV companies. Not only did the large cable 
companies consolidate to become larger, they also, and just as 
importantly, systematically consolidated franchise assets surrounding 
large metropolitan areas through acquisitions and trades with each 
other. The net result of this activity is that today you will rarely 
find more than one of the top cable TV operators servicing a single 
large metropolitan area, whereas before, you would find them operating 
in adjacent franchises within a given metropolitan market. This new 
strategy rewarded them with tremendous buying and pricing power.
    One result is that, of the approximately 87 million U.S. households 
that are pay-TV customers today, the largest 7 cable TV companies now 
control 65% or almost 56.9 million customers (an increase of almost 35% 
in 5 yrs.). The two remaining high-powered DBS satellite companies now 
control service to about 19% or 17 million customers (a staggering 400% 
increase). During this period of explosive growth in market share for 
both the large cable TV operators and the two high-powered DBS 
operators, the smaller local and rural cable TV companies have seen 
their market share shrink by almost 48% to about 13.4 million 
customers.

                                    Table 2: 2001 MVPD Subscriber Summary \2\
----------------------------------------------------------------------------------------------------------------
                                                                               Sep 2001               Cumulative
                    Rank                             MVPD Providers          Subscribers  % of Total  % of Total
----------------------------------------------------------------------------------------------------------------
1..........................................  AT&T..........................         13.7       15.8%       15.8%
2..........................................  Time Warner...................         12.6       14.5%       30.2%
3..........................................  DirecTV (DBS).................         10.3       11.8%       42.1%
4..........................................  Comcast.......................          8.4        9.7%       51.8%
5..........................................  Charter.......................          7.0        8.0%       59.8%
6..........................................  Echostar (DBS)................          6.4        7.4%       67.1%
7..........................................  Cox...........................          6.5        7.5%       74.6%
8..........................................  Adelphia......................          5.7        6.6%       81.2%
9..........................................  Cablevision...................          3.0        3.4%       84.6%
10.........................................  Mediacom......................          1.6        1.8%       86.4%
11.........................................  Insight.......................          1.6        1.8%       88.3%
12.........................................  HSD...........................          0.9        1.1%       90.7%
13.........................................  SMATV.........................          1.2        1.4%       89.6%
14.........................................  MMDS..........................          0.6        0.7%       91.4%
15.........................................  Other Cable Operators.........          7.5        8.6%      100.0%
                                             Total.........................         87.0      100.0%
----------------------------------------------------------------------------------------------------------------
\2\ Figures based on WSNet estimates using Skyreport and earnings reports for periods ending September 2001.

    Obviously, since 1996 the smaller cable TV operators have been 
steadily losing market share and losing in absolute numbers of 
customers, primarily due to the two high-powered DBS providers. This is 
largely due to the fact that until WSNet began to provide its wholesale 
satellite solutions, the smaller operators could not offer either the 
number of channels nor the enhanced digital services that the satellite 
video providers could.
Consolidation of Satellite Spectrum
    There are currently three companies that provide digital video, 
satellite facilities-based services operating in the U.S. The two 
largest, Echostar and DIRECTV, operate utilizing high-powered DBS 
satellites, and the third, WSNet operates utilizing medium-powered KU 
band satellites.
    If the announced Echostar and Hughes/DIRECTV merger goes through, 
the combined entity will control 100% of all 3 of the U.S. licensed, 
high-powered DBS, full-conus orbital locations (means each one can 
broadcast to all of the U.S.). In addition, they will also control more 
than 55% of the only 2 remaining useable high-powered DBS semi-conus 
orbital locations (each broadcasts to \1/2\ the U.S.). In short, the 
merged company will control virtually all of the U.S. high-powered DBS 
satellite assets (over 130 high-powered DBS transmitters). In addition, 
Echostar/DIRECTV will combine substantial other satellite assets in 
other frequency bands. Clearly, the merged company will be a daunting 
giant with vast competitive weapons at its disposal.
    This continues a trend of satellite consolidation since 1996. 
Initially there were going to be six other potential DBS providers (in 
both high-powered and medium power) including Primestar, United States 
Satellite Broadcasting Company, Inc. (USSB), Alphastar, AskyB (a joint 
venture between MCI/Worldcom and News Corporation), Dominion Video 
Satellite, and Continental Satellite Corporations (CSC). In a continued 
effort to consolidate the spectrum both Echostar and DIRECTV have 
either acquired or obtained the rights to control virtually all of the 
U.S. high-powered orbital slots.
    The U.S. medium powered Ku-Band orbital capacity is also undergoing 
the same type of consolidation. Of the 33 frequencies that are 
currently approved for use, there are currently 35 satellites in use, 
not including the DARS radio satellites. There are currently four 
companies that control the US orbital slots, Hughes, Loral Skynet, SES 
Americom, and Echostar. Telesat has control over the Canadian 
frequencies. After a merger between Echostar and Hughes/DIRECTV, the 
combined entity will control 16 different satellites and have 
operational control over 13 of the orbital positions. The table below 
shows the orbital positions and satellites currently in use.

                           Table 3: Ku-Band Orbital Slots (Medium and High Power) \3\
----------------------------------------------------------------------------------------------------------------
                                                           Oribtal Slot Licensee
               Slot                         Power                                      Satellites        Number
----------------------------------------------------------------------------------------------------------------
61.5W.............................  High.................  EchoStar.............  Echostar 3..........        1
72.0W.............................  Medium...............  SES Americom.........  AMC 6...............        1
74.0W.............................  Medium...............  Hughes/PanAmSat......  SBS 6...............        1
79.0W.............................  Medium...............  SES Americom.........  AMC 5, SatCom C1....        2
81.0W.............................  Medium...............  SES Americom.........  SatCom K2...........        1
82.0W.............................  High.................  Telesat (Canada).....  Not In Service......        0
83.0W.............................  Medium...............  EchoStar.............  Not In Service......        0
85.0W.............................  Medium...............  SES Americom, XM       AMC 2, XM Roll......        2
                                                            Radio.
87.0W.............................  Medium...............  SES Americom.........  AMC 3...............        1
89.0W.............................  Medium...............  Loral Skynet.........  Telstar 4...........        1
91.0W.............................  High.................  Hughes/PanAmSat,       Galaxy 11, Nimiq 1..        2
                                                            Telesat.
93.0W.............................  Medium...............  Loral Skynet.........  Telstar 6...........        1
95.0W.............................  Medium...............  Hughes/PanAmSat......  Galaxy 3R...........        1
97.0W.............................  Medium...............  Loral Skynet.........  Telstar 5...........        1
99.0W.............................  Medium...............  Hughes/PanAmSat......  Galaxy 4R...........        1
101.0W............................  High.................  DirecTV (U.S.), SES    Directv 1R/2/3, AMC         4
                                                            Americom.              4.
103.0W............................  Medium...............  SES Americom.........  AMC 1...............        1
105.0W............................  Medium...............  SES Americom.........  G-Star 4............        1
107.3W............................  Medium...............  Telesat..............  Anik F..............        1
109.2W............................  Medium...............  SatMex (Mexico)......  Not In Service......        0
110.0W............................  High.................  DirecTVEchoStar......  Echostar 5, Direct 1        2
111.1W............................  Medium...............  Telesat..............  Anik E2.............        1
113.0W............................  Medium...............  Loral Skynet, SatMex.  Solidaridad 2.......        1
115.0W............................  Medium...............  XM Radio.............  XM Rock.............        1
116.8W............................  Medium...............  Loral Skynet, SatMex.  SatMex 5............        1
118.7W............................  Medium...............  Telesat..............  Anik E1.............        1
119.0W............................  High.................  DirecTVEchoStar......  Echostar 4/6,               3
                                                                                   DirecTV 6.
121.0W............................  Medium...............  EchoStar.............  Not In Service......        0
123.0W............................  Medium...............  Hughes/PanAmSat......  Galaxy 10R..........        1
129.0W............................  Medium...............  Loral Skynet.........  Telestar 7..........        1
148.0W............................  High.................  EchoStar.............  Echostar 1..........        1
155.5W............................  Medium...............  Hughes/PanAmSat......  PAS 5...............        1
175.0W............................  High.................  EchoStar.............  Not In Service......        0
33 Slots                                                                                                     37
----------------------------------------------------------------------------------------------------------------
\3\ Lyngemark Satellite (www.lngsat.com) and WSNet company esearch.

    Echostar's combined capacity of both medium and high powered Ku-
band frequencies could make it very difficult for both programmers and 
alternative providers, since many are dependent on Hughe's PanAmSat as 
their current provider.
    WSNet has not been able to, and currently cannot find any 
commercially viable high-powered DBS capacity in the U.S. While high-
powered DBS is the much-preferred technology, WSNet must compete 
utilizing 17 leased transmitters of medium-powered KU band capacity 
operated from two different satellites. These medium-powered 
transmitters can only provide service to WSNet and its customers, 
through a 34''-36'' receive dish, an antenna more than twice the size 
of the 18'' receive dish of Echostar and DIRECTV, impacting the overall 
cost-effectiveness of any solution any independent operator can 
provide.
    Largely in response to the extraordinary control that a merged 
Echostar and DirecTV will enjoy, effectively dominating the U.S. high-
powered the DBS market; WSNet sought out the only possible high-powered 
alternative in existence in North America and recently filed with the 
FCC for landing-rights from two Canadian high-powered DBS satellites. 
It should be noted that all of the capacity from both Canadian DBS 
locations are currently committed to Canadian operators and it is 
highly questionable as to whether these satellites would be useable in 
the U.S.
                 potential impact to local broadcasting
    Even considering the intimidating realities posed by a merged 
entity, WSNet believes that the Echostar/DIRECTV combination can be 
good for competition; positioning it well for competing with big cable 
TV companies in the large markets. Unfortunately, we also believe that 
as currently structured, an undesired consequence of this merger could 
be the further elimination competition in the smaller and especially 
the rural markets. It is also evident that any further negative impact 
on the small local and rural cable TV operators could have a 
corresponding negative impact on the 800-1,000 local broadcasters who 
also rely on these operators to reach large portions of their markets.

                             Table 4: Local-into-Local Station Carriage Requirements
----------------------------------------------------------------------------------------------------------------
                                                                                  Secondary     Total
                                               4 Major      Other        All       Network       All    % of All
                                              Networks  Networks \1\  Networks  Stations \2\  Stations  Stations
----------------------------------------------------------------------------------------------------------------
Top 40 DMAs.................................       159         138         297         145         442     28.3%
Top 100 DMAs................................       398         282         680         293         973     62.4%
>100 DMAs...................................       324         123         447         140         587     37.6%
All DMAs....................................       722         405       1,127         433       1,560    100.0%
----------------------------------------------------------------------------------------------------------------

    As illustrated in Table 4, there are 1,560 non-digital television 
broadcast stations within the United States.4 Within the top 
40 Designated Marketing Areas (DMAs) there are 442 network stations, 
and within the top 100 DMAs there are 973 stations. Based on EchoStar's 
proposal to expand local-into local service to the top 100 DMAs, they 
would have to carry 973 total stations, provided must-carry provisions 
and that duplicated network stations within a DMA be carried. This is 
an addition of 812 new channels on top of the 161 local channels they 
currently transmit.5 This is more capacity than DIRECTV 
currently has with its existing satellite base. There are three 
solutions to this problem that EchoStar could elect.
---------------------------------------------------------------------------
    \4\ Warren Communications News, Television & Cable FactBook 2001
    \5\ Lyngemark Satellite, last updated 2001-12-01--http://
www.lyngsat.com/
---------------------------------------------------------------------------
    First, they could significantly expand their existing satellite 
capacity by launching new satellites in their licensed DBS frequencies 
with spot-beam technology, allowing them to add more channels to the 
limited frequencies by directing certain stations into specific 
footprints, allowing them to gain the additional capacity required to 
carry all the stations with these DMAs.
    Second, they could vigorously fight, as they have done in the past, 
any must-carry legislation, with the hope of overturning the 
requirement in a court of law. This would significantly reduce the need 
for new satellites to support the must-carry requirement.
    A third option that they could push the limits on the 
interpretation of the must-carry regulations in DMA's with large 
footprints. One approach would be to carry a national PBS channel (as 
they do now), eliminating the need to carry the 422 local PBS stations 
that support many local communities. If they chose to carry a local PBS 
feed in the DMA, they could then choose not to broadcast the 243 local 
PBS stations that cover multiple cities in 179 DMAs.6 This 
approach could be expanded with the network broadcast stations as well. 
For example, in the Phoenix DMA, Echostar currently broadcasts the four 
networks (ABC, CBS, NBC, and FOX) that originate from Phoenix, Arizona. 
They do not carry the secondary NBC Affiliate (KNAZ-TV) in Flagstaff, 
even though it falls within the Phoenix DMA, since they already carry 
Phoenix's NBC affiliate KPNX-TV. Another example is in the Denver DMA, 
where there are 6 secondary major network stations in addition to the 
main Denver affiliates. For example, while they carry Denver's ABC 
affiliate KMGH-TV, they do not carry the other ABC affiliates within 
the DMA such as K57CR from Rifle, Colorado, KNFR out of Rawlins, 
Wyoming or K36AF from New Castle, Colorado. If these secondary networks 
are not carried, 293 different stations could be adversely affected and 
consumers in their communities would have to depend on regional news 
versus local news. Many of these secondary affiliate stations are 
carried by small local cable companies in rural America. Should a 
EchoStar/DirecTV merger be approved, it is imperative that EchoStar not 
be allowed to bypass or avoid the legislative requirements for a 
comprehensive must-carry implementation. If this means that EchoStar 
would support fewer than the top 100 DMAs, then that is a business 
decision they must make. But to allow EchoStar to loosely interpret or 
legally challenge the must-carry rules would significantly affect many 
small local broadcasters.
---------------------------------------------------------------------------
    \6\ Based on WSNet analysis of local station data from Television & 
Cable FactBook 2001.
---------------------------------------------------------------------------
    Even given a merged EchoStar's ability to successfully meet the 
comprehensive must-carry requirements in the top 100 DMAs, the fact 
still remains that 14+ million households in rural America will not get 
the chance to see the 587 (37.6% of all broadcast stations) stations 
located outside the top 100 DMAs. The potential impact to these small 
stations and their local communities could be devastating. Many of the 
states outside the top 100 DMAs are subject to severe weather. Key 
tornado states like Kansas, Texas, Oklahoma, and Nebraska, along with 
severe winter weather states in the upper West such as North and South 
Dakota, Montana, Wyoming, and Idaho in addition to hurricane risk 
states such as Florida, Alabama, Mississippi and Louisiana along with 
the eastern seaboard of North and South Carolina are all subject to 
losing access to the local emergency broadcast network. Many households 
in these areas have poor off-air reception and rely on their local 
cable companies to carry their local broadcasting stations. Since a 
merged EchoStar would not carry these stations, it is critical as a 
condition to this merger, that local cable operators be supported in 
delivering a comprehensive digital satellite service in conjunction 
with their local channels. The local cable operators must have access 
to all the same programming provided by EchoStar along with the ability 
to compete both by providing service via their existing wired service 
and if it is too expensive to reach a remote home, with a satellite 
dish.
                               conclusion
    In conclusion, WSNet believes that the Echostar/DIRECTV merger 
should go forward with the addition of some modifications that would 
afford WSNet permanent access to enhanced satellite facilities. This 
accommodation should be accomplished in a way that does not materially 
diminish Echostar/DIRECTV's ability to compete aggressively with the 
large cable TV companies. WSNet is confident, that an enhanced 
satellite facilities commitment combined with the suggested 
modifications to the program access rules, will provide the best 
opportunity to ensure that real competition will exist in all markets 
in the U.S.

                                                   Appendix A
                          Popular National Video Programming Services by Ownership \6\
----------------------------------------------------------------------------------------------------------------
                                  2000
                                  Subs     Core    Launch
      Programming Service        (mil.   Channel    Year   MSO Ownership (%)     Owner Type           Tier
                                  HHs)
----------------------------------------------------------------------------------------------------------------
A&E (Arts & Entertainment)....     79.4      Yes     1984  Disney (37.5),     Broadcaster.....  Basic
                                                            Hearst (37.5),
                                                            GE/NBC (25).
ABC Family (formerly Fox           79.3      Yes     1977  Disney (100).....  Broadcaster.....  Basic
 Family Worldwide).
American Movie Classics (AMC).     75.9      Yes     1984  GE/NBC (53),       Broadcaster.....  Basic
                                                            Cablevision
                                                            (27), MGM (20).
Animal Planet.................     66.3      Yes     1996  Liberty (49), Cox  Independent.....  Basic
                                                            (24.5), Newhouse
                                                            (24.5),
                                                            Hendricks (2).
BET (Black Entertainment           63.4      Yes     1980  Viacom (100).....  Broadcaster.....  Basic
 Television).
BET on Jazz...................      8.4      Yes     1996  Viacom (100).....  Broadcaster.....  Expanded
Bloomberg Information                 6      Yes     1995  Bloomberg (100)..  Independent.....  Expanded
 Television.
Bravo.........................     50.4      Yes     1980  GE/NBC (52.8),     Broadcaster.....  Expanded
                                                            Cablevision
                                                            (27.2), MGM (20).
Cartoon Network...............     69.3      Yes     1992  AOL (100)........  MSO.............  Basic
Cinemax.......................               Yes     1980  AOL (100)........  MSO.............  Premium
CMT (Country Music Television)     44.7      Yes     1983  Viacom (100).....  Broadcaster.....  Basic
CNBC..........................     75.6      Yes     1989  GE/NBC (100).....  Broadcaster.....  Basic
CNN...........................     80.3      Yes     1980  AOL (100)........  MSO.............  Basic
CNN Headline News.............     76.2      Yes     1982  AOL (100)........  MSO.............  Basic
CNN/SI........................       16      Yes     1996  AOL (100)........  MSO.............  Expanded
CNNfn (The Financial Network).     16.5      Yes     1995  AOL (100)........  MSO.............  Expanded
Comedy Central................       69      Yes     1991  Viacom (50), AOL   MSO.............  Basic
                                                            (37), AT&T (13).
Court TV......................     51.1      Yes     1991  AOL (58), Liberty  MSO.............  Basic
                                                            (42).
C-SPAN........................     79.4      Yes     1979  Independent......  Independent.....  Basic
C-SPAN2.......................     60.7      Yes     1986  Independent......  Independent.....  Basic
Discovery Channel.............     80.8      Yes     1985  Liberty (49), Cox  Independent.....  Basic
                                                            (24.5), Newhouse
                                                            (24.5),
                                                            Hendricks (2).
Discovery Health..............     21.5      Yes     1999  Liberty (49), Cox  Independent.....  Expanded
                                                            (24.5), Newhouse
                                                            (24.5),
                                                            Hendricks (2).
Disney Channel................     68.2      Yes     1983  Disney (100).....  Broadcaster.....  Basic
E! Entertainment..............     66.7      Yes     1990  Comcast (90),      MSO.............  Basic
                                                            Liberty (10).
Encore........................               Yes     1991  Liberty (100)....  Independent.....  Premium
ESPN..........................     80.5      Yes     1979  Disney (80),       Broadcaster.....  Basic
                                                            Hearst (20).
ESPN Classic Sports (formerly        30      Yes     1995  Disney (80),       Broadcaster.....  Expanded
 Classic Sports Network).                                   Hearst (20).
ESPN..........................    274.1      Yes     1993  Disney (80),       Broadcaster.....  Basic
                                                            Hearst (20).
ESPNEWS.......................       20      Yes     1996  Disney (80),       Broadcaster.....  Expanded
                                                            Hearst (20).
Flix..........................               Yes     1992  Viacom (100).....  Broadcaster.....  Premium
Food Network..................     54.5      Yes     1993  EW Scripps (64),   Independent.....  Basic
                                                            Tribune (29),
                                                            AT&T (5), Others
                                                            (2).
Fox Health Network............     21.5      Yes     1999  AT&T (49), Cox     MSO.............  Expanded
                                                            (24.6).
Fox News Channel..............     57.5      Yes     1996  News Corp. (100).  Broadcaster.....  Basic
FOX Sports Net (5 channels)...               Yes     1995  News Corp. (100).  Broadcaster.....  Basic
FX............................       57      Yes     1994  News Corp. (100).  Broadcaster.....  Basic
FXM: Movies from Fox..........       13      Yes     1994  News Corp. (100).  Broadcaster.....  Expanded
Game Show Network.............     31.2      Yes     1994  Liberty (50),      Independent.....  Expanded
                                                            Digital (50).
Golf Channel..................     31.9      Yes     1995  Comcast (54.7),    MSO.............  Expanded
                                                            News Corp
                                                            (30.9), Times
                                                            Mirror (8.6),
                                                            Others (5.8).
Goodlife Television Network        10.1      Yes     1998  Concept Comm.      Independent.....  Expanded
 (formerly Nostalgia Channel).                              (71), Others
                                                            (29).
Great American Country........     14.7      Yes     1995  Jones              Independent.....  Expanded
                                                            International
                                                            Networks.
HBO (Home Box Office).........               Yes     1972  AOL (74.5), AT&T   MSO.............  Premium
                                                            (25.5).
History Channe................    l69.6      Yes     1995  Disney (37.5),     Broadcaster.....  Basic
                                                            Hearst (37.5),
                                                            GE/NBC (25).
Home & Garden Television           67.1      Yes     1994  EW Scripps (100).  Independent.....  Basic
 (HGTV).
Home Shopping Network (HSN)...     66.9      Yes     1985  Vivendi (45),      Independent.....  Basic
                                                            Liberty (21),
                                                            Others (34).
Independent Film Channel......       14      Yes     1994  GE/NBC (52.8),     Broadcaster.....  Expanded
                                                            Cablevision
                                                            (27.2), MGM (20).
Inspirational Network.........     14.6      Yes     1990  INSP (100).......  Independent.....  Expanded
International Channel.........     10.2      Yes     1990  Liberty (90).....  MSO.............  Expanded
Lifetime Television...........     78.8      Yes     1984  Disney (50),       Broadcaster.....  Basic
                                                            Hearst (50).
M2: Music Television..........     21.2      Yes     1996  Viacom (100).....  Broadcaster.....  Expanded
MSNBC.........................     61.4      Yes     1996  GE/NBC (50),       Broadcaster.....  Basic
                                                            Microsoft (50).
MTV ``X''.....................     21.2      Yes     1996  Viacom (100).....  Broadcaster.....  Expanded
MTV: Music Television.........     77.3      Yes     1981  Viacom (100).....  Broadcaster.....  Basic
Newsworld International.......               Yes     1994  Vivendi (45),      Independent.....  Expanded
                                                            Liberty (21),
                                                            Others (34).
Nickelodeon...................     79.8      Yes     1979  Viacom (100).....  Broadcaster.....  Basic
Outdoor Life Network..........       26      Yes     1995  Cox (33), Comcast  MSO.............  Expanded
                                                            (30), AT&T (4).
Ovation: The Arts Network.....     21.5      Yes     1996  AOL (4.0)........  MSO.............  Expanded
Playboy TV....................               Yes     1982  Playboy..........  Independent.....  Premium
QVC...........................     76.9      Yes     1986  Comcast (57),      MSO.............  Basic
                                                            AT&T (43).
Sci-Fi Channel................     67.3      Yes     1992  Vivendi (45),      Independent.....  Basic
                                                            Liberty (21),
                                                            Others (34).
Showtime......................               Yes     1976  Viacom (100).....  Broadcaster.....  Premium
Sneak Prevue..................       32      Yes     1991  Gemstar (100)....  Independent.....  Expanded
SoapNet.......................        6      Yes     2000  Disney (100).....  Broadcaster.....  Expanded
Speedvision...................       33      Yes     1995  Cox (33), Comcast  MSO.............  Expanded
                                                            (30), AT&T (4).
Starz!........................               Yes     1994  Liberty (88),      Independent.....  Premium
                                                            Others (12).
Style.........................       10      Yes     1999  Comcast (89.6),    MSO.............  Expanded
                                                            Liberty (10.4).
TBS...........................     81.4      Yes     1976  AOL (100)........  MSO.............  Basic
TechTV........................       23      Yes     1998  Vulcan Ventures..  Independent.....  Expanded
The Hallmark Channel (Odyssey      27.5      Yes     1993  Crown Media......  Independent.....  Expanded
 Channel).
The Weather Channel (TWC).....     78.5      Yes     1982  Landmark           Independent.....  Basic
                                                            Communications.
TLC (The Learning Channel)....     76.8      Yes     1980  Liberty (49), Cox  Independent.....  Basic
                                                            (24.5), Newhouse
                                                            (24.5),
                                                            Hendricks (2).
TNN: The National Network          78.8      Yes     1983  Viacom (100).....  Broadcaster.....  Basic
 (formerly The Nashville
 Network).
Toon Disney...................     17.8      Yes     1998  Disney (100).....  Broadcaster.....  Expanded
Travel Channel................     49.8      Yes     1987  Liberty (49), Cox  Independent.....  Basic
                                                            (24.5), Newhouse
                                                            (24.5),
                                                            Hendricks (2).
Turner Classic Movies (TCM)...     47.2      Yes     1994  AOL (100)........  MSO.............  Basic
TV Guide Channel..............     54.6      Yes     1988  Gemstar (100)....  Independent.....  Basic
TV Land.......................     55.5      Yes     1996  Viacom (100).....  Broadcaster.....  Basic
USA Network...................     80.4      Yes     1980  Vivendi (45),      Independent.....  Basic
                                                            Liberty (21),
                                                            Others (34).
VH-1..........................     74.2      Yes     1985  Viacom (100).....  Broadcaster.....  Basic
WGN-C.........................     51.1      Yes     1978  Tribune Media....  Independent.....  Basic
Women's Entertainment                25      Yes     1997  GE/NBC (52.8),     Broadcaster.....  Basic
 (formerly Romance Classics).                               Cablevision
                                                            (27.2), MGM (20).
----------------------------------------------------------------------------------------------------------------

    Mr. Upton. Thank you.
    Mr. Pagon, welcome.

