Filed by General Motors Corporation
Subject Company - General Motors Corporation
and Hughes Electronics Corporation
Pursuant to Rule 425 under the Securities Act of 1933
and Deemed Filed Pursuant to Rule 14a-12
under the Securities Exchange Act of 1934
Commission File No.: 001-00143
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
)
Application of )
)
ECHOSTAR COMMUNICATIONS CORPORATION, )
GENERAL MOTORS CORPORATION, )
HUGHES ELECTRONICS CORPORATION, )
)
Transferors, ) CS Docket No. 01-348
)
and )
)
ECHOSTAR COMMUNICATIONS CORPORATION, )
)
Transferee, )
)
For Authority to Transfer Control. )
)
To: The Commission
OPPOSITION TO PETITIONS TO DENY AND REPLY COMMENTS
Gary M. Epstein Pantelis Michalopoulos
James H. Barker Philip L. Malet
John P. Janka Rhonda M. Bolton
Arthur S. Landerholm STEPTOE & JOHNSON LLP
LATHAM & WATKINS 1330 Connecticut Avenue, N.W.
555 11(th) Street, N.W. Washington, DC 20036-1795
Suite 1000 202-429-3000
Washington, DC 20004
202-637-2200
Counsel for General Motors Corporation Counsel for EchoStar
and Hughes Electronics Corporation Communications Corporation
February 25, 2002
OVERVIEW & SUMMARY
Now that the merger's opponents have aired their objections, the
Commission may confidently conclude that New EchoStar will provide consumers
with numerous benefits, including:
- giving all Americans access by satellite to their local broadcast
stations;
- creating a true broadband alternative when in many areas of the country
there is no true broadband service whatsoever; and
- doubling (or better) the programming choices each company provides
today, including moving to 12 or more High Definition Television
channels.
These benefits translate directly into effective competition to cable
systems, which have continued to raise their prices unrestrained by either
EchoStar or DIRECTV standing alone, all to the benefit of consumers. The
merger's pro-competitive potential is recognized by the constituency with the
most direct stake in matters of competition and consumer choice - the consumers
themselves. Under the guise of promoting the public interest, the handful of
powerful organizations opposing the merger are pursuing rather obvious agendas
that have nothing to do with the public interest: seeking to improve bargains
they have struck; trying to preserve their competitive position or ability to
continue overcharging rural customers, as they do today; and airing other
unrelated grievances.
Many of the merger benefits will flow from the massive increase in
Direct Broadcast Satellite ("DBS") capacity that will result from the
elimination of duplicative
i
programming - a total of more than 500 identical channels - from the DIRECTV and
EchoStar satellite systems once the companies merge. And as the Applicants
announce here for the first time, the merger will bring consumers across the
United States access to local broadcast channels via satellite with
digital-quality television picture and CD-quality sound in every one of the 210
television Designated Markets Areas in the United States.
Subsequent to the announcement of the merger agreement on October 28,
2001, as part of the pre-merger transition process, EchoStar and DIRECTV have
been analyzing the technical and economic feasibility of a "Local Channels, All
Americans" plan by which every U.S. consumer can have access to
satellite-delivered local television signals. Today, in an Application being
filed contemporaneously with this Opposition, New EchoStar will make that plan a
reality by applying for Commission authority to launch and operate a new
spot-beam satellite that, when combined with other existing and
under-construction EchoStar and DIRECTV satellites, will allow the merged
company to serve all 210 Designated Market Areas ("DMAs"), equaling all
Americans, with local television stations.
New EchoStar will deploy new set-top boxes and satellite dishes capable
of receiving satellite signals from multiple orbital positions. The new
receiving equipment will be made available, free of charge, to all existing
EchoStar and DIRECTV subscribers who will require new equipment in order to
receive their local channels. Consumers across the country will pay the same
price for this DBS service, i.e., one nation, one rate card, regardless of a
subscriber's location. This means that whether for a town of 5 people or a city
of 5 million people, the New EchoStar will provide the same
ii
service for the same rate. And implementation of the plan will begin immediately
upon regulatory approval of the merger, becoming fully operational as soon as 24
months thereafter.
This "Local Channels, All Americans" service vision, however, is
premised entirely upon the EchoStar-Hughes merger being successfully
consummated. Neither company standing alone could achieve the tremendous public
interest benefit of being able to serve every television market in the country.
Certain Petitioners speculate that each company alone might be able to replicate
the merger benefits by building satellites of the Petitioners' own design. These
proposals suffer from two fundamental defects: (i) they make invalid assumptions
about technical feasibility, and (ii) they disregard entirely the question of
commercial feasibility. Even if these super-satellites looked good on paper, no
Petitioner has explained why no one in the world has deployed anything like
them, or how it could be profitable for each company on a stand-alone basis. As
Dr. Robert Willig explains in the attached Declaration, expansion of local
channel service to every DMA would not be economically feasible absent the
merger.
The merger will also create the first true broadband satellite
alternative. For urban areas, this will translate into meaningful
satellite-based competition to cable modem and DSL offerings. For tens of
millions of other Americans, it will translate into their first affordable
advanced service - a true move from zero to one provider. The "digital divide"
in the United States is real: as many as 40 million households in the United
States today do not have access to high-speed Internet and data services, in
large part due to the high cost of delivering these services to homes in less
densely populated
iii
areas. New EchoStar will create a more robust satellite platform that will
liberate these digital "have nots" by offering them a more affordable, viable
broadband service.
Here too, the Petitioners are wrong that each company could achieve
these benefits on its own. The two companies' current broadband offerings are
expensive "niche" products that are hampered by several constraints, do not even
satisfy the Commission's definition of an "advanced service," and have attracted
fewer than 150,000 subscribers combined. The merger will allow New EchoStar to
integrate these products and achieve a more competitive price point. As for the
future deployment of satellite service in the Ka-band, neither company standing
alone would be able to achieve early and affordable service to consumers. The
merger, on the other hand, will give New EchoStar the spectrum capacity,
subscriber base and economies of scale needed to ensure that next-generation
residential broadband service becomes a reality everywhere in the United States,
rapidly and inexpensively enough to matter.
In addition to the consumers, many other parties have supported the
EchoStar-Hughes merger. The most vociferous opposition comes from a handful of
entities, including the National Rural Telecommunications Cooperative ("NRTC"),
Pegasus Communications ("Pegasus"), the American Cable Association ("ACA") and
the National Association of Broadcasters ("NAB").(1) The Commission should
recognize the narrow self-interests of NRTC and Pegasus, who have been in active
litigation against
----------
(1) In contrast, businesses with an interest in greater competition and
output in the MVPD market, such as television equipment manufacturers and
electronics retailers, strongly support the merger. See Comments of Circuit City
Stores, Inc. and Thomson Multimedia.
iv
DIRECTV for years in a contractual dispute over distribution rights. Equally
important, while lamenting the future fate of rural consumers, NRTC and Pegasus
do not explain why they overcharge rural consumers today: in reselling DIRECTV's
service, they charge $3.00 a month more than DIRECTV charges for the same
service in other areas and than EchoStar charges for the equivalent package in
the same areas. The sincerity of Pegasus's concerns about competition is further
impeached by reported statements of a Pegasus executive to the press that a
buy-out of Pegasus by EchoStar would make the most financial sense for both
companies.(2) As for the American Cable Association, it expresses candidly its
fear that the merger will result in price competition in rural areas.(3) This is
the sort of harm to competitors that the Commission should not take into account
in its analysis, except as a benefit to competition and consumers.
The "Local Channels, All Americans" plan also disposes completely of the
concerns expressed by NRTC and NAB with respect to local service. NRTC has
alleged that New EchoStar "does not contemplate expanding local television
service to rural America in DMAs beyond the top 100," which the NRTC states "is
no consolation to the millions of rural Americans who most need local
service."(4) For its part, the NAB's principal stated concern is that
competition between the nation's two DBS providers "has driven the expansion of
local-into-local" and "will lead to more carriage of local
----------
(2) See Ted Hearn, "Pegasus: Contract Bars Post-Merger Competition,"
Multichannel News (Feb. 18, 2002).
(3) See ACA Petition at 14-16 ("EchoStar would have every incentive to [set
its uniform national price] below small cable systems' costs of providing
similar services...")
(4) NRTC Petition at 60.
v
stations."(5) New EchoStar's commitment to serve all 210 DMAs could not answer
those complaints more dispositively, leaving the NAB with no principled basis
for continuing its opposition.(6) The Applicants stand ready to achieve with one
stroke what NAB's members have not achieved in decades - extending the coverage
of local broadcast stations to all areas of the country.
The "Local Channels, All Americans" plan will uniquely benefit rural
subscribers, who without it might never enjoy digitally-delivered local channels
via any distribution medium. And, because of New EchoStar's one nation, one rate
card plan, consumers in rural areas will reap an additional benefit - they will
take advantage of the increased competition in the most populous areas of the
country.(7) Contrary to the claims of some Petitioners, national pricing makes
economic sense. It has been the Applicants' past practice and it is a common
practice for other national providers in network industries, such as Internet
Service Providers and cellular telephone companies. Local promotions may
continue to be a useful tool to the limited extent they have been in the past,
and the Applicants are willing to commit to reasonable requirements in that
regard.
New EchoStar has every incentive to set its national price at strongly
competitive levels instead of extracting additional profits from its existing
subscriber
----------
(5) NAB Petition at iii.
(6) Id. at 7 (opining that "if the merger is approved, it would still leave
markets 101-210, in which 14 percent of the country's population resides, with
no hope of receiving local-to-local service.") (emphasis added).
(7) Pegasus and NRTC vastly exaggerate the number of homes not served by
cable operators, in a stilted effort to argue that the merger would harm rural
consumers.
vi
base as some parties allege. New EchoStar would be "leaving money on the table"
if it restricted itself to existing subscribers. Instead, as Dr. Willig shows,
New EchoStar will have to set the national price low to compete for new
subscribers in the most densely populated and most heavily contested areas of
the country. The one nation, one rate card plan will therefore be a more
effective constraint on MVPD prices in rural areas than EchoStar is on NRTC's
and Pegasus's prices today. Finally, the fears of collusion raised by
Petitioners are equally unwarranted: this particular tango would require
EchoStar to dance with 9 or 10 cable MSO partners at the same time or forego
huge pools of potential subscribers. In the final analysis, the net benefits to
consumers from the creation of New EchoStar far outweigh any anticompetitive
concerns.
There are other miscellaneous attempts by certain parties to litigate
particular disputes or raise parochial concerns that have little bearing on the
Commission's public interest inquiry here. The Applicants urge the Commission to
restrict its analysis to merger-specific issues and remedies, to the extent
applicable, and promptly approve the Application, so that New EchoStar may begin
delivering on its promise of dramatic consumer and competitive benefits to all
Americans, including the carriage of local broadcast channels in all 210
television markets and true broadband services to all Americans.
vii
TABLE OF CONTENTS
PAGE
----
I. THE MERGER WILL PROMOTE MORE CHOICES FOR CONSUMERS AND
MORE EFFECTIVE COMPETITION AGAINST CABLE BY CREATING
EXTRAORDINARY EFFICIENCIES ......................................................... 2
A. New EchoStar Will Expand DBS-Offered Local Channel Service To
Every Television Market in the United States ................................ 3
1. The Petitioners' Technical Arguments Are Based on Flawed
Technical Assumptions and Would Require Quality Sacrifices .......... 6
2. None of the Postulated Super-Satellites Is Commercially Feasible .... 8
3. Neither Company's Stand-Alone Capabilities Allow Local Service
to All Americans .................................................... 12
B. The Merger Will Increase National Programming Choices and Enhance
the Quality of MVPD Service ................................................. 20
C. The Merger Will Make Broadband Service Available to All U.S. Homes .......... 24
D. The Merger Will Allow New EchoStar to Achieve Extraordinary
Efficiencies ................................................................ 26
E. The Commission Has a Unique Competence to Recognize the
Extraordinary Spectrum Efficiencies Flowing from the Merger ................. 30
II. THE MERGER WILL HAVE PRO-COMPETITIVE EFFECTS, AND NO
ANTI-COMPETITIVE EFFECTS, IN THE MVPD MARKET ....................................... 33
A. EchoStar and DIRECTV Compete Primarily Against Cable Operators in
the MVPD Market ............................................................. 33
1. Cable Dominates the MVPD Market ..................................... 35
2. NRTC, Pegasus and the NAB Greatly Overstate the Degree of
Competition Between DBS Providers Relative to Cable ................. 38
3. The Best Evidence Shows That the Degree of Competition
Between EchoStar and DIRECTV Is Modest .............................. 41
4. EchoStar and DIRECTV Have Been Unable to Discipline Cable
Prices .............................................................. 43
5. The Merger Opponents Wrongfully Ignore Other MVPD Providers
and Potential Entrants .............................................. 48
6. Petitioners Cannot Prove the Existence of a DBS Market from
Echostar's Pre-Trial Position in a Dismissed Proceeding ............. 56
B. NRTC, NAB and Pegasus Criticisms Of The FCC's "Homes Passed"
Estimate Are Not Persuasive and Rely on Inaccurate Data Sources ............. 59
C. Petitioners' Analyses Begin From a False Baseline of Healthy
Competition in the MVPD Market ............................................. 66
D. The Merger Will Result In Lower Prices for MVPD Consumers In Urban
And Rural Areas ............................................................ 67
1. The One Nation, One Rate Card Plan Will Be an Effective
Constraint on New EchoStar ......................................... 68
2. "One Nation, One Rate Card" Will Translate Effective
Competition in Urban Areas Into Benefits to All Households and
Renders the "3 to 2" and "2 to 1" Arguments Baseless ............... 73
3. There Is No Realistic Possibility of Collusion Among the Cable
MSOs and New EchoStar .............................................. 76
E. Rural Cable Operators Will Continue To Be A Competitive Factor ............. 77
III. THE MERGER WILL MAKE TRUE BROADBAND SERVICES AVAILABLE
FOR THE FIRST TIME TO ALL AMERICAN HOMES .......................................... 79
A. The Merger Will Create The First True Satellite Broadband Service 79
1. The Current State of Deployment of Advanced
Telecommunications Capability ...................................... 83
2. EchoStar's and Hughes' Current Ku-Band Broadband Offerings
Are Competitively Inadequate ....................................... 90
3. Neither Company's Stand-Alone Ka-Band Ventures Would Allow
Timely Deployment Of An Affordable Broadband Product to
Residential Subscribers ............................................ 96
B. Efficiencies Flowing From the Merger Will Make Possible Deployment of
a Competitive, True Broadband Alternative .................................. 106
C. The Merger Does Not Preclude Additional Entry .............................. 109
D. The Merger Provides A Market Solution to the Lack of True Broadband
Availability While Avoiding the Need for Costly and Contentious
Regulatory Measures ........................................................ 115
E. Nationwide Pricing Will Have the Same Beneficial Effect for Broadband
as for MVPD Services ....................................................... 118
IV. THE MERGER WILL HAVE PRO-COMPETITIVE EFFECTS IN THE VIDEO
PROGRAMMING MARKET ................................................................ 118
A. The Merger Will Promote, Rather Than Impede, Competition In the
Market for Video Programming ............................................... 118
B. The Merger Is Necessary to Promote Competition Among MVPD's For
Video Programming, Particularly in Light of Forthcoming Cable
Consolidation and Recent Judicial Action ................................... 125
C. The Merger Will Not Impair Competition for Local Channel
Retransmission ............................................................. 128
V. MANY PETITIONERS SUPPORT THE MERGER, AND MANY
OPPONENTS' MOTIVES ARE UNRELATED TO THE PUBLIC INTEREST ............................ 131
VI. THE COMMISSION MAY ADOPT THE ONE NATION, ONE RATE CARD
COMMITMENT AS A CONDITION FOR APPROVAL, BUT SHOULD
REJECT OPPORTUNISTIC ATTEMPTS TO IMPOSE COSTLY, NON-
MERGER SPECIFIC CONDITIONS ......................................................... 135
A. Applicants Accept Their Commitment to One Nation, One Rate Card As
a Condition ................................................................ 135
B. The Conditions Proposed By Merger Opponents Are Punitive And Non-
Merger Related ............................................................. 136
C. The Remaining Grievances Do Not Belong In These Proceedings ................ 146
VII. CONCLUSION ......................................................................... 148
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
)
Application of )
)
ECHOSTAR COMMUNICATIONS CORPORATION, )
GENERAL MOTORS CORPORATION, )
HUGHES ELECTRONICS CORPORATION, )
)
Transferors, ) CS Docket No. 01-348
)
and )
)
ECHOSTAR COMMUNICATIONS CORPORATION, )
)
Transferee, )
)
For Authority to Transfer Control. )
)
To the Commission:
OPPOSITION TO PETITIONS TO DENY AND REPLY COMMENTS
EchoStar Communications Corporation ("EchoStar"), General Motors
Corporation ("GM") and Hughes Electronics Corporation ("Hughes") (collectively,
the "Applicants") hereby submit this Opposition to Petitions to Deny and Reply
Comments ("Opposition") in response to the pleadings and comments filed in the
above-captioned proceeding. For the reasons set for in their Application and
this Opposition, the Applicants respectfully request that the Commission
promptly approve the proposed merger.
I. THE MERGER WILL PROMOTE MORE CHOICES FOR CONSUMERS AND MORE EFFECTIVE
COMPETITION AGAINST CABLE BY CREATING EXTRAORDINARY EFFICIENCIES
No party disputes that the merger will free up about half of the
spectrum currently used by the two companies through the elimination of
duplicative programming. Many commenters from consumer advocates to programming
producers recognize the expansion of programming choices and increase in
diversity that will result.(8) These parties recognize that expanded choices can
in turn spur more effective competition with cable and help New EchoStar impose
some true discipline on the ability of cable operators to continue to raise
their prices.
Indeed, as explained in more detail in Section A below, as a
direct result of the merger consumers across the United States will have access
to local broadcast channels with digital-quality television picture and
CD-quality sound in every one of the 210 television markets in the United
States. The merger will also permit greatly expanded high-definition television
("HDTV") programming, pay-per-view and video-on-demand ("VOD") services,
educational, specialty, and foreign language programming and interactive
services.
----------
(8) See e.g., Comments of Consumers Union, The Consumer Federation of
America, and the Media Access Project ("Consumer Groups") at 13-14 ("The
combination of EchoStar and DirecTV would add substantial satellite capacity and
would avoid the redundancy of two competitors having to offer the same local
signals in the same markets. As a result, these two competitors will be able to
offer substantially more local programming as a combined entity than either of
them would be able to do alone."); see also Comments of the National Taxpayers
Union at 1; Comments of the League of United Latin American Citizens at 1;
Comments of Frontiers of Freedom at 1; Comments of Vivendi at ii.
2
Unable to attack these benefits directly, some Petitioners set up
"straw-men" by arguing that each company could achieve these benefits on its
own, without need for the merger.(9) The Applicants show below that each of
these specific arguments must fail. At a general level too, no Petitioner can
deny three straightforward truths about this issue. First, thanks to the
freed-up spectrum, the combined entity can provide roughly twice as many choices
as each company standing alone. Second, while Petitioners make many unrealistic
claims about each party's stand-alone capacity, neither company has had any
reason to hold back and not make the fullest feasible use of the resources to
which it has had access. Third, no matter what each party's stand-alone capacity
is, it is the merger and only the merger which will achieve the end result of
providing all local stations to all Americans and reclaiming scarce spectrum to
increase available capacity.
A. NEW ECHOSTAR WILL EXPAND DBS-OFFERED LOCAL CHANNEL SERVICE TO
EVERY TELEVISION MARKET IN THE UNITED STATES
Subsequent to the announcement of the merger agreement on October
28, 2001, as part of the pre-merger transition process, EchoStar and DIRECTV
analyzed the technical and economic feasibility of a "Local Channels, All
Americans" plan by which every U.S. consumer can have access to
satellite-delivered local television signals. Today, in a satellite application
being filed contemporaneously with this Opposition, New EchoStar will make that
plan a reality by applying for Commission authority to
----------
(9) See e.g., NAB Petition at 75-92; NRTC Petition at 56-65; Pegasus
Petition at 38-49.
3
launch and operate a new spot-beam satellite that, together with the two
companies' operational and proposed satellites, will provide local channel
service to all 210 Designated Market Areas ("DMAs"), equaling all Americans, and
comply fully with mandatory carriage requirements.(10) DIRECTV and EchoStar
engineers have designed a system that enables the receipt of local channels,
other entertainment services and high-speed Internet access using one
consumer-friendly mini-dish. That 18 x 22-inch satellite will be capable of
receiving satellite signals from the merged company's multiple orbital
positions. New EchoStar will deploy new set-top boxes and satellite dishes that
will be made available, free of charge, to all existing EchoStar and DIRECTV
subscribers who will require new equipment in order to receive their local
channels.(11) Consumers across the country will pay the same price for this DBS
service, i.e., one nation, one rate card, regardless of a subscriber's location.
And implementation of the plan will begin immediately upon regulatory approval
of the merger, and the rollout can be completed as soon as 24 months thereafter.
The "Local Channels, All Americans" plan will feature the new
satellite operating in conjunction with DIRECTV 4S, DIRECTV 7S, EchoStar 7 and
EchoStar 8 satellites, for a total of 28 spot-beam frequencies, to collectively
provide local programming of approximately 1,500 TV channels to the 210 DMAs,
with necessary
----------
(10) The proposal will require use of a minimum of four uplink
facilities, including DIRECTV's California uplink center and EchoStar's Wyoming
facility.
(11) This aspect of the "Local Channels, All Americans" plan should
obviate the concern of commenter Steven C. Shapiro that subscribers would be
required to bear the cost of equipment replacements occasioned by the merger.
See Comments of Steven C. Shapiro at 2-3.
4
back-up and service expansion capabilities. This "Local Channels, All Americans"
service vision, however, is premised entirely upon the EchoStar-Hughes merger
being successfully consummated. Contrary to the claims of some of the parties
that have opposed the creation of New EchoStar, the tremendous public interest
benefit of being able to serve every television market in the country is not
achievable by either company standing alone.
Specifically, Pegasus, the NRTC and the NAB each acknowledge the
tremendous public interest benefit of providing more local channels to consumers
in additional markets, but they seek to attack the merger-specificity of this
benefit, and question New EchoStar's commitment actually to provide more local
markets with local channel service. Each of these parties has retained an
engineering consultant to hypothesize ways in which either EchoStar or DIRECTV
on its own might spend hundreds of millions of dollars to expand its system
capacity, even to the point of building new "greenfield" super-systems, in order
to offer local channel service in every local television market in the
country.(12) The merger, these consultants argue, is simply not necessary to
achieve this result.
These arguments are without merit for a variety of reasons:
first, they are based on flawed technical assumptions and require unacceptable
quality sacrifices; second, and most important, they disregard completely the
commercial feasibility of the
----------
(12) See NAB Petition, Exhibit C, Declaration of Richard G. Gould
("Gould Declaration"); NRTC Petition, Exhibit O, Declaration of Walter Morgan
("Morgan Declaration"); Pegasus Petition, Attachment B, Affidavit and Report of
Roger J. Rusch ("Rusch Declaration").
5
various proposed satellite projects. To take on the expense and risk of
constructing and launching such a satellite under the current structure of
fragmented DBS spectrum simply to serve smaller markets does not make economic
sense. Thus, the Petitioners' speculation about each company's stand-alone
capability is incorrect from a technical and commercial feasibility perspective.
Neither party individually has either sufficient spectrum or could make the
business case to adopt this plan alone. No one anywhere in the world has
deployed a commercial satellite with anything near the capability of such
super-satellites. Indeed, if Mr. Rusch's theories had true practical
applicability, there would be no reason why Pegasus could not implement its
expert engineer's plan and provide the entire nation with local video service
from a "super-satellite" located at one of its licensed Ka-band slots. The
simple truth is that nothing short of the proposed merger can enable all
Americans to receive all of their local stations by satellites. Neither company
alone has sufficient capacity to dedicate a tremendous portion of its scarce
spectrum to the expansion of local channel services, and neither company alone
could afford to do it.
1. THE PETITIONERS' TECHNICAL ARGUMENTS ARE BASED ON FLAWED
TECHNICAL ASSUMPTIONS AND WOULD REQUIRE QUALITY SACRIFICES
As explained in more detail in the attached Technical Annex
authored by Dr. Richard Barnett of Telecomm Strategies, NRTC, Pegasus and NAB
engineering consultants make a variety of incorrect, unwarranted or unproven
assumptions about the technical feasibility of their proposals to improve the
capacity of the DIRECTV and EchoStar satellite systems. These include:
6
- assuming compression ratios that either are not presently achievable or
that would result in much poorer video quality;(13)
- proposing the use of MPEG-4 video coding in place of MPEG-2, which
demonstrates a complete misconception about the role and applicability
of MPEG-4 to broadcast-quality video transmissions;(14)
- proposing the use of a new modulation scheme for DBS that is
significantly more susceptible to interference, and compounds antenna
design issues;(15)
- proposing "super-satellites" that would push beyond the mass and power
limits of commercial satellite technology, and that would require a
super-sized antenna as well as significant advances in antenna design
and deployment;(16) and
- proposing systems that pose significant risks of failures and poor
service quality due in part to erroneous assumptions and
misunderstandings concerning satellite spot-beam coverage.(17)
The flawed end result of these theoretical exercises is summed up
by Dr. Barnett. The capacity calculations of the merger opponents rely on
improvements in technology that "are either (a) not yet available and unlikely
to become available in the
----------
(13) Gould Declaration (NAB) at 5-11, 14; Rusch Declaration (Pegasus) at
11.
(14) Gould Declaration (NAB) at 14; Rusch Declaration (Pegasus) at 11.
(15) Gould Declaration (NAB) at 12-14; Rusch Declaration (Pegasus) at
10-11.
(16) Morgan Declaration (NRTC) at 23.
(17) Morgan Declaration (NRTC) at 24-36; Rusch Declaration (Pegasus) at
4-9.
7
near future, or (b) impractical from a business perspective," while the new
satellites proposed are "superficial concept designs only and have not been
rigorously developed to establish their feasibility, cost, schedule or
performance."(18) Thus, Dr. Barnett concludes that "[a]l predictions of capacity
achieved and spectrum used" by the new satellite designs of the petitioners are
"seriously in error."(19)
2. NONE OF THE POSTULATED SUPER-SATELLITES IS COMMERCIALLY
FEASIBLE
Even if the technical flaws in these analyses are ignored, the
submissions by the engineering consultants of Pegasus, NRTC and NAB in essence
merely restate the truism that, with enough time and enough money, almost
anything is possible on paper. They disregard entirely the question of whether
the measures and systems they advocate are commercially feasible and thus able
to be deployed in the foreseeable future under real-world conditions.
As such, these submissions are of no utility to the Commission's
analysis here. As recognized in the Department of Justice Merger Guidelines,
proper competition analysis is limited to alternatives that are "practical in
the business situation faced by the merging firms" and should not rely on
alternatives that are "merely theoretical."(20) And
----------
(18) Declaration of Dr. Richard J. Barnett on Behalf of EchoStar
Communications Corporation, General Motors Corporation, and Hughes Electronics
Corporation, Exhibit B, at 1 ("Barnett Declaration").
(19) Id.
(20) Horizontal Merger Guidelines, Section 4.
8
this principle is embedded in Commission satellite precedent, as well. The
Commission has specifically acknowledged that satellite system design is
"necessarily innovative" and involves "a variety of business judgments."(21)
Thus, the Commission historically has granted substantial deference to a
satellite company's business judgment in this complex area. For example, the
Commission has declined to conduct comparative hearings to evaluate the system
designs of Applicants for mobile satellite spectrum because "[s]ystem design
decisions involve a complex set of trade-offs among engineering, marketing and
financial considerations."(22) The Commission stated it preferred "not to
involve itself in business judgments of this nature."(23) Instead, the
Commission found that a cost-benefit analysis of a "gold-plated" system as
opposed to a "no-frills" system was "a determination better left to the
marketplace."(24) Similarly, with respect to geographic service requirements,
even where DBS service is technically feasible from a
----------
(21) In the Matter of Amendment of Parts 2, 22 and 25 of the Commission's
Rules to Allocate Spectrum for, and to Establish Other Rules and Policies
Pertaining to the Use of Radio Frequencies in a Land Mobile Satellite Service
for the Provision of Various Common Carrier Services, 2 FCC Rcd. 485, 488
Paragraph 25 (1987) ("MSS Spectrum Allocation").
(22) Id. at 487 Paragraph 15.
(23) Id.
(24) Id. In deferring to the business judgments entwined in a mobile
satellite company's system design, the Commission followed its precedent of
avoiding comparative hearings on system design among Applicants for cellular
licenses. See In the Matter of Amendment of the Commission's Rules To Allow the
Selection from Among Mutually Exclusive Competing Cellular Applications Using
Random Selection or Lotteries Instead of Comparative Hearing, 98 FCC 2d 175, 186
Paragraph 19 (1984) ("Cellular Lottery Decision") (stating "[c]ellular design
involves a complex set of trade-offs among engineering, marketing and financial
decisions" that are "essentially business judgments a cellular company must make
in response to the demands of its customers").
9
particular orbital location, the Commission does not require services from that
location to be offered if such service "would require so many compromises in
satellite design and operation as to make it economically unreasonable."(25)
In this case, the capacity expansion "solutions" proposed by
Pegasus, NRTC and the NAB all ignore economics and business judgment because
they focus on one type of programming service - local broadcast channels - to
the virtual exclusion of national programming that DBS providers must continue
to provide in order to be competitive. For instance, as Dr. Barnett observes,
this preoccupation with local channel service in satellite design ignores, for
example, the need to plan for the evolution of HDTV into "an essential national
programming product with vast audience appeal." Dr. Barnett explains it is not
possible today to
accommodate one HDTV channel in each 24 MHz satellite
transponder, although it is possible that this could increase to
two HDTV channels per transponder with further technical
innovations.(26)
Dr. Barnett further testifies, the increased requirement for
transponder capacity capable of carrying national programming is not limited to
HDTV. Other areas
----------
(25) Revision of Rules and Policies for the Direct Broadcast Satellite
Service, 11 FCC Rcd. 9712, 9762 Paragraph 128 (1995); see MCI Telecommunications
Corp., Assignor and EchoStar 110 Corp., Assignee; For Consent to Assignment of
Authorization to Construct, Launch, and Operate a Direct Broadcast Satellite
System Using 28 Frequency Channels at the 110(degrees) W.L. Orbital Location;
American Sky Broadcasting, LLC, Assignor and EchoStar North America Corp.,
Assignee; For Consent to Assignment of Transmit-Receive Earth Station
Authorizations, 16 FCC Rcd. 21608, 21649 Paragraph 42 (1999).
(26) Barnett Declaration at Paragraphs 4-6.
10
of growth in programming include new national networks and additional
pay-per-view, VOD, interactive and educational channels. Therefore, EchoStar and
DIRECTV must plan for growth in requirements for transponders with the ability
to provide national programming. The more of the scarce orbit-spectrum resource
is used up for local programming the less is available to cater for this growth
in national requirements.(27) The simple but all-important point, of course, is
that DBS providers must prioritize different types of programming, and must
strike a balance in allocating their scarce capacity among different types of
services. Thus, the fact that Pegasus expert Roger Rusch, for example, has
designed on paper a theoretical spot-beam satellite operating from a single
orbital location that would maximize the goal of carrying every local broadcast
television station in the country(28) is an academic (but flawed) exercise
wholly irrelevant to the question of whether either company could or could not
do what he theorizes, or more broadly, whether the creation of New EchoStar is
in the public interest. Mr. Rusch has ignored completely the different
real-world business considerations involved in balancing capacity demands for
local channels with the need to add new and additional national programming,
such as HDTV, pay-per-view, VOD, interactive, educational and foreign-language
channels. Simply put, without the greatly enhanced capacity, scale and combined
subscriber base of New EchoStar, neither company alone would strike a balance
that would utilize one-third of its full-CONUS DBS frequencies to provide local
broadcast carriage in the manner Rusch suggests.
----------
(27) Id. at 6.
(28) Rusch Declaration (Pegasus) at 7-9.
11
3. NEITHER COMPANY'S STAND-ALONE CAPABILITIES ALLOW LOCAL
SERVICE TO ALL AMERICANS
As noted above, the Petitioners' extrapolation of universal local
channel service from each company's current and planned capabilities suffers
from technical flaws and a blatant disregard for commercial feasibility. The
decision by a DBS operator to serve a local market involves questions of both
technical and economic feasibility. In assessing each DBS operator's standalone
ability to offer local channel service to subscribers, rather than deal with
fanciful proposals and speculative projections, the Commission must deal with
the facts and economics.
a. CURRENT CAPABILITIES
The current capabilities of existing and planned EchoStar and
DIRECTV satellites are as follows:
- EchoStar currently provides local channel service in 36 DMAs utilizing
full-CONUS satellite beams from the 110(degrees) W.L. and 119(degrees)
W.L. orbital positions, as well as satellites at its 61.5(degrees) W.L.
and 148(degrees) W.L. orbital positions;
- EchoStar recently launched its EchoStar 7 spot-beam satellite into the
119(degrees) W.L. orbital position, and plans to launch EchoStar 8, a
second spot-beam satellite, into the 110(degrees) W.L. orbital position
later this year;
- With these spot-beam satellites in place, New EchoStar expects to be
able to provide local broadcast signals in approximately 50 DMAs using
ten of its fifty licensed full-CONUS DBS frequencies;
- DIRECTV currently serves 41 markets with its DIRECTV 4S satellite, which
has 6 frequencies dedicated to spot-beam use, and is located at
101(degrees) W.L.;
- DIRECTV plans to allocate several more frequencies' worth of CONUS
capacity on an interim basis (pending the launch of another spot-beam
satellite) at the 119(degrees) W.L. orbital position in order to achieve
coverage of ten more local channel markets this year, for a total of 51;
12
- DIRECTV also plans to launch another spot-beam satellite, DIRECTV 7S,
into the 119(degrees) W.L. orbital location in 2003, which could have up
to four frequencies allocated for spot-beam use.
In sum, EchoStar will have the capability of offering local
channel service in approximately 50 DMAs from its spot-beam satellite, in light
of its satellite architecture, economic feasibility considerations and estimated
redundancy needs. In this regard, NRTC expert Walter Morgan is incorrect that
EchoStar on its own can provide all local stations to 80 DMAs by using EchoStar
7 and 8.(29) Although the spot-beams on EchoStar 7 and 8 would have the physical
capability of viewing additional DMAs (meaning all or a large portion of each
DMA), that capability is meaningless: because of must carry obligations, even
under EchoStar's current must carry implementation plan, EchoStar 7 and 8 will
be only able to serve a fraction of these DMAs.
For its part, DIRECTV will have the capability of offering local
channel service in 51 DMAs without dramatically reducing the carriage of other
national programming using CONUS capacity. Assuming that DIRECTV 7S: (i) suffers
no technical complications during construction and is not delayed; (ii) is
launched successfully; and (iii) is not required to be used for backup capacity
in the event that DIRECTV 4S malfunctions, then DIRECTV will have the technical
capability with its combined fleet to serve 103 DMAs in late 2003 or early 2004.
However, the merger opponents' attempt to emphasize this point(30) misses the
mark. DIRECTV simply cannot
----------
(29) See Morgan Declaration (NRTC) at 22.
(30) See NRTC Petition at 58 (stating - erroneously - that DIRECTV can
serve 110 DMAs using satellites already in orbit or currently on order).
13
serve 103 DMAs because, once again, the issue of technical capability is not
meaningful unless it is considered in tandem with the economic realities of
providing local channel service. As set forth in more detail below, at most, the
DIRECTV 4S and DIRECTV 7S satellites will serve approximately 29 additional
DMAs, or approximately 70 DMAs total, and it may likely serve less.
b. THE ECONOMICS OF PROVIDING LOCAL CHANNEL SERVICE
As Dr. Willig observes, in assessing the question of how many
DMAs each DBS firm is capable of serving, the merger opponents "have only
focused on technical feasibility, while ignoring the crucial issue of economic
costs and benefits."(31) In particular, when the DBS firms are determining the
DMAs in which local channels should be added, there are at least three major
factors which influence that determination. First, an attempt is made to
calculate the expected return from adding local channels in that DMA,(32) and as
Dr. Willig notes, "a key factor in determining the expected return from adding
local channels is the size of the DMA: According to both DBS firms, larger DMAs,
all else being equal, are associated with larger expected revenue - primarily
because the expected increase in total new subscribers are greater in larger
DMAs."(33)
----------
(31) Declaration of Dr. Robert D. Willig on Behalf of EchoStar
Communications Corporation, General Motors Corporation, and Hughes Electronics
Corporation, Exhibit A, at Paragraph 9.
(32) Id. at Paragraph 10.
(33) Id. Population growth by DMA is also factored into the analysis.
14
Second, another important factor in the process of selecting DMAs
has been the penetration that the firm has in that DMA, since a significant
share of existing subscribers will "take" local channels.(34) DIRECTV, for
example, has been very concerned about losing its installed subscriber base in a
DMA to the incumbent cable provider, so DIRECTV has been more likely to
introduce local channels in DMAs in which it has a high penetration rate.(35)
Third, the costs of providing local service are also taken into
account. In this regard, much of the cost associated with providing local
channel service is "fixed" - that is, it does not vary with the number of
subscribers.(36) As explained by Dr. Willig in more detail, the cost factors
evaluated by the companies in determining markets in which to provide local
channel service include backhaul costs, number of local channels that must be
carried, and opportunity costs - the competitive impact of reduced national
programming or other services.(37)
In summary then, EchoStar and DIRECTV each evaluate "the net
present value of adding local channels, and only decide to expand local channel
coverage that will bring them a sufficient return." As the size of DMAs
decreases, it is less likely that
----------
(34) Id. As Dr. Willig notes further, DIRECTV has used a high DBS
penetration rate as a "signal" of other factors that could make the introduction
of local service more profitable. For example, a high DBS penetration rate may
indicate that the local cable provider offers an inferior product. A high DBS
penetration rate may also be a signal that the area is conducive to DBS service
- that is, many households can "see" the southern sky where the DBS satellites
orbit the earth. Id. at n.4.
(35) Id.
(36) Id. at Paragraph 11.
(37) See id.
15
the return from adding local stations in these areas makes financial sense from
either company's individual perspective - "the increased revenue potential
decreases as the size of the DMA decreases, but the backhaul and opportunity
costs stay relatively constant."(38)
Notwithstanding its posture here that each DBS firm could serve
every television market in the country, the NRTC understands these economics.
During the Commission's SHVIA implementation proceedings, the NRTC observed that
"[e]ven assuming that DIRECTV and EchoStar were to expand their local service to
cover 50% more of the DMAs than they have announced, which is highly unlikely,
their local service offerings would still cease to exist at Market # 65" due to
the facts that "[t]here is not enough satellite capacity available" to each
provider, "nor is there a large enough subscriber base."(39)
The NRTC had it right. Applying these economics to DIRECTV's
case, for example, once the company launches its DIRECTV 7S satellite in late
2003, it will have the technical capacity to serve 103 DMAs. The economic
reality, however, due to the factors discussed above, is that DIRECTV would not
likely serve more than about 70 DMAs(40) (fairly close to the NRTC estimate) due
to the opportunity costs and expected returns, and likely would serve less.
----------
(38) Id. at Paragraph 13.
(39) Comments of the National Rural Telecommunications Cooperative, CS
Docket No. 00-96 (July 14, 2000) at 4-5.
(40) DIRECTV expects that DIRECTV 7S could provide local channels to
approximately 29 additional DMAs by utilizing state-of-the-art spot-beam
technology and three of the 32 frequencies at 119(degrees) W.L.
16
c. SERVING 210 DMAs MAKES NO ECONOMIC SENSE FOR
EITHER ECHOSTAR OR DIRECTV AS INDIVIDUAL
COMPANIES
The economics that Petitioners have ignored in overestimating the
number of DMAs that EchoStar and DIRECTV could feasibly serve with their
existing and planned satellites also apply with even more force to the fanciful
notion that each company would be able to justify building and launching
additional satellites simply to provide local channel service to every DMA in
the country with their existing scarce channel capacity. As Dr. Willig observes,
there are two primary reasons that neither DIRECTV nor EchoStar could serve all
210 DMAs on their own. First, each firm would have to utilize a significantly
greater number of additional DBS frequencies to offer local channels to all 210
DMAs, which translates to about 10 programming channels' for each frequency that
could otherwise be used to provide national programming or expanded advanced
video services.(41) The benefits from these national channels (or advanced video
services) to each company are extremely significant, since consumers have
indicated that the leading reason for switching to DBS has been the provision of
"more channels." Dramatically reducing each company's spectrum capacity to
provide more local channel service thus "would likely have a significant adverse
effect on the DBS firms' competitiveness and profitability."(42)
----------
(41) Willig Declaration at Paragraph 14.
(42) Id. DIRECTV, for example, has 37 full-CONUS frequencies available
for national programming and advanced services. Reducing that number by nine
frequencies would represent a more than 24-percent reduction in capacity to
provide national programming or advanced services. Id. at n.9.
17
The second factor is cost. Neither EchoStar nor DIRECTV can provide
service to more than a limited number of DMAs with their current and expected
fleets of spot-beam satellites, and cannot hope to serve every market in the
country with them. And even if 103 markets could feasibly be served, to
contemplate the provision of local service to the remaining 107 DMAs would
require the launch of another spot-beam satellite. As Dr. Willig observes:
Spot-beam satellites typically cost between $220 million and $300
million to construct, launch, and insure. The expected benefits
of providing local service to these 107 DMAs would therefore have
to be large enough to cover the opportunity costs of forgoing
national programming (or advanced services) and the expected
costs of providing the service including the cost of the new
spot-beam satellite. Absent the merger, expanding local service
to all 210 DMAs would not be profitable.(43)
These points highlight the error of the NRTC's suggestion that
each DBS operator could provide local channel service in many more markets with
the addition of "just one additional" spot-beam satellite beyond those on
order.(44) These additional proposed satellites would cost each provider up to
$300 million to construct, launch and insure, with only limited economic
benefits because of their local channel focus, and a reduction in capacity that
would be otherwise used for the expansion of HDTV, VOD and other national
program offerings. In addition, each company would separately incur backhaul and
other costs, and the potential available subscriber base in each market
----------
(43) Willig Declaration at Paragraph 15.
(44) NRTC Petition at 58 (citing Morgan Declaration).
18
would be reduced. In short, NRTC proffers a completely unrealistic proposition
from a technical and economic perspective that neither provider would ever
pursue.
By contrast, New EchoStar will have access to a tremendous amount
of new DBS capacity freed up by the elimination of duplicative programming
content, which directly translates into a sensible and efficient satellite
design and configuration that is actually capable of being implemented. Once
again, as Dr. Willig states:
Following the merger, however, the economics of providing local
service to additional DMAs are altered. The combined current and
potential subscriber base of the two DBS firms raises the returns
on the investment in providing local service to smaller markets
by spreading the fixed cost of providing local service over the
larger expected revenue that would come from a larger subscriber
base.(45) Furthermore, the opportunity costs of transferring a
significant number of frequencies from use for national
programming (or advanced services) to use for local services are
sharply reduced.(46)
Moreover, as Dr. Willig observes, the combined current and
potential subscriber base of the two DBS firms raises the returns on the
investment in providing local service to smaller markets by spreading the fixed
cost of providing local service over the larger expected revenue that would come
from a larger subscriber base. As
----------
(45) Besides the revenue from potential new subscribers, the
larger-than-expected revenues are generated by two factors: first, the ability
to sell the local service to a larger existing subscriber base, and second, the
ability to protect a larger subscriber base from switching to cable - as noted
below in the text, carrying local channels is an important service to maintain
extant subscribers.
(46) Willig Declaration at Paragraph 16. (footnote omitted)
19
noted above, in the absence of the merger, the individual firms would not be
able to serve these communities. Therefore, the merger is necessary to achieve
this efficiency.(47)
NRTC has accused EchoStar and Hughes of failing to make "specific
commitments" to serve many more local markets than the companies currently
serve,(48) while the NAB challenges the extent to which the merger will result
in a "net gain" in local channel service relative to the markets EchoStar and
Hughes currently plan to serve.(49) Indeed, the NAB's stated principal concern
is that competition between the nation's two DBS providers "has driven the
expansion of local-into-local" and "will lead to more carriage of local
stations."(50) Now that merger planning has resulted in the "Local Channels, All
Americans" plan, with a firm commitment by New EchoStar - and only New EchoStar
- to bring it to reality, all such concerns are simply not valid.
B. THE MERGER WILL INCREASE NATIONAL PROGRAMMING CHOICES AND
ENHANCE THE QUALITY OF MVPD SERVICE
As set forth in the Application, the merger of Hughes and
EchoStar will yield other tremendous benefits to consumers of multichannel video
services, such as expanded and new programming choices that include: more
national programming networks; greatly expanded HDTV offerings; new and expanded
VOD and pay-per-view
----------
(47) Id.
(48) NAB Petition at 58
(49) Id. at 79-80.
(50) Id. at iii.
20
services; additional educational, specialty and foreign language offerings(51);
and new interactive services. In the process of providing these benefits to the
consumer, New EchoStar will continue to drive the evolution of DBS technology as
the incumbent cable operators' most formidable competitor, and will continue to
erode these companies' undisputed dominance of the MVPD marketplace.
Indeed, a prime example of this phenomenon is HDTV. Because HDTV
is so bandwidth intensive, neither company standing alone will be able to deploy
more than a few channels of HDTV programming. By contrast, New EchoStar (in
addition to being able to provide local channel service in 210 markets, equaling
all Americans) will have the capacity to provide at least twelve HDTV channels,
and possibly more. As Thomson Multimedia, one of the world's largest
manufacturers of consumer products, observes, New EchoStar's plan "to expand the
number of available high-definition programming channels on a combined satellite
platform" is a move that "will invigorate other operators in the cable and
terrestrial TV business to offer more HDTV programming to consumers."(52)
Similarly, Circuit City Stores, Inc., one of the nation's largest retailers of
consumer electronics products, observes that "the broader offer of HDTV content
by a satellite MVPD provider will most certainly spur competition in this
----------
(51) The Application is supported by the League of United Latin American
Citizens, the oldest and largest Hispanic civil rights group. "[The League]
believes that the proposed merger . . . would provide improved communications
services to the nation's Hispanic community . . . EchoStar & DTV have offered a
great deal of programming for Spanish-dominant and bilingual households, but the
potential exists for even more." Comments of the League of United Latin American
Citizens at 1.
(52) Comments of Thomson Multimedia at 1.
21
area from cable operators and necessarily help speed the rollout of this
technology nationally."()(53-54) As Sharp Electronics Corporation puts it in its
letter supporting the merger, "[s]uch an increase in HDTV capacity will provide
incentives for programmers to increase HDTV programming, consumers to buy more
HDTV equipment, and competitors in the cable and broadcast industries to upgrade
their HDTV capabilities, all resulting in better service for consumers and a
timely return of analog broadcast spectrum to the public."(55) In sum, as cable
systems continue to "go digital" to compete with the competition that DBS
operators have already brought to the MVPD marketplace, New EchoStar will
continue to compete aggressively with the cable incumbents and drive them to
improve their own products, pricing, and service quality.