                 STATEMENT OF MARSHALL W. PAGON

    Mr. Pagon. Mr. Chairman and members of the committee, I 
thank you for the invitation to appear before you today. My 
name is Mark Pagon. I am the Chief Executive Officer of Pegasus 
Communications Corporation.
    I founded Pegasus in 1991. Sine then we have grown to 
become America's tenth largest multi-channel video provider. 
Today we provide digital satellite TV or DBS to more than 1.5 
million rural households in 41 States. We are the only major 
cable or satellite provider in the United States exclusively 
focused on service to rural communities.
    The binding lesson of my professional experience is that 
competition has worked extremely well in providing American 
consumers choice, innovation, and value in multi-channel video.
    The first DBS system was sold in July 1994 in Cowboy 
Maloney's Consumer Electronics Superstore in Jackson, 
Mississippi. That first subscriber lives in a rural area 
outside of Jackson and is a Pegasus customer.
    In the 7 years since, DBS companies have grown to serve 
more than 17 million subscribers. As a point of reference, it 
took the cable industry 32 years to sign up 17 million 
customers.
    Almost 10 million rural homes, 1 in 4, now have a satellite 
dish. In Montana and Vermont, the ratio is approaching almost 1 
in 2.
    As a result of DBS, digital television is now more 
prevalent in rural areas than in America's most affluent urban 
communities. The simple truth is that the satellite and cable 
industries are more competitive than they have ever been. Today 
the majority of American have a choice between a cable company 
an two DBS service providers. Even for the almost 20 million 
homes not passed by cable, there is still a choice of two 
satellite companies.
    The cost of becoming a multi-channel subscribers has never 
been lower. Seven years ago a new customer had to spend almost 
$1,000 to become a DBS subscriber. Today you can become a 
DIRECTV, EchoStar, or Pegasus customer without any initial up 
front payment.
    Perhaps the most compelling indication of how competitive 
this market is can be seen in how the cable industry has 
responded to competition from the DBS providers. When DBS was 
first launched in 1994, cable companies did not offer digital 
video or cable broadband. In the 7 years since, the cable 
industry has spent $50 billion to upgrade their facilities to 
enable the delivery of these new services.
    Without the competitive threat of two or more DBS 
providers, it is unlikely that the cable industry would have 
done this. In short, competition among the cable and satellite 
industries is working very well for the American consumer.
    However, while competition among the satellite and cable 
industries is working, the announced merger of Hughes 
Electronics and EchoStar Communications threatens to eliminate 
competition in the DBS industry and to replace it with a 
satellite monopoly.
    EchoStar and General Motors acknowledged publicly that the 
proposed merger would create a satellite monopoly and that 
millions of rural households will be left without any choice in 
multi-channel video. While EchoStar and General Motors have 
also publicly committed to resolving antitrust issues that may 
be raised by Congress, the FCC and the Department of Justice, 
they have to date offered no specific proposals that would 
assure the continuation of competition in the DBS industry.
    Indeed, Mr. Ergen has indicated that a consent decree that 
requires such a result is a deal breaker. This is the central 
issue concerning the merger. Will American consumers, 
especially the 20 million rural homes not passed by cable, 
continue to have a choice of satellite providers?
    We need a clear and specific statement of intent from 
EchoStar on this subject. I, therefore, pose the following 
simple question to Mr. Ergen: will you commit to take the steps 
necessary to assure that real and viable competition will 
continue in the DBS industry prior to completing your merger?
    If the answer is yes, the proposed merger should be given 
fair consideration. If the answer is anything short of yes, the 
proposed merger should be rejected quickly and as anti-
competitive and harmful to rural consumers.
    Mr. Chairman and members of the committee, I again thank 
you for your invitation to participate in this hearing. In 
addition to my written statement, I would like to submit for 
the record letters from the National Grange and the National 
Cattlemen's Beef Association.
    Thank you.
    [The prepared statement of Marshall W. Pagon follows:]
Prepared Statement of Marshall Pagon, Chief Executive Officer, Pegasus 
                       Communications Corporation
    Mr. Chairman and Members of the Committee, I thank you for the 
invitation to appear before you today.
    My name is Mark Pagon. I am the Chief Executive Officer of Pegasus 
Communications Corporation.
    To say that a hearing on the state of competition in the cable and 
satellite industries is timely would be an understatement. The 
announced merger of Hughes Electronics and Echostar Communications, the 
two remaining facilities based satellite competitors, and the imminent 
prospect of a merger of AT&T Broadband, America's largest cable 
company, with Comcast, Cox or AOL Time Warner and likely further 
consolidation in the cable industry, make the present an especially 
important time to be evaluating the record of competition in the cable 
and satellite industries.
    I have spent my entire professional life in efforts to expand 
choice in multi-channel video programming for those living in rural and 
underserved areas. In the 1980's and early 1990's, I did this by 
building and operating cable systems in rural areas of New England, the 
Middle Atlantic, the Southeast and Puerto Rico. Since 1994, I have 
committed most of my time and effort to providing digital satellite 
television (DBS) to rural areas of the United States.
    I founded Pegasus in 1991. Since then we have grown to become 
America's 10th largest multi-channel video provider. Today we provide 
digital satellite TV (DBS) to more than 1.5 million rural households in 
41 states. We are the only major cable or satellite provider in the 
United States exclusively focused on service to rural communities.
    The abiding lesson of my professional experience is that 
competition has worked extremely well in providing American consumers 
choice, innovation and value in multi-channel video.
    Competition has generated two waves of innovation in the 
distribution of multi-channel video in the United States. In the late 
1970's and 1980's, the innovators were cable companies. Over the last 
decade, the innovators have been DBS providers. In each instance, 
consumers and shareholders have benefited significantly. In both 
instances, however, success has encouraged a process of consolidation 
that will, if unchecked, succeed in creating cable and satellite 
monopolies that have as their goal the elimination of competition.
    In 1975, the average American home had access to less than four 
channels. Virtually all viewing was devoted to CBS, NBC and ABC. Choice 
was therefore limited to what the management of those networks decided 
their viewers should see.
    Cable changed that in the 1980's by creating cable networks such as 
TBS, CNN, ESPN, MTV, Discovery, CSPAN and CNBC and giving consumers 
access to 30 to 50 new channels. By doing so, cable went from a small 
sector of marginal importance in the media industry to an industry 
serving almost 70 million homes.
    Over the last decade, DBS has been the innovator by being the first 
to provide American consumers digital multi-channel video. Like cable 
before it, the DBS business was not built by established media 
companies--cable companies, the broadcast networks or vertically 
integrated entertainment companies--though they each were well situated 
to take the risks to do so.
    No, DBS has been built by the entrepreneurs testifying before you 
today:

 Eddy Hartenstein, whose vision brought DBS technology into 
        existence;
 Charlie Ergen, who has bootstrapped Echostar into America's 
        second largest DBS company through aggressive competition and 
        nimble negotiation and who will become the controlling 
        shareholder in the $40 billion combination of Echostar and 
        Hughes Electronics if their merger is successfully completed;
 Bob Phillips and the NRTC, whose members (including Pegasus) 
        provided over $100 million of seed capital to the launch of 
        DIRECTV when GE, News Corporation, Cablevision Systems and 
        other established media companies balked at the risk of such an 
        unproven technology; and
 My company, Pegasus, which has grown to serve almost 10% of 
        all DBS subscribers by focusing on rural markets that the big 
        cable and satellite companies don't care about.
    Today, Americans who subscribe to DBS or to digital cable have 
access to seven national broadcast networks, more than 200 national 
cable networks and over one hundred pay per view movie, digital audio 
and sports channels.
    The first DBS system was sold in July 1994 in Cowboy Maloney's 
consumer electronics superstore in Jackson, Mississippi. That first 
subscriber lives in a rural area outside of Jackson and is a Pegasus 
customer.
    In the seven years since, DBS companies have grown to serve more 
than 17 million subscribers. As a point of reference, it took the cable 
industry 32 years (1949-1981) to sign up 17 million subscribers.
    Almost 10 million rural homes--one in four--now have a satellite 
dish. In Montana and Vermont, the ratio is approaching one in two. As a 
result of DBS, digital television is now more prevalent in rural areas 
than in America's most affluent urban communities.
    According to the FCC, from 1999 to 2000 DBS grew by 28.86%, gaining 
over 2.9 million new subscribers. During the same period, cable grew by 
only 1.51%.
    DBS companies have been successful, because we have created real 
and vibrant competition to cable. However, we would not have been able 
to do so without Congressional, FCC and Department of Justice support 
to ensure access to cable programming and DBS orbital spectrum and to 
prevent efforts by cable companies and others to frustrate such access.
    The passage of the Satellite Home Viewer Improvement Act (SHVIA) in 
1999, which granted satellite companies a license to deliver the 
signals of the local television broadcast stations, has also been 
instrumental in furthering competition between cable and satellite 
providers. Since the passage of SHVIA just two years ago, DIRECTV and 
Echostar have made local TV via satellite available in 40 of America's 
largest TV markets--markets that include almost 70 million American TV 
households.
    There remain 170 TV markets that today still do not have access to 
their local TV stations via satellite. This is the single most 
important impediment to DBS becoming an even more effective competitor 
to cable.
    Some would have you believe that there is not enough orbital 
spectrum for competing satellite providers to provide local TV via 
satellite to smaller TV markets. I believe that these arguments are 
factually wrong and have been advanced primarily because it would be 
inconvenient for Echostar and DIRECTV to provide local TV in more TV 
markets while arguing that spectrum scarcity is the reason why the Must 
Carry provisions of SHVIA should be thrown out by the Federal Courts. I 
am confident that when the Must Carry litigation is finally resolved, 
the DBS industry will admit that adequate spectrum exists to provide 
satellite delivery of all local TV stations. I believe that when the 
DBS industry owns up to this fact and commits itself to this goal, 
satellite access to local TV will become a reality for all American TV 
homes.
    Despite the festering issue of access to local TV stations in rural 
markets, the simple truth is that the satellite and cable industries 
are more competitive than they have ever been. Today the majority of 
Americans have a choice between a cable company and two DBS service 
providers. Even for the almost 20 million homes not passed by cable, 
there is still a choice of two satellite companies.
    The cost of becoming a multi-channel subscriber has never been 
lower. Seven years ago, a new customer had to spend almost $1,000 to 
become a DBS subscriber. Today, you can become a DIRECTV, Echostar or 
Pegasus DBS customer without any initial upfront cost.
    Perhaps the most compelling indication of how competitive this 
market is can be seen in how the cable industry has responded to 
competition from the DBS providers. When DBS was first launched in 
1994, cable companies did not offer digital video or cable broadband. 
In the seven years since, the cable industry has spent almost $50 
billion to upgrade their facilities to enable the delivery of these new 
services. Cable now provides digital video to 13 million homes and 
cable broadband to another 7 million American households. Without the 
competitive threat of two or more DBS providers, it is unlikely that 
the cable industry would have done this.
    In short, competition among the cable and satellite industries is 
working very well for the American consumer. There is no reason to 
expect that competition will not continue to be the best means to 
assuring consumers more and better services at increasingly lower 
costs.
    While competition among the satellite and cable industries is 
working, the announced merger of Hughes Electronics and Echostar 
Communications, the imminent prospect of a merger of AT&T Broadband 
with Comcast, Cox or AOL Time Warner and likely further consolidation 
in the cable industry threaten to create satellite and cable monopolies 
that will eliminate competition.
    Just last week at the Western Cable Show, Ted Turner predicted that 
the cable industry would consolidate to just two companies in the next 
twelve months.
    Let us consider the proposed merger of Hughes Electronics 
(currently a wholly-owned subsidiary of General Motors) as an example 
of the imminent threat to continued competition in these markets.
    The proposed merger would create the largest multi-channel video 
provider in the world, serving 17 million American households. Echostar 
and General Motors project that the merger will create ``efficiencies'' 
equal to more than 50% of the revenues of the combined companies! ($5 
billion of annual efficiencies for a company with combined revenues of 
$9 billion annually.)
    In so doing, however, the merger would also:

 Eliminate facilities based competition in the DBS industry;
 Eliminate choice in multi-channel service providers for as 
        many as 20 million rural homes;
 Reduce choice for another 95 million homes from two satellite 
        providers and one cable company to just one of each; and
 Combine in one company 100% of the DBS satellite spectrum from 
        which ubiquitous coverage of the 48 contiguous states can be 
        provided, thereby pre-empting future facilities based DBS 
        competition.
    This merger, if approved without material modifications, would 
create a formidable satellite monopoly. Such a result would be directly 
contrary to the central premise of US anti-trust law and policy of the 
past 100 years.
    That central premise is to entrust the public interest to the 
efficacy of competitive markets rather than to the benevolence of 
monopolists. The key provision of Section 7 of the Clayton Act reads as 
follows: ``No person engaged in commerce or in any activity affecting 
commerce shall acquire, directly or indirectly, . . . another person 
engaged also in commerce or in any activity affecting commerce, where 
in any line of commerce or in any activity affecting commerce in any 
section of the country, the effect of such acquisition may be 
substantially to lessen competition, or to tend to create a monopoly.'' 
15 U.S.C. Sec. 18.
    Echostar and Hughes acknowledge publicly that the proposed merger 
will reduce choice in the distribution of multi-channel video. They 
acknowledge publicly that it would create a satellite monopoly and that 
millions of rural households will be left without any choice in multi-
channel video.
    Echostar and General Motors have also publicly committed to 
resolving all anti-trust issues that may be raised by Congress, the FCC 
and the Department of Justice. Unfortunately, they have to date offered 
no specific proposals that would convey an intention to assure the 
continuation of competition in the DBS industry. Indeed, Mr. Ergen has 
indicated that a consent decree that requires such a result is a ``deal 
breaker''.
    This is the central issue for consumers, for manufacturers, for 
programmers, for those (such as Pegasus) who compete in the satellite 
industry and for policy makers concerning this merger. We therefore 
need a clear and specific statement of intention from the parties to 
the proposed merger on this subject.
    I therefore pose the following simple question to each of Echostar 
and General Motors:
    Will you commit to the continuation of real and viable competition 
in the DBS industry and to take the steps necessary to assure this 
prior to completing your merger?
    If their answer is yes, then I suggest that their proposed merger 
be given fair consideration.
    If their answer is anything short of yes, then I suggest that their 
proposed merger be rejected quickly as anti-competitive and 
unambiguously contrary to US anti-trust law and policy.
    Mr. Chairman and Members of the Committee, I again thank you for 
your invitation to participate in this hearing.

    Mr. Upton. Without objection, that will be included as part 
of the record.
    Thank you.
    Mr. Fiorile.

                 STATEMENT OF MICHAEL J. FIORILE

    Mr. Fiorile. Thank you, Mr. Chairman and committee members.
    My name is Michael Fiorile, and I am President and CEO of 
the Dispatch Broadcast Group based on Columbus, Ohio.
    I am here today to tell you how competition, current 
competition in the DBS market will be totally eliminated by an 
EchoStar-DIRECTV merger. The merger would harm consumers and 
broadcasters on a number of levels.
    First, a DBS monopoly would completely end the competition 
that currently exists between satellite companies today, 
depriving consumers of future innovations and price battles 
that we see that competition has otherwise yielded, in 
particular, in rural America.
    Second, the merger would end any hope of expanding local-
to-local television service into a majority of television 
markets.
    And, third, the merger could lead to more disruptions in 
local television stations and the delivery of those stations, 
just as it has occurred with the cable gatekeepers recently. An 
EchoStar-DIRECTV merger would severely restrict choices for 
vast numbers of people.
    EchoStar asserts that decisions regarding this merger 
should be viewed in the context of the entire MVPD market. 
However, it was just a few months ago in a Federal antitrust 
suit against DIRECTV that EchoStar itself defined the relevant 
market as ``the high powered DBS market,'' nothing that 
satellite-to-home broadcast service constitutes a stand alone 
market.
    This merger should be held to that same standard. The 
combined company, as previously mentioned, would control every 
single full CONUS DBS frequency in the continental United 
States. And even if DBS were interchangeable with cable, which 
it is not, the merger would be a bad deal in the end for 
consumers.
    Competition between the two DBS companies has yielded a 
tremendous amount of consumer benefits. DIRECTV, for one, has 
taken the lead in offering high end sports and movie 
programming. EchoStar, on the other hand, responded to the 
innovation with aggressive competition, as we've heard, in 
price and in other service offerings.
    EchoStar's 1996 entrance into the market slashed the price 
then of buying a satellite dish by hundreds of dollars, and 
today consumers, as you have heard, have opportunities to get 
free dishes through numerous promotions in places like 
Blockbuster when you rent a movie or at Sears or at your 
grocery store, for that matter, and many, many other 
opportunities through local retailers.
    For consumers with access to cable, the proposed merger 
represents a reduction from three competitive options to two, 
in essence. And as most cable subscribers have only one cable 
option as it is, worse yet for tens of millions of viewers 
without access to cable, particularly in rural areas, this 
merger would remove one of the two competitors, giving EchoStar 
a perfect monopoly in those areas.
    Under this proposed monopoly, consumers in 110 U.S. 
television markets would never receive local news, local 
sports, or local weather through satellite. Once these two 
companies stop competing against each other, we lose the 
incentive for them to try to gain advantage by adding local-to-
local in new markets or through the competitive pricing we've 
seen.
    While EchoStar claims that it will offer local-to-local in 
100 markets, the broadcast industry has little faith in this 
claim. Right after, as was mentioned earlier, the ink had dried 
on the 1999 Satellite Home Viewer Act, EchoStar challenged the 
compromise legislation by trying to get to court to invalidate 
``carry one, carry all'' mandates, despite promises to the 
contrary.
    Further based on a trumped up claim of inadequate signals, 
EchoStar initially denied carriage to the many broadcast 
stations it is obliged to carry. The FCC has since determined 
these challenges are largely baseless.
    EchoStar claims they do not have the capacity to provide 
local-to-local in all markets, but with today's technological 
advancements they, in fact, could easily provide local into 
local in all 210 markets without this merger.
    Finally, a DBS monopoly as proposed will also adversely 
affect negotiations between local broadcasters and the DBS 
industry over retransmission consent. We all remember the 
nightmare when a cable company in New York cutoff the local ABC 
affiliate from their customers. In fact, you can expect the 
same type of abuse to occur by now creating a second monopoly 
gatekeeper.
    The tremendous advancements in technology and programming 
and in pricing in the DBS industry have been driven principally 
by one thing, and that is by competition. Despite the track 
record, DBS companies are asking you to give up on competition 
and instead rely on their promises to get these benefits in the 
future.
    We urge you to continue to rely upon competition in the 
marketplace. In fact, it is working, and we look for a 
continuation of this DBS competition to foster the competition 
that all of the committee members have talked about.
    Thank you.
    [The prepared statement of Michael J. Fiorile follows:]
 Prepared Statement of Michael J. Fiorile, President and CEO, Dispatch 
                            Broadcast Group
                            a. introduction
    As President and CEO of Dispatch Broadcast Group, I am pleased to 
appear before the U.S. House of Representatives Subcommittee on 
Telecommunications and the Internet to discuss the status of 
competition in multichannel video programming distribution (``MVPD'').
    Dispatch Broadcast Group owns two commercial television stations--
WBNS-TV, Columbus, OH and WTHR-TV, Indianapolis, IN. Both television 
stations are on the air with a digital signal, with WBNS-DT as the only 
digital signal in the Columbus, OH market. Our other broadcast 
interests include WBNS-AM/FM, Columbus, OH, Radio Sound Network, Ohio 
News Network, SkyTrak weather and Dispatch Interactive Television.
    Additionally, I am currently the Vice Chairman of the National 
Association of Broadcasters Television Board, and serve as Vice 
Chairman of the NAB DTV Task Force.
 b. the role of the broadcasting industry and the impact of cable and 
                          dbs on broadcasters
    As this committee is well aware, the broadcasting industry has 
historically provided free, over the air local programming and news 
within the United States. The advent of cable and satellite television 
as multi-channel video programming distributors has made cable systems 
and satellite carriers, the ``gatekeepers'' of programming, 
particularly local programming, throughout the United States.
    The available data demonstrates that while millions of U.S. 
consumers (particularly those with lower incomes) continue to rely on 
over-the-air broadcast television reception for their delivery of video 
programming, the majority receives local TV signals through a MVPD 
service.
    According to data in the Fall 2001 Home Technology Monitor 
Ownership Report prepared by Statistical Research, Inc. (``Home 
Technology Report'') 1, a total of 77 million television 
sets (or approximately 27.3% of the 283 million sets in the U.S.) are 
not connected to any MVPD service and receive all broadcast signals 
over-the-air. This leaves the rest of the sets attached to cable, 
satellite, or another MVPD service.
---------------------------------------------------------------------------
    \1\ This Report, issued twice a year by Statistical Research, Inc., 
is a comprehensive survey of television, telephone and computer 
equipment in U.S. homes. This estimate of the number of broadcast-only 
television sets is derived from information in the Home Technology 
Report and from Nielsen's estimates of the number of U.S. television 
households.
---------------------------------------------------------------------------
    Even for television households subscribing to an MVPD service, 
broadcast stations remain a very significant source of local, diverse 
programming--and it is the carriage of the local television stations 
that has substantially benefited the MVPD services. Particularly in 
this era of increasing consolidation in the cable industry, the 
broadcast stations carried on cable systems continue to provide a 
guaranteed minimum of local and diverse voices for subscribers. The 
Federal Communications Commission explicitly recognizes that most 
programming carried on any cable system is ``either originated or 
selected by the cable system operator, who thereby ultimately controls 
the content of such programming.'' Report and Order in MM Docket Nos. 
91-221 and 87-8, 14 FCC Rcd 12903, 12953 (1999). Moreover, according to 
the Commission, cable systems ``typically do not serve as independent 
sources of local information; most of any local programming they 
provide is originated'' by broadcast stations, which ``are the dominant 
source of local news and information.'' Memorandum Opinion and Second 
Order on Reconsideration in MM Docket Nos. 91-221 and 87-8, FCC 00-431 
at para. 22 (2001) (emphasis in original).2 Given these 
views, it would be inappropriate to discount the important role that 
broadcasters play in the provision of local, diverse programming to all 
television households, whether or not they subscribe to an MVPD 
service.3
---------------------------------------------------------------------------
    \2\ See also Report and Order, 14 FCC Rcd at 12933 (noting that 
``diversity of viewpoints in local news presentation'' is ``at the 
heart'' of the Commission's ``diversity goal'').
    \3\ Congress has expressed similar concerns about cable subscribers 
retaining access to local, diverse information sources. See H.R Rep. 
No. 628, 102d Cong., 2d Sess. at 56 (1992) (consumers who ``rely on 
cable television for video services'' should ``not be deprived of the 
programs presented by their local television stations,'' which include 
local news and information); 47 U.S.C. Sec. 532(g) (authorizing FCC to 
``promulgate any additional rules necessary to provide diversity of 
information sources,'' once cable systems reach a specified subscriber 
level).
---------------------------------------------------------------------------
    The role of broadcasters will be enhanced as the digital television 
(``DTV'') transition moves towards completion. DTV is our future, and 
will offer consumers more choices, better picture and sound quality, 
and ancillary services. Currently, there are 221 TV stations 
broadcasting a digital signal, reaching 78% of the U.S. TV households. 
By the FCC mandate of May 2002, NAB estimates nearly two-thirds of the 
commercial TV stations will be on the air with a digital signal--and 
the rest will not be far behind.
    DTV allows broadcasters to provide High-Definition television 
programming (``HDTV'')--the highest quality digital signal with several 
times the picture quality of current analog television--or Standard-
Definition television (``SDTV'')--where consumers can additional 
channels of programming. Digital broadcasters also will have the 
ability to provide ancillary services--such as datacasting--in addition 
to their digital signals. Thus, there are increased opportunities for 
consumers with DTV, and NAB has consistently advocated that Congress 
and the FCC need to take steps to facilitate the transition to bring 
these benefits to consumers as soon as possible.
    Broadcasters are committed to our role as the main source of local 
programming to all viewers whether they receive it free, over-the-air 
or through a MVPD service. However, as we have found--both historically 
and looking ahead to the future--the ``gatekeeper'' role cable and DBS 
abuse with regard to programming access has a substantial impact on the 
broadcasting industry.
        c. the cable industry has abused its ``gatekeeper'' role
1. Digital TV
    The monopoly position enjoyed by local cable systems in local 
markets underscores the harm to consumers from the lack of competition. 
Over 70% of the U.S. television households are connected to cable. 
Thus, cable serves as the dominant gatekeeper for broadcasters, and 
other programming providers. This ``gatekeeper'' role is one that cable 
has abused time and again.In 1992, Congress passed the Cable 
Act.4 As part of that comprehensive piece of legislation, 
Congress reimposed the ``must carry'' obligation on cable operators in 
order to preserve free, over-the-air broadcasting, and give local 
broadcasters control of the use of their signals by cable systems and 
other distributors. Additionally, the 1992 Cable Act required 
``retransmission consent.'' Thus, MVPDs can only retransmit a broadcast 
signal with consent of the originating station. The cable industry 
resisted the new must carry obligations, appealing to the U.S. Supreme 
Court. However, the Court found the must carry obligation 
constitutional in 1997.5
---------------------------------------------------------------------------
    \4\ Cable Television Consumer Protection & Competition Act of 1992, 
Pub. L. No. 102-385 (Oct. 5, 1992).
    \5\ Turner Broadcasting System, Inc. v. FCC, 520 U.S. 180 (1997). 
See also Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622 (1994).
---------------------------------------------------------------------------
    Now, as we move into a digital world, the cable industry is up to 
its old tricks. It is fighting any attempt to impose digital must carry 
obligations--despite the Supreme Court ruling. Additionally, the desire 
of cable gatekeepers to control access to consumers also is reflected 
in the current lack of agreements between cable operators and 
broadcasters for the carriage of DTV signals. Cable operators generally 
will not respond to broadcaster inquiries about cable carriage of DTV 
signals, and only a handful of actual carriage agreements have 
consequently been negotiated.6
---------------------------------------------------------------------------
    \6\ See Comments of NAB/MSTV/ALTV filed with the FCC in CS Docket 
Nos. 98-120, 00-96 and 00-2 at 17-26 (filed June 11, 2001) (explaining 
that cable has increased incentives not to carry DTV broadcasters and 
that cable carriage of DTV broadcasters will not happen without must 
carry).
---------------------------------------------------------------------------
    The reluctance of cable operators to even discuss carriage of DTV 
signals clearly demonstrates that cable systems have ``systemic 
reasons'' for limiting the access that broadcasters and other 
competitors have to consumers.7 Without a majority of U.S. 
households having access to local DTV signals, the pace of the DTV 
transition--and broadcasters' ability to compete--is drastically 
impaired.
---------------------------------------------------------------------------
    \7\ Turner Broadcasting System, Inc. v. FCC, 520 U.S. 180, 201-202 
(1997) (cable systems have the incentive to disadvantage broadcast 
competitors ``in favor of programmers . . . less likely to compete with 
them for audience and advertisers'').
---------------------------------------------------------------------------
2. Interactive TV
    The development of new technologies, such as interactive television 
(``ITV''), will only expand opportunities for the cable operators, and 
disadvantage competitors, because the cable systems control the optimal 
distribution platform for digital, interactive services.8 
The delivery of digital ITV requires a mechanism to link all of the 
interactive elements (i.e. video, audio, and data) once they reach the 
subscriber. Cable operators in the digital environment will be able to 
control this vital linking of the various elements through their 
creation of electronic program guides (EPGs). The EPGs will 
consequently become a powerful mechanism by which cable operators can 
favor or disfavor whatever interactive content and services they 
choose. In an interactive environment, a cable operator will be able to 
disadvantage the programming of competitors by blocking, interfering 
with or degrading the ITV enhancements associated with that 
programming. Discrimination in a variety of technology related 
matters--such as EPGs, screen displays, channel assignment and 
position, caching of information, and downstream and return path 
bandwidth and transmission speed--could also occur. Thus, the growth of 
digital ITV will only expand opportunities for cable operators to 
discriminate against unaffiliated entities and competitors--including 
broadcasters.
---------------------------------------------------------------------------
    \8\ The cable platform has the upstream and downstream bandwidth to 
provide the high-speed connection necessary for the full range of ITV 
services, in addition to its dominance in the MVPD marketplace.
---------------------------------------------------------------------------
3. Carriage Agreements
    Cable operators wield their market power in other ways, too. For 
example, some cable systems have attempted to restrict the amount of 
programming that cable networks can stream directly to consumers over 
the Internet.9 If these types of agreements are forced on 
cable networks in return for cable carriage, the provision of video on 
the Internet will be significantly impeded--adversely impacting both 
consumers and competitors. These agreements to block Internet video 
stem from cable's attempt to protect its power in the MVPD market. This 
same approach could be taken with respect to broadcast interactive 
triggers or data and other new services in digital.
---------------------------------------------------------------------------
    \9\ For example, Charter Communications wanted to insert a clause 
in its carriage agreement with ESPN that would have effectively 
prevented ESPNews from video streaming its content on the Web. See, 
e.g., L. Moss, ESPN to Charter: You're Out, Cable World at 7 (May 28, 
2001); L. Rich, Kicking and Streaming, The Industry Standard (June 11, 
2001); S. Schiesel, Charter Removes ESPNews from Some Cable Systems in 
Dispute, The New York Times, Section C, Page 2 (July 2, 2001). Other 
cable system operators are similarly ``pushing for guarantees that 
programmers won't offer content over the Web.'' L. Moss, Operators Back 
Charter in Web Dispute, Cable World at 1 (June 4, 2001). Charter, AT&T 
Broadband, Time Warner Cable and Comcast have been identified as the 
cable system operators attempting to limit streaming by programmers the 
most strictly. See R.T. Umstead and S. Donohue, Making Tense Times 
Worse, Charter Raises ``Stream'' Bar, Multichannel News at 1 (June 4, 
2001).
---------------------------------------------------------------------------
    NAB also observes that cable operators' attempts to use carriage 
agreements as vehicles to restrict the Internet streaming of video 
programming seem inconsistent with at least the intent, and arguably 
the terms, of Sections 616 and 628 of the Communications Act. Section 
616(a) directs the Commission to prevent cable operators from 
``coercing'' any programming vendor ``to provide . . . exclusive rights 
against other multichannel video programming distributors as a 
condition of carriage on a system.'' 47 U.S.C. Sec. 536(a)(2). If, ``as 
a condition of carriage,'' a cable operator attempts to obtain 
exclusive rights to a cable network's programming so as to prevent its 
distribution via the Internet, then a question of compliance with the 
Communications Act arises.10
---------------------------------------------------------------------------
    \10\ Section 616(a) also prevents cable operators from utilizing 
carriage agreements ``to unreasonably restrain the ability of an 
unaffiliated video programming vendor to compete fairly.'' 47 U.S.C. 
Sec. 536(a)(3). Unaffiliated cable programming networks could contend 
that cable operators' use of carriage agreements to restrict Internet 
streaming unreasonably restrains their ability to compete.
---------------------------------------------------------------------------
    Congressional concern with efforts by cable operators to deny 
competing distributors access to programming directly led to passage of 
Section 628 of the Communications Act. This section makes it unlawful 
for ``a cable operator'' to ``engage in unfair methods of competition 
or unfair or deceptive acts or practices, the purpose or effect of 
which is to hinder significantly or to prevent any multichannel video 
programming distributor'' from providing certain programming ``to 
subscribers or consumers.'' 47 U.S.C. Sec. 548(b). Cable operators' 
current efforts to ``hinder significantly or to prevent'' the 
distribution of cable network programming to ``consumers'' via the 
Internet are entirely in keeping with the cable industry's history of 
using its control over programming to the disadvantage of competing 
distributors, and are obviously contrary to Congress' intent in passing 
Section 628.
2. Cable-Broadcast Cross-Ownership
    Finally, there is yet another avenue where cable would like to 
further its gatekeeper role: through the elimination or relaxation of 
the cable-broadcast cross-ownership ban. The rule's fate is part of a 
pending court case before the U.S. Court of Appeals for the D.C. 
Circuit.11 NAB supports retention of the ban. If a cable 
operator were allowed to own and operate local stations, there would be 
nothing stopping it from giving preferential treatment to its own 
stations, and perhaps diminishing carriage of local stations owned by 
other entities and manipulating channel positioning. Cable would, of 
course, argue that the must carry statute prevents such discrimination 
from occurring. However, while there is an analog must carry rule in 
place, there is no digital must carry obligation at this time. Thus, 
digital TV stations could suffer such discrimination.
---------------------------------------------------------------------------
    \11\ Fox Television, National Broadcasting Company, Viacom, CBS, 
Inc, & Time Warner v. FCC, No. 00-1222 (consolidated with No. 00-1263, 
00-1381, 00-1326, 00-1359) (Oral Arguments heard Sept. 7, 2001).
---------------------------------------------------------------------------
    The cable-broadcast cross-ownership rule is different than other 
cross-ownership bans because in no other cross-ownership situation is 
there the potential for one competitor to eliminate or hamper the 
ability of another competitor to reach the public. Cable is unique 
because, ``by virtue of [its] ownership of the essential pathway'' to 
consumers' homes, it can, ``silence the voice of the competing speakers 
with a mere flick of the switch.'' 12 Retaining the cable-
broadcast cross-ownership ban is necessary to keep cable's market power 
reigned in to a limited degree.
---------------------------------------------------------------------------
    \12\ Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622, 656 
(1994).
---------------------------------------------------------------------------
d. a merger to monopoly in direct broadcast satellite service will harm 
                       broadcasters and consumers
    The history of cable as the dominant gatekeeper provides a lesson 
in the abuse of market power and--harm to consumers. The proposed 
merger of the only two DBS carriers, Hughes and EchoStar, directly will 
harm broadcasters and consumers in forging another monopoly, this time 
in satellite broadcast distribution, as well as in reducing needed 
competition to cable. Competition between the only two satellite 
carriers has proven beneficial to both broadcasters and consumers in 
innovation, service, pricing, and in particular the growth of local-to-
local satellite service. Those benefits will be lost if this merger 
proceeds.
3. The Direct Broadcast Satellite (DBS) Industry's Track Record with 
        Local Stations: A Consistent Pattern of Abuse and Lawlessness
    In every aspect of their dealings with local TV stations, the DBS 
industry--and particularly EchoStar--has shown a shameful disrespect 
for obedience to law. Since EchoStar and DirecTV have been perfectly 
willing to openly defy actual statutory mandates in their dealings with 
local TV stations, there is little doubt that they will readily walk 
away from vague assurances they may make today to obtain government 
blessing for a merger to DBS monopoly.
i. EchoStar's and DirecTV's Abuse of the Distant-Signal Compulsory 
        License: ``Catch Me if You Can''
    In 1988, with an extension in 1994, Congress created a special 
compulsory license in the Copyright Act to allow satellite carriers to 
retransmit distant ABC, CBS, Fox, and NBC stations--but only to the 
tiny fraction of households that are ``unserved'' by local broadcast 
stations. 17 U.S.C. Sec. 119. This statute is called the ``Satellite 
Home Viewer Act,'' or ``SHVA.''
    When DirecTV went into business in 1994, and when EchoStar did so 
in 1996, they immediately began abusing this narrow compulsory license 
by using it to illegally deliver distant ABC, CBS, Fox, and NBC 
stations to ineligible subscribers. In essence, the DBS companies 
pretended that a narrow license that could legally be used only with 
remote rural viewers was in fact a blanket license to deliver distant 
network stations to viewers in cities and suburbs.13
---------------------------------------------------------------------------
    \13\ For the first few years of this exercise in lawbreaking, 
DirecTV and EchoStar hid behind a small, foreign-owned company called 
PrimeTime 24. See CBS Broadcasting Inc. v. PrimeTime 24, 48 F. Supp. 2d 
1342, 1348 (S.D. Fla. 1998) (``PrimeTime 24 sells its service through 
distributors, such as DirecTV and EchoStar . . . [M]ost of PrimeTime's 
growth is through customer sales to owners of small dishes who purchase 
programming from packagers such as DirecTV or EchoStar.''). Starting in 
1998 (for EchoStar) and 1999 (for DirecTV), the two companies fired 
PrimeTime 24 in an effort to dodge court orders to obey the Copyright 
Act.
---------------------------------------------------------------------------
    As a result of EchoStar's and DirecTV's lawbreaking, viewers in 
markets such as Meridian, Mississippi, Lafayette, Louisiana, Traverse 
City, Michigan, Santa Barbara, California, Springfield, Massachusetts, 
Peoria, Illinois, and Lima, Ohio were watching their favorite network 
shows not from their local stations but from stations in distant cities 
such as New York. Since local viewers are the lifeblood of local 
stations, EchoStar's and DirecTV's copyright infringements were a 
direct assault on free, over-the-air local television.
    When broadcasters complained about this flagrant lawbreaking, the 
satellite industry effectively said: if you want me to obey the law, 
you're going to have to sue me. Broadcasters were finally forced to do 
just that, starting in 1996, when they sued the vendor (PrimeTime 24) 
that both DirecTV and EchoStar used as their supplier of distant 
signals. But even a lawsuit for copyright infringement was not enough 
to get the DBS firms to obey the law: both EchoStar and DirecTV decided 
that they would continue delivering distant stations illegally until 
the moment a court ordered them to stop.
    The courts immediately recognized--and condemned--the satellite 
industry's lawbreaking. See, e.g., CBS Broadcasting Inc. v. PrimeTime 
24, 9 F. Supp. 2d 1333 (S.D. Fla. 1998) (entering preliminary 
injunction against DirecTV's and EchoStar's distributor, PrimeTime 24); 
CBS Broadcasting Inc. v. PrimeTime 24 Joint Venture, 48 F. Supp. 2d 
1342 (S.D. Fla. 1998) (permanent injunction); CBS Broadcasting Inc. v. 
DIRECTV, Inc., No. 99-0565-CIV-NESBITT (S.D. Fla. Sept. 17, 1999) 
(permanent injunction after entry of contested preliminary injunction); 
ABC, Inc. v. PrimeTime 24, 184 F.3d 348 (4th Cir. 1999) (affirming 
issuance of permanent injunction).
    By the time the courts began putting a halt to this lawlessness, 
however, satellite carriers were delivering distant ABC, CBS, Fox, and 
NBC stations to millions and millions of subscribers, the vast majority 
of whom were ineligible city and suburban households. See CBS 
Broadcasting, 9 F. Supp. 2d 1333.
    By getting so many subscribers accustomed to an illegal service, 
DirecTV and EchoStar put both the courts and Congress in a terrible 
box: putting a complete stop to the DBS firms' lawbreaking meant 
irritating millions of consumers. Any member of Congress who was around 
in 1999 will remember the storm of protest that DirecTV and EchoStar 
stirred up from the subscribers they had illegally signed up for 
distant network stations.
    While Congress properly refused to grandfather all of the illegal 
subscribers signed up by DirecTV and EchoStar, the two firms ultimately 
profited from their own wrongdoing when Congress--having heard an 
earful of consumer complaints--enacted legislation in late 1999 
providing for limited grandfathering.
    Not only did EchoStar and DirecTV ignore the plain requirements of 
the Copyright Act for years, but also when courts finally ordered their 
vendor (and them) to stop breaking the law, they took further evasive 
action to enable them to continue their lawbreaking. In particular, 
when their vendor (PrimeTime 24) was ordered to stop breaking the law, 
and to ensure that its partners (such as DirecTV and EchoStar) stopped 
doing so, both DBS firms fired their supplier in an effort to continue 
their lawbreaking.
    When DirecTV tried this in February 1999, a United States District 
Judge held in open court that DirecTV's claims were ``a little 
disingenuous'' and promptly squelched its scheme. CBS Broadcasting Inc. 
et al v. DirecTV, No. 99-565-CIV-Nesbitt (S.D. Fla. Feb. 25, 1999); see 
id. (S.D. Fla. Sept. 17, 1999) (stipulated permanent injunction).
    EchoStar has played the game of ``catch me if you can'' with 
greater success. Thanks to a series of stalling tactics in court, 
EchoStar is continuing today to serve large numbers of illegal 
subscribers. Realizing that broadcasters were about to sue it in 
Florida, for example, in October 1998 EchoStar filed a declaratory 
judgment action in its home district--Colorado--against ABC, CBS, Fox, 
NBC, and their Affiliate Associations. The District Court in Colorado 
(Judge Nottingham) granted broadcasters' request to transfer EchoStar's 
lawsuit to Florida, finding that EchoStar had engaged in ``flagrant 
forum-shopping.'' Hearing Transcript, EchoStar Communications Corp. v. 
CBS Broadcasting Inc. (D. Colo. Mar. 24, 1999).
    Although EchoStar's stalling techniques have thus far kept it from 
being subject to any long-term court order to stop its infringements, 
there is no doubt that EchoStar is continuing to break the law. When 
EchoStar was (briefly) ordered to start turning off its illegal 
subscribers in late 2000, for example, it candidly told the Court that 
it had so many illegal subscribers that it would take a long, long time 
to turn them all off, even if it turned off 5,000 subscribers per 
day.14
---------------------------------------------------------------------------
    \14\ Declaration of Mark Jackson, Senior Vice President, EchoStar 
Technologies, para.para. 17, 19, 20, 21 (executed Oct. 11, 2000) 
(``Jackson Decl.'') (claiming that EchoStar can only terminate 6,000 to 
10,000'' per day); Declaration of James DeFranco, Executive Vice 
President and Director for EchoStar Communications Corp. (executed Oct. 
11, 2000) (``DeFranco Decl.'') at para.para. 18-21 (describing 
EchoStar's proposed time frame and alleged need for lengthy period for 
shut off process).
---------------------------------------------------------------------------
ii. The Satellite Carriers' Breach of Faith With Congress on the Local-
        to-Local Compulsory License
    Starting in 1997, EchoStar began urging Congress to enact a new 
compulsory license that would allow satellite companies to carry local 
TV stations to local viewers without paying any copyright fees. DirecTV 
joined in the call for such a law in 1999.
    In December 1999, Congress granted the DBS companies' wish: it gave 
them carte blanche to deliver any TV station within its own market, 
without paying a penny in copyright fees to the owners of the 
programming carried on the station. Satellite Home Viewer Act of 1999 
(``SHVIA''). Congress wanted to make sure, however, that the new 
compulsory license would not harm other stations in the market by 
putting a barrier--the DBS firm--between non-carried stations and many 
of their viewers.
    Congress therefore told EchoStar and DirecTV in the SHVIA that if 
they wished to use this special new license, they would need--starting 
in 2002--to carry all of the stations in each market. This simple and 
equitable principle, embodied in the SHVIA, is called ``carry one, 
carry all.''
    The DBS firms happily accepted the gift that Congress had given 
them--a local-to-local compulsory license. Thanks to that congressional 
largesse, the DBS firms have grown at a blistering pace since then: 
DirecTV has expanded from 7.86 million subscribers in November 1999 to 
10.3 million today, while EchoStar has grown even more explosively, 
from 3.25 million in November 1999 to 6.43 million today.
    The DBS industry made no secret of the fact that its phenomenal 
post-SHVIA growth has been largely the result of Congress' decision to 
make it easy for them to carry local TV stations. The Satellite 
Broadcasting & Communications Association, for example, said that the 
industry's ``40% subscriber addition growth in 2000 is primarily the 
result of legislation passed in November 1999 allowing the DBS 
operators to offer local broadcast channels in markets of their 
choice.'' 15
---------------------------------------------------------------------------
    \15\ SBCA Comments, In Re Annual Assessment of the Status of 
Competition in the Market for the Delivery of Video Programming, CS 
Docket No. 00-132 (filed July 2000) (quoting industry analyst).
---------------------------------------------------------------------------
    How did EchoStar and DirecTV show their gratitude for this 
extraordinary gift? By brazenly seeking to defeat the will of Congress.
    Only a few months after the SHVIA went into effect, EchoStar, 
DirecTV, and SBCA filed a lawsuit demanding that the Court invalidate 
the ``carry one, carry all'' principle, on the theory that Congress' 
generous (and lucrative) gift to the DBS industry somehow had to be 
even more generous to satisfy the First Amendment.
    In effect, the DBS firms demanded that the court rewrite the SHVIA 
to give them a sweet deal that Congress had emphatically refused them: 
the ability to use the programming of local TV stations with no 
copyright fees whatsoever, combined with a free hand to cherrypick a 
few stations while effectively cutting all other local stations off 
from DBS households. (Just two weeks ago, EchoStar and DirecTV filed an 
emergency motion asking the Court to stay the January 1, 2002 effective 
date of the SHVIA carry-one-carry-all provisions.)
    Luckily, the courts have thus far brushed aside the satellite 
industry's intense effort to thwart Congress' will. But the lesson is 
clear: Congress (and the administration) would be foolish to approve a 
merger to DBS monopoly based on vague promises about future benefits. 
EchoStar and DirecTV's track record shows that they are perfectly 
willing to take a government-granted benefit--here, permission to merge 
to DBS monopoly--and then use every available tactic to unravel the 
terms on which the government granted the benefit.
iii. The Satellite Carriers' Relentless Guerrilla Warfare Against 
        ``Carry One, Carry All.''
    EchoStar and DirecTV have not only attacked the principle of 
``carry one, carry all'' on a wholesale basis in the courts, but have 
sought to sabotage it in their ``retail'' dealings with local stations 
requesting carriage. When local stations sent requests to EchoStar in 
the summer of 2001 asking for carriage, for example, EchoStar sent back 
crude form letters offering nonsense reasons for rejecting most 
stations, such as absurd claims that the stations didn't list the city 
in which they are licensed or that TV towers a few miles away did not 
provide a strong enough signal.
    On its own initiative, the FCC sharply criticized EchoStar form-
rejection-letter tactic for failing to ``comply with the rule or the 
Report and Order.'' In re Implementation of the Satellite Home Viewer 
Improvement Act of 1999: Broadcast Signal Carriage Issues, CS Docket 
No. 00-96, para. 59, 16 FCC Rcd 1918 (Sept. 5, 2001).
    EchoStar's recalcitrance has continued since then: many station 
owners have been forced to file complaints against EchoStar at the FCC 
to enforce the carriage rights that Congress granted them. See 
EchoStar, DirecTV Turn Down Dozens Of Requests For Carriage, 
Communications Daily (Oct. 19, 2001). Indeed, as press reports reflect, 
the FCC has been ``inundated'' by an ``avalanche'' of complaints that 
broadcasters were forced to file after being turned away by EchoStar, 
DirecTV, or both. Id.
iv. EchoStar's Brazen Proposal to Defy the FCC by Placing Disfavored 
        Stations in ``Satellite Siberia''
    EchoStar and DirecTV have twice asked the FCC to rule that 
satellite companies can ``satisfy'' the carry-one-carry-all rules by 
relegating disfavored stations to an out-of-the-way satellite that 
viewers could receive only if they purchased an additional dish. In 
response, the Commission has twice emphatically rejected that proposal. 
See In Re Implementation of the Satellite Home Viewer Improvement Act 
of 1999: Broadcast Signal Carriage Issues, para.para.  37-41, CS Dkt. 
No. 00-96 (released Sept. 5, 2001) (discussing initial rejection of DBS 
proposal and reaffirming prior rejection).
    Both in its original decision in early 2001 and on reconsideration 
in August 2001, the Commission made absolutely clear that satellite 
carriers could not place ``disfavored'' stations ``on a satellite . . . 
that would require a subscriber to purchase equipment additional to 
what is needed to receive other local stations in the same market.'' 
Id., para. 40.
    In an extraordinary slap in the face to Congress and to the FCC, 
EchoStar announced in late October--just before the merger 
announcement--that EchoStar is considering doing exactly what the 
Commission said it could not do: purporting to ``satisfy'' its carry-
one-carry-all obligations by putting disfavored stations on a 
completely different satellite that requires viewers to buy new 
equipment. EchoStar Analyst Presentation (Oct. 23, 2001) (statements of 
President & Chairman Charlie Ergen).
    Even more recently, EchoStar filed a request with the FCC to move 
one of its backup satellites to a location far over the Pacific, 
apparently for the purpose of carrying out this sham ``compliance'' 
technique.
    In short, EchoStar is evidently considering a new method of openly 
defying the will of Congress and the FCC, even when it has twice tried 
and failed to get permission to do what it now proposes to do. The 
lesson for a possible merger to DBS monopoly is clear: no matter how 
explicit a governmental directive may be, EchoStar will resist with all 
of its powers if what Congress or the Executive Branch has ordered does 
not fit with EchoStar's preferred business plan of the moment.
v. EchoStar's ``Abuse of the Commission's Processes'' About 
        Retransmission Consent
    EchoStar has brought the same abusive approach to the arena of 
retransmission consent--the process by which DBS firms obtain 
permission from those local stations that the DBS firms do wish to 
carry. EchoStar's approach has been simple: if it is unable to make a 
retransmission consent deal with a station, it automatically--as 
punishment--files an FCC complaint alleging that the station had failed 
to bargain in good faith.
    One broadcaster victimized by this practice was Young Broadcasting, 
Inc., which owns local TV stations in several markets. On August 2, 
2001, the FCC's Cable Services Bureau rejected EchoStar's 
retransmission consent complaint against Young Broadcasting as 
unfounded. In re EchoStar Satellite Corp. v. Young Broadcasting, Inc., 
File No. CSR-5655-C, para. 32, at 15 (Aug. 6, 2001). Not only did the 
Commission reject EchoStar's complaint, but the FCC Bureau found that 
EchoStar had engaged in misconduct that the Bureau could not 
``excuse.'' The FCC Bureau chastised EchoStar for ``abuse of process'' 
and cautioned EchoStar ``to take greater care with regard to future 
filings'' (id. at 16), finding further that ``EchoStar failed in its 
duty of candor to the Commission'' by publicly disclosing portions of 
the documents for which it sought strict confidentiality in Commission 
proceedings. (Emphasis added.)
    The FCC's Bureau held that ``EchoStar's conduct in filing material 
with the Commission requesting confidentiality, while concurrently 
engaging in a public debate over the issues raised in this proceeding 
and publicly disclosing selected portions of the alleged confidential 
material, constitutes an abuse of the Commission's processes.'' Id. 
(emphasis added).
    Again, the lesson is clear: it would be foolish to expect a 
monopoly DBS firm to obey the law and comply with legal processes when 
the company that would own the monopoly firm (EchoStar) has never done 
so in the past.
4. EchoStar/DirecTV Merger Will Eliminate Competition in Satellite 
        Television Service and Reduce Competition in Multichannel Video 
        Programming Distribution Against Cable.
    Over the past several years, competition between EchoStar and 
DirecTV has contributed directly to the success of DBS. This 
competition not only has taken place in regard to price, but also in 
service offerings, customer service policies, marketing strategies, and 
technical innovations. The merger would eliminate competition over such 
items as the development of advanced set-top boxes and the delivery of 
high-definition programming and lead to fewer programming options and 
higher prices for consumers.
    In rural areas not currently served by cable, the result would be a 
single multichannel video provider in those areas. Furthermore, as DBS 
increases its stranglehold on rural customers, many rural cable systems 
are likely to go out of business. A recent report by a prominent 
satellite analyst at Credit Suisse First Boston has determined that 
approximately 8,270 cable systems serving roughly 8.2 million 
subscribers located primarily in rural territories will become extinct 
over the next five to eight years as a result of DBS competition. In 
fact, the CEO of Pegasus Communications recently stated that DBS might 
become the only programming option for rural customers in the near 
future. See Communications Daily, p. 5 (October 9, 2001). In sum, 
millions of rural customers could be at risk and subject to the 
monopolistic tendencies and practices of a combined Echostar/DirecTV.
    Even in markets where cable is currently available, American 
consumers would go from three competitive options to two because in 
most areas of the U.S., most consumers are served only by one cable 
system. Economic literature indicates that two competitors in a market 
will behave in an oligopolistic fashion and not compete on the basis of 
price, thus, allowing this merger is likely to lead to increased prices 
for consumers.
    EchoStar has suggested that the merger will not threaten 
competition because DBS operators compete in the broader MVPD market, 
which includes cable. Indeed, Mr. Ergen, himself, has acknowledged that 
``[i]f the market is satellite only, then I wouldn't approve this 
deal.'' See The Wall Street Journal, Echostar's Ergen Starts Campaign 
to Get Approval for DirecTV Deal, B6, Oct. 31, 2001. However, in its 
antitrust lawsuit filed against DirecTV last year (which EchoStar 
recently dropped), EchoStar defined the relevant market as the ``high-
power DBS market'' noting that ``satellite-to-home broadcast services 
constitute [] a stand-alone market, distinctly separate from the cable 
business.'' See Echostar Communications Corp. v. DirecTV Enters., Inc., 
Civ. No. 00-K-212 (D. Colo.). Accordingly, NAB respectfully suggests 
that this committee closely examine any claims by EchoStar aimed at 
lessening antitrust concerns.
    For example, in an attempt to alleviate these concerns, EchoStar 
has proposed to adhere to a nationwide pricing plan with equal pricing 
for rural and urban customers. NAB believes that any such behavioral 
remedy would not mitigate the inherent competitive harm resulting from 
a merger of EchoStar and DirecTV. Behavioral remedies are ineffective 
because they require constant monitoring and incentivize the merging 
companies to seek loopholes to avoid the intended relief--EchoStar's 
past behavior makes this more likely to occur.
    More fundamentally, however, a decree that only guarantees 
unilateral pricing in rural communities vis-a-vis metropolitan markets 
ignores many other forms of competition, such as improved and 
differentiated product offerings, marketing strategies, and customer 
service policies. Thus, under the proposed remedy, there would be no 
adequate method to ensure that the level of service (i.e., number, 
type, and variety of channels) provided to rural areas would equal that 
offered to urban markets. Not surprisingly, antitrust authorities 
strongly disfavor behavioral consent decrees similar to that offered by 
EchoStar since marketplace competition is always preferred to a 
regulatory solution.
    EchoStar's proposal also could not replicate the unique competition 
that exists between these two firms today. EchoStar has garnered a 
reputation as the pricing ``maverick'' that has marketed its lower 
priced offerings to increase market share. By contrast, DirecTV is 
known as the provider of premium programming services (e.g., exclusive 
sports packages and high-end pay-per-view services). After the 
consummation of the proposed deal, the merged firm would have no 
incentive to engage in this behavior, and consumers would suffer. 
Moreover, EchoStar and DirecTV each have proven to be very effective 
competitors against cable when operated under separate ownership. DBS 
currently wins 6 out of every 10 new DBS/cable subscribers, with 
EchoStar gaining roughly six million, and DirecTV over ten million 
subscribers over the last seven years. See 2000 Annual Assessment at 
para. 61-67. Even more compelling, both companies have become 
profitable. In light of this competitive history, EchoStar's claim that 
it needs this merger to compete with cable seems disingenuous, at best.
5. The EchoStar/DirecTV monopoly will be a fatal blow to local-to-local 
        in rural America
    If EchoStar and DirecTV are allowed to merge, consumers in 110 U.S. 
television markets will likely never receive local news, sports and 
weather via satellite. Charlie Ergen, who will serve as Chairman and 
CEO of the combined company, has publicly stated that the company will 
offer local signals in only 100 markets--virtually all in the top 100. 
Therefore, satellite's earliest and most loyal customers located in 
rural America will be denied the opportunity to receive their local 
broadcast signals. In fact, consumers located in non-cabled areas will 
have no choice to receive local signals via any MVPD platform.
    Two and a half years ago the DBS industry faced tough legal, 
technical and financial obstacles preventing the delivery of local 
signals, but today none of those obstacles exist for either DirecTV or 
EchoStar. The passage of SHVIA creating a statutory compulsory 
copyright eliminated local-to-local's legal obstacle. Previous DBS 
industry consolidation, the resulting concentration of spectrum and 
subscribers, the licensing of the Ka-band, and technological advances, 
such as digital compression, statistical multiplexing, and spot beam 
satellites, have virtually eliminated the technical and financial 
hurdles for DirecTV and EchoStar. Unfortunately, other potential third-
party local-to-local providers continue to face significant technical 
and financial obstacles. If the EchoStar/DirecTV monopoly cherry-picks 
the top 100 markets, those obstacles magnify. Third-party local-to-
local providers face the following barriers to entry:
    No available CONUS DBS spectrum: DirecTV and EchoStar already 
control all prime DBS spectrum--resulting in existing spectrum 
concentration. In 1997, there were five DBS licensees with high-powered 
DBS Ku-band satellite capacity within the coveted full CONUS 
(contiguous U.S.) orbital arc that covers the entire U.S. The five 
included:

1) DirecTV,
2) EchoStar,
3) American Sky Broadcasting (ASkyB), a joint venture of MCI and News 
        Corp.,
4) Tempo Satellite, Inc., a subsidiary of TCI Satellite Entertainment 
        and later rolled into PrimeStar, Inc. (PrimeStar), and
5) United States Satellite Broadcasting (USSB).
    Entering 2000, only DirecTV and EchoStar remained. During 1999, 
ASkyB was merged into EchoStar, and DirecTV acquired USSB and 
PrimeStar. With this consolidation, EchoStar's full CONUS satellite 
capacity increased 125% and DirecTV's increased 70%, giving each 
tremendous capacity.16 In addition, DirecTV's and EchoStar's 
experience with technological innovations such as digital compression, 
statistical multiplexing and spot beam satellites further expanded 
their capacity. As a result, both DirecTV and EchoStar currently have 
enough DBS Ku-band broadcast spectrum to carry their premium 
programming and all local television signals.
---------------------------------------------------------------------------
    \16\ EchoStar is also a licensee of DBS frequencies at five high-
powered, non-CONUS orbital slots, 11 at 61.5 deg. WL, 24 at 148 deg. 
WL, 1 at 166 deg. WL and 32 at 175 deg. WL.
---------------------------------------------------------------------------
    Even without the DirecTV/EchoStar monopoly, spectrum concentration 
already exists--EchoStar and DirecTV are licensees of all high-powered 
DBS, full CONUS Ku-band spectrum. As a result, no full CONUS, DBS 
spectrum is available for any potential third-party local-to-local 
provider.
    Limited availability of CONUS Ka Slots: Hughes and EchoStar 
dominate CONUS Ka-band licensees, adding to existing spectrum 
concentration. When the Federal Communications Commission first issued 
Ka-band licenses in 1997, many projected Ka-band as the answer to 
local-to-local with its higher frequencies suitable for spot beam 
satellites and CONUS locations adjacent to the coveted DBS spectrum. 
Utilizing the capacity in just one Ka slot, spot beam satellites and 
today's digital compression rates, all local stations in all markets 
could be carried. Although Hughes and EchoStar are licensees of five 
full-CONUS Ka-band orbital slots (Hughes at 99 deg., 101 deg. and 
103 deg. and EchoStar at 113 deg. and 121 deg.) and eight non-CONUS Ka-
band slots, DirecTV and EchoStar have chosen to ignore this capacity 
for local-to-local. Meanwhile, other potential local-to-local providers 
have struggled to lease or license Ka CONUS capacity.
    The limited rural marketplace: A rural, standalone local-to-local 
plan is not economically viable. Markets 101 through 210 account for 
only 15% of U.S. TV households--making it difficult for a third-party 
to develop an economically viable business plan. Licensing or leasing 
an orbital slot; designing, building and launching a spot beam 
satellite; building uplink facilities; creating a backroom support 
operation; and manufacturing and subsidizing consumer hardware will 
cost a third-party local-to-local provider hundreds of millions of 
dollars.
    In addition, it is not practicable to develop any local-to-local, 
standalone plan without partnering with a DBS provider. The two primary 
reasons are the need for a consumer-friendly, marketable product--
consumers want one dish, one receiver and one bill--and the economics 
of marketing, subsidizing consumer hardware and building a backroom 
operation to support a separate local-to-local plan.
    Proprietary transport and conditional access systems limit any 
third-party local-to-local provider's ability to reach the DirecTV and 
EchoStar subscriber bases in a consumer-friendly manner without the 
cooperation of DirecTV and EchoStar. Since 1997, both DirecTV and 
EchoStar have refused to cooperate with a potential third-party local-
to-local wholesaler. In addition, when Pegasus Communications Corp., 
one of DirecTV's largest rural distributors, proposed a possible local-
to-local rural plan, DirecTV again refused to cooperate.
    A Long Lead Time: A local-to-local satellite business will require 
30-36 months before revenues. The time to acquire spectrum, to design, 
build and launch a satellite, and to begin operations is approximately 
30-36 months.
    The bottomline. NAB vigorously supports local-to-local in all 210 
markets, but understands the enormous economic and technical hurdles 
faced by any third-party business focused exclusively on markets 101 
through 210. Without a larger potential market base and without the 
cooperation of DirecTV and EchoStar, NAB believes that no third-party 
provider can leap these hurdles to provide local news, sports and 
weather to 110 underserved markets in rural America, representing more 
than half of the U.S. TV markets.
4. Local-to-local will benefit more from a competitive satellite 
        marketplace with two DBS providers than from the DirecTV/
        EchoStar monopoly.
    Today DirecTV and EchoStar offer local-to-local in 41 and 36 TV 
markets respectively. Due to the competitiveness between the two 
providers, many of those markets overlap. See Appendix A. As one 
provider added a market, the other followed suit. Throughout the 
history of DBS, DIRECTV and EchoStar have driven each other to the 
benefit of consumers. Other examples of this ``leapfrogging'' 
competitiveness include:

 The introduction of the $199 receiver.
 Free installation offerings.
 Consumer hardware lease programs.
 Development of advanced digital receivers, which include 
        interactive offerings and personal video recorders.
 Expansive ethnic and niche programming.
 Multiple broadband offerings.
In addition, EchoStar and DirecTV have invested in innovative, start-up 
companies to gain access to new technologies and programming.
    Prior to the merger announcement, both DirecTV and EchoStar had 
already stated plans to expand their local-to-local coverage to 60 
markets using spot beam satellites. However, NAB believes that the 
fierce competitiveness that exists between DirecTV and EchoStar, 
combined with each provider's enormous satellite capacity and the 
desire to differentiate its product, will ultimately drive DirecTV and 
EchoStar to offer more local markets independently than together--
either by utilizing their existing DBS and Ka-band capacity or by 
partnering with a third-party to deliver markets 60 and above. With the 
DirecTV/EchoStar merger, this competitive ``one upmanship'' disappears.
    The bottomline. The NAB believes that more consumers will have 
access to their local news, sports, and weather via satellite with two 
DBS platform providers than with one for the following reasons:

 Capacity for local-to-local is not the issue. DirecTV and 
        EchoStar each have sufficient DBS Ku satellite capacity to 
        offer all local markets via satellite. Further, both DirecTV 
        and EchoStar have Ka capacity, suitable for local-to-local, 
        adjacent to their DBS spectrum--allowing them to develop a 
        consumer-friendly product. In fact, with one CONUS Ka slot and 
        well-designed spot beam satellites, a provider could offer all 
        local stations in all markets.
 The merged entity has capped its local-to-local plan at 100 
        markets, mostly in urban America, abandoning rural subscribers.
 Based on prior dealings, there is no guarantee that the merged 
        entity will actually ever offer 100 markets.
 Due to the previously outlined barriers to entry, a third 
        party local-to-local plan for markets 101 to 210 is 
        economically unviable.
 As a result, it is unlikely that rural, underserved consumers 
        will ever have access to local news, sports and weather via 
        satellite if there is only one DBS platform provider.
 Consumers have reaped enormous benefits from the intense 
        competition between DirecTV and EchoStar, including diverse 
        programming options, lower prices, and advanced technologies.
 That competition has already resulted in the carriage of 41 
        and 36 local markets by DirecTV and EchoStar respectively.
 Prior to the merger, both DirecTV and EchoStar had stated they 
        planned to expand their local-to-local offerings to 60 markets.
 Since late 1999, local-to-local has driven DirecTV and 
        EchoStar subscriber growth.
 Continuing competitive pressures to differentiate the DirecTV 
        and the EchoStar brand will drive DirecTV and EchoStar to add 
        more markets via their own capacity or in cooperation with a 
        third-party provider--resulting in carriage of more than 100 
        markets.
 A successful third-party wholesale provider offering universal 
        local-to-local service is more likely if it not dealing with a 
        DBS monopoly. The potential to negotiate with two DBS platform 
        providers is more likely to result in the development of a 
        viable business plan.
5. A DirecTV/EchoStar monopoly eliminates a local broadcaster's 
        leverage for retransmission consent.
    Local broadcasters, particularly those in smaller markets, fear 
dealing with a monopoly when granting retransmission consent based upon 
prior experience with cable and based upon the contentious history 
between broadcasters and the DBS industry. With two competitive DBS 
providers, broadcasters maintain some leverage to gain favorable 
retransmission terms. That leverage is eliminated with one.
6. A DirecTV/EchoStar monopoly is unnecessary to expand local-to-local
    As previously noted, both DirecTV and EchoStar have sufficient DBS 
spectrum to carry all stations in all markets. Both DirecTV and 
EchoStar have Ka spectrum located adjacent to their DBS spectrum, which 
could also be used to offer all stations in all markets. With these 
options, expanding local-to-local coverage is simply not a 
justification for a DBS monopoly.
                             e. conclusion
    Broadcasters will continue to fill the pivotal role of providing 
critical local news and programming. That role is threatened by the 
``gatekeeper'' roles played by both cable and DBS systems. Broadcasters 
want to insure that local programming and news is made available in all 
markets and that it is best served by competition between EchoStar and 
Direct TV and between the satellite companies and cable systems. 
Consumers have long benefited from competition among local broadcasters 
and there is no reason why the same should not be true for the DBS 
carriers and cable systems.

                               Appendix A
                          Local Markets on DBS
------------------------------------------------------------------------
                     Market                         DirecTV    EchoStar
------------------------------------------------------------------------
Albuquerque.....................................
Atlanta.........................................
Austin..........................................
Baltimore.......................................
Birmingham......................................
Boston..........................................
Charlotte.......................................
Chicago.........................................
Cincinnati......................................
Cleveland.......................................
Columbus, OH....................................
Dallas/Ft. Worth................................
Denver..........................................
Detroit.........................................
Greensboro......................................
Greenville/Spartanburg..........................
Houston.........................................
Indianapolis....................................
Kansas City.....................................
Los Angeles.....................................
Memphis.........................................
Miami...........................................
Milwaukee.......................................
Minneapolis/St. Paul............................
Nashville.......................................
New York........................................
Orlando.........................................
Philadelphia....................................
Phoenix.........................................
Pittsburgh......................................
Portland, OR....................................
Raleigh/Durham..................................
Sacramento......................................
St. Louis.......................................
Salt Lake City..................................
San Antonio.....................................
San Diego.......................................
San Francisco...................................
Seattle.........................................
Tampa/St. Petersburg............................
Washington, DC..................................
West Palm Beach.................................
------------------------------------------------------------------------
Source: DirecTV and EchoStar Consumer Websites

    Mr. Upton. Thank you.
    Mr. Hartenstein.

                STATEMENT OF EDDY W. HARTENSTEIN

    Mr. Hartenstein. Thank you, Chairman Upton, members of the 
subcommittee.
    I appreciate the opportunity to present our views. The last 
time DIRECTV appeared before this subcommittee was in April 
1998. We had barely been in business for a little over 3 years, 
just had a little over 3 million customers, and a lot has 
changed.
    Just 8 days ago, and a quarter billion dollars 
incrementally more investment on behalf of DIRECTV and Hughes, 
we successfully launched a new high power spot beam satellite 
that will enable the must carry obligation in all 41 major 
marketplaces that we are in today to begin offering all local 
stations.
    Now, notwithstanding the success we've had over the last 7 
years, we feel that it's important to combine our businesses 
with EchoStar's Dish Network to enable us to offer consumers a 
stronger competitive alternative to the market dominant cable 
operators.
    There are a number of developments and changes and 
challenges in the MVPD marketplace that motivated our decision. 
Cable is still the dominant technology for the delivery of 
video programming to consumers, with 80 percent of all video 
subscribers receiving their program from the franchised cable 
operator, while DBS subscribers combined represent only 17 
percent.
    The cable MSOs, or multiple system operators, have engaged 
in regional clustering, mergers, and trades, all viable 
business practices, and this consolidation has strengthened 
their ability to compete by lowering operating and programming 
costs and facilitating the provision of related services, such 
as cable modems, high speed Internet access, and telephony.
    Digital cable has in the last 2 years become very widely 
available. Before the advent of that, DBS providers had a 
distinct advantage over analog cable in terms of picture 
quality and channel capacity. Today, where digital cable is 
available, consumers believe that the picture quality and 
programming choices offered by cable and DBS, digital cable, 
are essentially the same.
    Finally, the advent of the must carry deadline has caused 
us to reexamine the issue of DBS spectrum constraints. Today 
EchoStar and DIRECTV each carry more than 200 identical 
national channels of entertainment, news, sports programming, 
as well as more than 140 identical local broadcast stations in 
35 common markets that we share.
    After the must carry takes effect in just 26 more days, our 
two companies will be required to carry a total of more than 
300 identical local broadcast stations while still serving just 
those 35 common markets.
    That is 500 redundant duplicated channels of spectrum. That 
would be 500 more channels that we could spread among other 
services and local television stations across the country.
    It became clear to us the most efficient use of the limited 
DBS spectrum could be achieved by a merger and only achieved by 
a merger between EchoStar and DIRECTV. Channels will need to be 
broadcast once instead of twice to reach all consumers, and 
this will enable the transmission to consumers of additional 
programming that just cannot be delivered today.
    Local channels in about 100 markets, a wider variety of 
programming up to a dozen high definition television channels, 
new interactive services, more foreign language programming, 
more pay-per-view options, and improved service to Alaska and 
Hawaii, all things we need to do to continue to be competitive 
with our competition, cable.
    It was these market realities that convinced our parent 
companies, Hughes Electronics and General Motors, and us that a 
merger with EchoStar could be both pro competitive and pro 
consumer. Combined we will be able to provide a greater variety 
of services and better value to urban, suburban, and rural 
customers alike.
    This will make us a much stronger competitor to cable in 
the MVPD market and bring the benefits of this robust 
competition to the current cable customers, as well as our own.
    Let me turn to a couple of statutory and regulatory 
obstacles that are inhibiting our ability to compete with local 
cable operators.
    First, as we said in the comments we filed yesterday, and 
Bob indicated that the NRTC did as well, the program access 
provision prohibiting exclusive cable contracts with vertically 
integrated programmers will continue to be necessary to protect 
competition after 2002. We hope the FCC will not allow that 
provision to sunset.
    Second, all of our efforts to bring a robust cable 
alternative to the marketplace will be undermined if DBS 
subscribers suddenly started to suffer service outages due to 
interference from terrestrial wireless services, such as these 
proposed by Northpoint.
    Our concern has always been about interference, not 
competition, and yesterday we, along with EchoStar, suggested 
to the FCC that the immediately adjacent spectrum band in 
frequency, the exact same amount of spectrum, the CARS band, is 
better suited and available for service such as Northpoint.
    Finally, our penetration rates in apartment buildings and 
condominiums continue to lag behind that of single family 
homes. We believe the FCC, through the Cable Act of 1992, has 
the ability to alleviate those barriers to entry and has yet to 
do so. We would hope that Congress asks to help rectify this 
situation.
    As I mentioned at the outset, there have been significant 
changes in the MVPD market in the 3 years since we last 
appeared here, and we think the next step in the evolution of 
the MVPD market is the approval of the pro competitive merger 
of DIRECTV and EchoStar's Dish Network, as well as the 
extension of the program access law's prohibition on exclusive 
cable contracts in the loopholes such as those employed by 
Comcast in not delivering via satellite, via cable, to prohibit 
us and others from having access to that programming.
    We appreciate the opportunity here today for us to share 
our views and look forward to questions you have after.
    Thank you.
    [The prepared statement of Eddy W. Hartenstein follows:]
Prepared Statement of Eddy W. Hartenstein, Chairman and Chief Executive 
                         Officer, DIRECTV, Inc.
    Chairman Upton, Mr. Markey, and members of the Subcommittee, thank 
you for inviting me to appear before you today. I appreciate the 
opportunity to present our views on the status of competition in the 
multichannel video programming distribution (MVPD) marketplace and to 
discuss our proposed merger with EchoStar.
    The last time DIRECTV appeared before this Subcommittee in April 
1998, we had been in business for three and three-quarter years and had 
3.45 million subscribers nationwide. Today, having celebrated our 
seventh anniversary this summer, we have more than 10.3 million 
customers.1
---------------------------------------------------------------------------
    \1\ Of the 10.3 million DIRECTV subscribers, 1.8 million are served 
through the National Rural Telecommunications Cooperative (NRTC) and 
its members and affiliates.
---------------------------------------------------------------------------
    We are offering local network stations in 41 major metropolitan 
markets (see Attachment A) which represent more than 61 percent of the 
television households in the country. Just eight days ago, we 
successfully launched a new high-power spot beam satellite. The DIRECTV 
4S satellite will enable us to make the most efficient use of our 
existing capacity in order to meet the must carry obligation imposed by 
the Satellite Home Viewer Improvement Act (SHVIA) in all 41 markets.
    Given the success we have had over the last seven years, you might 
ask why we feel that it is important to combine our business with 
EchoStar's Dish Network to enable us to offer consumers a stronger 
competitive alternative to the market dominant cable operators. There 
were a number of developments and challenges in the MVPD marketplace 
that motivated our decision.

 Cable television still is the dominant technology for the 
        delivery of video programming to consumers. Eighty percent of 
        all subscribers to multichannel video services receive their 
        programming from a franchised cable operator,2 while 
        DBS subscribers still represent only 17 percent of all MVPD 
        subscribers.3
---------------------------------------------------------------------------
    \2\ Annual Assessment of the Status of Competition in the Market 
for the Delivery of Video Programming, Seventh Annual Report, CS Docket 
No. 00-132, FCC 01-1, para. 5 (released Jan. 8, 2001).
    \3\ Cable Industry Outlook, Deutsche Banc Alex Brown at 32 (Sept. 
6, 2001).
---------------------------------------------------------------------------
 The cable multiple system operators (MSOs) have engaged in 
        regional clustering, mergers and trades.4 The result 
        of this consolidation is that the ten largest cable operators 
        now serve close to 90 percent of all U.S. cable 
        subscribers.5 This consolidation has strengthened 
        cable's ability to compete by lowering operating and 
        programming costs and facilitating the provision of related 
        services, such as cable modem service and 
        telephony.6
---------------------------------------------------------------------------
    \4\ Seventh Annual Report at para.para. 15, 35.
    \5\ Id. para. 15.
    \6\ Id.
---------------------------------------------------------------------------
 Digital cable has become widely available.7 Before 
        the advent of digital cable, DBS providers had a distinct 
        advantage over analog cable in terms of picture quality and 
        channel capacity. Today, where digital cable is available, 
        consumers believe that the picture quality and programming 
        choices offered by cable and DBS are essentially the same.
---------------------------------------------------------------------------
    \7\ Id. para.para. 17, 41; see Cable Industry Outlook, Deutsche 
Banc Alex Brown at 16 (89.271 million digital-ready homes at the end of 
the second quarter of 2001).
---------------------------------------------------------------------------
 Cable has aggressively launched cable modem service, and is 
        able to offer an attractive bundled video/high-speed Internet 
        access product to consumers 8 that neither DIRECTV 
        nor EchoStar can match today.
---------------------------------------------------------------------------
    \8\ Seventh Annual Report at para.para. 11, 48-49.
---------------------------------------------------------------------------
 Finally, the advent of the must carry deadline has caused us 
        to re-examine the issue of DBS spectrum constraints. Unlike 
        cable, DBS has bandwidth limitations that constrain growth in 
        service offerings. Today, EchoStar and DIRECTV each carry more 
        than 200 identical national channels of entertainment, news and 
        sports programming, as well as more than 140 identical local 
        broadcast stations in 35 markets. After must carry takes effect 
        on January 1, 2002, the two companies will be required to carry 
        a total of more than 300 identical local broadcast stations, 
        while still serving just those 35 markets.
    It became clear to us that the most efficient use of the limited 
DBS spectrum could be achieved by a merger of EchoStar and DIRECTV. 
Channels will need to be broadcast once, instead of twice, to reach all 
consumers. This will enable the transmission to consumers of additional 
programming that cannot be delivered today--local channels in about 100 
metropolitan areas, a wider variety of programming, up to 12 HDTV 
channels, new interactive services, more foreign language programming 
like the DIRECTV PARA TODOS TM Spanish-language service we 
offer today, more pay-per-view options and improved service to Alaska 
and Hawaii.
    It was these market realities that convinced our parent companies, 
Hughes Electronics and General Motors, and us that a merger with 
EchoStar would be both pro-competitive and pro-consumer. We are 
committed to working with both the FCC and the Department of Justice as 
they evaluate the merger. In the end, we hope both agencies conclude, 
as we did, that the combined company will be able to provide a greater 
variety of services and better value to urban, suburban and rural 
consumers alike. This will make us a much stronger competitor to cable 
in the MVPD market and bring the benefits of this robust competition to 
the more than 67 million cable subscribers,9 as well as to 
our own customers.
---------------------------------------------------------------------------
    \9\ Id. para. 7.
---------------------------------------------------------------------------
    During the pendancy of the merger, we will continue to operate as 
separate companies. We are continuing to attract new subscribers, and 
to provide our existing customers with the same high quality service 
they have come to expect.
    Let me turn to a couple of other issues. Several statutory and 
regulatory obstacles are inhibiting our ability to compete with local 
cable operators.
Extension of the Program Access Law's Prohibition on Cable Exclusive 
        Contracts
    As I have said on many occasions, without Congress' passage of the 
program access provision of the 1992 Cable Act, I would not be here 
before you today. That provision allows cable's competitors to gain 
access to cable-affiliated programming, such as CNN, Headline News, 
HBO, and Discovery Channel. Without this programming, we cannot 
compete. This was true in 1992 when the program access law was passed, 
and remains true today.10
---------------------------------------------------------------------------
    \10\ Id. para. 15 (``In 2000, one or more of the top five cable 
MSOs held an ownership interest in each of 99 vertically integrated 
national programming services.'')
---------------------------------------------------------------------------
    The program access provision prohibiting exclusive contracts 
between cable operators and vertically-integrated programmers is 
scheduled to expire in October of next year, unless the FCC finds, in a 
proceeding it began last month, that the provision continues to be 
necessary to ``preserve and protect competition and diversity in the 
distribution of video programming.'' 11 Using recent events 
as a likely indicator of future cable industry behavior, I can predict 
with some confidence that this provision of the program access law will 
continue to be necessary to protect competition after 2002, and to 
ensure that subscribers to video services other than cable continue to 
receive the programming they've been enjoying for some time now.
---------------------------------------------------------------------------
    \11\ 47 U.S.C. Sec. 548(c)(2)(D).
---------------------------------------------------------------------------
    In particular, Comcast, the nation's third largest cable operator, 
has refused to negotiate with DIRECTV or EchoStar for carriage of 
Comcast SportsNet, the Philadelphia-area regional sports network. 
Comcast's action has disenfranchised tens of thousands of Philadelphia-
area DIRECTV subscribers and hundreds of thousands of other DIRECTV 
subscribers who enjoy out-of-market sports. Comcast has used what it 
perceives to be a ``loophole'' in the exclusivity prohibition provision 
of the program access law, claiming that because it has chosen to 
distribute Comcast SportsNet using terrestrial rather than satellite 
facilities it does not have to make the regional sports network 
available to its DBS competitors.
    DIRECTV's experience with Comcast SportsNet is not an isolated one. 
There is every indication that other cable operators are contemplating 
similar strategies given the regional clustering to attempt to evade 
the exclusivity prohibition of the program access law, particularly 
with regard to regional sports networks. Thus, it is our hope that the 
FCC will conclude that the cable exclusivity prohibition continues to 
be necessary, and that Congress will consider tightening the law to 
ensure that cable operators cannot evade the law simply by delivering 
programming by terrestrial means instead of via satellite, as Comcast 
is attempting to do. The law should be revised to cover programming 
owned by cable operators, no matter the delivery mechanism they 
choose.Improved Access for MDU Residents
    Our penetration rates in apartment buildings, condominiums, and 
other multiple dwelling units (MDUs) continue to lag behind our single-
family home rates. The FCC has not yet taken full advantage of the 
preemptive authority Congress intended to convey in the 1992 Cable Act 
with respect to restrictive covenants and other impediments, including 
exclusive, long-term cable contracts, that prevent both MDU owners and 
renters who do not have exclusive use of areas suitable for antenna 
installation from subscribing to alternative video services such as 
DIRECTV. For years, DIRECTV has urged the Commission to amend its rules 
to require landlords, condominium associations, and other homeowner 
groups to provide access to at least two multichannel video services to 
residents who do not have exclusive use of areas suitable for antenna 
installation. I do not believe Congress ever intended to discriminate 
against residents of multiple dwelling units (MDUs) by depriving them 
of the benefits of competition available to single-family homeowners, 
and we would ask Congress to help rectify this situation.
Ill-Advised Spectrum Sharing Proposals
    All of our efforts to bring a robust competitive alternative to 
cable to the marketplace will be undermined if the primary spectrum 
used by DBS operators to downlink programming to subscribers across the 
United States is invaded by terrestrial wireless point-to-multipoint 
services such as those proposed by Northpoint Technology. One of the 
top reasons consumers switch from cable to DBS is the pristine and 
reliable signal of DBS. Millions of U.S. consumers who use and rely 
upon the DBS service could see increased interference in the form of 
longer and more frequent service outages if a mass market fixed 
wireless service is introduced into the DBS band. Today's happy 
customers could easily become tomorrow's unhappy constituents if, as a 
result of an ill-considered government action, they begin to see 
increased service interruptions.
    Let me assure you that our opposition to the deployment of a 
terrestrial service in the DBS band has nothing to do with fear of 
facing another competitor. We compete every day against the cable 
giants, so it's ridiculous to say that we're afraid of competition. And 
we will compete against these proposed terrestrial services if they're 
properly located in a different spectrum band, such as the immediately 
adjacent Cable Television Relay Service (CARS) band or the band used by 
the Instructional Television Fixed Service (ITFS) and Multichanel 
Multipoint Distribution Service (MMDS), as we suggested in the FCC 
filing we made yesterday. Our only concern is protecting the level of 
service our customers have come to expect and which we have spent 
hundreds of millions of dollars to ensure. The extensive efforts 
Congress has undertaken to increase cable competition will be 
undermined if the FCC allows the spectrum intended for DBS use to be 
shared with terrestrial fixed wireless services.
    Before I conclude, I wanted to let you know about an exciting 
initiative we've recently undertaken. As a company, we believe in 
public service. That is why we launched DIRECTV GOES TO SCHOOL 
TM, a public service initiative that provides public and 
private schools around the country with free access to our SCHOOL 
CHOICE TM programming package. Participating schools receive 
more than 60 channels of educational programming, including such 
networks as CNN, Discovery Channel, The History Channel, A&E, The 
Learning Channel, and of course, C-SPAN, which teachers can use to 
enhance their lesson plans. In addition, we provide free-of-charge to 
participating schools special issues of DIRECTV--The Guide 
TM, which includes feature articles on the educational 
programming offered in the SCHOOL CHOICE package. The program is 
available to schools in all 50 states and the District of Columbia.
Conclusion
    As I mentioned at the outset, there have been significant changes 
in the MVPD market in the three years since we last appeared before 
this Subcommittee. We think the next step in the evolution of the MVPD 
market is the approval of the pro-competitive merger of DIRECTV and 
EchoStar's DISH Network, as well as the extension of the program access 
law's prohibition on exclusive cable contracts.
    I appreciate the opportunity to share my views.
                              Attachment A
  directv customers in the following metropolitan markets can receive 
                       local broadcast channels:
    Atlanta, Austin, Baltimore, Birmingham, Boston, Charlotte, Chicago, 
Cincinnati, Cleveland, Columbus, Dallas/Ft. Worth, Denver, Detroit, 
Greensboro, Greenville/Spartanburg, Houston, Indianapolis, Kansas City, 
Los Angeles, Memphis, Miami/Ft. Lauderdale, Milwaukee, Minneapolis/St. 
Paul, Nashville, New York, Orlando/Daytona, Philadelphia, Phoenix, 
Pittsburgh, Portland, Raleigh/Durham, Sacramento/Stockton/Modesto, Salt 
Lake City, San Antonio, San Diego, San Francisco/Oakland/San Jose, 
Seattle/Tacoma, St. Louis, Tampa/St. Petersburg, Washington, D.C., and 
West Palm Beach.

    Mr. Upton. Thank you. Thank you very much.
    Mr. Ergen.

                  STATEMENT OF CHARLES W. ERGEN

    Mr. Ergen. Thank you, Mr. Chairman and distinguished 
members of the committee.
    Thank you for inviting our company to testify today on 
video competition issues, in particular about the merger, 
proposed merger of EchoStar and Hughes.
    First, a little history of our company. We started over 21 
years ago as a small business digging holes and putting in a 
large dish when only about 1,000 dishes existed, and we were 
relegated to farmers and ranchers and people who didn't have 
television.
    After about 10 years, we realized that our dish was too big 
and too expensive, and if we really wanted to grow our 
business, we would have to effectively compete against the 
cable industry.
    In doing so, we found out about some FCC spectrum and 
applied for high powered DBS satellites. Over the period of the 
next 6 years we designed and financed and launched high powered 
satellites and started Dish Network in 1996 to compete against 
cable not only in big cities, but wherever cable existed.
    There were lots of numbers thrown around in the committee 
hearings both this morning and today, but according to the FCC, 
96.6 percent of the country is passed by cable. So customers 
have an option of cable, leaving only about 3.5 million homes 
who do not have access to table. Some people have said it is a 
little higher. I have heard as much as 9 million at the 
committee today, but the vast majority of people do have access 
to cable in America today.
    The first thing I think this committee has to do is to look 
at what is the relevant market that we compete in, and I have 
heard from the broadcasters here today that we are a monopoly 
of some kind in the video business.
    But the fact of the matter is the Department of Justice in 
1998 through the Primestar merger review defined our market, 
the MVPD market, as cable and satellite. We have several 
competitors in that, both the C-Band big dish owners. We heard 
from WSNet today. We have cable over-builders, such as RCN, and 
we have, of course, the satellite companies and cable.
    Combined this merger with EchoStar and Hughes only will be 
17 percent of that MVPD market, hardly a monopoly by anybody's 
standard, and yet the dominant cable incumbent will be 80 
percent of that market, and where they have clustered in cities 
sometimes can be upwards over 90 percent in that particular 
community.
    Once you get past the emotion of the market that we are in, 
then we also realized that cable since the advent of DBS, 1994, 
the price increases have been at 2.5 to 3 times the rate of 
inflation. If we were such a dominant competitor against the 
entrenched monopoly, we certainly would have held those prices 
down.
    We have not been able to do that, and our sole charter at 
EchoStar has been how do we go out there and hold those prices 
down and give customers a better deal.
    Because of the barriers to competition with digital cable 
now and broadband access, we realize that the only way to do 
that was to merge our two companies. The big savings, the big 
thing we can do from an economic point of view in a market with 
recession and capital markets demanding efficiencies and 
productivity is to combine our spectrum together.
    Eddy mentioned that we duplicate over 500 channels of TV. 
Over 90 percent of our spectrum is repeated wastelessly. I do 
not believe that is what the FCC had in mind for the spectrum, 
and I believe that what we can do is take that spectrum and 
quit duplicating that spectrum so that we can go out and 
compete against cable.
    We have also been burdened by the must carry rules under 
SHVIA, and contrary to what had been mentioned by the 
broadcasters, EchoStar, in fact, testified to this committee, I 
think, on three different occasions about our opposition to 
must carry and the burden.
    It makes no sense to us on January 1st to carry 36 
different Home Shopping channels. They are exactly the same. 
They have absolutely no local new, weather or weather alerts, 
and are not anything but a 24 hour commercial channel when we 
already carry a national Home Shopping channel. I do not 
believe consumers are asking for that, and it inhibits our 
ability to compete.
    So let me just get to the point. This merger has tremendous 
benefits for consumers. First and foremost, access to the 
spectrum will allow us to increase our local markets from a 
minimum, by a minimum of 60 markets to at least the top 100 and 
at least one city in every State.
    Second, we can jump start high definition television. 
Broadcasters have had the spectrum for many, many years, have 
now filed for extensions on that broadcast, on that spectrum. 
We believe with satellite and our merger we can do at least 12 
channels of HDTV, which jump starts this new technology in a 
way that broadcasters haven't been able to do.
    Broadband Internet access for all consumers. In my opinion, 
he economics of broadband, the capital markets and the touch 
technical challenge ahead, the only way we can bring broadband 
to rural America is to combine these companies and combine our 
technologies to one standard platform. Not only will we be able 
to bring broadband to rural customers, but we will be able to 
compete in the cities where perhaps Excite at Home suddenly is 
taken off cable companies and there is no place for people to 
turn.
    Finally, there will be a new array of programming choices, 
things such video on demand that the cable industry is already 
actively doing, interactive services so that people in rural 
America get the same interactive services at all of these band 
widths.
    And finally, we are cognizant of the fact that in some 
parts of rural America, whether it be several million homes or 
4 or 5 million homes, there may be less choices for consumers. 
That's why we've offered a nationwide pricing mechanism which 
we already do. Both of our companies already do this today.
    We are willing to commit to continue to do that in whatever 
way the regulatory officials would like us to so that people in 
rural America get all of the benefits of broadband, high 
definition television, local-to-local, and true competition 
with cable at the very lowest price of anywhere in the country.
    I would like to thank you for allowing me to appear today, 
and I will be happy to answer any questions that you might 
have.
    [The prepared statement of Charles W. Ergen follows:]
  Prepared Statement of Charles W. Ergen, Chairman and CEO, EchoStar 
                       Communications Corporation
    Mr. Chairman, Mr. Markey, and distinguished members of this 
Subcommittee, on behalf of EchoStar Communications Corporation, I want 
to thank you for inviting our company to discuss video competition 
issues and how the merger of EchoStar Communications Corporation 
(EchoStar) and Hughes Electronics Corporation (Hughes) will promote 
competition and provide much needed benefits for American consumers. We 
would also like to outline for you why we believe the merger should and 
will win antitrust approval from the Department of Justice (DOJ) and 
regulatory approval from the Federal Communications Commission (FCC).
         i. echostar's long history of competing against cable
    EchoStar started 21 years ago providing large, C-band satellite TV 
dishes to rural Americans. The demand grew quickly as consumers, 
schools and businesses sought television service in areas untouched by 
cable or off-air network TV signals. In 1996, we launched the small 
dish satellite TV service called DISH Network to provide competitive 
television services to urban and suburban consumers as well as those in 
rural areas. Since its debut, EchoStar's DISH Network has been the 
leader in the pay television industry in offering low prices for 
superior, digital television products. Other notable items about 
EchoStar include the following:

a) EchoStar began lowering its prices for satellite TV equipment to 
        offer affordable or even free equipment and switched its annual 
        programming fees for consumers to monthly rates, all in an 
        attempt to compete better with cable companies.
b) Today, DISH Network offers consumers four main programming packages 
        starting with America's Top 50 for $21.99 per month for over 60 
        channels that include the best in entertainment, sports, news 
        and children's programming. The top programming package 
        available from DISH Network is America's Everything Pak for 
        $69.99 which offers 200 channels, including premium movie 
        packages such as the popular HBO and Showtime.
c) We have been ranked number one in 2 of the last 3 years in the J.D. 
        Power and Associate's customer satisfaction survey among 
        satellite and cable TV subscribers.
d) A study by the University of Michigan Business School also rated 
        EchoStar's DISH Network number one in overall customer 
        satisfaction in 2001.1
---------------------------------------------------------------------------
    \1\  Source: American Customer Satisfaction Index, University of 
Michigan Business School, August 2001.
---------------------------------------------------------------------------
e) We currently have 6 high-power direct broadcast satellites in orbit, 
        and we expect to launch three more satellites within the next 2 
        years to expand our local TV channel service, to comply with 
        must-carry rules and to offer other services.
f) We have invested billions of dollars and extensive technological 
        resources to compete vigorously in the marketplace with cable 
        and to make satellite technology affordable and accessible for 
        all Americans.
        ii. overview of providing effective competition to cable
    The planned merger with Hughes resulting in the new EchoStar will 
be a huge advance in our long-standing mission to compete with the 
dominant and entrenched cable companies. Satellite TV providers have 
limited, scarce spectrum to broadcast programming, and right now, DISH 
Network and DirecTV each broadcast hundreds of duplicate channels. For 
instance, both companies broadcast the same two C-SPAN channels, the 
same Disney channels, and so on. The merger will end this wasteful 
redundancy and offer consumers more programming such as the following: 
local broadcast channels available via satellite to more markets; 
greatly expanded high-definition television programming; pay-per-view 
and video-on-demand services and educational, specialty and foreign-
language programming; and other new and improved product offerings, 
including interactive TV services. The merger will also allow us to 
reduce the rates we pay programmers which will create greater value for 
consumers, especially by ending the practice of programming providers 
charging satellite TV companies higher rates than they do cable 
companies. The combined company will also help bridge the rural/urban 
``digital divide'' through the rapid development of an affordable, 
satellite-based, two-way, always on, high-speed Internet access product 
available to both rural and urban areas. New and better products, 
efficient operations, and more vigorous competition are precisely those 
things that the antitrust laws are meant to promote. That is why we 
believe that this merger will win the support of the DOJ and FCC.
    We want to talk to you today about how Congress can spur 
competition in the MultiChannel Video Programming Distribution (MVPD) 
marketplace. Specifically, Congress should: (1) support the efforts of 
EchoStar and Hughes in combining their satellite TV resources and 
spectrum to create an aggressive competitor to cable; and (2) continue 
to address and improve upon the role of program access regulation in 
preserving a competitive and diverse MVPD landscape; and (3) encourage 
new entrants to the MVPD market without damaging the viability of 
existing providers.
    iii. the proposed combination of echostar and hughes will allow 
      satellite tv to become a truly effective competitor to cable
    Providing competition against cable remains the single most 
important focus of satellite TV. DirecTV and DISH Network are the 
nation's third and sixth largest MVPD providers, which after the merger 
would consist of about 15 million combined subscribers, or 17% of the 
MVPD market. By contrast, the dominant and entrenched cable companies 
control about 80% of the MVPD market with nearly 70 million 
subscribers, according to the FCC's Annual Assessment of the Status of 
Competition in the Market for the Delivery of Video 
Programming.2 In fact, the top 10 largest cable firms such 
as AT&T, AOL-Time Warner, Comcast, Charter, and others account for over 
61 million cable customers.3
---------------------------------------------------------------------------
    \2\ FCC's Annual Assessment of the Status of Competition in the 
Market for the Delivery of Video Programming, published January 2001.
    \3\ Source: Cablevision Magazine Database, October 22, 2001. Basic 
subscriber counts are provided by MSOs and systems to Cablevision 
Magazine.
---------------------------------------------------------------------------
1.) Satellite TV Faces Barriers to Effective Competition Against Cable
    Satellite TV has worked diligently to compete with cable by 
offering technologically superior products and services, such as 100 
percent digital channels and expansive channel choices. However, 
despite satellite TV's lower pricing and better products, EchoStar and 
Hughes' ability to compete with cable has been hampered by several 
barriers, such as the following:

1) We are constrained in offering local broadcast TV channels and other 
        desirable programming to consumers due to constraints on scarce 
        and limited satellite spectrum allocated by the government,
2) We have a small market share of customers compared to cable 
        operators which creates difficulties in purchasing necessary 
        programming from cable programmers at reasonable rates,
3) The burden of complying with must-carry rules, which force satellite 
        TV providers to add hundreds of less popular channels in 
        markets where we carry local network TV channels,
4) Satellite companies today do not have a high speed Internet service 
        option that can effectively compete against cable's bundled 
        Internet and video services.
    This competitive imbalance has permitted cable companies to 
maintain their dominant market share while raising their prices an 
average of 6% per year over the last 10 years, more than twice the rate 
of inflation 4. At the same time, satellite TV has 
maintained low monthly rates for service with minimal rate increases 
and even then, well below the rate of inflation. Satellite TV equipment 
prices have dropped, and the equipment has even been offered for free 
in competitive promotions. In contrast to cable's recently announced 
round of rate increases, our recent ``I Like 9'' promotion offered 
consumers over 100 channels for only $9 a month for one year.
---------------------------------------------------------------------------
    \4\ Source: Kagan World Media.
---------------------------------------------------------------------------
    Over the past several years, to its credit, the cable industry 
responded to the competitive threat of satellite TV by introducing new 
products like digital cable, broadband, and telephony. The only way to 
remove the barriers to competition for satellite TV and realize a more 
competitive marketplace is by taking advantage of the extraordinary 
efficiencies and synergies created by combining EchoStar and Hughes. 
Currently, the two satellite TV providers broadcast approximately 200 
of the same entertainment, news and sports channels, and with the 
advent of must carry rules on Jan. 1, 2002, both satellite TV companies 
will broadcast over 300 more of the same local and national TV channels 
for a total of over 500 duplicated channels. In other words, 
approximately 90% of the DBS spectrum will be wastefully repeated. 
These redundant transmissions are an inefficient use of limited, scarce 
satellite spectrum, and they prevent satellite TV providers from 
delivering other much needed content, such as local TV channels into 
more local areas or more high definition TV channels.
2.) Benefits of Proposed Merger
    By eliminating this duplication, we will be able to offer hundreds 
of new channels of attractive content such as high definition 
television and local channels in more markets. This extraordinary 
increase in capacity will permit satellite TV to offer a wide variety 
of additional programming and services to consumers, including these 
benefits:

a) The new EchoStar will expand local network television coverage from 
        the current 42 markets the companies serve to over 100 markets, 
        with local TV channels offered in at least one city in each 
        state, including Alaska and Hawaii. This will provide local TV 
        service to about 85% of U.S. households. This increase in the 
        ability to serve local communities will eliminate the reason 
        that consumers cite most often when deciding not to subscribe 
        to satellite TV--the inability to receive their local broadcast 
        channels.
b) The efficiencies from the merger will also allow the new EchoStar to 
        offer more bandwidth-intensive HDTV programming with a minimum 
        of 12 different channels. By offering a critical mass of HDTV 
        programming, satellite TV could help jumpstart HDTV adoption, 
        which has stagnated due to lack of the necessary bandwidth and 
        the slow conversion by broadcasters and cable operators to this 
        new medium. Our commitment to HDTV will provide incentives for 
        programmers to increase HDTV programming, for manufacturers to 
        market their HDTV sets more aggressively, for consumers to buy 
        more HDTV sets, and for competitors like cable and network 
        broadcasters to upgrade their HDTV capabilities, all resulting 
        in lower prices for equipment and more HDTV channel choices for 
        consumers.
c) As a result of the merger, the efficiencies that are created will 
        make more bandwidth available for additional pay-per-view 
        services as well as the necessary bandwidth and equipment 
        development needed to compete against cable's new video-on-
        demand technologies.
d) Provide increased educational programming such as tele-medicine for 
        rural areas, as well as more specialty and foreign-language 
        programming,
e) The additional bandwidth will also allow the development of new and 
        expanded interactive services such as localized weather and 
        traffic, detailed point-and-click news and sports information, 
        and television commerce shopping.
f) The merger will also allow the new company to expedite the 
        introduction of affordable, always-on, two-way, high-speed 
        satellite Internet access.
    The enhanced product offerings enabled by the merger will make 
satellite TV a much stronger competitor to cable and will force cable 
to respond in a similar manner. The American consumer ultimately wins 
by having a better satellite TV competitor to cable in the MVPD 
landscape.
    iv. program access rules brought real competition and should be 
                       preserved and strengthened
    The program access statute that Congress enacted in 1992 is a true 
policy success story. No single governmental act is more responsible 
for the success of the satellite TV industry and for MVPD competition 
generally. We cannot offer consumers a competitive product if we do not 
carry the programming that consumers expect, including cable-owned 
networks. In fact, as was the case when Congress enacted the statute in 
1992, many of today's highest rated program networks are owned in part 
or wholly by cable operators, including HBO, TNT, and CNN. By 
prohibiting cable-owned programmers from refusing to sell their product 
to us, the program access law opened the door to meaningful competition 
against cable.
    Congress gave the FCC the ability to either let this prohibition on 
exclusive contracts sunset next year or to extend it. As we told the 
FCC yesterday in our comments concerning this proceeding, we believe 
that the prohibition on exclusivity is as important today as it was 
when Congress first enacted it. First, the fully competitive market 
that Congress envisioned stemming from the program access rules has not 
yet materialized. Cable remains the dominant platform and has an 
incentive to withhold programming from companies that take away its 
subscribers. We see this most clearly in the regional sports networks, 
which I will describe in more detail, where cable refuses to sell 
popular programming to satellite TV companies, giving up a huge 
potential source of revenue in order to hobble a competitor.
    Second, the ability of satellite TV to compete would be severely 
undermined by exclusive deals covering popular networks that are 
vertically integrated with cable operators and exclusive deals covering 
relatively minor networks. In both instances, consumers would be left 
with less than the full complement of channels. One of our industry's 
primary competitive advantages is that of price--offering the American 
consumer the same or more for less money. That is the competitive 
pressure Congress sought to impose on the cable industry. However, if 
we are forced to offer fewer channels for less money, our ability to 
effectively compete against cable evaporates.
    Third, EchoStar is not vertically integrated with program 
producers. Because we do not own or create the programming content, we 
are totally dependent on an open and competitive programming market to 
serve our customers.
    Fourth, even after EchoStar and Hughes combine, the dominant and 
entrenched cable industry collectively will still control about 80% of 
the MVPD market and will be able to invest jointly in programming 
ventures much more heavily than the new EchoStar ever could. Such 
programming, if allowed to be a cable exclusive, would be leveraged to 
the disadvantage of satellite TV providers and consumers.
    Cable's activities in the regional sports programming context not 
only shine light on how far cable is willing to go to undermine 
satellite TV competition, but they expose a shortcoming in the existing 
law that Congress and the FCC should address. Specifically, the 1992 
statute defined the relevant programming as ``satellite cable 
programming,'' meaning that the cable operator receives programming at 
the headend via satellite. That was an accurate technological 
description in 1992, but today with the abundance of terrestrial fiber, 
many cable operators are delivering programming to the headend 
terrestrially, thereby avoiding the program access rules.
    Comcast, for example, is a dominant cable company that owns two-
thirds of the Philadelphia Flyers, the Philadelphia 76ers, and holds a 
stake in the Philadelphia Phillies while also holding investments in 
the teams' arenas and other related interests. In 1997, it launched its 
own sports network called Comcast SportsNet, which owns the rights to 
the televised games of each of these popular sports teams. Comcast 
refuses to make this wildly popular sports network available to its 
competitors in the Philadelphia market, using the program access 
loophole as protection.
    Cablevision, which provides service in the New York area, owns the 
New York Rangers, Knicks, and their TV home, the Madison Square Garden 
Network. In early 1999, Cablevision revised its sports programming 
distribution system from satellite to terrestrial so as to preclude 
RCN's carriage of their sports network. Last year, RCN filed a 
complaint against Cablevision because Cablevision would not provide 
access to the Madison Square Garden Network, claiming a terrestrial 
exception from the program access rules.
    EchoStar's inability to provide local team sports programming has a 
direct effect on our ability to compete in these markets. Just as we 
would not be able to compete effectively with cable nationwide if we 
did not offer HBO, we cannot compete effectively in Philadelphia if we 
do not carry the Flyers or 76ers.
    Congress and the FCC can address these anomalies in the competitive 
landscape by closing the terrestrial loophole and extending program 
access rules. Technology has changed since 1992 and the law should 
reflect that. The means of delivering programming should not determine 
whether the MVPD market is competitive.
 v. new entrants should be permitted to enter the mvpd market provided 
                they do not cause spectrum interference
    According to the FCC, only 3.4 percent of rural American homes are 
not passed by cable,5 constituting a small amount of homes. 
While the majority of these homes will have a choice between video 
services provided by the National Rural Telecommunications Cooperative 
(NRTC) and their affiliates, the new EchoStar or other MVPD providers 
such as the C-Band providers, we are sensitive to the concern that 
competition in rural America could potentially be reduced. That is why 
we have committed to nationwide pricing where all consumers, including 
rural Americans, will get the same price benefits from the intense 
competition occurring in urban areas. We offer nationwide pricing today 
and we're willing to commit to this going forward so that rural areas 
will get the advantages of competitive prices occurring in urban areas 
for more entertainment channels, high definition television, greater 
access to local TV channels, specialty and educational channels and 
high speed Internet.
---------------------------------------------------------------------------
    \5\ Source for number of rural consumers unserved by cable: FCC's 
Annual Assessment of the Status of Competition in the Market for the 
Delivery of Video Programming, Footnote #80, December 1. Assessment 
released January 2001.
---------------------------------------------------------------------------
1. The New EchoStar Will Compete Against Many Others
    The new company will also continue to honor DirecTV's contract with 
the NRTC, which gives the co-op and its corporate partner, Pegasus, the 
ability to offer competitive DBS service from a single orbital position 
that covers the entire country. This will not change with the merger. 
In addition, consumers will be able to purchase service from DISH 
Network, which will likely continue to offer its brand name in these 
regions, and from its established network of dealers who have proven 
extremely effective at serving rural America. It is our hope that 
Pegasus and NRTC will continue to sell their product and continue to be 
aggressive in their territories as a competitive participant in the 
MVPD marketplace.
    There will be other competitors in this region besides the NRTC. C-
Band, which offers a new digital service driven by Motorola, is strong 
in rural America. Cablevision and Dominion are video providers who also 
have FCC licenses to offer satellite TV service and have announced 
plans to expand their MVPD services in the near future. Proposed 
terrestrial and other wireless spectrum technologies, such as MMDS and 
those proposed by Northpoint Technologies, will also offer additional 
options for rural customers. EchoStar is not opposed to any of these 
technologies or similar competitors. However, like any other wireless 
licensee in other spectrum frequencies, such as cellular services or 
digital services offered by network broadcasters, we are opposed to 
having interference from other providers within the same spectrum in 
which we operate.
2. Interference of Satellite TV Signals Hurts Competition
    While EchoStar does not oppose the emergence of new competitors in 
the MVPD market, we are opposing the proposal by Northpoint, one of the 
companies seeking to enter the multichannel delivery market by using 
``wireless cable technologies'' because NorthPoint's current proposal 
would interfere with the satellite reception of our established 
satellite TV customers. EchoStar's concerns about the electrical 
interference that Northpoint would cause to our customers' satellite TV 
signals have been confirmed by an independent arbiter: after conducting 
tests required by Congress, the MITRE Corporation has concluded that 
such a new service would threaten ``significant interference'' for the 
satellite TV service, and that the benefit of any mitigation methods 
must be weighed against their cost as well as the interference that 
would remain.6 In the spirit of constructiveness, not 
obstruction, EchoStar has recently filed with the FCC a petition 
suggesting alternative frequencies, including the ``CARS'' 
frequencies--which are ``next-door neighbors'' to satellite TV 
frequencies as well as the MMDS frequencies, in an effort to find a 
suitable home for Northpoint's plan.
---------------------------------------------------------------------------
    \6\ Source: The MITRE Technical Report: Analysis of Potential MVDDS 
Interference to DBS in the 12.2-12.7 GHz band. April 2001.
---------------------------------------------------------------------------
    The FCC has identified the CARS spectrum as a suitable place to 
increase spectrum usage. CARS spectrum is not currently used to serve 
consumers directly, eliminating any major interference concerns. Like 
the satellite TV spectrum, the CARS spectrum can be used to deliver 
MVPD service. Also similar to satellite TV spectrum, the CARS spectrum 
is used for point-to-point and point-to-multipoint technology, 
suggesting that a directional service like that proposed by Northpoint 
would be feasible on a spectrum-sharing basis. Finally, like satellite 
TV, CARS offers a full 500 MHz of spectrum, meeting one of the 
conditions sought by Northpoint.
    With our filing yesterday concerning this proposed solution, we 
hope that Congress will see that we are not opposed to competition. 
Rather, we welcome the competition, so long as it does not interfere 
with satellite TV service for approximately 15 million Americans 
receiving service from the new EchoStar.
                             vi. conclusion
    Competition in the MVPD marketplace is developing but will only 
reach fruition if satellite TV is allowed to become a truly effective 
competitor to the dominant and entrenched cable companies. Through the 
proposed combination of EchoStar and Hughes, a continued ban on 
exclusive agreements between cable-owned programmers and the cable 
operators, an improved program access rule addressing the terrestrial 
loophole, and a reasonable approach to allowing new MVPD competitors 
without damaging existing ones, Congress can help make truly effective 
competition a reality and provide new product benefits to the American 
consumer.
    On behalf of EchoStar, I thank you for allowing us to testify here 
about our proposed merger and other video competition issues, and we 
look forward to working closely with Congress and the appropriate 
governmental agencies in their reviews.
    I am willing to answer any questions.