The creation of New EchoStar also will not, as the NRTC asserts,
result in a "loss of choice" for rural Americans."(56) Indeed, not only is the
NRTC's view not
----------
(53) As Dr. Barnett observes, at present, it is only possible to
accommodate 1 HDTV channel on each 24 MHz transponder. Barnett Declaration at
Paragraphs 4-6.
(54) Comments of Circuit City Stores, Inc. at 5.
(55) Letter from Robert Scaglione, Vice President-Marketing, Consumers
Electronics Group, Sharp Electronics Corporation, to Attorney General John
Ashcroft, U.S. Department of Justice and Chairman Michael Powell, Federal
Communications Commission (Feb. 4, 2002).
(56) NRTC Petition at 30. Nor is it true that the Applicants plan to
consign all national programming to the 101(degrees) W.L. orbital location, as
suggested by the State of Alaska. See Comments of the State of Alaska at 8-9
(expressing concern that an eastward shift of key national programming from
119(degrees) W.L. to 101(degrees) W.L. would eliminate or degrade service to
parts of Alaska). The satellite Application filed today by Applicants makes
clear that the merger will result in significantly more national programming
from 119(degrees) W.L. than is currently available. Specifically, under the
Applicants' plan, 9 of the 32 DBS frequencies at 119(degrees) W.L. will be
devoted to spot-beams (one of which will be directed to Alaska). The remaining
23 frequencies will, therefore, be available for national programming. This will
likely result in a significant increase in the national programming transmitted
from the westernmost full-CONUS slot. Alaska too will
(Continued...)
22
shared by other rural constituencies,(57) the proposition itself falls on its
face. First, the elimination of extensive programming duplication by EchoStar
and DIRECTV will result in a significant increase in the number and types of
national programming, including HDTV programming, made available to DBS
subscribers. Subscribers in rural areas will enjoy all the benefits of this
expanded programming, benefits that simply could not be made available to them
due to spectrum constraints in the absence of a merger. Second, to the extent
that NRTC (and its members and affiliates, including Pegasus) currently has the
right to distribute DIRECTV programming in competition with EchoStar in rural
areas, that contractual right will be recognized by New EchoStar. Accordingly,
in those rural territories served by NRTC, there will be no reduction in the
number of providers of DBS service.
In addition, as a direct result of New EchoStar's plan to serve
every market, equaling all Americans, with local channel service, rural
Americans will receive access to local channel service, with digital quality
pictures and CD quality sound, that they have never enjoyed before, and could
not receive but for the merger. Indeed, a significant portion of these
subscribers may not even be able to receive quality over-the- air television
broadcast signals, such that New EchoStar will actually increase the number
----------
certainly share in the huge benefits of doing away with duplication of national
programming services between the two companies.
(57) See, e.g., Comments of the Louisiana Farm Bureau Federation at 1;
Letter to Chairman Michael Powell from M.J. "Mike" Foster, Jr., Governor of
Louisiana (Jan. 17, 2002) (merger will benefit rural residents of Louisiana);
Comments of Jeff Hoffman, Champion Rural Economic Area Partnership Alliance
Director at 1; Comments of Amy Pastor, Church Point (La.) Chamber of Commerce at
1.
23
of television households in rural areas. NRTC's claim that New EchoStar's
"promised increase in local service ignores" rural consumers(58) is flatly
incorrect.
Finally, the enhanced ability of New EchoStar to provide more
programming choices necessarily means more carriage opportunities for
independent programmers who historically have had trouble gaining carriage on
cable systems. To maintain its competitive edge against cable operators, New
EchoStar would have a clear incentive to differentiate itself through innovative
independent programming sources.
C. THE MERGER WILL MAKE BROADBAND SERVICE AVAILABLE TO ALL U.S.
HOMES
As discussed in more detail in Section III below, the merger will
provide New EchoStar with the spectrum capacity and economies of scale to create
a true broadband "advanced service" alternative. In doing so, it will help cure
the real problem, which the Petitioners assume away.(59) That problem is simply
the unavailability of true broadband service to millions of rural Americans and
the lack of effective broadband competition for all remaining consumers.
The high-speed Ku-band access services provided by the Applicants
today do not cure this problem - they do not satisfy the Commission's definition
of an "advanced service." Nor could either company standing alone deploy on a
timely basis an advanced residential service of mass scale and appeal at an
affordable price. Partly for
----------
(58) NRTC Petition at 60.
(59) See e.g., NRTC Petition at 42-51; NAB Petition at 99-102; Pappas
Telecasting Companies Petition at 6.
24
these reasons, SPACEWAY has been developed with a focus on the larger
commercial, or "enterprise," customers, while EchoStar's Ka-band program has
remained modest in scope. Both of these Ka-band programs will need to be
refocused and integrated with one another to achieve the required economic scale
for ubiquitous residential true broadband service. Therefore, the effects of
this transaction on the broadband market are more akin to an increase in the
number of true broadband competitors from "zero to one" in many areas and
"one-to-two" or "two-to-three" in other areas.
Ultimately, the question for the Commission is simple: will it
try to tackle the limited availability of advanced services throughout America
with a web of costly cross-subsidy and regulation? Or, will it allow a
multi-billion dollar private capital initiative to create a true broadband
competitor that will provide advanced services to virtually all American homes?
The latter alternative clearly is the better one for the public interest.
Given that there are large portions of the country that will not
be able to receive cable modem or DSL service any time soon, the roll out of a
competitively priced satellite broadband service will result in large consumer
benefits. As with the video service, there are incentives to price this service
subject to a national pricing policy such that the price for basic broadband
service will be set on the basis of competition with cable modem and DSL
services, thereby ensuring that rural customers will receive the benefits of
this new service.
25
D. THE MERGER WILL ALLOW NEW ECHOSTAR TO ACHIEVE EXTRAORDINARY
EFFICIENCIES
In addition to the spectrum efficiencies discussed above, the
merger will allow New EchoStar to substantially improve existing equipment and
services to consumers at a lower cost.
First, New EchoStar will provide a unified DBS firm with a stable
and better utilized satellite fleet. In addition to enabling innovative
merger-specific efficiencies such as the "Local Channels, All Americans" plan,
the merger will provide much greater flexibility to provide economical in-orbit
backups. Over time, New EchoStar will also be able to rationalize its satellite
fleet to the licensed frequencies of the combined company. For example, today,
DIRECTV is using an entire DBS satellite at the 110(degrees) W.L. orbital
location to utilize only 3 frequencies of licensed bandwidth at that orbital
position. New EchoStar will be able to match its satellites much more
efficiently to spectrum that is no longer fragmented between the companies.
The Applicants also anticipate that the standardized equipment
and services of New EchoStar will be functionally superior to either company's
existing equipment. Moreover, because of the economy of scale resulting from the
combined customer base, the Applicants anticipate a tremendous savings in
operational and manufacturing costs in providing these improved equipment and
services. Finally, the increased customer base will also allow New EchoStar to
decrease programming costs and may be the basis for creating a new programming
platform. Together, these synergies will create a dynamic company that will be
able to vigorously compete with
26
cable by offering consumers a more robust service at cost lower than either
party could achieve alone.
The combination of EchoStar and Hughes will allow the companies
to use the best equipment, technology, practices, and services of each to offer
a better and less expensive product to consumers. The Petitioners intend to
standardize the equipment used by its customers by combining the best elements
of the technology of EchoStar and Hughes. The next generation of DBS and
broadband equipment will offer a level of service currently unavailable. One
aspect of this will be the "Local Channels, All Americans" plan described above,
but Petitioners anticipate many other efficiencies as well. Functionalities
available to EchoStar customers that are not currently available to Hughes
customers or vice versa will be incorporated into the standardized equipment
thereby improving services to all customers and potential subscribers.
Standardization of components will also create an economy of
scale that will reduce costs. For example, New EchoStar will be using a
standardized set top box. By increasing the volume of units ordered, New
EchoStar anticipates substantial manufacturing cost savings that could be used
to reduce charges to customers. The increased potential customer base would also
make more economically attractive opportunities to integrate New EchoStar
equipment with other services and devices. By increasing the size of the market,
companies such as television or computer manufactures may be more interested in
creating products that integrate DBS and broadband abilities directly into their
products.
Consumers will also benefit from the consolidation of the service
departments of EchoStar and Hughes such as customer service and billing
operations.
27
New EchoStar would take advantage of the most efficient aspects of both
companies to raise the level of service it would provide to customers. In
addition, because of the economies of scale, it is anticipated that the cost of
providing this improved service will decrease on a per customer basis.
Similarly, the merger will allow the companies to eliminate duplicative
operational practices. For example, the cost and time of programming backhaul
and uplink would halved because New EchoStar would only need to perform these
functions once where today each company must perform these operations
separately.
New EchoStar will also gain tremendous efficiencies as a result
of the combination of the EchoStar and Hughes customer bases. By having a
greater number of viewers, New EchoStar will be in a stronger position to
negotiate with programmers for more programming options at a lower per customer
cost. Moreover, the increased number of customers may make the creation of an
independent programming platform economically viable where it is currently
impractical for either company alone.(60) With a large enough audience, New
EchoStar will be in a position to produce and offer new and alternative
programming choices to consumers. Finally, the greater number of viewers will
make advertising on New EchoStar more valuable. Thus, by leveraging the size of
its customer base, New EchoStar will be able to increase the programming options
for its customers while decreasing costs.
----------
(60) See Section IV.A, infra.
28
As a whole, the efficiencies of the merger will result in better,
more competitive services that will offer consumers greater programming and
broadband options in a more cost effective manner.
Nor is it possible, as the NAB suggests, for these efficiencies
to be realized through some type of spectrum-sharing joint venture.(61) Such a
venture is inherently unworkable outside of a merger scenario, primarily because
it would require each company to cede control over a significant part of its
"crown jewels" - its core satellite and spectrum resources. No court or agency
has ever agreed that a transaction short of merger is a palatable alternative
when it requires contribution of each firm's core assets. In fact, in this case
there is unusually tangible proof that a joint venture would not work: the
parties tried to negotiate one and failed because it was unworkable.
There are only three options for control in an arrangement like
the one the NAB proposes - control by DIRECTV, control by EchoStar, or shared
control with the potential for deadlock. Absent a merger, neither EchoStar nor
DIRECTV would cede the essential satellite assets of their businesses to its
competitor to control, or to a separate entity that itself would be subject to
instability and deadlock. Because spectrum sharing would require numerous
decisions that would significantly disadvantage one firm or the other, these
control questions are ruinous.
Considering how the transition issues would be addressed in such
a joint venture drives home the problem. Spectrum sharing would likely require
the replacement of one firm's consumer equipment. The firm that had to replace
its equipment would be
----------
(61) NAB Petition at 90-92.
29
put at a significant disadvantage, even if the costs were shared, because
consumers and retailers would stop buying that firm's equipment as soon as the
decision was announced. Similarly, the decision on how to use each firm's
satellite assets could significantly and adversely affect one firm or another in
the event the agreement was terminated. Issues such as potential satellite
failures and back-up plans would also be extremely difficult to address with
separately owned diverse fleets of satellites. Finally, the general instability
of such an arrangement would make the undertaking prohibitively risky, and would
discourage investment in research and development needed to move the platform
forward. Only the merger can provide the stability and decision making process
to overcome these obstacles.(62)
E. THE COMMISSION HAS A UNIQUE COMPETENCE TO RECOGNIZE THE
EXTRAORDINARY SPECTRUM EFFICIENCIES FLOWING FROM THE MERGER
The Commission is uniquely positioned to evaluate the
extraordinary merger-specific efficiency of eliminating redundant spectrum use.
In fact, the Communications Act requires the Commission to ensure the efficient
use of the spectrum.(63) The Commission recently summed up the importance of
spectrum efficiency and its role in achieving it:
----------
(62) In addition to the control issues, a joint venture would require
unwieldy procedural entanglements. The firewalls necessary to avoid sharing of
competitive information would massively complicate the relationship of the firms
with a stand-alone joint venture entity, exacerbating the control and stability
issues.
(63) See 47 U.S.C. Section 303(g) (requiring the Commission to "[s]tudy
new uses for radio, provide for experimental uses of frequencies, and generally
encourage the larger and more effective use of radio in the public interest.");
see also 47 U.S.C. Section 309(j)(3)(D)
(Continued...)
30
The growing demand for spectrum by new services and the
continuing development of radio communications technologies make
spectrum management a unique challenge. Spectrum is a valuable
and finite public resource that must be allocated and assigned in
a manner that will provide the greatest possible benefit to the
American public. At the same time, it is important to encourage
the development and deployment of new, more efficient
technologies that will increase the amount of information that
can be transmitted in a given amount of bandwidth.(64)
Within that policy, across a host of telecommunications sectors, the Commission
has consistently treated duplicative use of the spectrum with skepticism.(65)
----------
(in designing competitive bidding methodologies, the Commission shall seek to
promote the "efficient and intensive use of the electromagnetic spectrum.").
(64) In the Matter of Principles for Reallocation of Spectrum to
Encourage the Development of Telecommunications Technologies for the New
Millenium, 14 FCC Rcd. 19868, 19870 Paragraph 7 (1999); see also In the Matter
of Principles for Promoting Efficient Use of Spectrum by Encouraging the
Development of Secondary Markets, 22 Comm. Reg. 791 (2000).
(65) For example, in denying a request for the use of INTELSAT
facilities to provide an identical telecommunications service already in
existence on domestic satellite facilities, the Commission stated: "[g]iven the
finite nature of the geostationary orbital locations for communications
satellites... and transponder capacity on those satellites, the use of two
transponders (one domestic and one INTELSAT) for identical service clearly is
not an efficient use of this limited resource." Transborder Satellite Video
Services, 8 FCC 2d 258, 281 n.30 (1981). See also In re Revision of Radio Rules
and Policies, 7 FCC Rcd. 2755, 2783 Paragraph 57 (1992) (In the radio
broadcasting context, reasoning that it saw "no benefit to the public [by]
permitting commonly owned same-service stations in the same market to
substantially duplicate programming," the Commission limited simulcasting by
such stations to 25 percent of the broadcast schedule.); In re Application of
State of Idaho for a Waiver of the Rules to Allow Federal Government Agencies to
be Provided Service in the Private Operational Fixed Microwave Radio Service, 3
FCC Rcd. 5910 (1988) (In ruling favorably upon a requested waiver of the
Commission's rules by the State of Idaho to enable it to share several Private
Operational-Fixed Microwave Radio Service facilities with the United States
Forest Service and a federal energy body, the Commission reasoned that "the
proposed sharing w[ould] conserve public funds and (Continued...)
31
Notwithstanding the Commission's pro-efficiency policies, the NAB
argues that the Application should be denied because the "Commission has never
agreed to allow a single firm to control 100 percent of an entire spectrum [sic]
.. . . ."(66) This argument is both inapplicable here and incorrect.
First of all, the merger would not give New EchoStar such
control. To arrive at its "100% control" idea, the NAB offers a gerrymandered
definition of the relevant universe of spectrum - in its view, it is "all CONUS
high-power Ku-band spectrum."(67) This definition excludes the DBS licenses held
by R/L DBS and Dominion. Even under its own definition, moreover, the NAB
ignores the licenses available for high-power Ku-band FSS satellites for the
full-CONUS DBS slots allotted by the ITU to Mexico, Argentina, Canada and other
countries. In fact, two Applications are pending before the FCC to allow service
to the United States from two orbital locations allotted to Canada.(68)
Second, the Commission's competition analysis is not based on a
"band- by band" market definition. The inquiry is based on the competition
available in the entire market, not only users of a particular spectrum band. As
noted in Section II.A, below, the product market is multichannel video
programming distribution, not three
----------
spectrum space by avoiding expensive and unnecessary duplication of facilities
and service [and that] the public interest clearly favors this result.")
(66) NAB Petition at 106.
(67) Id.
(68) See Digital Broadband Applications Corp., File No.
SES-LIC-20020109-0023; WSNET Holding, Inc., File No. SES-LIC-200111121-02185.
32
DBS slots, not even satellites only. The comparison drawn by the NAB from the
DARS licensing proceeding is inapposite for a similar reason. The DARS licensees
were then, and are now, the only providers of unbundled nationwide subscription
radio. DBS providers, by contrast, have to compete against much larger,
entrenched incumbents that do not use the "high-power Ku-band spectrum" at all.
Finally, the Commission has, in fact, sanctioned the use of the spectrum
allocated to a particular service by one licensee.(69)
II. THE MERGER WILL HAVE PRO-COMPETITIVE EFFECTS, AND NO
ANTI-COMPETITIVE EFFECTS, IN THE MVPD MARKET
A. ECHOSTAR AND DIRECTV COMPETE PRIMARILY AGAINST CABLE
OPERATORS IN THE MVPD MARKET
EchoStar and DIRECTV compete in the market for Multichannel Video
Program Distribution ("MVPD"). This market (and not a DBS-specific one) has been
identified by both the Department of Justice(70) and the FCC(71) as the relevant
market for
----------
(69) When the Commission first established the Mobile Satellite Service
("MSS") in the L-band, it received competing Applications from 12 companies,
invited all the Applicants to form one consortium, American Mobile Satellite
Corporation, and gave one license to that entity. The Commission purposefully
elected to license one large consortium as opposed to multiple smaller entities
because, among other things: a larger amount of bandwidth would permit a greater
variety of services to be provided by an MSS system, and a larger customer base
to be served; the high cost of an MSS system and the amount of spectrum
available for MSS warranted the licensing of one initial MSS system using the
entire allocated spectrum; and joint ownership of an MSS system would best
permit a variety of competitive mobile satellite services to be made
expeditiously available to the public. These same considerations would justify
to a much greater extent here the creation of New EchoStar even if there were
not ample other spectrum in the same band available for other competing
providers.
(70) In 1998, the Department of Justice ("DOJ") sued to enjoin
Primestar, a joint venture of large cable companies, from acquiring rights to an
orbital slot for nationwide DBS service that were held jointly by News Corp. and
MCI Telecommunications Corp. In the suit, DOJ alleged that allowing cable
operators through Primestar to control those DBS assets would eliminate the
possibility that those assets could be used to compete
(Continued...)
33
purposes of evaluating transactions such as the EchoStar-Hughes merger.(72)
Although the MVPD market encompasses a number of different distribution
technologies, there can be no doubt that this market continues to be dominated
by incumbent cable operators, which continue to hold an approximately 78% share
according to the most recent FCC analysis.(73)
The principal merger opponents and their economists do not take
serious issue with the notion that the relevant product market is MVPD, but they
quibble around its edges and attempt to distort a number of facts and
marketplace developments in order to construct a case that the merger will
lessen rather than promote MVPD competition. Specifically, these parties have
adopted a four-pronged strategy that seeks to: (i) minimize the degree to which
cable operators dominate the MVPD marketplace; (ii) overstate dramatically the
degree to which DIRECTV and EchoStar are competitively
----------
against cable. DOJ also alleged that the MVPD market was the relevant product
market for the purpose of evaluating Primestar's proposed purchase of the DBS
assets. See United States v. Primestar, Inc., Civ. No. 1:98CV01193 (JLG) (D.D.C.
May 12, 1998).
(71) In re Application of MCI Telecommunications Corp., 15
Communications Reg. (P&F) 1038 (1999), at para. 9 & n.29 (finding that the
MVPD market was the relevant market for purposes of analyzing this DBS transfer
of control application, and moreover, that "DOJ concurs with the Commission's
analysis that the relevant product market is the provision of MVPD services.")
(72) Annual Assessment of the Status of Competition in the Market for
the Delivery of Video Programming, 9 FCC Rcd. 7442, 7474 Paragraph 62 (1994)
("First MVPD Competition Report") (from the outset, the FCC recognized that DBS
would "readily compete with cable")
(73) Annual Assessment of the Status of Competition in the Market for
the Delivery of Video Programming, Eighth Annual Report, FCC 01-389 (rel. Jan.
14, 2002) at Table C-1 ("Eighth MVPD Competition Report").
34
focused on one another, rather than on dominant cable incumbents; (iii)
marginalize the extent of any other existing or potential competition from other
MVPD market sources; and (iv) attempt to taunt the merger Applicants with
statements lifted from a private lawsuit that never came close to being
adjudicated to a conclusion, and that is of little relevance here. Each of these
prongs is discussed in more detail below, and when examined, illustrates the
degree to which the merger opponents have misrepresented the state of the MVPD
market, as well as the competitive effects of the proposed merger.
1. CABLE DOMINATES THE MVPD MARKET
To read the pleadings of the NRTC, Pegasus and the NAB, in
particular, one would believe that DBS, and not cable television, was the
dominant multichannel video programming distribution technology in the United
States. To the contrary, the Commission has recognized that cable is "the
dominant technology for delivery of video programming to consumers in the MVPD
marketplace."(74) Nationwide, cable controls more than three quarters - 78
percent - of the MVPD market.(75) The vast majority of U.S. households is passed
by cable, and most households subscribe: 64 percent - almost two thirds - of all
households owning a television subscribe to cable television.(76) Nor is
----------
(74) Eighth MVPD Competition Report Paragraph 5.
(75) Id. at Paragraphs 6-7.
(76) Id. at Paragraph 18.
35
cable subscribership falling. Indeed, cable penetration rose by over a million
subscribers last year, an increase of almost two percent.(77)
Plainly, this is a market in which the cable companies continue
to hold a dominant market position. And to the extent that DBS has emerged as
"the principal subscription competitor to cable television service,"(78) cable's
huge installed subscriber base of 70 million households is by far the greatest
source of potential growth for the DBS service, and will remain the primary
focus of competitive activity by DBS providers, in the future.
As stated in the Application, however, the key determinant to the
continued emergence of DBS as a strong MVPD competitor will be the degree to
which the service can keep pace with the technological enhancement of incumbent
cable television systems. Even analog cable operators historically have had
tremendous advantages over DBS operators in terms of system incumbency, consumer
resistance to satellite dish installation, and extremely low consumer equipment
costs relative to DBS providers. To the extent that DBS has been able to
distinguish itself in the marketplace as having certain quality advantages over
analog cable systems, such as a diverse number of programming channels offered
with a digital quality picture and sound, the rollout of digital cable systems
is reducing or eliminating this competitive advantage.(79)
----------
(77) Id. at Paragraph 18.
(78) Id. at Paragraph 57.
(79) See e.g. NRTC Petition at 20, 22; see also NRTC's Appendix, Exhibit
I, Declaration of Paul W. MacAvoy at 6 ("MacAvoy Declaration").
36
Indeed, as noted in the Application, digital cable is profoundly
threatening to DBS. Among other things, digital cable:
- erases DBS firms' historical quality and channel
advantages;
- allows cable firms to offer a video/cable-modem bundle
that DBS providers cannot begin to match;
- has led the large cable multiple system operators to
target DBS much more aggressively than in the past,
including with cable modem bundles, national advertising
targeted at DBS services, "dish bounties," and other
satellite-specific promotions; and
- has introduced true two-way VOD in a number of markets,
which currently cannot be matched by one-way only DBS
systems, and enables the development of vastly expanded
interactive services.
In addition, although DBS has become a more substitutable service to cable now
that local channels may be carried on DBS systems, unless the merger is
consummated neither DIRECTV nor EchoStar has the capacity or subscriber base,
especially in the presence of must carry obligations, to carry local channels in
anything close to the 210 DMAs in the United States.
Even the merger opponents agree that digital cable is emerging as
a formidable incumbent cable response to DBS,(80) but they fail, of course, to
recognize the
----------
(80) See Pegasus Petition, Attachment A, Report of Daniel L. Rubinfeld
("Rubinfeld Report") at 19; NRTC Petition at 20 (characterizing digital cable as
"reasonably interchangeable" with DBS); MacAvoy Declaration (NRTC) at 6; NAB
Petition, Declaration of J. Gregory Sidak Declaration at 9-10 ("Sidak
Declaration").