    Mr. Upton. Well, thank you all. Thank you all very much.
    At this point we are going to proceed. My suspicion is we 
may have two rounds of questions based on the number of members 
right here, and I would note that we have other ongoing 
committee business as well. I think we will go to 5 minutes per 
member, and we will see where that takes us at the end.
    Thank you again for your testimony, and I wrote down a 
number of questions that I have for all of you. Let me just 
tell you where my perspective is, and I say this as someone who 
has been home every week certainly since September 11th, and in 
this capacity I have been able to witness much of the 
telecommunication industry not only in my district, but around 
the country as well.
    And I am pleased where they have gone in terms of 
technology and what is available in people's homes and 
businesses. There is a disparity between a good number of parts 
of the country in terms of what is here and what may be there. 
As I look at this proposed deal, I would have to say that I am 
thinking about the consumer because I want the consumer to have 
HDTV. I want the consumer to have access to high speed Internet 
access or broadband.
    I know in my own household the number of channels that are 
available, whether it's my own kids at age 10 and 14, my wife, 
or myself. I look at the advances that are coming with 
interactive TV. I am excited about the technology changes that 
we have seen, and I also know as a supporter of must carry, we 
need to have local broadcast channels carried in local markets. 
This is very important.
    Mr. Ergen and Mr. Hartenstein, when you talk about 
providing local channels on your services, does that mean that, 
as an example, in my home county in Michigan, if I had a decent 
antenna, I could pick up an affiliate of CBS and ABC, NBC and 
an affiliate from both Chicago, South Bend, and maybe 
Kalamazoo, and Grand Rapids.
    As you provide local stations on your network, how do you 
pick and choose between what I can get over the antenna versus 
what you count as local?
    Mr. Hartenstein. We are very specifically limited as 
satellite operators. Depending on where you live as to what 
local stations we can deliver based on where you live. Those 
are DMAs, designated and specified, and have the purview of the 
rights through the broadcasters. I can't tell you exactly what 
you might also pick up, if it might be Kalamazoo, if it might 
be another station with an off air antenna. That would vary 
from almost house to house.
    If you life in the Chicago defined area, we would be able 
and only able to deliver the Chicago local stations,a nd that's 
what, in fact, we would do and will do in 26 days from now in 
addition to the ones that we're delivering today.
    Mr. Upton. Well, how do you all answer the charge that Mr. 
Fiorile makes? That is you say that if the merger comes about 
you are going to provide local to local in at least 100 
markets, perhaps the technology to go the full route. How do we 
believe you in saying that when, in fact, as Mr. Fiorile 
indicated in his testimony the challenge that has happened in 
the court is you have tried to undermine that in those specific 
cases where you provide local broadcasting now?
    How is that a guarantee? When you say you are going to 
provide local to local, there is a very compelling argument in 
terms of how the deal ought to proceed if, in fact, you are 
able to deliver that. But, if, in fact, the track record shows 
that you have challenged it in court and you have tried to 
undermine your obligations now, how is it that we would take it 
to the next step to believe it will, in fact, come about?
    Mr. Hartenstein. Our point was this. When SHVIA came about 
in 1999, and members of your committee were key in bringing 
that about, we in general supported the passage of it, although 
we did not agree with all of the terms. We were very clear that 
we did not support the provision in the bill, such as must 
carry, because we think it is (a) an infringement on our First 
Amendment rights, and also it prevents us from serving more 
markets.
    As Mr. Ergen indicated, we would under the strictest of 
interpretations of that have to replicate every Home Shopping 
channel in every market that we serve.
    Mr. Upton. We can understand why people do not want 30.
    Mr. Hartenstein. Right, and we stand prepared today and 
have launched the facilities at considerable expense and have 
others under construction as has EchoStar to provide satellites 
to be compliant with that. Our continuation of our action 
through the courts is to challenge that provision. We will 
abide by that.
    Mr. Upton. I am one of those non-lawyers in the room.
    Mr. Hartenstein. So am I.
    Mr. Upton. So is what you are saying that your deal is not 
to provide 30 Home Shopping channel stations coming in, but in 
fact, to provide the local ABC, the NBC, the major affiliates 
within the region? Those you are absolutely in favor of having 
carried on your new system.
    Mr. Hartenstein. Absolutely.
    Mr. Upton. Without the redundancy of a number of other 
stations that, in fact, have exactly the same program.
    Mr. Hartenstein. Exactly.
    Mr. Ergen. I might just add, I think, and I am surprised 
the broadcasters are against this because when we put our 
company is launching two high powered satellites, we have spent 
over $500 million to do it, and so has DIRECTV, to comply with 
must carry. In doing that, we still believe we can get to these 
100 markets or maybe a few more, and why the broadcasters would 
be against 500, on the one hand, they are talking about must 
carry and attacking us. On the other hand, they are denying 500 
of their members' the ability to go up on satellite and have 
their service go into homes.
    And it does include all of the broadcast networks. In fact, 
it covers all high powered stations today. We do think the law 
has some constitutional challenge. I noticed that broadcasters, 
cable companies, for example, have challenged the ownership cap 
limits. It happens in business all the time. That is why we 
have three branches of government.
    But we will abide by the law as the judiciary, you know.
    Mr. Upton. Let me just ask, and I think this merits a 
little discussion. So with the prerogative of the chairman, I 
am going to allow the time to stop for a moment.
    Take that time keeper at Michigan State, a lesson from 
them.
    Pegasus claims in their testimony that you have got the 
capacity already to provide. You have the spectrum space; you 
have the capability to provide all of the local stations now. 
Is that true?
    Mr. Ergen. I think Pegasus is referring to an engineering 
study done by a gentleman who did an engineering study that 
basically failed to take into consideration that we would have 
to change out all of our systems to do so and uses some 
advanced technology that we do not believe is ready for the 
market yet.
    Believe me. If I could build a satellite that would 
broadcast every station in America, I would do it as a business 
person, but engineers sometimes get caught up in details of 
with enough money and enough time you can do anything.
    I mean, we would put people on the moon that could commute 
to work, but it would be a long community. You know, we do not 
do that because it is not practical, and I think that study was 
just not a practical study.
    Mr. Upton. Mr. Pagon, do you want to comment on that?
    Mr. Ergen. By the way, I might mention that Pegasus does 
have some orbital spectrum and K band, and if all of this 
technology they agree with, they could certainly build their 
own satellites today to do exactly that.
    I have no seen them start construction of that like we have 
in the past.
    Mr. Pagon. The study to which Mr. Ergen refers is on the 
record in the must carry litigation in Federal court. The 
Department of Justice's own expert witness is the party in 
question. He is a very well respected and longstanding expert 
in the satellite arena, and all that he reflected was that if 
you built one spot beam satellite appropriately with contiguous 
beams covering the contiguous 48 States with as few as 12 
frequencies, you could provide ubiquitous coverage. You could 
provide coverage for all 210 television markets, not just 100, 
within the constraints of the existing technologies, MPEG-2 
technologies.
    If, in fact, you were to do so in the context of MPEG-4, 
which is our current technology--MPEG-2 is a technology which 
exists in the DIRECTV and DISH Network systems today, but it is 
about 10 years old--you could do with fewer frequencies, 
perhaps half as many frequencies.
    So in terms of the costs to do so, it would require 
significant expenditure for a new satellite, but a new 
satellite would cost $250 or $300 million perhaps. The 
companies have proposed in their mergers that they are going to 
spend as much as $3 to $5 billion in changing out equipment 
over the next 5 years as a result of conforming their 
technologies together. So $250 or $300 million seems a 
relatively modest expenditure to extend local-to-local to all 
television markets.
    Mr. Upton. Thank you, sir.
    Mr. Abbruzzese. Mr. Chairman, may I just add something 
quickly, if I might? There are 16 to 1,800 local broadcasters 
in the United States. So carrying 500, while it is impressive, 
there are still close to 1,000 that will be left out in the 
cold under the current proposal.
    What WSNet does by working with local operators, primarily 
small local cable operators, is we facilitate them providing 
more channels so that they can compete against Charlie Ergen 
and Eddy Hartenstein, but also it allows them to continue to 
carry the local programming services and deliver it to their 
neighborhoods.
    And in Kalamazoo, Michigan, WSNet, what it would do is 
providing currently pre-digitized programming to services and 
private cable operators in Kalamazoo today, and it affords them 
to also have enough space to carry the local programming 
services. So God help us if there was some tragedy or weather 
tragedy about to occur in Kalamazoo. The local emergency 
broadcasting system would be heard by everybody where it would 
not unless it hit Chicago first over EchoStar, and the same 
would occur down in Fancy Gap, Virginia where Congressman 
Boucher is from.
    Mr. Boucher. Boucher.
    Mr. Abbruzzese. Boucher. Sorry. Excuse me. It is a very 
complicated name. I apologize.
    But we have a relationship down there where the local 
channels are carried, again, and the local programming is 
carried by the cable company there who has expanded service 
offered through WSNet.
    So, I mean, there is an answer here for local programming, 
and it exists today in the marketplace if we just do not let 
these entities get squashed by this giant that we are talking 
about creating today.
    So there is an answer. It does not require spot beams. It 
does not require a lot of new things.
    Mr. Upton. I know my time has expired. We will come back to 
this, but I want to yield to Mr. Boucher.
    Mr. Boucher. Well, thank you very much, Mr. Chairman, and I 
want to say thank you to these witnesses for enlightening us 
today.
    Mr. Ergen, I am intrigued by the possibility that this 
merger might enable EchoStar to offer a more robust and durable 
and perhaps less expensively priced, high speed Internet access 
service, and that would be a tremendous advance for people in 
rural America.
    There are tens of millions of Americans who do not have any 
broadband opportunity. They include the 3.5 million homes that 
are not passed by cable. Other homeowners live in a place where 
the cable company offers a service, but it does not offer cable 
modem service, and chances are that those same residents also 
would not have access to DSL. They are in a rural area 
typically and well beyond the DSL research of the local 
telephone company.
    So tens of millions of Americans do not have a broadband 
opportunity at all.
    I might note that the heads of the major technology 
companies in the United States from Bill Gates to Andy Grove 
and a number of others have recently said that a revival of the 
technology sector in our economy depends upon providing 
broadband to homes and businesses throughout the Nation and 
that the best thing that could happen for a spark of the 
technology sector, which in turn could spark an American 
economic revival, would be an aggressive and sustained 
deployment of broadband.
    And perhaps you are bringing us a partial answer to that 
and a way that we could make that happen. Let me ask you how 
the merger with DIRECTV would enable EchoStar to offer that 
more durable broadband service, and in particular, how does it 
enable you to offer that service in a way that it is priced 
comparatively to the cable modem service and to DSL service?
    Mr. Ergen. Okay. Well, again, it is all about economies of 
scale. I agree with you that broadband is not in rural America 
and it is hard for small communities of less than 10,000 to 
bring jobs to those communities or to encourage businesses to 
come without broad band.
    I saw a recent study where only 5 percent of communities 
under 10,000 have any kind of high speed access. We can do that 
really overnight after we build and launch new generations of 
satellites to do that.
    Hughes is a leader in that technology. We have done some 
things with that technology. Both of us are looking at billions 
of projects or billions of dollars. Yet we spread that in non-
standard systems across different subscriber bases, and what we 
believe needs to be done given the state of the capital markets 
today where the money is dried up and all of the broadband 
companies that have tried to do satellite have yet to fulfill 
that dream, is to combine those resources and spread that fixed 
cost at a cost or subscriber basis of 15 million.
    That essentially cuts the cost in half from each company 
individually doing it and puts it on a standard plat form. That 
allows us to be competitive in rural America and give somebody 
in rural America exactly the same opportunity of somebody in 
Boston.
    But more importantly, it also allows us to compete in the 
cities with a robust, two-way system, and I think that is 
critical. We are not in just the video business anymore. The 
cable industry has made great inroads and is clearly the leader 
in broadband today over phone companies and satellite.
    Mr. Boucher. Let me ask you the reverse side of that 
question. If this merger is not consummated, what will that do 
to your ability to become a viable broadband offeror and 
competitor with cable?
    Mr. Ergen. At least from our company's perspective I do not 
believe the capital is available in today's market to take the 
risk, and we have taken a lot of risk as a company, as people 
know, starting with the Chinese rocket back in 1996. So we are 
not averse to risk.
    But I do not think that we could take the risk to spend the 
several billion dollars to provide broadband to rural. I think 
we would have to partner up with the phone company. In some 
case, maybe we would have to sell to the phone company because 
that is really the only alternative we would have.
    And I am just a big believer in broadband as being the next 
thing that will bring efficiency and technology and 
productivity to America.
    Mr. Boucher. Mr. Phillips, just excuse me. I need to 
inquire of Mr. Ergen with regard to a couple of other matters. 
I will come to you in a second round.
    The other thing that I find so interesting about the 
prospects of this merger is that it will immediately more than 
double the number of local television markets that have local-
into-local services. That number is about 40 today. You have 
committed to move to 100 markets very shortly after the merger 
is consummated.
    My question is designed to give you an opportunity to 
respond to those who have said, ``But what about the other 110 
local markets?'' How should people in the other 110 local 
markets that still will not have local-into-local service view 
this merger, and what can you say to them in terms of how this 
merger improves the long term prospects for them to get this 
service also?
    Mr. Ergen. Well, first of all, I think the only hope that 
those people in the other 110 markets have is for this merger, 
and I just do not want to over promise this committee. I have 
been testifying for many years here now, and I believe when you 
look at the track record of what we have testified as a 
company, we have done each and every thing that we have said we 
were going to do.
    So that is why we have committed to 100 today. Our 
engineers are working together and seeing what we can do to get 
beyond that.
    The key is, the key is by putting this merger together we 
will end up in a standard system several years from now, and 
when you do that, there then are economies for other people to 
come in perhaps and use that same standard to go across the 
other 100 markets.
    For example, the rural loan guarantee that you and others 
have gotten through is a great thing because now that billion 
dollars in the loan guarantee would never be enough to replace 
all of the boxes out there that would need to be done to get in 
the standard. But because our company is going to do that at no 
charge to consumers because of the efficiencies of this merger, 
it will allow companies, perhaps like the NRTC or Pegasus, to 
go out and provide that service, and I am certain things can be 
done there. We certainly would look at it as a company as well.
    So I am cautiously optimistic that we ultimately will get 
to all of the market with this merger, but I do not want to 
over promise.
    Mr. Boucher. Thank you, Mr. Ergen.
    Thank you, Mr. Chairman.
    Mr. Upton. Mr. Terry.
    Mr. Terry. Thank you, Mr. Chairman.
    As I mentioned in my opening statement, my concern was not 
necessarily the macro, but the micro. The micro competition 
factors are in those areas that cable does not serve. Satellite 
becomes 100 percent of their access to the television.
    So focusing on those rural areas, the two companies 
combine, and you are now more efficient in eliminating the 
redundancies that Mr. Hartenstein had mentioned in his 
statement, and in the macro you are able to compete. You can go 
into the big cities, the New York Cities, the Chicagos, the 
Detroits, and the Omahas, and maybe even the Kalamazoos and 
compete in there against cable.
    So here is what my fear is, and I am going to ask Mr. Ergen 
this question. My fear is you become so competitive in those 
areas that you have to reduce your prices, have a subsidized 
price, in essence, in the urban areas to compete against cable 
that will then be transferred to the rural areas that have no 
remedy available to them, no other satellite competitors to go 
to to get a better price.
    Obviously as a consumer we focus on three things: you know, 
service. How often do you go off line? How often does the TV go 
off channels? Do you have what I want to watch? And price?
    So those outside the city limits, are they going to get 
stuck then paying a higher price for the quality of service and 
channels that you will provide in trying to compete in the 
urban areas? How do you insure those consumers that they will 
not get stuck with a bigger bill?
    Mr. Ergen. I think you have asked a great question, and I 
think the way that we have tried to be sensitive to that issue 
is to say that we would go to nationwide pricing. We will 
commit to nationwide pricing so that those people in rural 
America get exactly the same price that we charge in the most 
competitive city, for a Boston where you have an RCN as an over 
builder. You have the Cablevision cable company there, and of 
course, you would have DIRECTV there. That would be a very 
competitive market.
    Somebody in Nebraska would get that exact same price, but 
in addition to that, and here is where they are going to be 
better off, particularly when you go home over Christmas and 
talk to them, they are going to have the ability to get HDTV. 
Without this merger, they are not going to get a lot of HDTV.
    They are going to have the ability to get video on demand 
from satellite. Probably not going to have that without this 
merger. And they are going to have the ability to get broadband 
at a low price, always on connection without using a phone line 
some day.
    So those are things they are going to get with this merger, 
and we will give them the benefit of committing to nationwide 
pricing. There may be other remedies that people have. We are 
open to suggestion if the committee or regulatory agencies have 
a different mechanism for doing that.
    But I would point out that after 6 years in business on the 
EchoStar side and, I think, 8 years now, almost 7 years for a 
DIRECTV, we have always done that. Our prices are the same no 
matter where you go, just like America On Line has the same 
price across the Nation.
    Mr. Terry. Well, I do think your nationwide pricing plan 
does answer that question. Though how do I assure my 
constituents in Valley Nebraska in my district or go outside of 
Douglas County to any small community in Nebraska? How do I 
assure them that their community will be part of your 
nationwide pricing plan? And how do I assure them that 2 years 
after the merger is approved that competition does not force 
you to a different plan?
    Mr. Ergen. Yes, I am not the legal expert here, but my 
understanding is that the regulatory agencies have entered into 
consent decrees to protect consumers. So you are not just 
taking my word for it or Eddy's word for it, and we would 
certainly consider a consent decree that would be long term in 
nature, binding, and protect that very piece of America that is 
so important to you.
    Mr. Terry. Do you feel that the nationwide plan resolves 
any of the antitrust issues that some of us may have concerns 
about?
    Mr. Ergen. Well, again, I am not a lawyer, but I believe 
you have to look at the merger in the context of the 
marketplace. We are in high technology business. We are not 
certainly in the baby food business. We are in a very high 
technology business. Our competition owns 80 percent of the 
markets moving 90 miles an hour. We have to catch up. We have 
to invest capital.
    And I think when we look at the broad context and the 
benefits and the efficiencies, I believe the antitrust law 
takes that into consideration when they review a merger. And I 
am certainly not an expert, but I believe the people at 
Department of Justice are, and I think when they go through and 
look at the facts that they will some to the conclusion that 
this does pass all antitrust muster.
    Mr. Terry. Mr. Chairman, I know my time is up. If I can ask 
just one quick follow-up question, when we talk about 
nationwide pricing, earlier I said as a consumer you look at 
service, startup costs, channels, all of those type of things. 
So when we talk about nationwide pricing, what do you mean by 
that?
    Does that mean, you know, the up front cost to the 
consumer? Does it include equipment, installation, those type 
of things as well?
    Mr. Ergen. Yes, I think it needs to cover not only the cost 
of your service, which in our case perhaps we have our top 50 
channels for $21 nationwide, but it would include the price of 
our set top box, which today we sell. If you lease it from us, 
it is $49 up front first month. It would include free 
installation, which we do on a nationwide basis, and again, we 
do that today. This is not a departure because we have huge 
fixed costs in our space. We have very low marginal costs. It 
costs is very little to get the next subscriber. So we have to 
go get subscribers from the incumbent cable company. We have to 
have low cost across the Nation from our billing systems and so 
forth, and so this also then protects customers and includes a 
wide range of services.
    Mr. Terry. Thank you.
    Mr. Upton. Mr. Shimkus.
    Mr. Shimkus. So many questions, so little time.
    It is great to have you all here. You bring up a lot of 
compelling arguments and counterpoints that I am finding very 
interesting.
    I would just say, to begin with, I find it difficult when 
people in other industries try to preach to another industry 
how to run their business. I know it is very difficult to you 
to operate in competitive markets, whether that is cable or 
that is free over-the-air broadcasting or whether that is 
direct satellite.
    And those who put up capital to try to do it should be 
admired and thanked, and those who have not put up the capital 
to do what they are doing and may be doing something else ought 
to be admired, but that is what makes this world and this 
country great.
    And then we have the conflict of when the paths cross and 
we get into the competitive market, but we want a lot of things 
that the promises that are being made by this proposed merger. 
You know, we do want broadband access. We do want, I think, 
nationwide pricing if it accomplishes what you are entailing to 
my colleague from Nebraska. It would be beneficial.
    Who could argue that if there is no competition currently 
in rural America and there is no cable that they have the same 
competitive price as if they were in the St. Louis metropolitan 
market?
    High definition TV, which we are all supporting and offers 
great benefits.
    Let me ask to Mr. Hartenstein and Mr. Ergen: why can't the 
competition that you are now fighting against each other, why 
can that not bring the services that you are promising with the 
merger?
    Mr. Hartenstein. If you look at how we started in the 
business, it was really sort of upside down from how our 
competition did. The first thing we did when we launched our 
first satellite is put up the first hundred or so services that 
we could deliver, and those are nationwide services, the likes 
of ESPN, the Disney channel and some of the others, HBO and a 
few more.
    It wasn't until only 2 years ago when certain members of 
this committee helped author the SHVIA Act that allowed us to 
really compete and bring the most watched product and most 
watched channels in anyone's home, namely, the local stations, 
the network affiliates and the independent television stations.
    So we had to then add on with a fixed amount of capacity 
that we have, we at DIRECTV and separately Charlie at EchoStar, 
the local channels into as many markets as we could.
    The best that we're doing today, notwithstanding 
theoretical expert postulations as to what might happen, the 
best we can do in Hughes and DIRECTV comes from a long 
heritage, as Congressman Harman indicated, developing the first 
satellites; the best we could do is deliver a few local 
channels into a few markets, and obviously from an economic 
perspective, we picked the most populated ones first.
    Mr. Shimkus. Well, let me, and I understand. I only have 5 
minutes.
    Mr. Hartenstein. Okay.
    Mr. Shimkus. And I want to keep the responses relatively 
short.
    And I understand that. And there is going to be a 
convergence of the ability to do this and more capital or the 
ability to get capital to get this new technology, but we would 
hope the competitive market would bring these services.
    And actually, aren't you providing broadband direct 
satellite in the West right now?
    Mr. Ergen. We do provide some experimental broadband 
service today. It has not been economical. We have to charge 
about $1,000 for the equipment with installation, and we have 
to charge about $70 a month, and we lose a lot of money on it. 
We believe that we have got to get the cost of that system to 
the consumers down to a couple hundred dollars, about the 
prices of a satellite system, and we have got to get the 
service down to the national average of about $50 a month.
    To do that we have got to put the companies together and 
invest several billion dollars, and both to Hughes' credit and 
EchoStar's credit, we're both willing to do that going forward 
with this merger.
    It is a risky proposition. I am not sure our shareholders 
are particularly happy about it, but we feel strongly about it.
    Mr. Shimkus. Okay. Let me follow up on the discussion on 
local into local, and I think you probably have consensus here 
that there are services that need to be broadcast and there are 
some that may not be as arguable.
    You know, I will talk for the local broadcasters, and I 
represent currently about 19 counties in the State of Illinois 
and possibly in the next cycle over 30. So I have communities 
of Quincy, Springfield, Decatur, Harrisburg, Evansville, 
Indiana, Terra Haute, Indiana, Paducah, Kentucky. They probably 
do not make the cut.
    Mr. Hartenstein. Actually I think some of them do. Some of 
them do not. We have to look at the best possible engineering 
solution we can give with the combined spectrum as quickly as 
we can roll that out and consolidate it, taking into account 
all of the real world technologies.
    But, yes, we are going to do as many as we can, and if we 
do get some relief on must carry, then there is just that many 
more that we could deliver.
    Mr. Shimkus. Who is from the broadcast? Do we have someone 
on the table?
    Address the high definition TV and the proposals that could 
occur to help offset the cost and the sharing spectrums. No one 
has really addressed the transition to high definition TV. And 
does this help or hinder that?
    Mr. Fiorile. Well, I find it interesting to hear one of the 
things a merger will do will advance high definition 
television. There are currently over 225 stations on the air 
covering about 75 percent of America. To the best of my 
knowledge, none of them are carried by either EchoStar or 
DIRECTV.
    The fact the merger will double the amount of local markets 
or almost triple the amount of local markets, up to 60 markets 
or up to 100 markets and not service the other 110 markets, I 
am confused as to how it is also going to deliver high 
definition television because there is not even enough room to 
cover the other half of the United States.
    You know, again, the record shows there are no, to the best 
of my knowledge, no high definition stations. We have two that 
have been on the air more than a year that are currently 
carried on DBS.
    Mr. Ergen. Yes, I would just like to state for the record 
that EchoStar does carry CBS, an owned and operated station out 
of New York and Los Angeles. We do carry it in the owned and 
operated station. CBS has worked very closely with us to get 
high definition television going forward.
    I might also mention that local broadcasters, while 
accusing us of being a monopoly, we have asked them when they 
do not broadcast the CBS station; we have asked them to let us 
bring it in via satellite, and we have been turned down by all 
of the affiliate groups, stations, across the country. Only the 
CBS corporate owned and operated stations in about 15 markets 
allow us to do that.
    And we are very appreciative of that, that they have taken 
the lead in advancing the technology.
    Mr. Shimkus. And I have consumed much more than my time. I 
will just yield back.
    We understand the turf wars. We have dealt with them over 
many, many years, and I yield back, Mr. Chairman.
    Mr. Upton. Actually, we were hoping to broadcast some of 
the Cub games down there. There are some St. Louis fans down 
there.
    Mr. Shimkus. No one would watch. We do not watch minor 
league ball. We just watch major league ball.
    Mr. Upton. The gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Ergen, I was interested to hear what EchoStar is doing 
with HDTV, and is CBS, the national affiliate in New York and 
L.A., the only two that you are providing?
    Mr. Ergen. No, we also provide a full-time channel of HBO 
and a full-time channel of Showtime. Occasionally when 
Hollywood will release a movie in HDTV and DIRECTV--I will let 
Eddy mention what you broadcast.
    Mr. Hartenstein. We have an HBO feed of high definition and 
an HDNet.
    We are looking at this as members of also the Consumer 
Electronics Association to try to jump start and get through 
the chicken and egg process, to make about a dozen nationwide 
high definition channels available. The content is out there. 
No, it is not the local affiliates, but we think this would be 
a tremendous boon for the industry and the economy and the 
broadcasters to help bring a dozen channels of high definition 
content to every home in America.
    Mr. Green. Mr. Ergen, let me follow up. I have read in your 
testimony that your company is planning to make a major push in 
the carriage of local into local broadcast if the proposed 
merger is approved; is that correct?
    Mr. Ergen. That is correct.
    Mr. Green. I would like to know what hurdles your company 
has been experiencing that currently limits you to only 
offering limited local-into-local service. In particular, I am 
interested to know if you are currently utilizing all of your 
Ka-Band satellite slots that are not Y.
    In addition, I would like to know how long you have owned 
those unused Ka-Band slots and what your future plans are for 
them.
    Mr. Ergen. Okay. The limitations and the barriers to doing 
more local cities today is the absence of a spectrum. Our 
satellites are full. So we do not have spectrum to do it.
    Second, those satellites were designed before technologies, 
such as spot beaming, were available to increase our capacity.
    And, third, the burdensome must carry law requires us to 
carry every channel in a market no matter how many times it is 
redundant, such as Home Shopping.
    So those are the factors. We have spent $500 million to 
build and launch two new generation satellites to comply with 
must carry. It does not necessarily give us particularly more 
markets. We are hopeful we will get a few more beyond the 36 we 
carry today.
    As far as our Ka-Band slot, we have had that slot for 
several years. We have a satellite under construction with the 
Loral Space Corporation that is a Ka-Band satellite to launch. 
I believe in October of next year is when they are telling us 
it will be finished. It is an experimental Ka-Band satellite 
because the technology is relatively new, and we believe that 
it will take some work to make that economical.
    And so we started to sell out a couple of years ago and 
just took about 3 years to build it. So every slot that we have 
gotten as a company we have built or intend to build. We have 
not let any slots lay fallow as other companies have done.
    Mr. Schnog. Excuse me, Mr. Green.
    Mr. Hartenstein. Well, excuse me 1 second. Hughes 
Electronics also has a couple of Ka-Band slots for which 
satellites at the expense, including ground equipment, of over 
a billion dollars has under construction and will be launched 
in early 2003 for the so-called Spaceway Project.
    Mr. Schnog. Excuse me, Congressman Green. You know, I keep 
hearing about this must carry and how they have all of these 37 
Home Shopping networks, but my question as a local guy is what 
about Chemeketa College, which is out of Salem, Oregon, which 
provides local educational programming off premises to students 
who can't get into college or get in to the site?
    What about the college programming tat we send down to a 
casino in Grand Ronde, Oregon so that people can go in there 
and learn because they cannot make the trip to Portland?
    I mean, those kinds of things, the local broadcaster in 
Salem who is not in that Portland market, you know, these guys, 
they want to cherry pick off the ABC, the NBC, the CBS in 
Portland, but they do not want to bring the local programming 
that is important to our communities.
    You know, we are talking about are we going to bring these 
in and how come they do not want to put them on. Mr. Upton 
asked before why do they not do that. Well, Chairman, I will 
tell you why they do not want to do it. It does not make them 
any money. It is all about the dollars.
    You know, I keep hearing this there are 36 channels of Home 
Shopping. Well, there might be that out there, but what about 
Chemeketa College? What happens to them? They just get lost?
    Mr. Ergen. Well, I might add that we do carry it. If it 
complies with the must carry law, we will be carrying it 
January 1st, No. 1.
    And second, we are a national service. There is a 
difference between a local broadcaster who sends a signal out 
for 30 miles and a national broadcaster from a satellite that 
goes to every square inch. We carry about 30 channels of public 
service, which include almost all of them are educational 
channels, universities, high schools, public education, Head 
Start on a national basis for people for education.
    We do a great job of that, and we do that. Our company did 
that voluntarily. The SHVIA law did require us to do 4 percent, 
but we did a lot of that voluntarily, and we do not make money 
on that, but we are happy to do that as a public service.
    Mr. Green. Let me ask a follow-up though for the 
broadcasters. Mr. Fiorile, if you can answer the question, do 
you think that the proposed merger between EchoStar and 
DIRECTV, if it did not go through, could each company still 
comply with the must carry requirements under the Satellite 
Home Viewer Act?
    And more specifically, do you believe that each currently 
possess sufficient spectrum to comply when taking their Ka-Band 
into account, as well as the ability to use spot band 
technology?
    Mr. Fiorile. In answer to your first question, yes, I do 
believe there is enough capacity.
    And the second question, in particular, I am not an 
engineer. I cannot. To get into all of the particulars of that 
piece of the spectrum, I would be happy to get you that answer, 
but currently I believe there is room.
    Furthermore, you know, the comment that other CBS 
affiliates would not allow them to carry the signal, as Mr. 
Ergen suggested, they are a national program service. The 
interest of local broadcasters is in providing the local news 
and information that come with the local network affiliation: 
emergency weather, emergency broadcast systems. That is what we 
miss by providing service only to New York and Los Angeles.
    Mr. Green. Mr. Chairman, I know I am out of time, and I 
agree. I have a station in Houston that I would much rather 
have than the New York or the L.A. affiliate.
    Thank you, Mr. Chairman.
    The Cubs play well down in Texas as well.
    Mr. Upton. Mr. Ergen and Mr. Hartenstein, if this merger 
goes through, you have got millions of Americans that have one 
system and not the other. As you convert to one system, who is 
going to cover the cost of that conversion? And which one is it 
going to be or is it going to be a combined of the two? Will 
everyone get a new system?
    I mean, you have got encryption. You have got a whole 
number of things that have to be evaluated.
    Mr. Hartenstein. In the interest of time, we have not yet 
decided which platform and which aspects of which platform we 
will combine, but we made a pledge when we made this merger as 
part of the contractual agreement that no existing consumer 
would be disadvantaged or inconvenienced or incur any cost to 
get to a combined system. That is a cost that we would cover as 
combined, and I believe Chairman Dingell asked that and I am 
glad to answer that in the affirmative.
    Mr. Upton. Mr. Phillips, you indicate in your testimony, in 
regard to the nationwide pricing proposal that is on the table 
that there was no price guarantee, no enforcement, and no 
service quality type of issue.
    Let me just ask a quick question on service quality. You 
know, when we did the Cable Act a number of years ago, it was 
prompted in large part because of service problems which I have 
to say is a credit to the cable industry. They have addressed 
and addressed it well a number of complaints, the time that it 
takes for a consumer to get to a cable company to make sure 
that that complaint is registered and, in fact, make sure that 
that's fixed.
    What does your system have? If someone has got a problem, 
if they want to watch HBO, if they want to watch ESPN and there 
is some problem, how quickly are you able to address that in 
terms of service quality? What are your standards that you 
impose on yourself?
    Mr. Ergen. Well, first of all, I am going to point out that 
both DISH Network and DIRECTV are normally rates No. 1 and two 
in all the surveys for customer service, and I agree with you. 
Cable has made vast improvements, and they are a very tough 
competitor on customer services where they were not, you know, 
3 or 4 years ago.
    But one of the advantages of putting the companies together 
is that we both have service technicians in rural America that 
has to respond to you when you have a service call, that's 
awfully expensive for us obviously with one service technician 
we will now be able to respond to the platform.
    So we are committed to customer service. We will go out of 
business if we do not have it. The cable companies have made 
great progress there, but we are still rated at the high end of 
the scale on that, and we want to continue to do that.
    Mr. Upton. Mr. Hartenstein, that same answer?
    Mr. Hartenstein. Yes.
    Mr. Upton. Mr. Phillips, how do you judge the guarantee in 
terms of nationwide pricing?
    Mr. Phillips. I would like to respond to that, and I 
appreciate the opportunity.
    As a competitor today to EchoStar, who knows them in the 
marketplace, respects them for their competition and someone 
who helped DIRECTV by putting money up to launch the service, I 
would suggest to you that the inquiry you have had so far is 
not sufficient to really nail that point down.
    EchoStar and DIRECTV each have somewhat like 50 packages 
and a la carte services that they offer. So there are multiple 
offerings here that are made available to consumers, first of 
all.
    Second, the way that price varies is by coupons, by 
rebates, by products which are offered with the service to 
consumers.
    There are differences in service cost. He just indicated 
that today there are two sets of technicians. They each hire 
competing people in the field so that they can race to your 
home to get service.
    Their answer on everything today that you have heard is by 
getting more efficient having one is better. I would suggest to 
you that is not the case. By having one technician out there 
and one provider, you have got one place to go to get service, 
one place to go to get support.
    Now, to your point, when EchoStar goes to compete with 
Charter Communications, what they do is they offer a $100 
coupon or rebate, and the relevant question is: is that going 
to be available to rural customers?
    And I would suggest to you, no, there is no need to anymore 
because they do not have any other choice but to take EchoStar 
once the company merges with DIRECTV.
    What I have sat here and listened to today I am alarmed by 
because as a competitor in the marketplace the way the 
satellite industry developed where it is today is through 
competition. Mr. Ergen and Mr. EchoStar--excuse me. When we 
launched the business with DIRECTV, satellite equipment cost 
$700 to $800. That price did not come down until Mr. Ergen 
launched his service. Suddenly we all started subsidizing the 
cost of the equipment to make it cheaper.
    There was no local in the local service initially because 
DIRECTV chose not to offer it. It was only when Mr. Ergen 
offered local into local that DIRECTV responded and offered it. 
I am suggesting to you that if you remove the competition, the 
intense competition that exists in our satellite market today 
that you will leave one provider, and Mr. Ergen will get to 
choose what he provides, when he provides it, and who is going 
to service and take care of that system.
    So I think there is a lot of exploration here that needs to 
be done that we have not talked about today.
    Mr. Upton. Mr. Pagon.
    Mr. Pagon. Mr. Chairman, if I could just add or elaborate a 
little bit on the point that Mr. Phillips was making, one of 
the concerns that I would have, Mr. Ergen and Mr. Hartenstein 
have talked about the virtues of standardizing equipment as a 
recommendation for the merger going through, and that if that 
were to happen perhaps other providers in the future, NRTC, 
Pegasus or others might take the cost of putting up additional 
services like local-to-local that they are not doing and 
provide it over standard equipment.
    The defect with that, I think, is that to do that we would, 
of course, be dependent upon securing an agreement from the 
merged company to allow us to do that, and I would say from my 
personal experience I would have concern that that would happen 
on terms that would be attractive to consumers, and I can just 
give you one specific anecdotal experience that relates to 
local-to-local.
    Fifteen months ago I proposed to Mr. Hartenstein that if 
DIRECTV would allow us a license to combine programming from 
least Ku transponders with the program that they offered over 
their 101 satellites, we would undertake the cost and the 
expense of leasing transponders and to negotiate agreements 
with broadcasters to provide local-to-local in smaller markets 
beginning with markets like Burlington, which is the 92nd 
market, and Jackson, Mississippi, which I believe is the 85th 
market, and perhaps as many as ten or 20 more at no cost to 
DIRECTV and no risk to DIRECTV.
    And we have an exclusive right to provide DIRECTV in our 
territories. We do not unfortunately have a right to combine 
programming offered from other facilities with that 
programming. We need DIRECTV's agreement to allow us to do 
that. They declined to allow us to do that.
    So my point is very simple. There may be virtues in 
standardizing equipment, but if one company is the party that 
is the gatekeeper for delivery through standard equipment, you 
have the issue of competition versus monopoly and will that one 
company allow services to be offered and on what terms?
    Mr. Upton. Mr. Hartenstein, do you want to respond? Then I 
am going to yield to Mr. Boucher.
    Mr. Hartenstein. Sure. I guess it was about 18 months ago 
that the proposal that Mr. Pagon referred to was part of a 
larger context of issues that time probably does not permit 
here, but there is not a single service on the DIRECTV 
platforms across all of the satellites that DIRECTV has today 
that we have not made provision for the NRTC and its members 
and affiliates, which include Pegasus, to offer to their 
consumers, and we certainly would be willing to entertain that 
as part of an overall solution to this, to provide that 
continued competition going forward.
    Mr. Upton. Mr. Boucher.
    Mr. Boucher. Thank you very much, Mr. Chairman.
    Mr. Ergen, I was pleased to note the several comments that 
you have made during the course of our hearing today in which 
you have committed to have national pricing so that the price 
that is charged to all of your subscribers is the same on a 
nationwide basis, and that price would be the price that is set 
in the competitive market, where you are competing directly 
with cable, and so it is a market based rate.
    I would assume that extends not only to your basic package 
structure, but also to any special responses you might have to 
make to cable on a market-by-market basis as cable offers 
particular attractive packages within that market. You would 
then agree to match that offer or respond to it in some way and 
then carry the benefits of that response you've made into your 
entire national subscriber basis; is that correct?
    Mr. Ergen. Yes. We typically do that today, and I think 
that part of anything that we might talk about with the 
regulatory agencies would be to look at those kinds of things 
to make sure that you do, in fact, get the benefits in rural 
America of the most intense competition.
    In just relation to Mr. Pagon's comment, I think it is a 
great idea if somebody wants to put up the local channels in 
Jackson, Mississippi and we could not do it. You know, I think 
those are the kind of things that if you want to bring true 
competition, you have to get people to work together. You have 
to make some compromises, and I think that those are the kind 
of things that as a satellite industry we have to do to compete 
against the entrenched cable companies.
    Because, you know, a lot of people that have gone up 
against cable are not around today, and we don't want to be one 
of those companies.
    Mr. Boucher. Let me ask you about the non-price elements of 
the service that is provided to your customers and just get 
your response to these particular matters. I would assume that 
the same national programming would be available through your 
service everywhere in the United States, urban areas and rural 
areas alike.
    I would also assume that in response to the question raised 
by the chairman, every subscriber to EchoStar's service would 
have access to your 800 number through which technical support 
or other customer service could be provided.
    And I would also assume that the on premises installation 
of equipment to initial subscribers, which is competitively 
provided today by the retailers who are in competition with 
each other locally, would continue to be competitively provided 
and there would be no change in that.
    Could you simply respond to those three non-price elements 
of your service?
    Mr. Ergen. Well, I think all three of those would be true, 
and again, the reason is because you have a nationwide system, 
but, again, I have mentioned we have high fixed costs of 
several billion dollars. The only way we can grow as a 
business, the only way we can pay for the satellites is to 
continue to get new subscribers. We have to get them from cable 
because they have them.
    So that is why you are going to do all of those things on a 
nationwide basis.
    Mr. Boucher. And so I have correctly stated your intention 
with regard to those non-price elements of service?
    Mr. Ergen. Yes, you have I think more succinctly put, it is 
beyond just the price of your service or a la carte channels, 
which of course is easy to do.
    Mr. Boucher. Let me ask you, Mr. Ergen, and also Mr. 
Hartenstein about what might happen if this merger is not 
consummated. Your companies have been very successful. You have 
acquired on the order of 17 million customers. You have about 
17 percent of the national multi-channel video market, and that 
is a commendable performance for the period of time that both 
companies have been in business.
    But I also understand that at the present time neither 
company is profitable, and in the absence of profits, it is 
hard to be a viable competitor to cable over the long term.
    And so my question to you is in the absence of this merger, 
what is the basic outlook for both companies? And what would 
the effect of the merger not being approved be upon your 
ability to continue to offer new services, such as local-into-
local, HDTV, and that high speed Internet access?
    Mr. Hartenstein. I guess it's a compound question. You are 
right. Well, I cannot speak for Charlie's numbers, but we're 
yet to be profitable, notwithstanding the fact that we are 
serving with DIRECTV some 10 million homes.
    Clearly we would not be able to stay competitive, as I 
indicated in my oral and written testimony. The world has 
changed. Digital cable has come. We have a lot more things that 
we have to be competitive with today. We are truly competitive 
in only about 60 percent of the country today even with the new 
spot beam satellite we launched.
    We are not going to be able to offer more than the couple 
of high definition channels. Expanded capacity for other 
interactive services would not be possible.
    The subscriber acquisition costs have gone up from where 
they began in the business where we started in 1994. It's a 
different world. It's not as good an outlook. We would 
obviously have to, after a long time coming to this conclusion, 
you know, look at another path, but this is the best path that 
we saw given the capital markets that were in today and where 
we feel we need to go with the market power there as defined 
by, you know, the business that we are in, namely, the cable 
industry.
    Mr. Boucher. Excuse me, Mr. Hartenstein. Let me ask just 
one follow-up question before I turn to Mr. Ergen. Would you 
agree that the ability of DIRECTV to offer enhanced services, 
to continue to be a strong and viable competitor to cable is 
better if you combine with EchoStar than if DIRECTV's business 
were sold to someone else, such as Murdoch or some other 
individual or party?
    Mr. Hartenstein. We looked at all of the possibilities 
there, and the answer to your question is, yes, this is the 
merger that made the most sense for us, our shareholders and, 
we believe, for consumers.
    Mr. Boucher. Thank you.
    Mr. Ergen.
    Mr. Ergen. Yeah, I think that General Motors has made the 
decision to sell the company. If not EchoStar, it would 
ultimately be, you know, somebody else. It clearly would not 
have the synergies because they would not be in the satellite 
business. They would probably be in the programming business 
where you would have vertical integration issues and costs 
going up to consumers.
    Mr. Abbruzzese. Excuse me, Congressman.
    Mr. Ergen. I would hope that we would, as a company, be 
able to survive and go it alone, but I think that might be 
difficult, and I think that ultimately a broadcaster might buy 
us or a cable company might buy us. I mean, because I think 
that ultimately we might have a longer row to hoe.
    But if we could go it alone, we certainly would try to do 
that. That would be my goal, but I hope we didn't come to that.
    Mr. Abbruzzese. If I could interject for one quick second, 
please, I just want to point out that traditionally in cable 
TV, the business of cable TV, very few of the largest cable 
companies have ever been profitable. They've operated on a 
cash-flow basis. That is not unique in this industry. They go 
decades without being profitable.
    TCI went decades without being profitable. It is not unique 
that EchoStar and DIRECTV operate on an unprofitable basis, and 
I would submit that we pose that they have grown by 400 percent 
in the last 5 years. That is astounding growth, and that has 
occurred at a time when there are two providers.
    You have here at least three entities that are in the 
satellite business today who would like to compete going 
forward and just do not have the space because through the 
merger of these two entities, there is not going to be any 
space left for anybody to operate on.
    You have people willing to provide that second entity in 
the marketplace to insure that there is competitive pricing 
without relying on promises of national pricing policies. We 
will have the ultimate in pricing policy, which is a 
competitor, if we are provided access to some limited assets 
out of this merger in order to operate going forward. That is 
good policy. That is good business, I would submit.
    And I do not think there is anything unique about them 
operating on a nonprofitable basis at this point in time. It is 
standard business in this industry.
    Mr. Boucher. Well, I would only note, Mr. Chairman, in 
closing that the companies against which they are competing are 
profitable today. The large cable MSOs are doing quite well. 
They have deep cash reserves. They have the ability to attract 
capital. These are all problems that both EchoStar and DIRECTV 
have pointed to in order to roll out new services, such as high 
speed Internet access. They're having trouble attracting the 
capital because of the narrowness of the subscriber base of the 
individual companies and the high cost of providing that 
service for each company. By merging they can spread that cost 
out over a larger subscriber base. It becomes economical. They 
are then in a position to attract capital. They can be a much 
more viable competitor against the very profitable multi-
channel video operators.
    Mr. Chairman, time has expired.
    Mr. Abbruzzese. But, Mr. Chairman, can I just answer one 
quick thing on that? They are mature companies, the other 
capital operators, at this point in time. They are profitable 
because they have experienced their highest growth period.
    When you are in a growing mode in cable, you are always 
losing money no matter whether it is NMDS, cable TV or a 
satellite. That is just a fact of life in the business. They 
are growing so fast; they are doing such a good job; they are 
losing money.
    Mr. Pagon. Mr. Chairman, if I could just make one comment. 
The implication would be that the companies have fared poorly 
in the capital markets. I think if you look at the record of 
appreciation for shareholders of all of the pay TV companies, 
satellite and cable, you will find that the No. 1 performing 
stock over the past 6 years is EchoStar, and that with respect 
to Hughes, I think Hughes has created in DIRECTV almost $20 
billion of value in a company that did not exist 7 years ago.
    Mr. Boucher. Mr. Chairman, if I can indulge you just for a 
moment.
    Mr. Pagon, the problem that has been presented is that in 
order to deploy the infrastructure that is necessary for new 
series, which themselves are necessary to compete with cable, 
including the high speed Internet access service that EchoStar 
is determined to make more robust and more affordable to 
consumers, in order to attract the capital to do that, a merger 
is really necessary because the capital markets have simply 
said to the companies, ``You have got too few subscribers to 
make a $2 billion per company investment in this 
infrastructure. Bring your infrastructure costs down by merging 
to 2.5 billion, and then the money will be available in order 
to finance the deployment of these facilities.''
    And that would enable the company to offer high speed 
Internet access and be a more viable competitor with cable.
    Now, I acknowledge the accuracy of many of the things that 
you have said about this market, but this fact remains, and 
there are needs to have a larger subscriber base under a merged 
company if capital is going to be attracted for additional 
services and those additional services are absolutely necessary 
to be a viable competitor.
    Mr. Chairman, I am going to yield back.
    Mr. Upton. The gentleman's time has expired some time ago.
    Mr. Boucher. I have taken up too much time.
    Mr. Upton. Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman.
    Mr. Sachs, you have been sitting at the end very patiently, 
and I know in the opening statement you did not come out in 
support or in opposition to a merger, but based upon your 
position, do you feel that the merger would create a larger 
competition to the industry you represent than the two 
competing elements presently?
    Mr. Sachs. Let me go back to what I tried to say. We regard 
both EchoStar and DIRECTV as very formidable competitors today, 
and the prospect of a 17 million subscriber satellite company 
will probably look more like a 19 or 20 million subscriber 
satellite company at the time this merger would close is no 
less daunting.
    This company, both companies have excellent track records, 
and if their energies are combined and if they achieve certain 
efficiencies, they will certainly be as competitive as they are 
today, and they have given you reasons why they believe they 
will be more competitive.
    Mr. Shimkus. Thank you.
    Mr. Ergen, based upon the announcement today that Comcast 
and AT&T could merge, and based upon the arguments for your 
efficiencies based upon your merger, could I assume that you 
would be supportive of that?
    Mr. Ergen. We certainly will compete against anybody that 
we can in a level playing field, and we certainly think that 
from a regulatory point of view that would be a hard merger to 
stop.
    The ownership cap limits which would have stopped perhaps 
that kind of merger was 30 percent. Those were thrown out by 
the courts. The Supreme Court, I believe, just announced they 
are not going to hear an appeal of that. So there is no 
ownership cap today against, I guess, cable companies becoming 
really one company.
    So it is a scary thought, but we are up to the challenge to 
compete as long as we can on a level playing field. I think our 
concern would be program access there where Time Warner owns, I 
mean, or AT&T or Comcast own programming. Comcast, for example, 
does not sell its sports channel today in Philadelphia. 
Therefore, it cannot compete in Philadelphia. That would be our 
big concern.
    Mr. Shimkus. Let me go to one more question, and I am not 
an attorney. I do not even pretend to be one, but for those who 
are, tell me how viable consent decrees are and if they are 
worth the paper they are written on.
    Does anyone have an opinion on that?
    Mr. Ergen. Well, I am certainly not an attorney either, but 
they certainly have been done many, many times in mergers and 
so forth. And the Justice Department obviously is proficient at 
that.
    We can get some information to you in the committee. AOL 
Time Warner is the most recent one where I think there were 
similar concerns with AOL Time Warner.
    Mr. Shimkus. Does anyone have a dissenting view?
    Mr. Schnog. You know, the consent decrees are great and 
wonderful, but I think that you also have to think about kind 
of the reality in the marketplace of what is going to go on if 
this merger is approved.
    Kind of the reality is this as I see it. You are going to 
create this 900 pound gorilla with 1,200 channels, or God knows 
what it is, that they control, that no one else will ever be 
able to touch.
    They are going to be able to compete with cable. For folks 
who say they are not competing with cable now, look at Classic 
Cable who is in bankruptcy because they cannot compete with the 
satellite dish competition as it is today. That is 350,000 
customers in this country.
    There are lots of other small cable companies like my own 
who are in trouble because of this, and I think what you are 
going to see happen is if this 900 pound gorilla comes out of 
the closet, all of the small cable companies or a great number 
of them are going to disappear. You are not going to have 9 
million homes or 3 million without cable. You are going to have 
maybe close to 18 million. That is the 8 million customers that 
we have.
    And in those markets where they are used to paying $2 for a 
hamburger, and you guys here in Washington, I bought one 
yesterday for $9; they will be paying that same $9 for their 
cable TV or their satellite dish, and it is the same price as 
the big cities.
    And the big cities, do you know what? They will still have 
the cable competition because those major operators who have 
those economies of scale will be able to compete and put on 
1,200 digital channels.
    What you will end up having is this huge, huge digital 
divide. You know, I see Congressman Boucher has gone out, and I 
hate to disagree with the Congressman, and I appreciate him 
wanting to get services into his market for high speed Internet 
and what have you, but I might suggest that he has kind of 
thrown the baby out with the bath water, you know, saying, 
``Let's get them in here.''
    But remember when you get them in here, you are creating a 
900 pound gorilla, and these guys, these big companies, they 
are after the dollars. They are after making money, and that is 
what they are going to do.
    If you think any different, I mean, you look at Charlie 
Ergen's testimony to the courts when somebody else was going to 
buy DIRECTV and when they were going to merger Primestar, and 
as soon as it suits his way it changes when he gets before you 
here.
    I mean, Id o not blame him. He is a tough businessman. He 
knows what he is doing. He is trying to make money for his 
investors. No problem.
    But if you are really thinking about the consumer, think 
about what a 900 pound gorilla will do.
    Mr. Phillips. Mr. Shimkus, could I respond to your 
question?
    Mr. Shimkus. My time is out, if the chairman would be so 
diligent.
    Thanks.
    Mr. Phillips. I do have a law degree. I do not practice 
anymore, and I am not an antitrust expert, but I am advised by 
some good attorneys, and they indicate to me that the 
Department of Justice's preference is to have competition and 
not to eliminate it. If there is to be a consent decree, I 
think the department generally favors a scenario where they can 
create competition with a provider that has some staying power.
    For example, facilities. You will remember the United Air 
case where essentially Robert Johnson's company was set up to 
be facilities based, to compete in certain routes so that there 
was two providers. It ultimately failed, but I think that is 
the way the Department of Justice would tend to go.
    They do not like to accept promises. There is no regulatory 
scheme really that has been set up to enforce Mr. Ergen's 
promises about national pricing. As I tried to point out, it is 
very complicated because it involves more than just 50 packages 
and what you charge. It invites rebates and other things that 
are shoved through the distribution channel that affect 
consumer price.
    And so those are generally not the kind of remedies that 
the Department of Justice favors.
    I would suggest, as a participant in the industry having 
experience with these people, that if there are to be these 
kinds of consent decrees based on promises, they are going to 
have to be very thorough. They are going to have to be very 
clear. They are going to have to be very enforceable and 
swiftly, not through the courts or any other, you know, delayed 
mechanism if we are really going to protect consumers.
    Mr. Fiorile. Mr. Chairman, I think it would be foolish to 
suggest that the combination of these companies would not help 
the profitability. Of course it would.
    This industry, because of the competition, has grown by 
close to 20 percent in the last year, which I would submit 
there is probably not a whole lot of businesses that have grown 
close to 20 percent in the last 12 months.
    So let's look at what has caused it to grow by 19 percent, 
which is exactly, I think, the number. Some of cable's 
nonresponsiveness to service, and this industry has done a 
marvelous job with service. They have an excellent reputation. 
So what kind of promises are we hearing that are going to 
happen with the combined companies?
    We are going to be able to reduce our service departments 
and save a lot of money. No question. Who is it going to 
impact? It is going to impact consumers. Where there were two 
service people in an area, there is going to be one, and, yes, 
it will be more profitable.
    What else has driven the growth of DBS recently is the 
competitiveness between pricing and programming, and there is 
no question that that has helped this industry. And what we 
have heard a little bit about today is we are a national 
program service, and some of these services are redundant, and 
I would suggest the redundant is another way of saying 
competitive.
    And last, what has driven largely the growth of DBS in the 
past year has been local-into-local. People no longer have to 
go out and buy a local television antenna in addition to their 
satellite dish. Now they can get both, and where we are today 
is local-into-local is being challenged in the courts.
    And last but not least certainly is we have also heard not 
even a promise with regards to the other 110 markets in this 
country.
    So it will be profitable? Yes, it will be more profitable, 
but let's face it. The consumers are the ones that are going to 
pay for it.
    Mr. Upton. Mr. Markey.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    First I want to say to Mr. Shimkus and to the audience I am 
a lawyer.
    And I just wanted full disclosure.
    Actually I ran into Gregory Peck about 20 years ago, and I 
said to him, ``Mr. Peck, I just wanted to let you know that I 
saw `To Kill a Mockingbird' when I was 15 years old, and I have 
wanted to be a lawyer from that moment on.''
    And he looked at me and he said, ``Young man, you are the 
100,000th lawyer to tell me that.''
    ``And I do not want the responsibility.''
    So I appreciate, you know, the conditions under which I am 
about to begin my questioning.
    When you look at any merger, especially from an antitrust 
perspective, the key decision always is to define what market 
we are talking about. Are we talking about solely the DBS 
marketplace or are we assessing the impact on the entire multi-
channel video market including cable? Define the market.
    In this case, I am not sure it makes a difference because 
in the former we would go from two current competitors, DBS and 
EchoStar, down to one, and in the latter, that is, including 
cable, we would go from three competitors, including cable plus 
DBS or, I mean, plus both of the companies that are here, down 
to two, moving to a duopoly.
    It is hard to see how either scenario would be in the 
consumer's interest in the long term.
    In addition, fewer distribution platforms may have a 
negative effect on programmers, especially programmers who are 
neither owned by cable operators nor major broadcast networks. 
Obviously those players would bring some leverage to the 
negotiation at that point with either the cable industry or the 
remaining satellite company.
    Fewer competitors may also have negative consequences for 
manufacturers and retailers. We are still waiting on this 
committee to see the fulfillment of the Telecom. Act mandate 
that the FCC assure that consumers can purchase their own set 
top boxes and modems and other equipment not of the cable 
industry's choosing, but of the consumer's choice. We still do 
not have that from the FCC. The cable industry continues to 
lobby that they decide what cable boxes each American gets, and 
that is wrong.
    The leading argument for approving the merger is that 
although quantitatively we would have fewer competitors, the 
merged satellite company would represent qualitatively better 
competition in the marketplace.
    This notion is supported by the assertion that the merged 
company would do local to local into more markets. So on that I 
have a question that I would like Mr. Ergen and others to 
answer.
    Why shouldn't we believe that instead of merging the 
spectrum between these two companies, that instead, with 
digital compression and with new spot beam technologies that 
would be driven by the paranoic competition between your two 
companies, that we would not wring much more efficiency out of 
the existing spectrum rather than having the spectrum of both 
companies put together, but having a dramatic reduction then in 
the intensity of the investment in new technologies that would 
insure that we would wring more efficiencies out of that 
spectrum which we do have?
    Mr. Ergen.
    Mr. Ergen. Well, as a business person, I have to make those 
decisions every day, and I wish I could wave my magic wand, 
snap my fingers and suddenly double the amount of capacity or 
spectrum.
    But one thing. I am not an expert in law, but I am an 
expert in the satellite side of the business, and just the 
spectrum, the technology does not exist to do that today. 
Something like MPEG-4 that was mentioned, the chip sets are not 
available, the thousands of dollars in tests today. MPEG-4s for 
steel frames is not there yet, and by the time 5 or 10 years 
from now we get advances, and I think we will get advances, it 
is going to require we replace the equipment that is out there 
just like digital cable has upgraded their plant to digital.
    But we cannot snap our fingers and turn our signal off for 
3 years while we are building these satellites and this 
technology. We have to continue to do an ongoing business.
    So just from a practical point of view it is not possible, 
but believe me, as a business guy, for my shareholders if I 
could spend $250 million, as Mr. Pagon suggested, and put up a 
satellite that broadcast to every local city, 210 markets, I 
would be crazy not to do it.
    But I spent my $250 million on a satellite that was state-
of-the-art that we believe can do 40 markets.
    Mr. Markey. All right. Let's go to Mr. Pagon then. What do 
you have to say, sir, quickly?
    Mr. Pagon. Well, I recall 10 years ago going to Fleet Bank, 
and I was then in the cable business, and asking them to lend 
me money to get in the DBS business, and they said, ``Well, it 
will not work. Everybody knows that.'' And 7 years later we 
have 17 million customers who are served by technology which 
was unproven then. I think MPEG-4 is here. It is not generally 
deployed, but over the next, I think, 5 or 6 years, you will 
see it deployed commercially, and MPEG-4 will allow compression 
rates, a standard definition digital channel to be delivered in 
a third of the current bandwidth that MPEG-2 does.
    So it will be here. Spot beam satellites are here. Mr. 
Hartenstein referred to the launch of their 4-S satellite, 
which went up 2 or 3 weeks ago. Spot beam technology is 
something that would allow potentially a four to sixfold 
increase in the intensity of use of the current spectrum, which 
is not very useful for national channels, but very, very useful 
for delivery of channels like local TV stations which you do 
not have a legal right to offer outside of their home markets.
    So I think it is here.
    Mr. Markey. Now, let me move on now. The way I see all of 
these hearings is that it is kind of like the segment in ``Who 
Wants to Be a Millionaire'' where the key part of all of these 
and, I think, the most fun for everyone is ask the audience.
    For Congress that segment is really ask the consumer. You 
know, ask your constituents what would they want So they are 
being told that cable rates are rising. DBS rates rise, but it 
is because of these programming costs that are just out of 
their control. And so the question would be here if this merger 
goes through, would this give you any more leverage over the 
programmers so that you could extract lower rates from the 
programmers and as a result see the consumer pay less for the 
service overall?
    Mr. Ergen. Well, two things would happen. One is you 
probably from a practical point of view would get some 
leverage, and certainly the NAB has testified that they are 
worried about us having leverage on the retrans. side where 
they pay for their channels, but I think the consumer benefits 
from that.
    But mostly what you have is contracts where you have 
something called a most favored nation clause, and so let's 
say, for example, AT&T pays 20 cents for a channel because they 
have 14 million subscribers, and because we have 6 million 
subscribers we pay 30 cents. By combining the companies, we 
would go to the bottom of the rate card as AT&T and Time Warner 
are, and most of these contracts are up in those numbers where 
we just do not get to and probably will not get to in our 
lifetime without the merger.
    So that is how you get the lower costs. Those are then 
passed on to the consumers.
    Mr. Markey. Would you then commit here today that if those 
prices to you lowered that you would lower rates for consumers?
    Mr. Ergen. I will commit that I will pass on a substantial 
portion of programming rates that we save on to consumers. And 
the reason we do that is because then we become a----
    Mr. Markey. Is a substantial portion more than 50 percent, 
more than 75 percent?
    Mr. Ergen. Yes, more than 50 percent. Substantial, more 
than 50 percent.
    And the reason we would do that is because as we lower our 
costs to consumers for programming, we get more subscribers to 
pay our fixed cost of satellites. So there is an economic one 
on one analysis here that says whether we guaranteed you we 
would do that or not, we would do it because it makes practical 
business sense and improves our bottom line.
    Mr. Markey. I have read reports that the synergies that are 
created through this merger will save $5 billion between the 
two companies. Now, will you pass that $5 billion on to the 
consumer in the form of lower rates?
    Mr. Ergen. We would pass some of that on. Some of it would 
go----
    Mr. Markey. How much would you pass on to the consumer?
    Mr. Ergen. I do not know exactly. It would not be----
    Mr. Markey. Because here is the problem from our 
perspective.
    Mr. Ergen. Whatever it is, it is more than it is today.
    Mr. Markey. Well, from the perspective of Congress, from 
the consumer looking at these industries, the multi-channel 
video marketplace seems to be the only place where prices 
always go up and they never go down.
    So since September 11th, automobiles, they are like giving 
them away. You go into the stores, and they are like giving you 
the suit. Please, take it, you know. Thirty percent is not 
enough? I will give you 50 percent of, and they are giving away 
everything in our society.
    And yet AT&T is announcing they are increasing cable rates 
by 8 percent, and there is no reduction in DIRECTV or EchoStar 
rates to consumers. It is the only product area that is 
completely immune to everything else that is going on within 
the economy.
    So here we have a moment in time where a merger promises so 
much savings, $5 billion a year, that you would want the 
consumer to see a dramatic lowering of his rates maybe in a way 
that actually allows you to be price competitive with the cable 
industry.
    And so it is important for us to hear the actual kind of 
percentage reduction in your rates that you might promise. Is 
it a 5-percent reduction, a 10-percent reduction, a 20 percent 
reduction in your rates for consumers that kind of brings it 
more in line with a product that the cable industry might have 
to fear in price competition?
    Mr. Schnog. Congressman Markey.
    Mr. Markey. Just wait a second.
    Mr. Schnog. Oh, I am sorry.
    Mr. Ergen. Well, I can only tell you that we have been 6 
years in the business. We have raised our rates of our basic 
channel one time without these efficiencies. Nobody has fought 
harder against cable than our company in terms of trying to be 
the most competitive we possibly can.
    You certainly balance that with investing in new 
technologies and so forth as a business person. You have to 
balance your shareholder needs, but because this merger brings 
$5 billion in savings a year, as you say, a large part of that 
will be passed on to consumers to go from a practical point of 
view, because of our high fixed costs, but I have not done the 
analysis, and I am certainly there. I do not know what interest 
rate we pay on our debt today to finance the acquisition. I do 
not know a lot of different things. We have to finance the box 
switchout, which will be a couple billion dollars, I think 
about $2 billion. So it will be a large part of it, but it 
probably will not be all of it. It will not be all of it. That 
is for sure.
    And certainly as we get farther into this, we will have 
more detail for you on that, but as we sit here today, I 
certainly do not have an exact answer for you.
    Mr. Markey. See, this committee is----
    Mr. Ergen. Oh, by the way, the $5 billion synergy is, I 
think, 4 years after the merger is completed. It is not $5 
billion the first year. It is $5 billion the fourth year.
    Mr. Markey. How much is it the first year?
    Mr. Ergen. In 2005, it would be about $5 billion a year.
    Mr. Markey. How much is it the first year?
    Mr. Ergen. I think it is about a billion.
    Mr. Markey. A billion? And that keeps rising to the point 
where it is $5 billion?
    Mr. Ergen. Yes, yes.
    Mr. Markey. Does it get bigger as each year goes on?
    Mr. Ergen. No, it stops at about $5 billion unfortunately.
    Mr. Markey. Five billion. That is still a lot of money 
after you make the initial, you know, investment in trying to 
help on the converter boxes and everything.
    Mr. Ergen. It is a lot of money, and I am very excited 
about passing those costs or some of those savings on to 
consumers and keeping our prices lower than cable so we can go 
get their customers.
    Mr. Markey. Right. So would you commit? In other words, I 
need a commitment from you that it would be a minimum of 10 
percent. That is a lot of money.
    Mr. Schnog. I will give you ten.
    Mr. Markey. In the total universe of revenues here, in the 
entire multi-channel video industry, that is a lot of money, $5 
billion.
    Mr. Ergen. No, we would definitely be more than 10 percent. 
We would definitely be more than 10 percent of the savings. 
That would be a low number in my opinion. I believe it would be 
in our best interest to do materially more than 10 percent.
    Mr. Markey. What would be a median number?
    If 10 percent is low, what do you think is a median number?
    Mr. Ergen. I think 100 percent would be high.
    Mr. Upton. Is that your final answer?
    Mr. Ergen. So somewhere between 10 percent and 100 percent. 
I am not trying to be evasive here, but you are asking me a 
very technical question without me knowing the circumstances a 
year from now when the merger is completed.
    Mr. Markey. Okay. We have got a Mr. Schnog on the line.
    Mr. Schnog. Yes.
    Mr. Markey. Mr. Schnog, I would like to ask you what do you 
think about what we have here with prices?
    Mr. Schnog. I am glad you asked, Congressman Markey. I have 
looked at your face in many trade magazines, and all the time I 
think in the cable TV business, ``Boy, oh, boy, what does this 
guy know?''
    And what you do not know and what I need to tell you is 
that I do not----
    Mr. Markey. All you think of is what I do not know.
    That is why we have you on the line.
    Mr. Schnog. That is right. That is right. I have got to let 
you know.
    Everybody complains about the high rates and what you do 
not know is honest to goodness, it is not my fault, and it is 
not Mr. Ergen's fault. You see, in this country people think 
there are only two things that are certain, death and taxes. It 
is death, taxes, and paying Disney $5 a month per consumer.
    Something you do not know. Right now I have Disney on one 
of my systems. It is a pay channel. If people want it, they can 
pay for it. If they do not, they do not have to.
    Disney came to me 6 months ago, actually about a year ago 
and said, ``We want you to put it on your basic service, and 
you are going to pay us about a buck for every single one of 
your customers now.''
    And I said, ``I cannot do that. I cannot afford it. I do 
not have any way to pay for this.''
    They said, ``No problem. Raise your rates.''
    I said, ``I cannot raise my rates. I have got competition 
from satellite.''
    Mr. Markey. Let me frame the question for you.
    Mr. Schnog. Okay.
    Mr. Markey. What impact do you think the merger between 
DIRECTV and EchoStar will have on the programming costs to you, 
Mr. Schnog, a small cable operator?
    Mr. Schnog. I think they are going to go much higher.
    Mr. Markey. Much higher? Not lower?
    Mr. Schnog. Much, much higher. Here is what is going to 
happen. They are going to be that giant gorilla out there with 
the other five gorillas, G.E., Disney, CBS and Fox, and when 
they go to make a deal, they are going to say, ``We are a giant 
gorilla. We want you to charge the rural operators more,'' and 
they will be because we are smaller. I have only got 8,300 
customers, and charge us less because we have got this large 
area, and we will not go out and compete for the programming 
with you.
    And they will have their nice, cozy, little I do not know 
what you would call it, but they will keep the monopoly there, 
and you will see a lot of these smaller operators. Their costs 
continue to rise, and we will not be able to do much but go out 
of business.
    And for these guys, all of a sudden again that market will 
go from 9 million people who do not have cable TV now available 
as a competitor to maybe around 18 million.
    The worst part of it is or the thing that is most 
important, if you would commit to me to say I will sit down and 
help you with this programmer problem, help me with the fact 
that ESPN raised it rates last year 20 percent just like that, 
and it had to get passed along someplace. I mean, my difference 
in what my cost for programming today and 10 years ago, in 1991 
I was paying $3.85 for my programming for basic. Today I am 
paying about $10.
    My rates have gone from $24 to $27. That is the truth.
    So where are the rate increases coming from? A lot of that 
money is going straight on back to the programmers who now with 
two competitors?
    Mr. Markey. Can I say this?
    Mr. Schnog. Go ahead. I am sorry.
    Mr. Markey. No, we are talking about selling the most 
precious asset that we have in New England, the Boston Red Sox.
    We have this shrine, Fenway Park. We have all of these 
wonderful players. We have everything else that is attached to 
it. But do you know what the bottom line is in the business 
section? It is that everyone says it is a cable play.
    Mr. Schnog. It is all about money.
    Mr. Markey. It is a cable play, and it is all about how 
much higher you can raise these rates to consumers because no 
matter what you are going to pay for Nomar Garciaparra or for 
Pedro Martinez to make sure that they are not ultimately free 
agents that are purchased by the Yankees and you want to keep 
them in Boston, well, do you know what the key is? We are going 
to raise cable rates.
    So we obviously are increasingly conscious on this 
committee, you know, as is the American consumer, that this is 
a spiral that seems to continue to go out of control. And so we 
would like out of this conversation, amongst other things, to 
figure out ways in which it starts to get under control.
    Because if it does not, with all due respect, because I 
think that, you know, Mr. Ergen is a technological and business 
genius, but I think there are certain other inevitable 
inexorable forces that are built into this process that run 
counter to any and all promises which you might try to make 
here, and they may be well intentioned promises, but ultimately 
illusory promises made to the committee because of the 
essentially uncontrollable nature.
    And my own feeling is that--and it is why I think it is 
important to study this issue--is that if there is no real 
competition in the marketplace because that is a proxy; 
competition is a proxy for regulation to within an inch of your 
life government intervention into the marketplace. It is the 
only thing you can substitute, is real competition, and it is 
the only way in which you get the conversation with all 
players, including programmers.
    I am just a little bit apprehensive about what could happen 
if it gets reduced down to two from three because it is already 
so bad at three, and I am not sure that this kind of provides 
us with a road map to the consumer not putting aside 10 percent 
of their monthly budget just to watch programming, not a 10-
percent savings, but an ever increasing share of the limited 
discretionary income average families have in our country.
    Mr. Sachs, I appreciate it.
    Mr. Sachs. If I can just speak to your observation about 
cable rates and automobiles, if I might for a second, I think 
the anomaly in part is that cable is not a static product, and 
that with most rate adjustments cable operators are offering if 
it is part of the basic package new services that are coming on 
the market.
    I mean, in the last year National Geographic launched. 
Oxygen for Women launched, and so if you look at it simply in 
absolute terms about if the product had not changed, then the 
rate increases look a lot more substantial.
    If you look at it as the Bureau of Labor Statistics does 
and look at it for the period since cable rates were 
deregulated, which is mid-1999, cable rates have gone up 
approximately 1 percent over inflation, if you take account of 
the fact that the product itself has expanded, and I think that 
is the anomaly.
    Mr. Markey. Well, if I may just for a second, you know, one 
of the things that I think we have to take note of is that 
DIRECTV is owned by General Motors.
    Mr. Sachs. They should sell Charlie the car division, not 
the satellite company.
    Mr. Markey. The question here is: what is the market cap 
today for DIRECTV? What would you say it would be worth?
    Mr. Hartenstein. The market cap for Hughes is on the order 
of about $20-some billion.
    Mr. Markey. And what is the market cap for General Motors 
minus Hughes?
    Mr. Hartenstein. It is a little bit difficult because 
General Motors owns 100 percent of the asset, but it is a 
tracking stock.
    Mr. Markey. No, now I am only talking about General Motors, 
the automotive branch. What is that market cap worth?
    Mr. Hartenstein. I am not sure I can do where the stock 
price is today, but it is probably about 25, 30 percent above 
that of what the market cap is of Hughes. I would have to 
confirm that form you.
    Mr. Markey. The point is that the automotive industry is 
static. We know that they have not really improved fuel economy 
standards for 16 years.
    But at the same time this is not static. The asset which 
General Motors owns is really quite dynamic. It is growing 
exponentially year after year after year. It is now worth $20 
or $25 billion, and the entire automotive division of General 
Motors might only be worth $30 or $35 billion. Think about that 
in our society.
    Now, if we were having a hearing on whether or not General 
Motors should be allowed to purchase Chrysler, it would almost 
be understandable at this point. Look at that market just 
shrinking.
    Here, however, we are having a hearing on the largest 
growth sector of the American economy that are picking up 1.5, 
you know, 1.8 million customers per company per year. So that 
is why it causes us some concern, because obviously the 
consumer is a beneficiary of that robust competition.
    And while the cable industry over the years has been a 
beneficiary of policies on this committee, the Cable Dereg. Act 
of 1984, and the broadcast industry has been a beneficiary of 
acts on this committee, the Spectrum Allocation Act of 1996. 
So, too, the satellite industry has been a beneficiary of the 
1992 programming access provisions and the local-into-local 
provisions of 3 years ago.
    So obviously each industry has been nurtured by this 
committee trying to create many more players that are more 
robust, and so what we are really trying to do here today is to 
find a route that insures that the consumer is the beneficiary 
of the wise decisions this committee has made in creating a 
blueprint that has allowed the geniuses of these industries to 
go out there and create, to innovate, and that we do not want 
to invoke the law of unintended consequences whereby we 
decrease the incentive to innovate, decrease the incentive for 
more technological breakthroughs.
    We know that the satellite industry is driving the digital 
revolution in the cable industry. We know that, and the more 
successful you are is the more they are going to have to move 
because it is all about paranoia, and the broadcasting industry 
and every other industry that is represented here is all driven 
by the same phenomenon.
    And I am looking forward to working with you because I do 
not come to this with any preconceived judgment as to what is 
the right route out, except that it has to at the end of the 
day benefit the consumer, the viewer at home with lower prices 
and more choices, which I believe is the promise of all of your 
industries.
    I thank you, Mr. Chairman.
    Mr. Upton. Thank you.
    I want to thank all of the panelists for being here. I know 
we asked a lot of good questions. We look forward to the 
decisions that are going to be made downtown.
    Thank you.
    [Whereupon, at 5:25 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
  Prepared Statement of Sophia Collier, President and CEO, Northpoint 
                            Technology, Ltd.
    Mr. Chairman, members of the Committee, I applaud you for holding 
today's hearing on the status of competition in the Multi-Channel Video 
Programming Distribution Marketplace.
               the need for facilities-based competition
    The fact of the matter is that the state of competition in this 
marketplace is dismal, and Echostar's acquisition of DirecTV can only 
make matters worse.
    As disclosed in its most recent annual report on competition in 
video markets, the FCC has certified only one percent of all 
communities in the United States have effective 
competition.1 EchoStar's acquisition will simply match 
today's local cable monopoly with tomorrow's national satellite 
monopoly.
---------------------------------------------------------------------------
    \1\ 7th Annual Report on Competition in Video Markets, Jan. 8, 
2001, paragraph 138.
---------------------------------------------------------------------------
    When Congress passed the 1996 Telecommunications Act, many hoped 
that cable overbuilders would enter the marketplace and create new 
competition. That, unfortunately, has not come to pass. In fact, these 
overbuilders have failed to materialize. And if this merger occurs we 
will see the total elimination of facilities-based competition in 
satellite service.
    DBS has never been a price competitor to cable. If it were, the 
entry of DBS service should have tempered the rise of cable rates. Yet 
for the last five years cable prices have increased at 2.2 times the 
rate of inflation. Remarkably, the cable rate increases appear to have 
increased at a faster pace after DBS service began in December 
1994.2 Clearly, a form of competitor to cable other than DBS 
is needed if consumers are ever going to enjoy the higher quality and 
lower prices that have been realized in other areas such as personal 
computers, long distance services, and consumer electronics.
---------------------------------------------------------------------------
    \2\ Bureau of Labor Statistics, comparison of monthly cable prices 
and consumer product index.
---------------------------------------------------------------------------
    For almost eight years now, our company has stood ready to offer 
consumers a new, facilities-based alternative to cable and DBS service. 
We can provide a uniform high quality of service in all 210 local 
markets in the country. We would offer your consumers access to 96 
channels of video programming for $20/month and high speed access to 
the Internet for just another $20/month.
    Some may recall that nearly three years ago I testified before this 
very subcommittee, then under the leadership of Chairman Tauzin. Let me 
repeat to you a commitment I made then, which still holds true today: 
``Once regulatory approval is achieved, our service can be deployed in 
the first markets in as little as six months, with nationwide coverage 
within two years.'' 3
---------------------------------------------------------------------------
    \3\ Statement of Sophia Collier before the House Commerce 
Subcommittee on Telecommunications, Trade and Consumer Protection, 
February 24, 1999.
---------------------------------------------------------------------------
    In the period of time since I last addressed this panel, we could 
have fully built out our entire network, offering all of your 
constituents the choice of a low-cost alternative to cable and 
satellite.
                satellite opposition to new competition
    The only reason that our service is not deployed today is because 
the satellite incumbents have used the regulatory process to slow our 
progress toward approval to a crawl. Initially they tried to turn our 
licensing process into a Catch 22--we can't be licensed until we can 
prove that we won't cause interference to DBS, but we shouldn't be 
given any experimental licenses to demonstrate our abilities. With 
strong support from Members of Congress, we have been able to 
successfully demonstrate our technology in Kingsville, TX, Austin, TX, 
and Washington, DC.
    But rather than invest in the infrastructure of our system, we've 
invested millions in legal fees.
    Few small companies with new technologies could sustain the kind of 
multi-year assault from entrenched incumbents that we've experienced. 
In the end, when incumbents are permitted to abuse the regulatory 
process to keep out new competition, its not the prospective 
entrepreneurs that suffer the greatest loss, its consumers who are 
denied the opportunity to select from alternative providers who can 
offer better service and lower prices.
    Northpoint is not concerned about our ability to compete 
effectively against New EchoStar. What we do fear, however, is that the 
new satellite monopoly will leverage its power to ratchet up the 
satellite industry's eight-year campaign to keep us out of business.
    EchoStar's continued opposition to our service--at a time in which 
EchoStar desperately needs to demonstrate to antitrust and FCC 
regulators that there will be sufficient competition in the MVPD 
marketplace after its merger--attests to the depth of its commitment to 
keep us out.
    I hope members of the Committee share Northpoint's frustration at 
our slow progress towards the marketplace. As you consider the merits 
of the EchoStar consolidation of the satellite industry, I ask that you 
examine how that company has been treating this would-be competitor.
                             local channels
    The proponents of the merger have asserted that they need to 
consolidate so that they can deliver local channels to more markets. 
This statement further confirms our long-standing assertion that 
satellites are ill-suited to carry local TV stations.
    Even though a single company will control 100% of the spectrum 
allocated to DBS service, the proponents of the merger themselves 
concede they will still lack the capacity to serve even a majority of 
the 210 local television markets. But even assuming the merger goes 
through, the public must wonder if it can count on EchoStar to make 
good on its claim to serve 100 markets. EchoStar's record is one of 
seeking to avoid local carriage, not foster it.
    Recall that EchoStar supported enactment of legislation to enable 
it to carry local channels, but later led an industry lawsuit seeking 
to over turn the must carry component of the law, a compromise that was 
critical to ensuring the legislation's passage.
    Earlier this year the satellite industry ridiculed my prediction, 
published in Broadcasting & Cable magazine, that on January 1st--just 
in time for the college Bowl games--the DBS companies would likely drop 
local television stations in dozens of markets in order to comply with 
the must carry law.4 Now comes word--from none other than 
EchoStar CEO Charlie Ergen himself--that EchoStar will be forced to 
take down local programming in several markets.5
---------------------------------------------------------------------------
    \4\ See ``Technology validated: Northpoint asks FCC to proceed with 
license--at last,'' Sophia Collier, Broadcasting and Cable, June 11, 
2001; ``Fears of interference: DBS `fights tooth and nail' to protect 
customers, investment,'' Chuck Hewitt, Broadcasting and Cable, June 25, 
2001.
    \5\ ``ECHOSTAR SURPRISES WITH RECORD-BREAKING QUARTER,'' 
Communications Daily, October 24, 2001: ``Ergen said EchoStar `may be 
forced to take down' local TV programming in several markets to comply 
with must-carry rules because EchoStar 7 won't be launched in time to 
meet increased demand. He indicated eliminating service was last 
resort, but finances would be major determinant in decision. `We have 
some markets where we offer 22 channels and there are only a couple of 
thousand' subscribers. [`]We are going to make sure' where service is 
offered `makes economic sense . . . We're going to have to make some 
tough choices.' ''
---------------------------------------------------------------------------
    Many fans of the hit show ``Survivor'' won't be able to see the 
next contestant to be eliminated because EchoStar will have eliminated 
their ability to watch the local CBS affiliate.
    Which markets will be exiled in this EchoStar version of 
``Survivor''? Stay tuned for the answer on January 1st.
    Nevertheless, if the public is still willing to assume that New 
EchoStar will try to serve 100 markets, this won't come about until it 
addresses the incompatibility between the existing DirecTV and EchoStar 
set top boxes. This lengthy process will slow the provision of local 
channels.
    Finally, these 100 markets that New EchoStar claims it will serve 
with local channels leave behind the people who would benefit most from 
getting local channels via satellite. That is, the states with the 
highest penetration of DBS service (and usually the lowest penetration 
of cable service) are least likely to get local channels via New 
EchoStar.
                    specious claims of interference
    The satellite industry says it has no problem with Northpoint's 
terrestrial service--so long as it operates in another spectrum band. 
The FCC has rejected this specious, self-serving excuse.6
---------------------------------------------------------------------------
    \6\ First Report and Order, ET Docket No. 98-206, paragraph 168 
(November 29, 2000): ``These [other] bands either do not offer the same 
amount of spectrum, are encumbered by existing operations, impose 
higher equipment costs, or have significant propagation constraints. 
The use of innovative spectrum sharing techniques will facilitate a 
high level of frequency reuse in this [12 GHz] band and provide a 
variety of broadband services to a vast number of consumers.''
---------------------------------------------------------------------------
    DBS satellites today share the 12 GHz band with each other, 
enabling a tremendous amount of spectrum to be reused over and over 
again. DBS satellites in the 12 GHz Ka Band are stationed nine degrees 
apart over the equator; in the Ku Band, similar satellites are 
stationed just two degrees apart.
    Northpoint's patented technology brings satellite spectrum sharing 
principles down to earth. We avoid interference by transmitting in a 
southerly direction, right into the back end of DBS subscribers' 
reception dishes, which serves as a shield to our transmissions.
    The FCC has noted that in all of the tests of our system, not a 
single DBS subscriber has suffered an outage,7 despite the 
satellite industry's dire predictions that interference was 
``unavoidable'' for ``tens of thousands'' of subscribers.8
---------------------------------------------------------------------------
    \7\ FCC First Report and Order, paragraph 215.
    \8\ DirecTV ex parte filing urging the FCC to reject Northpoint's 
experimental testing in Washington, DC, June 23, 1999.
---------------------------------------------------------------------------
    Based on these successful tests, the FCC established the 
Multichannel Video Distribution and Data Service (MVDDS). The FCC found 
that it would be in the public interest for the DBS industry to share 
the 12 GHz band with terrestrial services such as ours.9
---------------------------------------------------------------------------
    \9\ First Report and Order, paragraph 167.
---------------------------------------------------------------------------
    Clearly, the FCC would not have established MVDDS unless it was 
confident that satellite-terrestrial spectrum sharing is indeed 
feasible. Congress sought and obtained further confirmation that 
terrestrial operations would not harm DBS customers when it directed 
the FCC to commission an independent test.10 The FCC 
selected the MITRE Corporation, which unequivocally concluded, and I 
quote, ``MITRE believes that with implementation of the licensing 
process and other policy recommendations outlined above, spectrum 
sharing between DBS and MVDDS services in the 12.2-12.7 GHS band is 
feasible.'' 11
---------------------------------------------------------------------------
    \10\ Public Law 106-553, Title X, ``Launching our Communities' 
Access to Local Television Act of 2000,'' Section 1012--``Prevention of 
Interference to Direct Broadcast Satellite Services.''
    \11\ Analysis of Potential MVDDS Interference to DBS in the 12.2-
12.7 GHz Band, MITRE Corporation, page 6-8 (April 23, 2001).
---------------------------------------------------------------------------
               dbs: hold auctions, but not for satellites
    The satellite industry's latest line of attack is to subject us to 
a burdensome licensing process to which satellites are not required to 
endure. They say we should have to pay for the right to share the 
spectrum they were given for free.
    Here are the facts:
    The FCC awarded DBS operators in the 12 GHz Ku Band almost 6,000 
MHz of spectrum without an auction.12 In contrast, we are 
seeking just 500 MHz. True, EchoStar did buy some extra spectrum, but 
that was in addition to the 3,075 MHz of spectrum it had already 
obtained for free.13 DirecTV has never participated in an 
auction for its spectrum.
---------------------------------------------------------------------------
    \12\ ``DBS Orbital/Channel Assignments,'' http://wireless.fcc.gov/
auctions/data/maps/dbs.pdf. (Based on FCC's assignment of 185 
transponder channels without an auction. Each orbital slot allocates 
1,000 MHz of spectrum to 32 transponder channels, i.e., 31.25 MHz/
transponder channel times 185 = 5,781.25 MHz.)
    \13\ Northpoint ex parte letter to Chairman Powell, Appendix C 
(November 28, 2001).
---------------------------------------------------------------------------
    While the FCC did auction two partial orbital slots 14, 
this must now be viewed as an anomaly. Just a few months ago, the FCC 
awarded 66,000 MHz of auction-free spectrum to 11 satellite companies--
including EchoStar, DirecTV and Pegasus--who will provide DBS-type 
service in the Ka Band.15
---------------------------------------------------------------------------
    \14\ January 25-26, 1996, 24 channels at 148 degrees; 28 channels 
at 101 degrees.
    \15\ FCC Ka Band ``Second Round'' Order, DA 01-1693 (August 2, 
2001).
---------------------------------------------------------------------------
    We are in a proceeding at the FCC with eight non-geosynchronous 
orbiting satellites (NGSOs) who applied on the same day as us to use 
the same spectrum.16 The FCC determined that we can all 
share the spectrum safely with one another and with DBS incumbents, but 
only our application is being contemplated for an auction.17 
To put this in perspective, the NGSOs seek 25,400 MHz of spectrum; we 
seek just 500 MHz--more than a 50:1 ratio!
---------------------------------------------------------------------------
    \16\ ET Docket No. 98-206.
    \17\ First Report and Order and Further Notice of Proposed 
Rulemaking, paragraphs 331-339.
---------------------------------------------------------------------------
    How is this so? Why would the FCC discriminate against applications 
solely on the basis of technology? The answer is, with respect to the 
satellite applications, federal statute prevents the FCC from 
conducting an auction.18 (While our applications were 
pending, the satellite industry sought and obtained an exemption from 
auctions as a rider to the ORBIT Act, the legislation which privatized 
Intelsat and Inmarsat.)
---------------------------------------------------------------------------
    \18\ Public Law 106-180, Section 647--Satellite Auctions: 
``Notwithstanding any other provision of law, the Commission shall not 
have the authority to assign by competitive bidding orbital locations 
or spectrum used for the provision of international or global satellite 
communications services.''
---------------------------------------------------------------------------
    We firmly believe that this statutory exemption should apply to the 
spectrum used by satellites and not just to the satellites themselves. 
Certainly a statutory clarification is needed to end the obvious 
competitive advantage it bestows upon satellites at the expense of 
terrestrial competitors that would use the same spectrum.
    Putting aside the need for parity, the FCC still lacks the 
authority to hold a spectrum auction in our case because there are no 
mutually exclusive applicants before it. Northpoint Technology alone 
submitted technology for the independent MITRE test, a statutory 
requirement. Another company, MDS America, has advocated an auction, 
but apparently because of its foreign ownership, the company has not 
filed an application.
    Northpoint's technology is patented and has been licensed only to 
its Broadwave affiliates. To wait for new and unknown innovators to 
come forward with a non-infringing technology, just for the purpose of 
holding a spectrum auction, cannot be considered good public policy. 
American consumers need new service now.
                      set top box standardization
    If the merger is approved, at a very minimum conditions must be 
imposed to ensure that customer set top boxes are open to competitive 
services.
    These conditions would replicate the ``open access'' and 
``interoperability'' regulations now required of cable operators and 
cable boxes. They would allow new terrestrial providers to offer 
competitive services to EchoStar customers to either complement (e.g., 
local channels and high speed Internet) or completely replace EchoStar 
service. Consumers should be free to choose to switch providers without 
losing their investment in equipment.
    The FCC reached a similar conclusion with respect to the new 
satellite radio service, for which it has ruled that all Digital Audio 
Radio Service (DARS) operators must design their receiver for 
interoperability with all other DARS operators.19
---------------------------------------------------------------------------
    \19\ 47 CFR Sec. 25.144 (a)(3)(ii)
---------------------------------------------------------------------------
    In practical terms the new regulations should be implemented at the 
same time that EchoStar standardizes its set top boxes. Instead of 
providing a closed set top box that can only receive its service, 
EchoStar should be required to provide all of its customers a box that 
is open to competition. All future set top boxes should be required to 
be designed according to these regulations.
    In order for this to be effective the following three principles 
should be observed.