37
implications of this point. If EchoStar and DIRECTV are to continue to succeed,
they must match both the current dominance of incumbent cable operators as well
as the dire competitive threat posed by the upgrade of these incumbents'
systems. Absent a merger, there is a profound risk that DBS will devolve from
its current position in the MVPD market as a quality and innovations leader to a
lesser alternative that will cause its customers to abandon the DBS platform.
And this development in turn will lessen the competitive pressure on cable
firms, enabling them to continue to exercise market power.
2. NRTC, PEGASUS AND THE NAB GREATLY OVERSTATE THE DEGREE OF
COMPETITION BETWEEN DBS PROVIDERS RELATIVE TO CABLE
Consistent with their strategy of ignoring the "900 pound
gorilla" presence of incumbent cable operators in the MVPD market, the
Petitioners also use misleading anecdotes and false inferences to suggest that
"EchoStar and DIRECTV compete very closely with each other," while "competition
with cable" from the DBS firms allegedly is "more attenuated."(81) Indeed, each
of the NRTC, Pegasus and the NAB go to great lengths to portray EchoStar and
DIRECTV as "vigorously competitive" with one another, in order to suggest that
the merger will lead to a dramatic reduction in MVPD competition.(82) They of
course compete, but this competition is dwarfed in comparison to DBS competition
with cable. The Petitioners' point is overstated, and the policy conclusion is
incorrect.
----------
(81) See e.g., Pegasus Petition at 22.
(82) NAB Petition at 15-31; NRTC Petition at 31-35; Pegasus Petition at
12-14, 21-29.
38
First, NRTC mischaracterizes the testimony of the merger parties'
economist, Dr. Willig, as concluding that EchoStar and DIRECTV "do not compete"
in the MVPD market, which the NRTC asserts "defies logic."(83) This is a
strawman that clearly does not track Dr. Willig's statement. What Dr. Willig
observed was that "DBS pricing decisions appear to be driven by competition with
cable companies," that EchoStar and DIRECTV focus on gaining market share "by
luring consumers away from the leading cable providers," and thus, that DBS
companies "focus" their competitive efforts "on cable providers, rather than the
other DBS firm."(84) Such statements, of course, are in no way inconsistent with
the notion that DBS providers also compete to an extent with each other - as
MVPD market participants, they clearly do. But the level of competition between
DIRECTV and EchoStar, which together control less than 20 percent of the MVPD
marketplace, is dwarfed by the level of competition between DBS and cable.
Second, to the extent that NRTC, Pegasus and the NAB attempt to
support their claims of ultra-vigorous intra-DBS competition with "evidence,"
most of it is flawed and misleading.
- The Petitioners claim parallel equipment discounting promotion
and offers by both companies. In fact, they ignore that these
actions describe the gradual move of both DBS companies towards
the cable paradigm of free equipment, a clear effort to better
----------
(83) NRTC Petition at vii.
(84) Merger Application, Exhibit A, Declaration of Dr. Robert D. Willig
on Behalf of EchoStar Communications Corporation, General Motors Corporation,
and Hughes Electronics Corporation at Paragraph 11 ("Merger Application Willig
Declaration).
39
compete with cable. The DBS firms realized early on that they
could not persuade cable subscribers to switch to DBS if the up-
front costs were too high in relation to cable, and this dynamic
has increased as they seek to grow deeper into cable's installed
base.
- The Petitioners claim that five days after DIRECTV announced that
it was beginning to offer local service at $5.99 per month,
EchoStar announced it was going to start providing a similar
line- up of local channels for $4.99, events which occurred in
late November 1999.(85) In fact, it was exactly at that time,
November 29, 1999, that the Satellite Home Viewer Improvement Act
("SHVIA") of 1999 allowed EchoStar and DIRECTV to begin offering
"local-into-local" service for the first time. Given the
importance of this regulatory development (and its import in
allowing the two DBS companies to begin competing more
effectively with cable operators), it is hardly surprising that
the two companies announced at roughly the same time that they
would begin offering local channel service.(86)
- The Petitioners claim that both DBS firms announced on December
27, 2001, that they were going to provide additional local
channels in each market. In fact, on January 1, 2002, both DBS
firms' must carry obligations went into effect, so that both
firms were required by law on the same day to offer more local
channels.(87)
- The Petitioners claim that each of EchoStar and DIRECTV generally
picked the most populous areas in the country to roll out their
local-into-local service. In fact, EchoStar and DIRECTV lists of
DMAs do not overlap completely, suggesting that each company's
local-into-local decisions are based on different considerations,
to a much greater extent than overlap cities suggest intra-DBS
rivalry.
- The Petitioners emphasize that both EchoStar and DIRECTV
announced the availability of HDTV-compatible set-top receivers
within one day of each other.(88) Petitioners fail to note,
however,
----------
(85) Willig Declaration at Paragraph 57.
(86) Id.
(87) Id. at Paragraph 58.
(88) See e.g., NRTC Petition at 33.
40
that each of these announcements occurred at the Consumer
Electronics trade show, a venue where such announcements
regarding new technologies are commonplace. The timing of this
announcement is much more logically ascribed to the promotional
benefits of making such announcements at the leading electronic
trade shows, rather than competitive response.(89)
The bottom line is that the incidents cited by opponents of the
merger simply do not provide persuasive evidence of intense competition between
the two DBS firms. Rather, each provider primarily targets cable, and to the
extent that they appear to be lowering prices or adding services in approximate
tandem, those tandem movements for the most part reflect the response of both
operators to predictable extrinsic events.
More broadly, the basic question posed by the Petitioners, i.e.,
whether the DBS providers compete at all, is misplaced. As Dr. Willig observes,
the more relevant question for analyzing the impact of the merger on competition
in the MVPD market is not whether EchoStar and DIRECTV "compete at all. Rather,
it is the degree of competition between EchoStar and DIRECTV. . . ."(90)
3. THE BEST EVIDENCE SHOWS THAT THE DEGREE OF COMPETITION
BETWEEN ECHOSTAR AND DIRECTV IS MODEST
Notwithstanding the optical illusion of contemporaneous action
and reaction that Petitioners try to create, the data show that the DBS services
of the Applicants do not compete fiercely against each other, and the loss of
existing competition from the merger is correspondingly limited. Perhaps the
best witnesses of
----------
(89) Willig Declaration at Paragraph 58.
(90) Id. at Paragraph 59.
41
this, and certainly the greatest beneficiaries from the lack of perfect
competition between the two satellite providers, are NRTC and Pegasus
themselves. While these two entities purport to be concerned about the fate of
rural consumers, they currently charge rural subscribers $34.99 - $3.00 more per
month for DIRECTV's Total Choice package, an expanded basic service, than
DIRECTV charges its subscribers for the same programming package in other areas
of the country. This subscription fee is also $3.00 per month more than the
price charged by EchoStar for its equivalent America's Top 100 package.(91)
As explained above, the reasons for NRTC's and Pegasus's ability
to overcharge their subscribers include the "huge differentiator" associated
with sports programming and DIRECTV's brand name.(92) For whatever reason,
EchoStar today does not effectively constrain the prices charged by Pegasus and
NRTC in rural areas. As the Applicants will show below, national pricing will
better constrain the DBS prices charged rural consumers by NRTC and Pegasus than
EchoStar can today.
Dr. Willig's examination of "churn data" confirms the relatively
low degree of competition between DIRECTV and EchoStar. For example, using a
DIRECTV subscriber survey, Dr. Willig studied the percentage of current DIRECTV
----------
(91) Ironically, it appears that the reason that NRTC and Pegasus are
able to charge a supracompetitive price is precisely because, unlike EchoStar
and DIRECTV, they do not compete with the major MSOs in urban areas.
(92) NAB Petition at 63.
42
subscribers who were previously EchoStar subscribers.(93) The data showed that
only nine percent of DIRECTV's current subscribers were previously EchoStar
subscribers.(94) By comparison, roughly 61 percent of DIRECTV's current
customers previously subscribed to cable.(95) Dr. Willig concludes that these
figures confirm the views expressed by DBS executives that the "objective of
each firm is to gain market share by luring customers away from the leading
cable providers," not the customers of the other DBS firm.(96) Analyses by Dr.
Willig of other churn data reflect as well that there is only limited
competitive interaction between the DBS firms.(97)
4. ECHOSTAR AND DIRECTV HAVE BEEN UNABLE TO DISCIPLINE
CABLE PRICES
The competition from EchoStar and DIRECTV that Petitioners are so
eager to see preserved has not been enough to constrain the pricing behavior,
improve the service quality, or enhance consumers' perception of most cable
companies. One perennial fact observed by the Commission in its annual reports
on the status of competition in the MVPD market is that cable operators continue
to increase their prices
----------
(93) See Willig Declaration at Paragraph 61. Each month, DIRECTV surveys
a random sample of roughly 350 subscribers and asks them a series of questions,
including whether they have ever subscribed to cable or another DBS service. Id.
(94) Id.
(95) Id.
(96) Id.
(97) Id. at Paragraphs 62-66.
43
at rates that far outpace inflation.(98) EchoStar and DIRECTV, by contrast, have
only raised their rates twice since 1996.
The findings of a Consumers Union survey of cable and satellite
subscribers, published in the September 2001 Consumer Reports, highlights the
effects on customer satisfaction of an industry with inadequate competition.(99)
The report of this survey summed up its findings on cable service with a lament:
"In the national surveys of nearly 2,000 cable- and satellite-TV subscribers
conducted for this report, cable companies received among the lowest marks of
any service providers we regularly evaluate - even lower than those for
technical support from computer manufacturers."
---------- (98) Eighth MVPD Competition Report at Paragraph 9 ("During
the period under review, cable rates rose faster than inflation. According to
the Bureau of Labor Statistics, between June 2000 and June 2001, cable prices
rose 4.24 percent compared to a 3.25 percent increase in the Consumer Price
Index ("CPI"), which measures general price changes."); Annual Assessment of the
Status of Competition in the Market for the Delivery of Video Programming, 22
Comm. Reg (P&F) 1414 at Paragraph 9 (2001) ("Seventh MVPD Competition Report")
("During the period under review, cable rates rose faster than inflation.
According to the Bureau of Labor Statistics, between June 1999 and June 2000,
cable prices rose 4.8 percent compared to a 3.2 percent increase in the Consumer
Price Index ("CPI"), which measures general price changes."); Annual Assessment
of the Status of Competition in the Market for the Delivery of Video Programming
15 FCC Rcd. 978 at Paragraph 9 (2000) ("Sixth MVPD Competition Report") ("During
the period under review, cable rates rose faster than inflation, although the
difference between the cable price index and the Consumer Price Index ("CPI") is
not as great as in the previous year. According to the Bureau of Labor
Statistics, between June 1998 and June 1999, cable prices rose 3.8% compared to
a 2% increase in the CPI, which measures general price changes."); Annual
Assessment of the Status of Competition in the Market for the Delivery of Video
Programming, 14 FCC Rcd. 923 at Paragraph 9 (1998) ("Fourth MVPD Competition
Report") ("During the period under review, cable rates rose more than four times
the rate of inflation. According to the Bureau of Labor Statistics, between June
1997 and June 1998, cable prices rose 7.3% compared to a 1.7% increase in the
Consumer Price Index ("CPI"), which is used to measure general price changes.")
(99) See TV: The Digital Decision, A Guide to Choosing Between Digital
Cable and Satellite TV - Or Sticking with Regular TV Service, Consumer Reports
(Sept. 2001).
44
When the Consumers Union asked the survey respondents if they had been charged a
"substantial rate increase" in the last year, more than three times as many
cable customers answered affirmatively than did satellite customers (40% to
13%). And when asked if their service was an "excellent value," more than three
times as many satellite subscribers responded affirmatively ("fewer than 10%" of
cable subscribers to 30%). Cable customers were also much more likely to report
frequent service disruptions, unwanted changes in program packages, and frequent
channel-listing changes.
While cable rates have risen steadily and faster than the rate of
inflation since they were deregulated in the early 1990s,(100) what follows are
a few examples of some recent cable rate hikes in a few representative
cities.(101)
- In Austin, Texas, AOL/Time Warner recently raised the monthly fee
for expanded basic cable service to $41.67. They had charged
$34.20 in 1999, $37.74 in 2000, and $39.69 in 2001. This is an
increase of more than 21% in just three years. For a converter
box, the increase over the same period was 93.8%, and the price
for service charges increased 77.6%.(102)
- Cable customers in Reno, Nevada saw Charter raise its expanded
basic rates approximately 15% this year, to $39.99 per month.
Monthly service charges had been just $16.45 in 1990, increasing
143% over the next eleven years.(103)
----------
(100) See Comments of Consumer Groups at 7-10.
(101) See Attachment D for news articles announcing recent rate hikes.
(102) Austin American Statesman, "Time Warner is upping cable rates,"
Nov. 28, 2001.
(103) The Associated Press State & Local Wire - Reno, Nevada, "Cable
television rates to jump in northern Nevada," Nov. 26, 2001.
45
- Monthly cable fees in Syracuse, New York have been repeatedly
raised by AOL/Time Warner by 5.4% in January 2001, 5.4% in August
2001, and another 5% in January 2002, with the number of channels
remaining the same.(104)
- AT&T Broadband raised its monthly rates for expanded basic
service an average of about 8% around the country, after two
similar rate hikes in 2001.(105)
When Comcast recently increased its rates in line with the other
dominant cable operators around the country, cable consumers in the Washington,
D.C. area experienced this lack of effective competition first-hand.(106)
Comcast's Basic Plus package went from $36.04 to $38.17 a month, another 6%
increase. This particular Comcast package compares closely to EchoStar's Top 50
programming package with local channels, except in price: EchoStar still charges
only $28.98 per month. That's a yearly difference of over $110.
Mark Cooper, director of research for the Consumer Federation of
America, correctly observes that the primary reason for these enormous rate
hikes is the lack of effective competition: "The simple fact of the matter is
that they [cable operators] know they can pass through all those increases. The
only people who raise prices in the middle of a deep recession are the
monopolists. They use market power to force those
----------
(104) The (Syracuse, NY) Post-Standard, "Time Warner raises cable rates
again," Dec. 1, 2001.
(105) The Boston Globe, "AT&T will hike cable rates 8.7%," Nov. 22,
2001; The Miami Herald, "AT&T to raise cable rates," Nov. 3, 2001; Atlanta
Journal and Constitution, "AT&T Broadband to raise cable TV fees for metro
Atlantans," Nov. 3, 2001.
(106) See Attachment E, "Dear Comcast Customer" Letter.
46
increases through to the public."(107) Gene Kimmelman, co-director of Consumer
Union's Washington, D.C. office, agrees: "This reflects ongoing price gouging by
cable monopolies. It's particularly astounding that they're raising prices at a
time when the economy is stalled."(108)
It is against the backdrop of these quintessential elements of
cable market power that the Commission must analyze the proposed transaction. As
reflected in the views of the Consumers Groups and others,(109) as well as the
attached economic analyses,(110) the proposed merger is the only clear path to
introducing effective competition to cable operators throughout the country.
In sum, EchoStar and DIRECTV both compete in the MVPD market, and
to some limited degree they compete against one another. But the undeniable
facts remain that the MVPD market is dominated by incumbent cable operators,
both EchoStar and DIRECTV compete primarily against those cable operators, and
the two firms must merge to stay competitive with those cable operators.
----------
(107) The (Albany, NY) Times Union, "Higher cable TV bills coming," Nov.
22, 2001.
(108) The Seattle Times, "AT&T to raise cable fees 5.5%," Nov. 3, 2001.
(109) See e.g., Comments of Consumer Groups at 21; Comments of the
National Taxpayers Union at 1; Comments of the Missouri Chamber of Commerce at
1; Comments of the Competitive Enterprise Institute at 1; Comments of Frontiers
of Freedom at 1; Comments of Farm Bureau Financial Services at 1; Comments of
the Third Millenium Communications & Electronics Co. LLC at 4; Comments of the
Small Business Survival Committee at 1.
(110) Willig Declaration at 4, 70-71.
47
5. THE MERGER OPPONENTS WRONGFULLY IGNORE OTHER MVPD
PROVIDERS AND POTENTIAL ENTRANTS
Another part of the strategy of the merger opponents is to argue
that, apart from cable and DBS, other MVPD competitive services are "fringe
technologies,"(111) with no prospect of "entering the market on a time frame or
a scale sufficient to constrain a DBS monopolist."(112) Again, such statements
miss the mark.
First, the statements are inaccurate. There are other MVPD
services across the country that retain significant subscribership. C-band
satellite, Multichannel Multipoint Distribution Service ("MMDS") providers,
Satellite Master Antenna Television ("SMATV") systems, and cable overbuilders
all compete with DBS and incumbent cable systems. In fact, the combined MVPD
market share of these technologies surpasses 3.25 million households - nothing
like the dominance of cable, of course, but about one fifth of the total share
of DBS subscribership.(113) In addition, the merger opponents do not accurately
characterize the extent to which new MVPD market entry is possible or probable.
Thus, the Commission itself has recognized that "competitive [MVPD] alternatives
continue to develop."(114)
Second, even if there were no other competitive distribution
technologies or prospects for additional near-term entry in the MVPD market -
neither of which is the
----------
(111) NRTC Petition at 23. It is odd that NRTC would make this
characterization as it is one of the four major distributors of C-Band
programming. Eighth MVPD Competition Report at Paragraph 67.
(112) Pegasus Petition at 36.
(113) Eighth MVPD Competition Report at Paragraphs 67-76, 107-112.
(114) Id. at Paragraph 5.
48
case - the fact remains that the dominant providers in the market remain cable
operators, who have a 78% share. These are the providers that need
"constraining," and New EchoStar will achieve that goal.
(a) Satellite Competition. As indicated above, the formative
years of the DBS industry have demonstrated that effective competition against
the dominant cable providers in the MVPD market now requires the combination of
the facilities and spectrum to which EchoStar and DIRECTV have access. At the
same time, other companies have ample opportunity to use satellite spectrum and
orbital locations, as well as other technologies, in an attempt to introduce
additional competition in the MVPD market. Nothing in this merger will act to
preclude such additional entry.
In this regard, Mr. Sidak is simply wrong in his assessment that
"[b]ecause orbital slot allocation is governed by the International
Telecommunication Union, not the FCC, the number of orbital locations is
fixed."(115) In fact, several orbital locations allotted by the ITU to other
countries in the Western Hemisphere have the technical capability to serve the
entire continental United States. Two of these countries, Mexico and Argentina,
have reached agreements with the U.S. allowing satellites from these orbital
locations to serve the U.S. direct-to-home market subject to the same FCC
licensing requirements that apply to the U.S. DBS orbital slots.(116) Canada
also has an ITU allocation for two DBS orbital locations that could be used to
serve the U.S. market.
----------
(115) Sidak Declaration (NAB) at 20.
(116) See International Bureau Announces Conclusion of U.S.-Argentina
Framework Agreement and Protocol for Direct-to-Home Satellite Services and
Fixed-Satellite Services, 13 FCC Rcd. 16581 (1998); International Bureau
Announces
(Continued...)
49
MVPD competition could be brought to bear by any number of
Ka-band licensees. Pegasus, for example, is free to use its valuable Ka-band
licenses to provide MVPD service throughout the United States. Far from the dire
picture of spectrum warehousing painted by opponents of the merger,(117) there
is wide dispersion of Ka-band and other FSS licenses among a variety of
licensees.(118) In fact, of the full CONUS Ka-band and FSS orbital locations
(those from 83(degrees) W.L. to 133(degrees) W.L. according to Pegasus),(119)
licensees other than New EchoStar would hold a majority of the assets.(120)
Non-full CONUS licensees, such as R/L DBS and Dominion, also will
pose a competitive threat to New EchoStar. R/L DBS has proclaimed its ability to
serve nearly every corner of the United States with regional programming from
the 61.5 W.L. orbital location.(121) Assuming this is true, it and its progeny
will be able to compete head-to-head with New EchoStar.
----------
Conclusion of U.S.-Mexico Framework for Agreement and Protocol for
Direct-to-Home Satellite Services, 12 FCC Rcd. 13105 (1996).
(117) NAB Petition at iii, 11-12; Pegasus Petition at 63-69; NRTC
Petition at 50-56.
(118) Even medium-power FSS satellites still lend themselves to various
DTH initiatives, as shown for example by BellSouth's recent plan for a DTH
offering. While BellSouth has not gone forward with that plan, the fact remains
that ample FSS spectrum remains available for medium-power and high-power
satellite DTH initiatives.
(119) See Pegasus Petition at 71.
(120) Eleven other entities affiliated with neither EchoStar nor Hughes
currently control orbital slots in the 83(degrees) W.L.-103(degrees) W.L. arc,
which demonstrates that there are more than enough prime Ka-band slots
controlled by others to ensure that the merger will not "stifle" competition in
providing broadband services. See "FCC International Bureau Authorizes Second
Round Ka-Band Satellite Systems," Press Release (Aug. 2, 2001).
(121) See Ex Parte Presentation by Howard J. Symons, Petition of R/L DBS
Company L.L.C., For Extension of the R/L DBS Direct Broadcast Satellite
Construction Permit, Spot Coverage Map (June 6, 2000).
50
NRTC and its affiliate Pegasus will also likely compete against
New EchoStar by using certain facilities of the combined entity if they desire
to do so. Specifically, to the extent that DIRECTV's contract with NRTC grants
NRTC the right to distribute certain video programming in certain areas, the
merger would not alter its contractual rights. Since NRTC and Pegasus would not
in those circumstances be constrained by New EchoStar's national pricing
commitment, they would be able to continue to charge more to rural subscribers,
as they do now, than DIRECTV or EchoStar, separately or together. In fact,
however, the DIRECTV/ NRTC agreement makes clear that NRTC's exclusive rights
are limited and will expire in the future. As a consequence, New EchoStar will
be able to compete fully with NRTC/Pegasus throughout those areas where NRTC and
Pegasus have distribution rights under their contracts. This may in turn mean
that, for commercial reasons, NRTC and Pegasus no longer will be able to charge
more than New EchoStar for the same service, but such a result would be a
benefit, not a loss, for rural consumers.
C-band satellite services are maintaining efforts to attract
rural subscribers. While C-band is certainly not an effective alternative in
urban areas, it should not be discounted as an alternative in rural areas. NRTC
itself is a major distributor of C-band service even as it resells DBS service.
While acknowledging that the number of C-band subscribers has fallen over the
past few years, PrimeTime 24, the self-proclaimed "leading provider of network
television programming to the C-band
51
marketplace," claims that, as of November 2001, there were almost 900,000 C-band
subscribers in the United States.(122)
(b) Terrestrial Competition. The Commission has also observed
that entrants using a number of different technology platforms are having an
impact on MVPD competition that cannot be ignored. Terrestrial services such as
MMDS are capable of serving an estimated 36 million homes.(123) Although MMDS
subscribership remained steady in the past year, the competitiveness of MMDS
video offerings will likely be enhanced by MMDS operators' roll out of
high-speed Internet access service, which can be paired with video to create the
type of bundled service offering that consumers increasingly find
attractive.(124)
The Commission recently recognized "the growing importance of
providers that are overbuilding existing cable systems with state-of-the-art
systems that offer a bundle of telecommunications services, including video,
voice, and high-speed Internet access."(125) The Commission has termed these
overbuilders "Broadband Service Providers" ("BSPs"), and noted that despite the
challenges inherent in BSPs' strategy of entering markets with entrenched
competitors, BSPs such as RCN and Knology are continuing to grow in terms of
revenue and subscribership.(126)
----------
(122) Comments of PrimeTime 24 Joint Venture at 3.
(123) Eighth MVPD Competition Report at Paragraph 71.
(124) Id.
(125) Id. at Paragraph 13.
(126) Id. at Paragraph 109, 111.
52
Electric and gas utilities are moving forward with ventures
involving video distribution. The Commission noted that although the utilities
are "not yet major competitors in the telecommunications or cable markets,"
characteristics of these entities, "such as ownership of fiber optic networks
and access to public rights-of-way, could make them competitively
significant."(127) Importantly, utilities appear to hold great promise for
competition in rural areas, as the Commission observed that "utilities,
particularly some municipal utilities in rural areas, are willing to build
advanced telecommunications networks offering a full range of services where
incumbent cable operators and telephone companies are not."(128)
Finally, the Commission has reported that it is "technically
feasible" for a new terrestrial service, which the Commission has dubbed
Multichannel Video Distribution and Data Service ("MVDDS"), to share spectrum
allocated to DBS in the 12.2-12.7 GHz band.(129) The Commission has adopted a
Further Notice of Proposed Rulemaking seeking comment on technical and service
rules for licensing the new services.(130) Four companies, Northpoint
Technologies, MDS America, Satellite Receivers, Ltd. and PDC Broadband
Corporation have sought licenses or otherwise expressed interest in providing
such a service. While EchoStar and DIRECTV have opposed the interference levels
posited by proponents of MVDDS, they also have stated
----------
(127) Id. at Paragraph 104.
(128) Id.
(129) Id. at Paragraph 64.
(130) Id.
53
on the record that competition from such services is welcome so long as no
interference occurs.(131)
(c) Analogous examples of "intermodal competition." The broad
view of MVPD as the relevant market is consistent with that of other agencies
regulating different but competing technologies. In their competitive analysis,
agencies typically consider not only the provision of service by the particular
mode of carriage utilized by the company at issue, but also other competing
forms of carriage (frequently referred to as "intermodal" competition).(132)
In an analogous case, for example, the Interstate Commerce
Commission ("ICC") took a broad view of the relevant market in approving the
merger of the
----------
(131) Cable and Satellite Broadcast Competition: The Status of
Competition in the Multi-Channel Video Programming Distribution Marketplace
Before the House of Representatives Energy and Commerce Committee, Subcommittee
on Telecommunications and the Internet (statement of Charles Ergen, Chairman and
CEO, EchoStar Communications Corporation) (Dec. 4, 2001) ("While EchoStar does
not oppose the emergence of new competitors in the MVPD market, we are opposing
the proposal by Northpoint, because Northpoint's current proposal would cause
electrical interference with the satellite reception of our established
satellite TV customers as confirmed by the MITRE Corporation's testing."); see
also Comments of EchoStar Satellite Corporation in CS Docket No. 99-250 (Aug.
16, 1999) at 1, 3 ("EchoStar welcomes new entry into the MVPD market and
applauds the Commission's proposal" to open the 12.7 - 13.2 GHz band for use by
all MVPD providers... [T]he Commission should consider this band as yet another
possible home for the service planned by Northpoint Technology.")
(132) Market Dominance Determination & Consideration of Product
Competition, 365 I.C.C. 118, 130 (1981); see also Market Dominance
Determinations - Product and Geographic Competition, STB Ex Parte No. 627, 1 n.2
(served April 6, 2001)(noting that Board's market dominance analysis considers,
among other things, "whether the complaining shipper can use other
transportation modes, such as trucks or barges, to transport the same commodity
between the same points"); Williams Pipe Line Co., 68 F.E.R.C. Paragraph 61,
136, at 61, 660 (1994).
54
Trailways bus line into Greyhound, at a time when those two lines accounted for
the vast majority of intercity bus transportation in the U.S. As the ICC stated,
"the relevant `product' market is the intercity transportation of passengers,"
including private automobile, airlines, intercity bus, and Amtrak.(133) The
Commission went on to explain that, essentially, the national pricing of bus
transportation was a sufficient safeguard: "bus passengers, even those with
limited access to air, Amtrak, or private auto will continue to be protected
from unreasonable rates by the market discipline of intermodal competition since
remaining bus firms must set rates and service to attract passengers who do have
these options."(134) In affirming, the Court of Appeals for the D.C. Circuit
cited approvingly the ICC's findings that the market included other modes of
transport, that "competition in the national market was necessary to promote the
public interest," and that "even in rural markets, the consolidation would have
little effect because intermodal competition would provide a sufficient cap on
unreasonably high prices or inadequate services."(135)
Like the Greyhound/Trailways transaction, the proposed merger
should be evaluated in the broader market. Here, as there, all consumers will be
protected because New EchoStar "must set rates and service to attract
[consumers] who do have these options."
----------
(133) GLI Acquisition Company Purchase Trailways Lines, Inc., ICC
Decision No. MC-F-18505, at 7 (May 27, 1988).
(134) Id. at 10.
(135) Peter Pan Bus Lines, Inc. v. ICC, Nos. 88-1532, 88-1566, 88-1567,
slip op. at 5 (D.C. Cir. May 8, 1989).
55
6. PETITIONERS CANNOT PROVE THE EXISTENCE OF A DBS MARKET FROM
ECHOSTAR'S PRE-TRIAL POSITION IN A DISMISSED PROCEEDING
Petitioners NAB and Pegasus, among others, try to prove their
economic case by recourse to statements that EchoStar made in a 2000 pre-trial
request for extension of time in a now dismissed antitrust dispute with
DIRECTV.(136) The Petitioners use these statements to suggest that EchoStar
believes in the existence of a separate DBS market, that therefore there must be
such a market, and that EchoStar has reversed course now only to serve its
interest in approval of the merger Application. The Petitioners misread these
litigation statements, and in any event their reliance on them to prove their
economic case is misplaced, particularly since none of their own economic
experts has argued in favor of a separate DBS market.
First, it is certainly not true that EchoStar's belief in a
single MVPD market is of recent origin. EchoStar has always held the same view:
that there is one MVPD market, in which cable is the incumbent and dominating
player, and that DBS competes, although presently with distinct disadvantages,
against cable within the MVPD market. It has also consistently recognized that
certain factors have historically inhibited DBS from robustly competing with
cable.
EchoStar has expressed that view on dozens of occasions, starting
as early as 1995. In 1996, for example, EchoStar asserted that "the relevant
market includes all
----------
(136) NAB Petition at 37-40; Pegasus Petition at 12-14.
56
multichannel video programming distributors, not just DBS service
providers."(137) In 1997 EchoStar wrote in comments to the Commission: "Ever
since it commenced DBS service in the spring of 1996, EchoStar has viewed cable
subscribers as its primary target market. Accordingly, EchoStar has priced and
structured its offering with the primary purpose of attracting cable
subscribers."(138)
In December 1998, EchoStar expressed a similar view with respect
to the potential impact of its transaction with MCI: "EchoStar emphasizes that
the MVPD market - not any subset of that market - is the relevant market for
analyzing the public interest impact."(139) It also noted that "DBS service has
emerged as the most likely alternative with the potential for introducing
full-fledged competition against dominant cable operators in the MVPD market,
but is still a long way from realizing that potential because of various
spectrum-related and regulatory constraints."(140) Appearing before a
congressional committee in 1999 regarding EchoStar's efforts to compete with
cable systems, EchoStar's Chief Executive Officer Mr. Ergen testified: "The
relevant market for our service is the MVPD market. DOJ has found extensive
evidence of customers
----------
(137) In re Application of Direct Broadcasting Satellite Corp., 11 FCC
Rcd. 10494 (1996) at Paragraph 8.
(138) Comments of Echostar Communications Corp., In re Annual Assessment
of the Status of Competition in Market for the Delivery of Video Programming, CS
Docket No. 97-141 (July 23, 1997) at 2.
(139) In re Application of MCI Telecommunications Corp. and EchoStar 110
Corp. (Dec. 2, 1998) at 7.
(140) Id. at ii.
57
switching from cable to DBS, contrasted with the early days of DBS, when
subscribers most often came from uncabled areas."(141)
While this view of the relevant market was certainly the
prevalent one in 2000, this does not mean that it was free from any doubt. As
zealous advocates, EchoStar's lawyers in the litigation had the duty to explore
fully the extent to which any such doubt could be used to bolster EchoStar's
case. This was the context of the statements seized on by Petitioners in
EchoStar's request for more discovery to shed additional light on the factual
issues. In its Request for Rule 56(f) Continuance to Respond to Defendants'
Motion for Summary Judgment, EchoStar argued that the summary judgment requested
by DIRECTV was inappropriate pending ongoing discovery and in light of the need
for additional discovery on highly complex issues such as market definition. The
statements cited by Petitioners described only beliefs about what the evidence
could establish, and they did not purport to be statements of proven fact.
Indeed, EchoStar explicitly noted that its assertions were based on a
preliminary understanding of the case, stating that "expert witnesses will play
an important role on several issues, including the definition of the relevant
market."(142)
Finally, even if there were any potential counter-argument about
the relevant market in 2000, it has been dispelled by developments that were
then in their early stages and that have since matured decisively. As explained
above, these
----------
(141) Charles W. Ergen, Testimony Before the Subcommittee on Antitrust,
Business Rights, and Competition, Committee on the Judiciary, U.S. Senate (Jan.
27, 1999) at 3.
(142) Request for Continuance, at 3.
58
developments include: on the one hand, the fuller extent to which DBS providers
have since been able to capitalize on the local-into-local opportunity afforded
by SHVIA since the end of 1999; and, on the other hand, the aggressive roll-out
of digital cable.
B. NRTC, NAB AND PEGASUS CRITICISMS OF THE FCC'S "HOMES PASSED"
ESTIMATE ARE NOT PERSUASIVE AND RELY ON INACCURATE DATA SOURCES
In discussing the lack of anti-competitive impact on rural
markets of the proposed transaction, the Application referenced the Commission's
then-current statement on cable availability, which observed that over 96% of
all television households in the United States are passed by cable television
systems and that these cable operators continue to be the dominant distributors
in the national MVPD market.(143) The Commission has since released its Eighth
Annual MVPD Competition Report which places the current percentage of television
households passed by cable at 97.1%.(144) NRTC, NAB and Pegasus argue that the
statistics cited by the Commission overstate the percentage of TV households
that have access to cable. These Petitioners, however, provide nothing but
speculation to support their claims. And, even if the parties in this proceeding
could agree on a percentage of homes not passed by cable, the practical
----------
(143) Merger Application at 39-40 (citing Seventh MVPD Competition
Report, 16 FCC Rcd. 6005, at App. B., Table B-1).
(144) Eighth MVPD Competition Report at Paragraph 17.
59
significance of this number would be insignificant, since New EchoStar
effectively would be unable to isolate such consumers for an anticompetitive
action.(145)
In every Annual Report on the status of competition in the MVPD
market since the Commission first began issuing them, the Commission has relied
on data collected by Paul Kagan Associates, Inc. for the number of homes passed
by cable.(146) Likewise, each year the Commission has compared the number of
homes passed with the number of television households to obtain a sense of the
availability of cable services to television viewers.(147) No Petitioner argues
that this is the incorrect comparison for the Commission to make; nor could
they, since the availability of cable to unoccupied housing units and occupied
households without a television is indisputably irrelevant. Instead, the
Petitioners argue that the Kagan data relied upon by the Commission overstates
the number of television households in determining the number of homes passed,
and that as a result, the percentage of television households passed by cable
may
----------
(145) See Willig Declaration at Paragraph 98 (explaining that the
percentage of homes passed by cable is only relevant if New EchoStar is able to
"find" the non-cable passed homes, a process that would be extremely difficult
and costly).
(146) Annual Assessment of the Status of Competition in the Market for
the Delivery of Video Programming, 11 FCC Rcd. 2060, 2068 n. 19 (1995) ("Second
MVPD Competition Report") (explaining source of data for First MVPD Competition
Report); Third MVPD Competition Report, 12 FCC Rcd. 4358, 4368, 4465; Fourth
MVPD Competition Report, 13 FCC Rcd. 1034, 1049, 1174; In the Matter of
Assessment of the Status of Competition in the Market for the Delivery of Video
Programming, Fifth Annual Report, 13 FCC Rcd. 24284, 24322 (1998) ("Fifth MVPD
Competition Report"); Sixth MVPD Competition Report, 15 FCC Rcd. 978, 990, 1080;
Seventh MVPD Competition Report, 16 FCC Rcd. 6005, at Paragraph 18, App. B.
Table B-1; Eighth MVPD Competition Report, FCC 01-389, at Paragraph 17, App. B.
Table B-1.
(147) Id.
60
be inaccurate and could be as low as 81% instead of the 97% figure cited by the
Commission.(148)
The Petitioners' entire argument in this regard is based on the
assertion that cable operators include unoccupied housing units and
non-television households in the homes passed data that they provide to
Kagan.(149) The assumption underlying this theory is that cable operators have
no way to determine the number of television households in their service
area.(150) Yet, this assumption is entirely unsupported by the Petitioners.
Cable operators have every incentive to determine this figure because it defines
their potential local customer base. The figure is relevant to any number of
budgeting, marketing and other financial efforts undertaken by cable operators.
Moreover, the number of television households in a service area is not
unknowable. To the contrary, Nielsen Media Research publishes yearly estimates
of TV households on a county-by-county basis for the entire U.S.,(151) and
provides studies at an even finer level of granularity at the request of private
entities. There is every reason to believe that cable operators are well
informed concerning their potential customer base when they respond to Kagan
data requests.
Indeed, the Petitioners' own attack on the numerator of the
calculation shows that the Kagan number of homes passed may in fact be
understated in one
----------
(148) NRTC Petition at 9; Pegasus Petition at 16; NAB Petition at 46.
(149) NRTC Petition at 9; NAB Petition at 46.
(150) NRTC Petition at 9-10 (quoting NTIA/RUS Report at 19 n. 62)
(151) See Broadcasting & Cable Yearbook 2001 at B-160 - B241.
61
important respect. NRTC attacks the data based on each cable operator's
uncertainty about which of several possible "homes passed" criteria to use:
feeder cables in place nearby; cable television "readily available"; "potential"
to be connected; or, households "capable" of receiving service.(152) As Dr.
Willig notes, the correct criterion is the broadest one, i.e., the number of
homes with the potential for being connected to the cable system.(153) The
potential for a home to be connected to a cable system is enough for the purpose
of disciplining a satellite provider's conduct. All of the other criteria listed
by the NRTC may be read as requiring more than that for a home to be considered
"passed." To the extent that a cable operator may be using a more restrictive
"homes passed" criterion, the number of homes passed may in fact be understated
from the economic point of view.
Petitioners also attempt to support their theory regarding the
Kagan data by citing data from Warren Communications ("Warren") on homes passed
in six states, which exceeds the 2000 Census Bureau data on the number of
occupied households in those states.(154) However, as Dr. Willig observes,
Petitioners make no attempt to explain how data and collection practices by
Warren Communications support their theory that the Kagan data is
erroneous.(155) Petitioners also compare the Kagan data on homes
----------
(152) See NRTC Petition at 10.
(153) See Willig Declaration at Paragraph 98, n.119.
(154) NRTC Petition at 11-12; NAB Petition at 46.
(155) See Willig Declaration at Paragraph 98 ("No commenter has provided
any evidence that the Warren data are more accurate than the Kagan data.")
62
passed in the U.S. with Census Bureau data on occupied households in the U.S.,
but this comparison is likewise unavailing in support of Petitioners' theory
because there is no indication that the data collection and analysis practices
of Kagan and the Census Bureau are the same or even similar. Simply put, the
Petitioners do not make a persuasive case supported by hard evidence that the
Kagan data, on which the Commission, industry and investors have relied for
years, is incorrect or overstated.(156)
Certainly, the opposite appears to be true for the figures
proffered by the NRTC the NAB and their economic experts. As Dr. Willig
explains, Dr. MacAvoy and Mr. Sidak both present a series of maps that purport
to show areas where cable is available and where cable is not available and
purport to show that it is possible to identify these areas with a great deal of
precision.
As an initial matter, it is important to realize that these maps
are based on information that is provided to Warren Communications by the cable
companies. To the extent this information is inaccurate or not kept current,
Warren's information will not be accurate.(157)
Dr. Willig independently tested the accuracy of the Warren data
in two ways: First, he analyzed DIRECTV churn data and examined whether any
customers who lived in zip codes that the Warren data suggest were not passed
had churned from
----------
(156) NRTC also attempts to manipulate the numbers to its own advantage
by arguing that 23 million homes do not have access to cable. NRTC Petition at
14; see also Pegasus Petition at 17. By NRTC's own analysis this 23 million home
figure includes unoccupied housing units and homes without televisions. Id.
(157) Willig Declaration at Paragraph 95.
63
DIRECTV to cable. The data that Dr. MacAvoy and Mr. Sidak present suggest that a
large number of zip codes are not passed by cable. But the DIRECTV data indicate
that more than one quarter of the customers who lived in these supposedly
non-cable passed zip codes and who left DIRECTV, left for a cable provider.(158)
Next, to ensure that the problem is not with misreporting in the
DIRECTV churn data, Dr. Willig asked Ginsberg Lahey, LLC, a Washington-based
research firm, to check the accuracy of these results by contacting the local
cable firms to ensure that subscribers in these zip codes could receive cable
service. For a significant number of these zip codes, Ginsberg Lahey was able to
confirm the accuracy of the DIRECTV churn data by verifying with the local cable
provider that cable service was indeed available.(159) Ginsberg Lahey also
contacted local cable firms in zip codes that the Warren data suggested were not
passed by cable. In two weeks alone, Ginsberg Lahey discovered that at least 20
zip codes that Warren indicated were not passed by cable were in fact cable
passed.(160)
In any event, even assuming arguendo the correctness of Pegasus's
characterization that "[t]here is a range of estimates and some controversy over
the number of U.S. homes that lack access to cable,"(161) the homes passed issue
is only
----------
(158) Id. at Paragraph 96.
(159) Id.
(160) Id. Ginsberg Lahey found that cable service was available in the
following zip codes: 13635, 13690, 24649, 25040, 25205, 30045, 30297, 30127,
37191, 40165, 46175, 47145, 42085, 55783, 63966, 66040, 70577, 72073, 77561, and
77650. The Warren database suggests that each of these zip codes is not passed
by cable.
(161) Pegasus Petition at 17.
64
relevant to the extent that New EchoStar would be able to discriminate against
consumers in those areas not served by cable. This is not possible for at least
three reasons. First, as described more fully by Dr. Willig, economic theory
predicts that in the situation that Pegasus describes, where homes passed data
may be unsound and yield uncertainty regarding the identification of customers
in non-cable passed areas, a firm is not likely to engage in price
discrimination.(162) In particular, New EchoStar would need to be wrong only in
a relatively small number of cases to make it unprofitable to charge different
prices to non-cabled and cabled customers.(163)
Second, as originally described in the Application, the
geographical diversity of those television households not served by cable makes
discrimination between television households that are served by cable and those
that are not very difficult.(164) Indeed, this latter point is aptly
demonstrated by the maps of the fourteen "clusters" of rural areas included in
the MacAvoy Declaration.(165) Those maps quite clearly show that census blocks
without access to cable are interspersed with census blocks that do have access
to cable in a way that would not permit a DBS provider to discriminate between
cabled and non-cabled areas. In short, as Dr. Willig observes, even if the
Warren (or Kagan) maps and data were accurate, cable franchise areas do not
correspond to geographic designations such as DMAs, counties, or even zip codes.
Thus,
----------
(162) See Willig Declaration at Paragraph 94.
(163) Id. (citation omitted).
(164) Merger Application Att. A, Willig Declaration at Paragraph 37.
(165) MacAvoy Declaration (NRTC) at 10-25.
65
even if New EchoStar were to price differently based on the zip code of a
customer, the zip code of a customer will not tell New EchoStar precisely
whether that customer is passed by cable or not. Therefore, Dr. Willig found, it
"cannot be concluded from these maps that New EchoStar could implement a price
discrimination scheme based on whether customers had cable available or
not.(166)
Finally, New EchoStar's commitment to the one nation, one rate
card plan, which is addressed in more detail below, also will ensure that no
discrimination occurs. At bottom, the question that the NRTC and others have
injected into this proceeding over the number of homes passed by cable is a red
herring that is not decisionally significant.
C. PETITIONERS' ANALYSES BEGIN FROM A FALSE BASELINE OF HEALTHY
COMPETITION IN THE MVPD MARKET
The proposed merger will have significant pro-competitive effects
in the relevant MVPD market, and the Applicants' one nation, one rate card
commitment can demonstrably address any alleged anti-competitive effects on this
market. The Petitioners' assertions that the merger will result in higher prices
for consumers are wrong from the starting point. They are based on false, rosy
assumptions about the welfare of MVPD consumers today. In particular, as shown
above, Petitioners disregard at least two crucial facts: (1) EchoStar's and
DIRECTV's services are not perfect substitutes for each other; and (2) neither
company on its own has been able to rein in the
----------
(166) Id. at 63.
66
behavior of large cable MSOs, which continue to raise their prices well in
excess of the Consumer Price Index.
Instead of recognizing these facts, the Petitioners assume
implicitly that there is now full-blown competition in the MVPD market between
DBS and cable. Starting from that premise, they attempt to show that the merger
will destroy much of this competition to the detriment of consumers. The premise
is false, however.
To the question of whether MVPD consumers are well off today, the
consumers' representatives correctly answer, no.(167) The Commission should not
base its evaluation of the merger on the contrary assumptions entertained by the
NAB, Pegasus and NRTC - that all is basically well today in the MVPD
market.(168)
D. THE MERGER WILL RESULT IN LOWER PRICES FOR MVPD CONSUMERS IN
URBAN AND RURAL AREAS
Some Petitioners argue that the merger will decrease the number of
competitors from 2 to 1 in some areas, and 3 to 2 in others, thereby resulting
in increased prices for MVPD consumers and a net public welfare deficit.(169) In
support of this
----------
(167) Comments of Consumer Groups at 4-7.
(168) NAB Petition at 13-15; Pegasus Petition at 9-10; NRTC Petition at
1-2.
(169) See, e.g., NAB Petition at 52-56 ("a horizontal merger may `create
a single firm with substantial market power, enabling that firm to unilaterally
raise prices. . .'" (quoting ABA Section of Antitrust Law, Antitrust Law
Developments 493 (4(th) ed. 1997)); NAB's Sidak Declaration at 21-30
(calculating supposed price increase that would result form "duopoly-to-monopoly
merger" and from a 3-to-2 merger); NRTC Petition at 30 (merger would lead to
"monopoly prices to rural Americans"); NRTC's MacAvoy Declaration at 47-51
(predicting price increases as a result of merger); Rubinfeld Report (Pegasus)
at 3.
67
proposition, Petitioners pursue two somewhat inconsistent lines of attack: (1)
that New EchoStar will seek to maximize profits by instituting a patchwork of
different prices in different areas of the country; or (2) that even with a
national price commitment, New EchoStar will be able to raise its prices
unilaterally in both urban and rural areas; and that the merger will facilitate
collusion and allocation of territories between New EchoStar and cable
operators.(170) The first category of arguments ignores the Applicants' national
pricing commitment, the Applicants' past pricing practices, and the reasons why
national pricing makes as much sense for satellite television services as it
does for national offerings of Internet access and cell-phone services. The
second category of arguments disregards that New EchoStar must set its price to
be competitive in the most competitive markets where the largest number of
potential subscribers are located. By setting its price above competitive rates
or colluding with a cable operator, New EchoStar would forego large pools of
U.S. consumers and fail to maximize its profits.
1. THE ONE NATION, ONE RATE CARD PLAN WILL BE AN EFFECTIVE
CONSTRAINT ON NEW ECHOSTAR
The Petitioners question the value of New EchoStar's commitment of
national pricing as a constraint on prices.(171) Their arguments ignore the fact
that national pricing is consistent with the Applicants' efficiency-enhancing
incentives and with their prior practices. It is also consistent with the
practices of other national providers in
----------
(170) NAB Petition at 96-98 (Sidak Declaration at 34-35); Pegasus
Petition at 53-55; NRTC Petition at 35-38 (MacAvoy Declaration at 52-55).