 All DBS boxes must conform to an open (non-proprietary) 
        standard such as the DVB protocol or other open-standards based 
        (freely available) transmission protocol so that these boxes 
        can be connected to new terrestrial providers.
 All DBS boxes must have separate conditional access, as the 
        rules require for cable boxes.
 Add on or proprietary features should be allowed but must be 
        designed as removable modules (similar to PC cards, for 
        example) such that the basic functionality of the set top box 
        is not disturbed by adding or removing proprietary features.
                             program access
    Before concluding, I would like to comment on an important matter 
on which I believe we share common views with the DBS industry and that 
is program access.
    Section 628 of the Communications Act prohibits exclusive contracts 
between vertically integrated programming vendors and cable operators. 
Congress recognized that cable operators enjoyed a monopoly in program 
distribution at the local level and concluded that exclusive contracts 
would further inhibit competition and diversity. This provision will 
sunset on October 5, 2002, unless the Commission determines it 
continues to be necessary.
    The Commission has noted that the purpose of the restrictions on 
exclusive contracts for this ten year period were intended to foster 
development of emerging competitors to cable, allowing a transition to 
a competitive market for the distribution of programming.
    Regrettably the transition to the competitive market envisioned by 
Congress in 1992 has not occurred, as cable still maintains its 80% 
monopoly in the MVPD marketplace.
    Instead of seeing greater diversity of programming, industry 
consolidation threatens to limit consumer choice. Through its TCI and 
Media One mergers, AT&T became the largest cable operator. AOL, which 
already dominated the ISP landscape, acquired Time Warner, becoming the 
second largest cable operator. Now, number 3 Comcast, poised to merge 
with AT&T Broadband, would overtake AOL/Time Warner and become the 
largest vertically integrated cable operator. Nearly a decade after 
Congress insightfully prohibited exclusive contracts, programming 
content and distribution is even more firmly entrenched in the hands of 
a few powerful cable companies.
    Content is crucial in order for competitors to attract and retain 
viewers. Given the recent and substantial industry consolidation, it's 
even more critical today to maintain the prohibition on exclusive 
contracts. If incumbent cable providers are permitted to use their 
market dominance to inhibit competitors' access to programming, 
competitors will not survive. The ultimate loser will be the American 
people who will be denied the benefits of competition and diversity.
                               conclusion
    Northpoint has been seeking approval for almost eight years. It has 
invented and proven a new technology that can provide low cost services 
to consumers who currently lack service and/or competition. Although 
entrenched incumbents such as the DBS industry have opposed Northpoint, 
we have continued to seek licenses and strongly believe our services 
are now needed more than ever.
    I would like to conclude by reiterating my offer, made nearly three 
years ago, to fully deploy our system throughout all 210 television 
markets within two years.
                                 ______
                                 