(171) NAB Petition at 96-98; Pegasus Petition at 53-55; NRTC Petition at
35-38.
68
comparable network industries. The ability to offer local promotions for
installation and equipment will not undermine the effectiveness of national
pricing as a constraint. Discrimination in the quality of service has not been a
problem in the past, and the same incentives that have prevented the Applicants
from practicing such discrimination to date will remain in place after the
merger to prevent it in the future.
As set forth in the attached Declaration of Dr. Willig, national
pricing, which both EchoStar and DIRECTV have always used, makes sound economic
sense. Offering a national price will allow New EchoStar to take advantage of
this national footprint when marketing its services - using television
advertising, for example, and making the price of the service part of such
campaigns. In contrast, tailoring packages to particular areas would cause the
loss of the economies of scale inherent in a national marketing campaign.(172)
Moreover, customer service and direct sales are also done on a national basis,
and implementing local price variations would require customer service
representatives to be knowledgeable about a wide range of prices, only some of
which would be available to any particular customer.(173)
Even if these efficiencies did not attend national pricing, it
would be extremely difficult to charge different programming prices in different
areas. As Dr. Willig explains, evidence of this difficulty is demonstrated in
areas where NRTC sells DIRECTV service at a price $3 per month higher than
DIRECTV charges for the same
----------
(172) See Willig Declaration at Paragraph 94. As Dr. Willig observes,
while it is true that some local variations exist with respect to promotions,
these are largely with respect to equipment, installation and value-added gifts,
for example, an umbrella. Id. at 60-61.
(173) Id.
69
service. In such areas, EchoStar could maintain or perhaps strengthen its
competitive position vis-a-vis DIRECTV and charge an extra $1 or $2 in NRTC
areas (which are easily identifiable). However, EchoStar has not reacted to this
price disparity by charging higher prices, providing additional evidence of the
inefficiencies of regionally pricing DBS services.(174)
Nor could New EchoStar implement a price discrimination scheme
based on whether customers had access to cable or not.(175) Dr. Willig shows
that the task of isolating consumers without cable is inherently difficult and
imprecise (for example, the Warren data used by Sidak and MacAvoy are rife with
inaccuracies). And as Dr. Willig explains, it would only be necessary for New
EchoStar to be wrong in a relatively small number of cases before it would
become unprofitable to charge different prices on this basis.(176) Such a price
discrimination scheme, therefore, simply would not make good economic sense.
The fact that in the past the Applicants have used a limited
number of local promotions to attract new subscribers in no way undermines their
national pricing commitment. In a "Catch-22," the Petitioners attack the notion
of national pricing both if New EchoStar renounces the ability to offer local
promotions (they say it would be inefficient) and if New EchoStar retains that
ability (they say local promotions will
----------
(174) Willig Declaration at Paragraph 93.
(175) Sidak Declaration (NAB) at 34-35; MacAvoy Declaration (NRTC) at
52-53.
(176) Willig Declaration at Paragraph 94.
70
undermine the value of the national pricing commitment).(177) The truth is that
local promotions can be a valuable tool to the same limited extent that
Applicants have used them in the past, for example, in testing a promotion
before taking it national, and that such limited promotions will not detract
from the effectiveness of national pricing as a safeguard against price
discrimination.
The local promotions that EchoStar and DIRECTV have offered over
the years have been limited in geographic scope, time, value and number of
subscribers affected. In the last year, for example, EchoStar and DIRECTV have
offered local promotions in only a handful of areas. These areas have been
targeted due to localized, specialized reasons such as cable bounty programs
targeted at local rate increases. Importantly, the promotions have been limited
in duration and very limited in scope. Over the last year, for example,
subscribers gained by local promotions were a very small percentage - less than
5% of EchoStar's total new subscribers for that period. Such limited local
promotions for installation or equipment have not affected at all the levels at
which the Applicants have set their national rates in the past and, according to
Dr. Willig, will not do so in the future. For example, the effect on the
profit-maximizing national pricing level would be negligible if New EchoStar
were to offer in the first year of its operations only promotions of the same
scope as those EchoStar and DIRECTV offered in the past. Indeed the Applicants
are willing to commit to reasonable requirements to ensure that national pricing
is an effective constraint on pricing behavior, consistent with efficiency and
market dictates.
----------
(177) NAB Petition at 94-95; NRTC Petition at 31-35.
71
The Applicants also have engaged in no regional discrimination in
the quality of service for several reasons. These reasons include the importance
of national brand building and the significance of the DBS quality rankings by
national consumer services evaluating quality on a national basis, such as J.D.
Power. Some Petitioners nonetheless assert that New EchoStar will have an
incentive to discriminate in the quality of the service it offers to subscribers
with fewer MVPD alternatives.(178) The facts, however, disprove this assertion.
Dr. Willig analyzed DIRECTV's customer satisfaction survey to determine whether
DIRECTV currently engages in any form of non-price discrimination. Dr. Willig
found that "the results suggest that rural customers are just as satisfied with
DIRECTV's overall service and customer service as non-rural customers."(179)
EchoStar, for its part, has generally received significantly fewer complaints,
both on an absolute and a proportionate basis, from consumers in rural areas
than from urban households. This fact alone disproves the Petitioners' assertion
that New EchoStar will have an incentive to discriminate against customers with
fewer choices, for if this speculation were valid, each company today would have
the incentive to reduce its service quality in those rural areas. EchoStar has
not done so, proving that it values the image of its brand over the alleged
incentive to pick and choose to whom it offers its top-ranked customer
service.(180)
----------
(178) Rubinfeld Declaration (Pegasus) at 16; NAB Petition at 98, Sidak
Declaration (NAB) at 36; NRTC Petition at 31, MacAvoy Declaration (NRTC) at 55.
(179) Willig Declaration at Paragraph 69.
(180) American Customer Satisfaction Index of the University of Michigan
Business School, Aug. 20, 2001. See http://www.theacsi.org.
72
2. "ONE NATION, ONE RATE CARD" WILL TRANSLATE EFFECTIVE
COMPETITION IN URBAN AREAS INTO BENEFITS TO ALL HOUSEHOLDS
AND RENDERS THE "3 TO 2" AND "2 TO 1" ARGUMENTS BASELESS
Petitioners allege that, even with a national price commitment,
New EchoStar would raise its prices or collude with cable operators to maximize
its profits. Petitioners specifically argue that the merger will reduce the
number of competitors from 2 to 1 in areas without access to a non-satellite
MVPD provider, which will permit New EchoStar to charge "monopoly" prices, and
that it will also reduce the number of competitors from 3 to 2 in areas served
by non-satellite MVPD, leading to higher "duopoly" prices and facilitating
collusion.(181) The cost/benefit analysis posited by Petitioners to reach this
conclusion, however, assumes that New EchoStar would have no interest in growing
its base of subscribers, and the only question would be how to maximize its
profits from its existing subscriber base. Under Petitioners' analysis, New
EchoStar would increase its prices if the additional profits from existing
subscribers that have no realistic alternative service exceed the lost revenues
from existing subscribers
----------
(181) See, e.g., NAB Petition at 52-56 and Sidak Declaration (NAB) at
21-30 (calculating supposed price increase that would result from
"duopoly-to-monopoly merger" and from a 3 to 2 merger); NRTC Petition at 30 and
MacAvoy Declaration (NRTC) at 47-51 (predicting price increases as a result of
merger); Pegasus Petition at 21-22, 29-30 (speculating that the merger will lead
to "unilateral anti-competitive effects enabling a single DBS firm to increase
price independently of how rivals behave, or will enable one satellite and one
cable firm to coordinate behavior resulting in "greater freedom to raise
prices"); CWA Petition at 2 (the reduction of competitors from 2-to-1 or from
3-to-2 will allow the merged firm to raise prices); Letter from the National
Consumers League, National Farmers Union and the National Grange to William F.
Caton, Acting Secretary, FCC (Feb. 4, 2002), at 1 (merger to monopoly will lead
to higher prices).
73
choosing to cancel New EchoStar's service. However, Dr. Willig explains that
such an approach would not be in New EchoStar's economic interests, for the
simple reason that New EchoStar would not be maximizing revenue if it restricted
itself to existing subscribers.
A subscriber growth strategy is far more profitable for a firm
such as New EchoStar that would serve a little more than 20% of the nation's
MVPD households with a relatively high cost satellite fleet and uplink centers
and relatively low marginal costs. As Dr. Willig explains, given the national
pricing commitment, the prospect of gaining even a small percentage of new
subscribers from the largest DMAs in the country would be much more valuable to
New EchoStar than any prospect of extracting extensive rents from rural
subscribers.(182) In other words, the benefits of gaining additional subscribers
in the largest DMAs by charging a competitive price would be much more valuable
to New EchoStar than the additional margin from any conceivable rate increase
above a competitive price. And this comparison does not even take into account
the revenue streams from advertising or from pay-per-view, VOD, and interactive
services. These services are likely to be relatively more attractive in more
affluent, urban areas, and they are more reason why New EchoStar would not want
to forgo the huge pools of urban subscribers.
This profit maximizing strategy is consistent with the way in
which both DBS companies have uniformly favored growth to date, even though the
prospects of growth are dampened by the constraints on EchoStar's and DIRECTV's
ability to take on
----------
(182) Willig Declaration at Paragraph 39-41.
74
digital cable as an equal and from their ability separately to offer local
channels to all DMAs and thereby compete more effectively with cable providers
in all markets. EchoStar, for example, aggressively prices its America's Top 50
and 100 packages at $22.99 and $31.99 per month in order to convert cable
subscribers, even though Pegasus and NRTC charge a full $3.00 more per month in
rural areas, leaving EchoStar ample room to raise its prices in those areas
without losing rural subscribers. This growth strategy will make even more sense
post-merger as New EchoStar takes advantage of the spectrum and other
efficiencies gained by combining the two companies' resources in order to better
compete with digital cable and therefore increasing the prospects for urban
subscriber growth.
Therefore, based on current and past practices in the DBS
industry, as well as sound economic theory and modeling, there is no question
that New EchoStar will set its national price at a competitive level based on
the MVPD prices prevailing in the most populous markets in the nation. Precisely
because of these profit-maximizing incentives, national pricing will act as a
means of bringing to all Americans, wherever they are located, the benefits of
MVPD competition, wherever in the country it is the most intense. Competitive
pressures from MVPD distributors operating in the largest cities will translate
into benefits for consumers that are not directly served by these distributors.
Accordingly, the merger will not, as alleged by Petitioners,(183)
be a "2 to 1" in any respect that matters for any area that is not passed by
cable any more than it will
----------
(183) NAB Petition at ii, Sidak Declaration (NAB) at 12); NRTC Petition
at v; ACC Satellite TV Comments at 5.
75
be a "3 to 2" for any household that is served by a cable system. To maximize
its profits, New EchoStar will have to set its prices at levels allowing it to
compete for subscribers in the most densely populated and most heavily contested
markets.
3. THERE IS NO REALISTIC POSSIBILITY OF COLLUSION AMONG THE
CABLE MSOS AND NEW ECHOSTAR
For the same reasons that New EchoStar will attempt to maximize
its profits by competing vigorously with those MVPD distributors serving the
largest DMAs, the concerns expressed by Petitioners about collusion among New
EchoStar and cable operators are unfounded. First of all, this particular tango
would require New EchoStar to dance with as many as 10 cable MSO partners
simultaneously. New EchoStar would have to coordinate not only with one cable
operator but at least with most, if not all, of the largest cable MSOs operating
in the nation's most populated areas.
As explained by Dr. Willig, if any one of the major cable MSOs -
AT&T/Comcast, AOL/Time Warner, Cablevision, Charter or Adelphia - were to refuse
to participate in a deal to set prices at artificially high levels, a pool of
millions of potential customers would automatically become unavailable to New
EchoStar, making such a deal among the remaining parties economically
unattractive.(184) Nor is Mr. Sidak's postulation of a "tacitly collusive
strategy of market allocation" where "DBS would keep the rural customers and
cable would be free to take the urban customers,"(185) a realistic
----------
(184) Willig Declaration at Paragraphs 72-73.
(185) Sidak Declaration (NAB) at 34-35.
76
possibility. Such a deal could not happen for a simple reason, among others: the
failure of consideration. New EchoStar would be giving up a huge pool of
potential subscribers without getting anything in return. In particular, a
promise on the part of large cable operators to hold back from expanding into
the few truly unpassed rural areas would be meaningless, as cable operators
would be unlikely to find such expansion profitable anyway. In short, under this
theory, New EchoStar would be willing to act irrationally by forgoing the
opportunity to gain subscribers in the nation's most populated urban areas and
getting nothing in return.
Ever since the inception of their services, both EchoStar and
DIRECTV have consistently followed a strategy of making their services
increasingly competitive with cable systems in order to convert cable customers
and obtain a large percentage of new MVPD subscribers. The proposed merger is
the next logical step in that direction in order to keep pace with digital
cable, and it is illogical to view it as an attempt to revert to the bygone era
of rural-only satellite television. Such a strategy would be equivalent to
economic suicide for New EchoStar.
E. RURAL CABLE OPERATORS WILL CONTINUE TO BE A COMPETITIVE FACTOR
The fear expressed by the American Cable Association that rural
cable operators may be forced to discontinue operations is both overblown,
inconsistent with the cable industry's representations to the Commission in
other proceedings, and ultimately irrelevant.(186) Apparently, what these rural
cable companies fear most is that
----------
(186) ACA Petition at 2, 13-20.
77
due to the efficiencies of the proposed merger, New EchoStar will be able to
bring more services to rural America at lower prices. It is this threat of
enhanced competition from DBS that they believe will make it more difficult to
maintain and expand their customer base.(187)
First, as the cable industry has repeatedly pointed out in the
broadband and open access proceedings, rural cable operators can incorporate
digital upgrades at an affordable cost, and have increasingly been doing
so.(188) Using such technological innovations as the much touted "Headend in the
Sky," small analog cable companies unable or unwilling to invest in new
facilities can expand their channel capacity to compete with other MVPD
providers. Indeed, in its comments to the Commission in the open access
proceeding, the American Cable Association asserts that its "ACA Cable Modem
Survey shows members are making substantial progress in deploying cable modem
service" and that
[t]he efforts of ACA members are providing hundreds of thousands
of consumers the option of high-speed cable modem service in
smaller markets. The number of homes passed by ACA members
surveyed should exceed 1.7 million within 24 months. Other
facilities-based providers have chosen not to invest in these
markets. In this way, ACA members deliver a choice of broadband
Internet access where none would otherwise exist . . . Emerging
----------
(187) ACA Petition at 14-23.
(188) See Comments of the American Cable Association, CS Docket No.
00-30, at 5-8 (Apr. 25, 2000) (describing progress by ACA members, including
Mediacom Communications Corporation, Galaxy Cablevision, Pine Tree Cablevision
and Rural Route Video in providing cable modem service to small markets.)
78
competition from satellite delivered Internet access should
add to consumer choice in even the smallest markets.(189)
And just this past month, NCTA and several smaller rural cable
operators lobbied the Commission on their digital upgrades "seeking to
demonstrate to policy- makers that cable TV companies were rolling out broadband
services in markets outside major metropolitan areas."(190) NCTA's president and
CEO is quoted as follows:
Cable operators - even those serving midsize and rural markets -
are widely delivering on the deployment of high- speed Internet
service and other broadband services.(191)
Second, even if a particular cable operator were to discontinue
operations, the cable plant would remain available for use and would likely be
used by a successor entity that could run it more efficiently and avail itself
of the decreasing cost of digital upgrades. The possibility of harm to a
particular competitor does not constitute the type of harm to competition that
the Commission is called upon to evaluate.
III. THE MERGER WILL MAKE TRUE BROADBAND SERVICES
AVAILABLE FOR THE FIRST TIME TO ALL AMERICAN HOMES
A. THE MERGER WILL CREATE THE FIRST TRUE SATELLITE BROADBAND SERVICE
----------
(189) See Petition to Deny of the American Cable Association, ET Docket
No. 00- 185, at 12 (Dec. 1, 2000).
(190) See Telecommunications Reports, "NCTA Touts Cable Modem Deployment
in Rural Areas," (Feb. 4, 2002). See also Ex Parte Letters from Lisa A.
Schoenthaler, NCTA Senior Director, Office of Rural/Small Systems and
Association Affairs to William Caton, Acting Secretary, Federal Communications
Commission (Feb. 8, 2002).
(191) Id.
79
Some commenters claim that the merger will result in an
elimination or reduction of competition by reducing the number of broadband
competitors from "two to one" in some areas, and from "three-to-two" in other
areas.(192) These commenters completely miss the point. They appear to begin
with the assumption that all Americans enjoy vibrant competition among providers
of true broadband services today; they then seek to prove that this competitive
marketplace will suffer as a result of the proposed merger.
In fact, however, the merger of EchoStar and Hughes will create
for the first time a truly competitive broadband alternative to DSL and cable
modem service. In doing so, it will help alleviate the real problem, which these
commenters assume away:
- by any measure, the broadband revolution is far from reaching
every corner of the United States. For many Americans living
in remote areas, DSL or cable modems remain out of reach.
Satellite high-speed service is the only platform with a
national footprint, yet today's satellite broadband services
are not comparable in price or quality to DSL or cable modem
services, resulting in a low level of subscription to
satellite services by rural Americans; and
- even the remaining consumers today located in areas served by
DSL or cable modems lack access to effective satellite
broadband competition.
The high-speed Ku-band access services provided by the Applicants
today do not cure either part of this problem. As a threshold matter, they do
not satisfy the Commission's definition of an "advanced service."(193) Nor could
either company
----------
(192) See, e.g., Comments of the State of Alaska at 6; NAB Petition at
102; NRTC Petition at 50.
(193) See In the Matter of Inquiry Concerning the Deployment of Advanced
Telecommunications Capability to All Americans in a Reasonable and Timely
Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section
706 of the Telecommunications Act of 1996, Third Report, CC Docket No. 98-146,
FCC 02-33 (rel.
(Continued...)
80
standing alone deploy on a timely basis an advanced residential broadband
service of mass scale and appeal at an affordable price. Partly due to these
issues, SPACEWAY has been developed with a focus on the larger commercial, or
"enterprise," customers while EchoStar's Ka-band program has remained modest in
scope. Both of these Ka-band programs will need to be refocused and integrated
with one another to achieve the required economic scale for ubiquitous
residential true broadband service.(194) Therefore, the effects of this
transaction on the broadband market are more akin to an increase in the number
of broadband competitors from "zero to one" in most areas and "one-to-two" or
"two-to-three" in other areas of the country. New EchoStar is the best hope for
true and competitive satellite broadband service to virtually all Americans at
an attractive price.
Ultimately, the question for Congress and the Commission is
simple: will the government try to tackle the limited availability of advanced
broadband services across America only through a costly web of cross-subsidy and
regulation? Or, will it allow a multi-billion dollar private capital initiative
to create a true broadband service competitor that will provide service
virtually to every home in America? The latter alternative is the better one for
the public interest. Indeed, the approval of the proposed
----------
Feb. 6, 2002), at Paragraph 60 ("none of these [satellite] lines satisfies the
Commission's definition of advanced services.") ("Third Advanced Services
Report").
(194) As discussed in more detail below, the estimates about the
stand-alone Ka-band capacity of each company made by one Petitioner's expert
are over-inflated by a host of inaccurate assumptions, such as the collocation
of two SPACEWAY satellites in one orbital location and the mistaken belief that
EchoStar can use the spectrum licensed to another company through its minority
investment in that company.
81
merger will help fulfill several of the Commission's stated broadband principles
and policy goals by:(195)
- encouraging the ubiquitous availability of broadband access
to the Internet to all Americans;
- promoting competition across different platforms for
broadband services; and
- ensuring that broadband services exist in a minimal
regulatory environment that promotes investment and
innovation.
The importance of being able to offer a seamless bundle of video
and broadband services cannot be overemphasized in considering what tools will
be necessary to become and remain competitive with cable companies capable of
leveraging their tremendous power in video into the broadband market. The
Commission recognized years ago that "[m]ulti-service offerings and bundling
services for sale seems to enhance subscription to alternative services offered
by cable companies. . . . Indications are that consumers value receiving those
services through `one-stop-shopping.'"(196) Cable is far ahead of any other
service in fulfilling consumers' demand for "one-stop-shopping," thanks to its
bandwidth advantages and market power in the MVPD market. Cable's strategy was
succinctly described by one commenter in the Commission's cable modem open
access proceeding:
The cable industry has informed everyone else outside the
Commission that it is cable itself that is advantageously
----------
(195) See "FCC Launches Proceeding to Promote Widespread Deployment of
High- Speed Broadband Internet Access Services," News Release (Feb. 14, 2002).
(196) Fifth MVPD Competition Report at Paragraph 60.
82
positioned to leverage cable's dominant incumbent position in
cable's existing video markets, in order to secure cable's
dominance of the broadband market. Cox openly declares that it has
`outlined a clear strategy: Leverage the power of our delivery
network to offer customers not just cable television, but advanced
services including . . . high-speed Internet access.'
* * *
The cable industry expects its leveraging to solidify cable's
dominance of existing video markets, as well.(197)
Present-day, spectrum-constrained, satellite providers simply
cannot offer a bundled video, broadband and interactive service comparable to
that being rolled out by those cable companies offering digital cable service.
1. THE CURRENT STATE OF DEPLOYMENT OF ADVANCED
TELECOMMUNICATIONS CAPABILITY
The problem with broadband is a threshold one: availability. Many
areas of the country still have no access whatsoever to what the Commission has
described as "advanced telecommunications capability" (referred to here as "true
broadband" services).(198) Such services are defined by the Commission as having
upstream (customer-to-provider) and downstream (provider-to-customer)
transmission speeds of
----------
(197) Reply Comments of SBC Communications, Inc. and BellSouth
Corporation, In the Matter of Inquiry Concerning High Speed Access to Internet
Over Cable and Other Facilities, GN Docket No. 00-185 (filed Jan. 10, 2001), at
6 (citing a Cox Communications press release).
(198) The Commission has also used the terms "advanced service" and
"advanced telecommunications service" to refer to these capabilities. See Third
Advanced Services Report at Paragraph 8, n.23 (noting the Commission's adoption
of the terms "advanced telecommunications services" or "advanced services" in
its Second Report on such services, because it determined that the term
"broadband services" "had come to include a much broader range of services and
facilities" than those examined by the Commission.)
83
more than 200 kbps.(199) The Commission distinguishes true broadband services
from those having 200 kbps capacity in only one direction, such as currently
available satellite offerings, which the Commission defines as "high
speed."()(200) The Commission's data make clear that in terms of actual levels
of subscribership, true broadband is less broadly deployed than high-speed
services. In other words, a significant number of Americans, both urban and
rural, still do not subscribe to true broadband service, whether because it is
not available to them, the service is too costly, or for other reasons.
The present patchwork quilt of true broadband availability
demonstrates that while the pace of deployment is acceptable, the coverage is
far from complete. Even in areas served by cable, the availability of true
broadband service remains limited. For example, out of more than 60 million
homes passed by cable modem plant in July 2001, only about 5.2 million had
high-speed cable modem lines and less than two-thirds of these met the
definition of "advanced service."(201) This number is, of course, a subset of
----------
(199) Id. at Paragraph 8. According to the Commission, a transmission
speed of 200 kbps "is enough to provide the most popular applications, including
web-browsing at the same speed as one can flip the pages of a book." Id. at
Paragraph 11.
(200) See id. at Paragraph 9.
(201) The Commission reported that of the 5.2 million high speed cable
lines existing in June 2001, 64 percent met the definition of advanced services,
id. at Paragraph 44, meaning that there were approximately 3.3 million such
lines. Relying on a report by the National Cable Television Association
("NCTA"), the Commission reported that "more than 60 million homes" were passed
by cable modem plant in July 2001. See id. at Paragraphs 44-45 & n.93. These
figures yield a penetration rate of roughly 5.5 percent of cable modem capable
homes assuming 60 million homes are passed by cable modem service. The NCTA has
reported that as of November 2001, there were 6.4 million cable modem
subscribers and 70 million homes passed by cable modem service. See
http://www.ncta.com/industry_overview/indStat.cfm?indOverviewID=2 . Estimates
vary as to the percentage of U.S. homes that have access to cable modems,
ranging from 66 (Continued...)
84
the total number of homes passed by cable,(202) which in turn is a subset of the
total number of U.S. homes. Thus, while the availability of advanced services
via cable modem is growing, with the number of subscribers predicted to double
in one year's time,(203) advanced service via cable modem is currently being
provided to only a small fraction of all U.S. homes.
Likewise, the Commission has noted that service via asymmetric
digital subscriber line ("ADSL"), the most popular residential wireline
offering, is available to less than half of all U.S. homes.(204) Moreover, only
about 37 percent of the 2.7 million ADSL lines reported at the end of June 2001
met the Commission's definition of advanced services.
While satellites offer the best hope for filling the gaps left by
cable modem and DSL, satellite broadband today is not fully comparable to cable
modem and DSL, leaving many Americans without a true broadband alternative. The
Commission found that none of the current satellite offerings qualifies as an
advanced service under its
----------
percent to roughly 80 percent of U.S. households by year-end 2001. Third
Advanced Services Report at Paragraph 46 & n.98.
(202) See Eighth MVPD Competition Report at Paragraph 17 (reporting that
by the end of June 2001, the number of homes passed by cable was estimated at
104 million).
(203) See Third Advanced Services Report at Paragraph 66 (citing a Morgan
Stanley report on broadband cable that estimated growth in subscribers from
year-end 2000 to year-end 2001).
(204) See id. at Paragraph 51 (quoting an estimate that ADSL was
available to "about 45 percent of U.S. homes" at the end of 2001). Assuming that
there are 107 million households, the number of households without ADSL access
amounts to 58.85 million.
85
definition.(205) It follows that in areas where advanced services via cable
modem or DSL are not available, the number of competitors providing true
broadband services is essentially zero. Nor is the situation likely to change
soon. A number of reports have suggested that a sizable number of homes in the
U.S. will not have access to cable modem or DSL technology in the near future,
if ever. A report cited by the Commission puts the number of homes that may
never have such access at 20 to 30 million.(206) Many of these homes will be in
rural areas, as reflected in another study cited by the Commission which found,
for example, that "about 25 to 30 percent of rural telephone subscribers are not
likely to have access to high-speed services in the near future."(207)
This conclusion is consistent with the Commission's general
finding that there is a "positive correlation" between "population density and
the presence of high- speed subscribers."(208) With respect to advanced and
high-speed services in the aggregate, the Commission reports that such services
are currently utilized in "fewer than 40 percent of the most sparsely populated
zip codes," in contrast to the most densely populated zip codes, nearly all of
which report use of such services.(209) As the NRTC
----------
(205) Id. at Paragraph 60 ("none of these [satellite] lines satisfies the
Commission's definition of advanced services.").
(206) See id. at Paragraph 78 (citing studies by Salomon Smith Barney and
Merrill Lynch).
(207) Id. at Paragraph 113 (citing a study by the National Telephone
Cooperative Association).
(208) Id. at Paragraph 109.
(209) See id. at Paragraph 35 and App. C, Table 11 (observing that "well
over 90 percent" of "the most densely populated zip codes" have high speed
subscribers. The Commission defined the most densely populated zip codes as
those in the top three deciles of its study in terms of density. Those most
sparsely populated zip codes were those in the bottom three deciles. Id., App. C
at 4, n.13. It should be noted that the Commission's data report (Continued...)
86
observes, a joint report by the National Telecommunications and Information
Administration ("NTIA") and the Rural Utilities Service ("RUS") in 2000 noted
that "only 5% of towns with fewer than 10,000 residents have access to cable
modem service, and only 1.4% of such towns have access to DSL service.(210) And
as discussed above, not all of these cable modem and DSL lines meet the
definition of advanced services. In one important respect, however, rural areas
with no access to true broadband are in the same position as urban and suburban
areas without this service - the current number of providers offering this
service in these areas is essentially zero.
Even in those areas where cable modem and DSL services are
available, real broadband competition has not been effective in restraining
prices that are high and rising. This likely reflects the current lack of
effective broadband competition even in urban markets. As the Commission has
found, cable modem service is by far the most widely used mode of high-speed and
advanced service. According to the Commission, cable modem lines accounted for
54 percent of the estimated 9.6 million high-speed lines reported as of June
2001,(211) with subscribership figures expected to double in one year's
----------
the presence of subscribers in a zip code, and that this data cannot necessarily
be used to precisely calculate the percentage of the population to whom a
service is available. See id. at Paragraph 25.
(210) NRTC Petition at 44 (citing NTIA/RUS Report at 18-21).
(211) See Third Advanced Services Report at Paragraph 44 and App. C,
Table 1.
87
time according to a report cited by the Commission.(212) ADSL lines accounted
for roughly 28 percent of all high-speed lines.(213)
On the other hand, satellite-based and terrestrial fixed wireless
systems accounted for only 2 percent of all high speed lines, with less than
195,000 subscribers.(214) These data reflect that subscribership for high-speed
satellite services, which again do not meet the definition of true broadband,
with only approximately 140,000 residential and small business subscribers to
Hughes' DIRECWAY and EchoStar's StarBand combined,(215) pales in comparison to
the figures for high-speed cable and wireline technologies.
Cable likewise dominates in providing true broadband service,
accounting for approximately 56 percent of the reported 5.9 million true
broadband lines in service
----------
(212) See id. at Paragraph 66 (citing a Morgan Stanley report on
broadband cable that estimated growth in subscribers from year-end 2000 to
year-end 2001).
(213) Id. at Paragraph 48 & Paragraph 71. Other wireline technologies,
such as T1, symmetric DSL, and optical fiber services, which are used primarily
by businesses, accounted for approximately 16 percent of all high-speed lines.
Id. at Paragraph 48.
(214) See Third Advanced Services Report, App. C, Table 1 (data for
satellite and fixed wireless services, which was aggregated by the Commission
due to confidentiality concerns, reflect that such services accounted for
194,707 of the nation's 9,616,341 high speed lines).
(215) As a percentage of homes with Internet service, the figure for
satellite service is even smaller. The NTIA's most recent study reflected that
only 0.5 percent of all Internet homes utilized high-speed services other than
cable and DSL, while 12.9 percent of such homes used cable modem, and 6.6
percent used DSL. See U.S. Department of Commerce, National Telecommunications
and Information Administration and Economics and Statistics Administration, A
Nation Online: How Americans Are Expanding Their Use of the Internet (Feb. 3,
2002), at 39 (reporting that technologies other than standard dial-up, cable
modem, and DSL, were used by only 0.5% of Internet households).
88
as of June 2001.(216) The Commission reported that cable companies increased
residential subscribership for advanced services by 261 percent in the 18 months
preceding its Third Advanced Services Report.(217) Wireline technologies
including ADSL accounted for 35 percent of all true broadband lines, and
residential subscribership to ADSL advanced services grew by 683 percent in the
18 months leading up to the Commission's Third Advanced Services Report.(218)
Fiber accounted for less than 8 percent of all true broadband lines.(219) As
noted above, none of the satellite operators currently offers true broadband
service, reflecting the fact that satellite providers account for zero percent
of this market. With cable far outstripping other high-speed technologies in
terms of availability, it comes as no surprise that competition is lacking in
the high-speed and advanced services market, and that, as NRTC has observed,
prices for such services are high and rising.(220)
----------
(216) See Third Advanced Services Report, App. C, Table 1.
(217) Id. at 16, n.70.
(218) Id.
(219) Id.
(220) See NRTC Petition at 50 (citing reports that conclude "price
appears to be a key obstacle to broadband penetration.")
89
2. ECHOSTAR'S AND HUGHES' CURRENT KU-BAND BROADBAND OFFERINGS ARE
COMPETITIVELY INADEQUATE
a. CURRENT KU-BAND OFFERINGS ARE SIMPLY NOT COMPETITIVE
IN TODAY'S MARKET
What many Petitioners describe as a loss of competition from the
merger(221) relates to two interim alternatives that have not been able to
realize anything close to the full potential of satellite broadband offerings.
The Commission itself has described the DIRECWAY and Starband offerings as
"still in the early stages of deployment,"(222) and although each company has
tried to make the most of these delivery modes, it is clear that these services
are subject to significant constraints that will limit their long-term
viability, especially in light of the emergence and rapid deployment of more
advanced broadband service alternatives.
Foremost among these constraints are transmission speeds, capacity
limitations and overall cost. As noted above, current satellite offerings do not
meet the Commission's definition of "advanced services" because the satellite
offerings are not capable of providing transmission speeds in excess of 200 kbps
in both directions.(223) These Ku-band offerings have limited capacity. As
discussed in the attached Declaration of Mr. Arnold Friedman ("Friedman
Declaration") attached as C hereto, there are
----------
(221) See NRTC Petition at 50-52; Pegasus Petition at 30; NAB Petition at
98-104.
(222) Third Advanced Services Report at Paragraph 60.
(223) Id.
90
operational limits on the number of subscribers that can be served on the
Ku-band transponders that Starband and DIRECWAY lease from existing Ku-band
satellite operators.(224) Although satellite broadband providers seek to group
transponders on the same satellite for operational efficiencies and customer
service quality, there are limits on their ability to successfully do so. The
Ku-band is used for many commercial purposes other than DIRECWAY and Starband
services, and satellite operators have already committed many Ku-band
transponders for such other uses. Moreover, Starband and DIRECWAY directly
compete with other users for access to the available Ku-band capacity. As a
result, it is not always possible to obtain additional capacity on the same
spacecraft where DIRECWAY and Starband have already located existing broadband
subscribers.(225) These limitations directly impact the economics of the
currently provided Ku-band services.
Obtaining Ku-band capacity is also expensive. In today's market, the
cost to lease a single 36 MHz transponder is approximately $2,000,000 per year.
The cost of acquiring space segment capacity from third parties is a large
component of the total cost of the monthly service cost for satellite broadband
service. Thus, the cost of leasing Ku-band capacity increases the cost to
provide DIRECWAY and Starband service, relative to the cost to provide DSL and
cable modem service.(226)
----------
(224) Friedman Declaration at Paragraph 12.
(225) Id. at Paragraphs 13-14.
(226) Id.
91
The long-term ability of services of this nature to compete with
faster, true broadband services is therefore questionable, especially since, as
the Commission observes, "new and unforeseen capacity hungry applications that
require advanced service platforms will drive demand, and in turn deployment, in
the future.(227) For example, the Commission notes that one report forecasts
that "by 2005, the average broadband household will download about 70 megabits
[sic] of files, consume more than 20 minutes of video streaming per day, and
download three two-hour long movies per month."(228) Consumers will demand
nothing less than true broadband service and more to facilitate their use of the
Internet for such activities.(229)
Other constraints on the competitiveness of present-day satellite
broadband services versus cable modem or DSL service include higher up-front
costs for equipment and installation, and the need for professional
installation.(230) As explained in Mr. Friedman's Declaration, the impact of
these constraints is that current Ku-band
----------
(227) Third Advanced Services Report at Paragraph 64.
(228) Id.
(229) A survey conducted by McKinsey & Co. and JP Morgan in April 2001
characterized consumer interest in broadband as already "surprisingly high."
McKinsey & Co. and JP Morgan, Broadband 2001: A Comprehensive Analysis of
Demand, Supply, Economics, and Industry Dynamics in the U.S. Broadband Market
(Apr. 2001), at 25. Ninety-four percent of survey respondents indicated that the
"primary benefits of broadband - data speeds many times faster than with most
dial-up connections, not tying up the phone line, always being on, never having
any busy signals" were either extremely, very, or somewhat important to them.
(230) Friedman Declaration at Paragraph 8. Professional installation of
satellite equipment is required by FCC licenses for transmit-receive Ku-band
terminals used for two-way service to consumers. This requirement has negatively
impacted installation costs and consequent pricing.
92
broadband offerings are unable to compete with cable modem and DSL
offerings.(231) The price of these satellite services is significantly higher
than that of cable modem and DSL services.(232) Monthly charges for the Starband
and DIRECWAY services, for example, start at approximately $70 and $60
respectively,(233) compared to approximately $30-60 for cable modem service from
major providers(234) and $45-59 per month for standard DSL service.(235) Second,
equipment and installation costs are much higher for satellites than cable modem
or DSL services. The suggested retail price of equipment for satellite broadband
service is more than $500, plus the customer must obtain professional
installation at a cost starting at $199, for a total price tag of over $700.
Moreover, satellite subscribers typically have no alternative other than to
purchase their satellite equipment, as the equipment is usually not offered on a
lease basis. Cable modem and DSL installations, on the other hand, entail
significantly lower costs to bring the subscriber on line. Cable modems are
offered by one major provider for $199 or a $5 monthly rental
----------
(231) Id. at Paragraph 9.
(232) Id.
(233) See Third Advanced Services Report at Paragraph 48. DIRECWAY service
is obtained through Hughes' distributors. The current monthly fee for DIRECWAY
service is $59.99 and for Starband service is $69.99. See Friedman Declaration
at Paragraph 9.
(234) See Friedman Declaration at Paragraph 9. A $40-55 price range was
reported by Comcast Corporation's website, www.comcast.com, visited Feb. 18,
2002. Cox Communications-Northern Virginia offers a high-speed Internet access
service for $30-40 per month. See
www.coxcable.com/Fairfax/RoadRunner/rates.asp (visited Feb. 21, 2002). Time
Warner Cable advertises high-speed Internet access in Bergen County, New Jersey
for $45-60 monthly including the cost of modem rental. See
www.timewarnercablenj.com/road_runner/faq.html#gq17 (visited Feb. 21, 2002).
(235) Third Advanced Services Report, App. B, at Paragraph 25.
93
fee, with a self installation kit.(236) DSL installation costs to consumers
ranged from no cost to $250 according to a recent Commission survey.(237)
The sum effect of all of these factors is that current Ku-band
satellite broadband offerings are not as competitive, and therefore not as
attractive as cable modem and DSL offerings. Low rates of subscribership to
satellite broadband offerings - only 140,000 satellite subscribers to date
compared to subscribership numbers in the millions for cable modem and DSL -
demonstrate this lack of competitiveness of satellite offerings. Logically, a
merger that will result in the combination of two interim and struggling
broadband alternatives that are already not competitive with cable modem and DSL
services will not produce a further loss of broadband competition.(238)
According to
----------
(236) These prices were reported by Comcast Corporation's website,
www.comcast.com, visited Feb. 18, 2002. Cox Cable-Northern Virginia offers cable
modem rentals for $15 per month with a $124.99 professional basic installation
fee. The modems may also be purchased from computer equipment retailers. See
www.coxcable.com/Fairfax/ RoadRunner/rates.asp (visited Feb. 21, 2002). Time
Warner Cable in Bergen County, New Jersey charges a basic installation fee of
$69-99, depending on the configuration of the subscriber's computer. See
www.timewarnercablenj.com/road_runner/faq.html#gq17 (visited Feb. 21, 2002).
(237) Third Advanced Services Report, App. B. at Paragraph 25.
(238) See Pegasus Petition at 30. The NAB has also suggested that EchoStar
and DIRECTV "compete in the deployment of advanced services." NAB Petition at
30-31. However, the "evidence" supplied by NAB of supposed competitive reactions
is a disjointed litany of events that cannot even be characterized as tandem
movements by the two DBS operators, let alone as indicia of intense
competition.. NAB claims, for example, that the following events are competitive
reactions: "On March 17, 1999, DIRECTV announced it would invest $1.4 billion in
Spaceway Broadband Satellite System, with the stated goal of `establish[ing]
satellites as the preeminent means of delivery broadband services. On April 19,
1999, EchoStar announced that it would work with SkyStream Data Injection
Equipment to insert data into the transport stream to reclaim lost bandwidth."
Id. at 30 (citations omitted). This "evidence" of intense satellite broadband
competition is as unavailing as the Petitioners' "evidence" of intra-DBS
competition in the video market, as discussed in Section II.A.2 above.
94
Professor Willig, "[d]espite the fact that satellite-based Internet access is
technically available in all areas of the United States, the low penetration
rate of this technology -- even in areas without any access to DSL or cable
modem service -- raises questions about whether households in both rural and
urban areas are likely to accept it on a large scale."(239)
b. CURRENT SATELLITE OFFERINGS CLEARLY HAVE NOT
FUNCTIONED AS A CHECK ON BROADBAND PRICES
Petitioners such as NRTC, Pegasus and NAB argue that what they
characterize as competition between DIRECWAY and StarBand must be preserved as a
check on broadband prices. The lack of satellite competitiveness is borne out
not only by the low subscribership rates discussed above, but also by the rising
cable modem and DSL prices also observed by these Petitioners. NRTC's own data
reveal that its characterization of the current market is simply wrong - NRTC
states that "the price of high-speed services is an impediment to 36% of those
interested in subscribing," and that "the lack of advanced services competition
has resulted in monopoly pricing [of DSL services] by ILECs."(240) These facts
contradict NRTC's argument that the merger will reduce or eliminate competition.
Consumers are already subject to monopoly pricing notwithstanding the presence
of both DIRECWAY and StarBand in the marketplace.
----------
(239) Willig Declaration at Paragraph 29.
(240) NRTC Petition at 50 (citing comments of Focal Communication
Corporation and Pac-West Telcomm, Inc. and quoting comments of the Competitive
Telecommunications Association before the NTIA) (internal quotation marks
omitted).
95
3. NEITHER COMPANY'S STAND-ALONE KA-BAND VENTURES WOULD ALLOW
TIMELY DEPLOYMENT OF AN AFFORDABLE BROADBAND PRODUCT TO
RESIDENTIAL SUBSCRIBERS
As the Application explains, the future of satellite broadband lies
with the deployment of next-generation systems in the Ka-band capable of
competing with the advanced services offerings of cable companies and DSL
providers.(241) Because of the challenges involved in bringing these satellite
systems to fruition, however, deployment of these new satellites has taken
longer, and will require more capital than many Ka-band licensees have been able
to sustain. Just recently, Astrolink reported that it had terminated its Ka-band
spacecraft contract with Lockheed Martin, after having built 90% of its first
spacecraft, and after spending about $710 million on its Ka-band system and
finding itself unable to finance the remaining cost of implementing the
Astrolink broadband system.(242) Indeed, the current satellite programs are not
immune to downturns in the capital markets or changes in the projected demand
for broadband services. However, as discussed in Section III.B. below, the
efficiencies flowing from the merger will enable New EchoStar to deploy a
competitive true broadband satellite offering for the benefit of all U.S.
consumers, rural, suburban and urban alike.
----------
(241) See Merger Application at 47.
(242) "Decision Nears on Astrolink as Lockheed Ends Funding, Communications
Daily, Nov. 1, 2001. See also Letter from Peter A. Rohrbach and David Martin,
Counsel for Astrolink International LLC, to William F. Caton, Acting Secretary,
FCC, Re: Astrolink International LLC, File Nos. 182 through 189, SAT-P/LA-95 &
SAT-MOD-19971222-00200 (Feb. 8, 2002) at 2.
96
a. HUGHES' KA-BAND VENTURE - SPACEWAY
The Hughes SPACEWAY system is licensed to operate at two U.S. orbital
slots with full-CONUS coverage: 99 Degrees and 101 Degrees West Longitude.
Consistent with the FCC license for the system, and Hughes' system design, the
first spacecraft to be deployed at each of these locations is constructed to
utilize 500 MHz of spectrum in each direction (19.7-20.2 GHz downlink; 29.5-30.0
GHz uplink).(243)
Deploying the SPACEWAY system requires a capital expenditure in excess
of $1.8 billion, and the development of very complex technology that has never
before been deployed in a commercial satellite network, such as on-board
processing and switching. It also involves the substantial commercial risks
associated with implementing cutting edge technology in outer space. In order to
support these expenditures and mitigate the attendant risks, the Hughes SPACEWAY
business plan targets enterprise customers.
There are a number of reasons why focusing on enterprise customers
increases the commercial viability of the SPACEWAY system and reduces the
business risk.
o Hughes' experience from Ku-band VSATs is that enterprise
customers are willing to subscribe to broadband services more
quickly than residential customers.
----------
(243) Hughes also is licensed to operate a Ka-band spacecraft at the
131 Degrees W.L. "wing" slot, which the Commission has acknowledged is not
suitable for CONUS service, as well as spacecraft at a number of other locations
that are suitable only for international service.
97
o Targeting enterprise users provides a greater opportunity to
generate additional revenue from value-added broadband
services.
o Because Hughes already provides Ku-band VSAT services to
hundreds of thousands of enterprise Ku-band VSAT terminals,
SPACEWAY services can readily be marketed to this large base
of installed enterprise users.
o Enterprise customers are not as cost-sensitive as residential
users to the up-front costs of acquiring VSAT equipment, or
the complexities associated with professionally installing
that equipment.
o Serving the enterprise sector provides the opportunity for
Hughes to recover more quickly the enormous capital cost of
deploying this system; conversely, focusing on a ubiquitous
residential service is a far riskier endeavor that would take
far longer to recover such costs.
o The profit margins of residential service are significantly
lower, partly because subscriber acquisition costs are
significantly higher.
In short, the focus on enterprise users is based on the expected higher
and quicker "take up" rate by those users, larger profit margins through
increased opportunity for value-added services, as well as more modest
subscriber acquisition costs, and it has justified Hughes' making capital
investment in the SPACEWAY system and incurring the associated technology risks.
By contrast, costs of actually marketing a ubiquitous residential service on a
broad scale and equipping residential users to use SPACEWAY-enabled services
most likely would not be feasible without the merger.
The SPACEWAY spacecraft at 99 Degrees and 101 Degrees W.L. will be
capable of providing coverage of the 50 states, Puerto Rico and the U.S. Virgin
Islands. However, the fact that those spacecraft will be technically capable of
serving users throughout the
98
U.S. does not mean that it is economically feasible to actually market broadband
service to, and equip, residential households, particularly those in rural
areas.
The recent experiences of terrestrial broadband providers demonstrates
that U.S. consumers are very price sensitive in the case of broadband services,
and are willing to stay with or revert to dial-up phone service if the cost of
broadband service is too high.(244) Thus, DSL and cable modem service providers
are moving toward a model in which consumers can self-install their modems, and
in which there is no up-front cost to the subscriber - the inexpensive modem
often is provided free of charge by the service provider, and there is no
installation charge.(245) Current monthly costs for DSL and cable modem service
are as low as $30-60. DSL and cable modem service can therefore be offered to
residential customers at a lower "all-in" cost than is possible with satellite-
delivered broadband. As a result, both Starband and DIRECWAY currently
substantially subsidize Ku-band equipment costs.
Thus, actually marketing and deploying SPACEWAY services to U.S.
households will require a substantial additional investment by Hughes that is
far and beyond the $1.8 billion of capital costs for the SPACEWAY system.
Particularly in the current economic climate, it is extremely risky for Hughes
to make this type of investment to provide service to residential customers.
Such an investment makes sense only if the costs of acquiring residential users
are at a level that is sustainable by the
----------
(244) See Willig Declaration at Paragraph 29 (observing that "consumers
appear to be very sensitive to the price of broadband services") (citing studies
of consumer demand for broadband service).
(245) See Friedman Declaration at Paragraphs 9, 11.