                  The Commonwealth of Massachusetts
                                        State House, Boston
                                                   December 4, 2001
The Subcommittee on Telecommunications and the Internet
2125 Rayburn House Office Building
Washington D.C. 20515
    Dear Chairman Upton, Ranking Member Markey and Members of the 
Subcommittee on Telecommunications and the Internet:
    I apologize that my schedule does not permit me to attend the 
Committee's public hearing today on the status of competition in the 
multi-channel video programming distribution marketplace. However, my 
absence does not in anyway indicate less than full support for 
mandating satellite and cable providers operating across the country to 
provide local news channels to all of their subscribers.
    As you know, since the events of September 11, 2001 it is more 
important than ever for people across the country to be informed as to 
what decisions are being made, and what actions are being taken by 
government officials regarding public safety and public health on both 
the state and federal level. It is essential for people to have 
immediate access to not only national news but also a local news source 
that can provide up to the minute accounts of the events of the day.
    With that said, I represent the Second Berkshire District in the 
Massachusetts House of Representatives. It is a large, rural district, 
encompassing parts of Berkshire and Franklin Counties. I write to 
inform you that most of my constituents are unable to receive local 
news coverage from Massachusetts' network stations. As much of my 
district is rural, cable service is not available in all areas and 
consequently most of my constituents rely on satellite providers to 
receive television signals. Additionally, due to the rural nature and 
mountainous terrain of the area, a standard roof top antenna will not 
service homes with local channels almost without exception. I can 
without hesitation make the assertion that this is a problem in other 
parts of the country as well.
    The problem of not having access to the local Boston channels in 
Western Massachusetts stems from the Satellite Home Viewer Improvement 
Act of 1999 (SHVIA). This legislation permitted satellite providers to 
offer local broadcast TV to subscribers, however, SHVIA also gave 
satellite companies the authority to decide whether or not to provide 
local coverage to subscribers. Currently, none of the satellite 
companies are providing local coverage in western Massachusetts. 
Nevertheless, even if the satellite providers decided to provide local 
TV coverage, Berkshire County is considered to be in the Albany, NY 
local market, and Franklin County is in the Springfield, MA market. 
Western Massachusetts still would not receive news from Boston, our 
state's political and economic capital.
    At a time when public safety and public health are of major concern 
across the country, it is imperative that people know of government 
decisions that are being made that affect them. Everyone across the 
country deserves to know immediately breaking news on public health and 
safety, regardless of where they live. On October 2, 2001, 
Massachusetts Governor Jane Swift addressed the citizens of 
Massachusetts on the issue of public safety, which was carried on all 
three local network news stations in Boston; however, most of my 
constituents did not have the means to watch this address.
    This problem is not endemic to Massachusetts. Across the United 
States our own government is not allowing access to local news 
channels; channels that will provide people with the best source 
information at a time when news and information is crucial. The recent 
events in our country illustrate the great need for people to have 
immediate access to news and information. By not mandating that 
satellite and cable providers offer access to local network stations, 
the Government is limiting the public's ability to make timely 
decisions regarding public safety and health in the event of a crisis.
    People need access to local TV news stations and they need it now. 
As this information needs to be provided without delay, I respectfully 
request that you seek to mandate satellite and cable providers 
operating across the country to provide at least one local news channel 
from the political capital of all of their subscribers' respective 
states. On a matter as important as this, politics should not be able 
to trump the dissemination of vital information to citizens.
    Thank you for your time and attention on this matter. If you have 
any questions or require additional information that would assist you 
in the consideration of this issue, I would be more than willing to 
discuss this matter at your convenience. I can easily be reached at 
617-722-2240 or 413-684-5133.
            Sincerely,
                                             Shaun P. Kelly
                                               State Representative

```