99
expected revenue stream from those residential users, after taking into account
anticipated subscriber churn. As set forth below, the combined scale produced by
the merger offers the only way to drive down those subscriber acquisition costs,
and thereby to justify the substantial investment needed to market and deploy
true broadband services to residential users, including those in rural areas.
Moreover, the subscriber acquisition costs for such a large customer base will
consume significant cash resources, something that Hughes alone has a very
limited financial ability to provide, and the merged entity will be better able
to provide.
b. ECHOSTAR'S LIMITED KA-BAND DEVELOPMENT
EchoStar's development of a Ka-band offering is not nearly as advanced
as Hughes' SPACEWAY program. While it has been granted licenses for three
Ka-band orbital locations (83 Degrees, 113 Degrees and 121 Degrees W.L.), the
limited amount of spectrum licensed for its use at two of these locations (500
MHz in each direction) and its lack of experience with enterprise customers,
have resulted in relative modest plans for deploying its Ka-band satellite.(246)
EchoStar 9 has been designed with a limited number of spot-beams and
----------
(246) Pegasus and the State of Alaska suggest that EchoStar's statements in
the Application regarding the development of its stand-alone Ka-band offerings
are somehow inconsistent with statements made in other proceedings. See State of
Alaska Comments at 7; Pegasus Petition at 48-49. Alaska and Pegasus misread the
Application. While identifying the risks involved with Ka-band ventures, the
Applicants do not, as Pegasus and Alaska suggest, state that each has "changed
its mind" about deploying a system. See Comments of the State of Alaska at 7.
Neither is there any inconsistency with regard to EchoStar's statements in the
VisionStar transfer of control proceeding concerning the need for spectrum. In
that proceeding, EchoStar stated: "EchoStar . . . with two full-CONUS licensed
orbital locations (compared to 3 or 4 locations assigned to certain other
licensees) does not have adequate bandwidth to serve the same number of
potential customers that certain current and future competitors can provide."
Transfer of Control Application, In the Matter of VisionStar, Inc., File No.
SAT-T/C-20001215-000163 (filed
(Continued...)
100
could be used to backhaul DBS programming to EchoStar's uplink facilities and/or
to provide limited broadband services to consumers. However, its total capacity
is quite limited (see below) and prior to the merger, EchoStar had no plans to
roll out residential broadband Ka-band service on other than a trial basis.
While several Petitioners have speculated as to the commercial
viability of launching a number of high-capacity Ka-band satellites into
EchoStar's licensed orbital locations, the simple truth is that EchoStar cannot
justify making the enormous capital investment in residential broadband service
based upon its limited resources and MVPD subscriber base. As explained in the
Application, EchoStar believes that it must achieve at least 5 million broadband
subscribers within a five year period in order to recover the significant
up-front investment and subscriber acquisition costs associated with launching
and marketing a new two-way broadband satellite service.(247) EchoStar currently
does not have access to sufficient spectrum, orbital locations or capital
resources to achieve these targets. All of these limitations, however, can be
overcome by combining the resources of the Applicants once this merger is
approved.
----------
Dec. 15, 2000), at 6. While EchoStar further explained that the combination of
EchoStar's and VisionStar's spectrum would "mitigate" the problem of inadequate
spectrum, see id., EchoStar never stated that the VisionStar transaction would
resolve the inadequacy, as Pegasus suggests.
(247) Merger Application, Attachment B, Joint Engineering Statement at
15.
101
c. AVAILABLE SPECTRUM RESOURCES
NRTC and Pegasus are simply wrong when they allege that each company
could achieve miracles on its own and serve tens of millions of subscribers
simply by using its own orbital locations.(248) Mr. Morgan's conclusions to that
effect rest upon several erroneous assumptions. Mr. Morgan wrongly assumes, for
example, that it is feasible for Hughes to collocate two operating SPACEWAY
satellites at the same orbital location. He also believes that Hughes could have
unencumbered access to a full 1,000 MHz of spectrum at each orbital location.
A key element of the SPACEWAY design, and a key element to offering a
competitive broadband service by satellite, is the ability to deploy the small
transmit/receive user antennas on a ubiquitous basis, and without incurring the
delay and expense involved with individually licensing each antenna. The
reality, however, is that Hughes is only able to use 50% of its assigned
spectrum for service to such ubiquitous terminals.
The Commission has designated 1000 MHz of spectrum at 18.3-18.8 GHz and
19.7-20.2 GHz bands for downlinks from Ka-band GSO FSS spacecraft, and 1000 MHz
of spectrum at 28.35-28.6 GHz, 29.25-29.5 GHz, and 29.5-30.0 GHz for uplinks to
Ka-band spacecraft.(249) However, 280 MHz of this downlink spectrum (18.3-18.58
GHz) and 250 MHz of this uplink spectrum (29.25-29.5 GHz) is not suitable for
the
----------
(248) See NTRC Petition at 54-55; Pegasus Petition at 45.
(249) See In the Matter of Second Round Assignment of Geostationary
Satellite Orbital Locations to Fixed Satellite Service Space Stations in the
Ka-Band, 16 FCC Rcd. 14389, 14393 n.26 (2001).
102
deployment of small, ubiquitously-deployed satellite earth terminals. There are
number of reasons for this. First, the Commission has indicated its
"expectation" that this 280 MHz of downlink spectrum will generally be used for
"gateway" type earth stations(250) (which are not part of the SPACEWAY plan) and
not for ubiquitous antennas. Second, the Commission has raised questions about
whether the ubiquitous deployment of small terminals in this shared uplink and
downlink spectrum is practicable, given the Commission's stated desire to limit
widespread FSS deployment in bands where terrestrial deployment is widespread or
where feeder links to MSS satellite networks are being deployed.(251)
The net result of this regulatory situation is that Hughes cannot plan
on using the 18.3-18.58 GHz band or the 29.25-29.5 GHz band for its SPACEWAY
system. These problems have a corresponding effect on the 18.58-18.8 GHz band
that prevents Hughes from using that 220 MHz downlink segment for broadband
service to ubiquitous
----------
(250) Redesignation of the 17.7-19.7 GHz Frequency Band, Blanket Licensing
of Satellite Earth Stations in the 17.7-20.2 GHz and 27.5-30.0 GHz Frequency
Bands, and the Allocation of Additional Spectrum in the 17.3-17.8 GHz and
24.75-25.25 GHz Frequency Bands for Broadcast Satellite-Service Use, IB Docket
No. 98-172, at Paragraph 48 & n. 100 (rel. June 22, 2000).
(251) FWCC Request for Declaratory Ruling on Partial-Band Licensing of
Earth Stations in the Fixed-Satellite Service That Share Terrestrial Spectrum,
FWCC Petition for Rulemaking to Set Loading Standards for Earth Stations In the
Fixed-Satellite Service that Share Terrestrial Spectrum, Onsat Petition for
Declaratory Order that Blanket Licensing Pursuant to Rule 25.115(c) is Available
for Very Small Aperture Terminal Satellite Network Operations at C-Band, Onsat
Petition for Waiver of Rule 25.212(d) to the Extent Necessary to Permit Routine
Licensing of 3.7 Meter Transmit and Receive Stations at C-Band, Ex parte Letter
Concerning Deployment of Geostationary Orbit FSS Earth Stations in the Shared
Portion of the Ka-band, FCC 00-369 (released October 24, 2000) at Paragraph 99.
103
small antennas. The SPACEWAY system is designed to use spectrum in 500 MHz
segments, and it not feasible to change the design of the SPACEWAY system at
this late date. Thus, Hughes cannot simply "add" this other 220 MHz of spectrum
to its current system design.
In addition, contrary to the speculation of some of the
Petitioners,(252) the 103 Degrees W.L. orbital location licensed to PanAmSat
Corporation simply is not part of the SPACEWAY program. The spacecraft that
PanAmSat is constructing for the 103 Degrees W.L. orbital location has a
different configuration than the Boeing-manufactured SPACEWAY spacecraft
licensed for 99 Degrees and 101 Degrees W.L. That PanAmSat spacecraft, being
manufactured by Orbital Sciences Corporation (i) is incompatible with the
SPACEWAY design, (ii) uses a bent-pipe configuration, and (iii) does not contain
the advanced switching capabilities that are a central feature of the SPACEWAY
system. Thus, the PanAmSat spacecraft under construction for 103 Degrees W.L.
simply has not been optimized to provide the type of true broadband services
that will be offered by SPACEWAY.(253)
Mr. Morgan is equally wrong in his assertion that EchoStar controls
Celsat's use of its licensed Ka-band slots,(254) and even overstates the
spectrum available to
----------
(252) See NRTC Petition at 54-57, Morgan Declaration (NRTC) at 36-37.
(253) Furthermore, PanAmSat is a publicly funded company, with fiduciary
obligations to its 19.4 percent stockholders other than Hughes, and has no
agreement with Hughes or Hughes Network Systems regarding the operation of any
of PanAmSat's satellites as part of the SPACEWAY system.
(254) On the contrary, an EchoStar affiliate holds only a 17.6 percent
interest in Celsat, and EchoStar simply has no control over Celsat's use of its
spectrum. See Merger Application at Attachment D.
104
that company.(255) Nor is it appropriate for the Commission to speculate about
possible alternative combinations between EchoStar and Celsat or any other
Ka-band licensee in evaluating the specific merger before it.(256)
Mr. Morgan makes another fundamental mistake by grossly overstating the
number of subscribers that could be served in the Ka-band spectrum that is
available. Mr. Morgan wrongly relies on dial-up subscriber usage
statistics.(257) These figures simply do not apply to broadband users, who spend
substantially more time online, and are much more likely to watch movie
trailers, watch streaming video, listen to streaming audio and download software
and music on demand. Thus, Mr. Morgan's assumption of an "average busy hour
demand" of 2.75 kbps per subscriber" is flawed. As a result of these and other
errors, Mr. Morgan substantially overstates the number of broadband subscribers
that each company could serve.(258)
----------
(255) Mr. Morgan appears to assume that Celsat was authorized to operate
over an additional 850 MHz of spectrum "outside the normal FSS Ka-band
allocation." See Morgan Declaration (NRTC) at 37. The basis of this assumption
is not clear. In fact, Celsat received authorization for 500 MHz spectrum in
each direction at each of the 83 Degrees W.L. and the 121 Degrees W.L. orbital
locations, and not an additional 850 MHz. Moreover, use of this spectrum is
limited to feederlinks to and from Celsat's MSS system (Celsat is not licensed
to provide ubiquitous broadband service). Celsat is licensed for downlinks at
18.3-18.8 GHz and uplinks at 28.35-28.6 GHz and 29.25-29.5 GHz. See In the
Matter of Celsat America, Inc., File Nos. 192-SAT-AMEND-97 and 88-SAT-AMEND-98,
Order and Authorization, DA 01-1682 (Int'l Bur. rel. Aug. 3, 2001).
(256) See 47 U.S.C. Section 310(d) (in considering a transfer of control
application "the Commission may not consider whether the public interest,
convenience, and necessity might be served by the transfer, assignment, or
disposal of the permit or license to a person other than the proposed transferee
or assignee").
(257) Friedman Declaration at Paragraph 26.
(258) Id.
105
B. EFFICIENCIES FLOWING FROM THE MERGER WILL MAKE POSSIBLE DEPLOYMENT OF
A COMPETITIVE, TRUE BROADBAND ALTERNATIVE
The many efficiencies gained by the merger will allow New EchoStar to
deploy a true broadband alternative that is competitive in all major respects to
DSL and cable modem services. It will also allow New EchoStar to price its
broadband services at competitive levels in those areas unable and unlikely to
receive cable modem or DSL services.
The merged company will combine the resources and subscriber bases of
both companies which will result in substantial cost and service advantages over
any possible individual Ka-band offering of EchoStar or Hughes. As Mr. Friedman
explains, the combination of the Applicants' broadband programs through the
merger will address many of the economic hurdles facing prospective Ka-band
operators today, such as the relatively high costs during the early years of
developing and manufacturing subscriber equipment.(259) While some of these
costs may be passed on to subscribers, it is clear that much of these costs
would have to be borne by the satellite providers in order to attract a critical
mass of subscribers relatively quickly. New EchoStar would be in a much better
position to drive down the equipment costs for this service with a larger
potential subscriber base.(260)
----------
(259) Friedman Declaration at Paragraph 20.
(260) Id. at Paragraph 21.
106
The combined company would be able to market its broadband services to
a much larger base of MVPD subscribers and bundle broadband and video services
to new subscribers more efficiently and economically by, among other things,
consolidating advertising and promotion budgets and sharing distribution
channels. The merger will also allow New EchoStar to market its broadband
services to the combined DBS customer base of the two companies. Indeed, current
subscribers of DBS services are more likely to subscribe to satellite broadband
services because these households have a clear line of sight to the satellites
and because they have a demonstrated willingness to place the necessary
equipment and antenna dishes on their homes.(261) In fact, half of Hughes'
current broadband subscribers also subscribe to DIRECTV. As Professor Willig
explains, the ability to market this broadband service to the combined
subscriber base of both companies will lower the acquisition costs necessary to
reach the critical mass of subscribers and also likely shorten the time period
necessary to reach this level of subscribers.(262)
New EchoStar will also be able to manage its satellite fleet and
spot-beam capacity more efficiently than either Applicant could do separately.
Additional cost savings would also be achieved, according to Mr. Friedman,
through the consolidation of customer service centers, uplink facilities,
network operating centers, trunking facilities and billing functions.(263)
----------
(261) Id.
(262) See Willig Declaration at Paragraph 32.
(263) Friedman Declaration at Paragraph 22.
107
There also can be little doubt that New EchoStar must pass on these
cost and efficiency advantages directly to consumers in order to be competitive
with DSL and cable modem services, which in turn will spur competition among
cable modem, DSL and any other broadband service providers.
A broad range of commenters understand the potential that this new
service holds for closing the "digital divide" between urban and rural areas,
including business owners who see the potential boost to the competitiveness of
rural economies, rural healthcare providers who see the potential for improved
telemedicine services via a true broadband satellite link to urban healthcare
centers, rural educators desiring to provide their students with a true
broadband link to the Internet equal to what is available to their urban
counterparts, and citizens who simply seek access to the same types of services
available in urban areas.(264) These commenters recognize that the merger will
be
----------
(264) See, e.g., Comments of Arnold Sherman, Executive Director, Montana
World Trade Center, Missoula, Montana; Comments of Jeff Hoffman, Champion Rural
Economic Area Partnership Alliance Director; Comments of W.A. (Bill) Gallagher,
Farm Bureau Financial Services, Helena, Montana; Comments of Dave Lewis, State
Representative, State of Montana; Comments of Susan Fischetti, Fischetti
Enterprises, Inc., Eagle River, Alaska; Comments of Dick Maxwell, Executive
Director, Buckeye Association of School Administrators, Columbus, Ohio; Comments
of Amy Paster, Director, Church Point Chamber of Commerce, Church Point,
Louisiana; Comments of Shelby Robert, Robert Farms, Gonzales, Louisiana;
Comments of Sen. Noble Ellington, Chairman, Senate Judiciary A Committee, State
of Louisiana; Comments of Russell Hanson, President, North Dakota Retail
Association, Bismarck, North Dakota; Comments of Lois Hartman, Executive
Director, North Dakota Firefighter's Association, Bismarck, North Dakota;
Comments of Jason Brostrom, NetExpress LLP, Bismarck, North Dakota; Comments of
Jeffrey Masten, Medical X-Ray Center, Sioux Falls, South Dakota; Comments of
Mary E. Jones, Ed.D. Sioux Falls, South Dakota; Comments of Edward T. Clark,
M.D., Central Plains Clinic, Sioux Falls, South Dakota; Comments of Rick
Bauermeister, Director of Business Development, Market Solutions Group, Inc.,
Sioux Falls, South Dakota; Comments of George Landrith, President, Frontiers of
Freedom, Fairfax, Virginia; Comments of David Charles, M.D., National Alliance
of Medical Researchers & Teaching Physicians, Washington, D.C.
108
a step forward toward parity between the services available in rural and urban
areas , and not the "step backward" feared by the National Rural Electric
Cooperative Association.(265) The merger will help make this potential a reality
for all of these constituencies.
C. THE MERGER DOES NOT PRECLUDE ADDITIONAL ENTRY
While the merger will create a true broadband service alternative,
including in areas where none currently exists, it will not preclude new,
additional entrants from providing high-speed and advanced services. Arguments
to the contrary by some Petitioners, claiming that the merger will "stifle"
Ka-band competition, or "prevent" Ka-band competition from emerging in rural
areas,(266) are mistaken.
NRTC and Pegasus argue that the merger will adversely affect broadband
competition with regard to Ka-band services because the merged entity would
control enough Ka-band slots to preclude new Ka-band entrants.(267) Simple
arithmetic reveals the flaws in this argument. Pegasus identified orbital slots
capable of serving CONUS as those from 83 Degrees W.L. to 133 Degrees W.L. and
complains that New EchoStar will control "between 8 and 11 of the slots."(268)
Pegasus fails to mention that eleven other entities affiliated with neither
EchoStar nor Hughes currently control orbital slots capable of serving CONUS,
which demonstrates that there are more than enough prime Ka-band
----------
(265) See Comments of National Rural Electric Cooperative Association at 9.
(266) See NRTC Petition at 52-56.
(267) Pegasus Petition at 69-72; NTRC Petition at 52.
(268) Pegasus Petition at 71.
109
slots controlled by others to ensure that the merger will not "stifle"
competition in providing broadband services.(269) Moreover, as explained above,
SPACEWAY only has access to only two full-CONUS slots and EchoStar has access to
at most three such slots, not three and five, respectively, as Pegasus and NRTC
claim.(270)
Pegasus and NAB also argue that merger approval would violate Section
25.140(e) of the Commission's Rules, which limits the number of FSS orbital
slots to two per applicant.(271) This argument is without merit. The Commission
has never held that Section 25.140(e) operates to preclude a merger that results
in a transfer of control over orbital slots.(272) It does not. In any event, the
Commission has never applied this rule to
----------
(269) See "FCC International Bureau Authorizes Second Round Ka-Band
Satellite Systems," Press Release (Aug. 2, 2001) and attached "Ka-Band GSO Orbit
Assignment Plan," which reflects that Lockheed Martin Corporation, DirectCom
Networks, Inc., CAI Data Systems, Inc., TRW, Inc., Pegasus Development
Corporation, CyberStar Licensee LLC,GE American Communications, Inc., Astrolink
International, NetSat 28 Company, LLC, Motorola, Inc., and Loral Space &
Communications Corporation are authorized to operate satellites at orbital
locations ranging from 83 Degrees W.L. to 133 Degrees W.L.
(270) See Pegasus Petition at 69; NRTC Petition at 52.
(271) Pegasus Petition at 71-72; NAB Petition at 110.
(272) See e.g., In the Matter of Loral Space & Comm. Ltd. and Orion Network
Syst., 13 FCC Rcd. 4592 (1998); In the Matter of Hughes Comm. Inc. and
Affiliated Companies and Anselmo Group Voting Trust/PanAmSat Licensee Corp., 12
FCC Rcd. 7534 (1997); In the Matter of VisionStar, Inc., Order and
Authorization, File No. SAT-T/C-20001215-00163, DA 01-2481 (Int'l Bur. rel.
Oct. 30, 2001) (approvals of transfer of control applications which resulted in
the transferee controlling more than two Ka-band slots. In none of these
instances did Rule 25.140(e) operate to preclude the transfer). Pegasus and NRTC
are likewise incorrect in their assertion that Commission Rule 25.140(f)
precludes this transfer of control. See NRTC Petition at 52-53; Pegasus Petition
at 71-72. Rule 25.140(f) limits an FSS applicant to one additional slot beyond
its assigned authorizations, provided that its in-orbit satellites are filled
and that it has no more than two unused orbital locations for previously
authorized but unlaunched satellites in that band. 47 C.F.R. Section 25.140(f).
This rule too has never been held to preclude transfers of control, and
Petitioners cite no authority to the contrary.
110
restrict assignments in the Ka-band because it concluded that there were
sufficient slots to accommodate all applicants.(273)
The Commission has recently observed that new entrants using several
different technology platforms have already begun, or are poised to begin,
playing a significant role in providing high-speed and advanced services to many
areas of the country including smaller markets. The Commission has reported, for
example, "that there are at least 241 different companies using unlicensed
spectrum to provide high-speed terrestrial fixed wireless Internet access in
approximately 503 different counties" across the nation.(274) Importantly, the
Commission recognized that industry observers have pegged fixed wireless as a
solution for rural areas, noting that "while fixed wireless has the potential to
compete with DSL and cable modem service, the technology is best-suited for
rural and underserved markets where these services are not available."(275)
MMDS systems have been cited by the Commission as another competitor
expected to gain strength in the next two years. MMDS, which currently reaches
55 percent of the population by Commission estimates, is expected to reach 90
percent of the population by the end of 2004.(276) The Commission noted that
industry observers predict that "[d]espite the setbacks that the fixed wireless
industry has faced during the past year,
----------
(273) See In the Matter of Second Round Assignment of Geostationary
Satellite Orbit Locations to Fixed Satellite Service Space Stations in the
Ka-Band, DA 01-1693, 16 FCC Rcd. 14389 (2001) at Paragraphs 16-17.
(274) Third Advanced Services Report at Paragraph 59.
(275) Id. at Paragraph 75 (citing industry observers).
(276) Id. at Paragraph 61.
111
including financial problems and halting of deployment plans by major operators,
analysts believe that the industry still has the potential to grow and become a
successful vehicle for offering high-speed services."(277)
Furthermore, Loral, WB Holdings and Teledesic recently certified to the
Commission that they have commenced construction of their Ka-band satellite
networks.(278)
The Commission has observed as well that multiple providers are
beginning to deploy third generation wireless ("3G") systems, including "many
commercial mobile radio service licensees [who] are beginning to deploy, or have
developed plans to deploy, 3G services within their existing spectrum."(279) The
Commission concluded that "successful deployment of 3G wireless services may
significantly expand availability of advanced services, especially to consumers
that are currently unserved by wireline connections."(280)
Advances in technology will also expand the reach of DSL services. The
Commission has reported that "DSL extension products" have been developed to
relieve significant constraints on DSL availability. The Commission describes
these products,
----------
(277) Id. at Paragraph 71. The Commission has also pointed out that during
2001, it authorized the use of MMDS and Instructional Television Fixed Service
spectrum for mobile in addition to fixed use, by licensees, and that industry
analysts predicted that this action by the Commission "gives fixed wireless
carriers and equipment vendors additional flexibility and may help revive the
industry." Id. at Paragraph 76.
(278) "Satellite Companies File Milestone Documents with FCC,"
Communications Daily (Feb. 11, 2002) at 9.
(279) Third Advanced Services Report at Paragraph 80.
(280) Id.
112
developed to serve subscribers who are located beyond the range of the central
office or who are blocked by a digital loop carrier that cannot be modified with
a remote access mulitplexer or remote DSLAM, and capable of "bring[ing]
consumers, especially those in low-density areas, within the range for DSL
services."(281) A new DSL standard recently announced by the International
Telecommunication Union, G.SHDSL, also has the potential to expand DSL
availability. G.SHDSL can reportedly be deployed nearly twice as far from the
central office as symmetric DSL, while increasing the amount of available
bandwidth. As a result the Commission has noted that this new standard
"would . . . extend DSL capability to consumers that are currently beyond the
reach of the central office."(282)
With respect to cable modem deployment, the ACA has reported that its
member companies are "leading the industry in delivering broadband services to
smaller markets," noting that the Commission "has received substantial data on
ACA members' broadband deployment in response to the High-Speed Access N[otice
of Inquiry]."(283)
----------
(281) Id. at Paragraph 83. The Commission has also pointed out that the
number of rural subscribers receiving DSL may be under-reported in Commission
studies because the Commission only requires high-speed providers that have 250
or more subscribers in a given state to report subscriber numbers. "Thus, many
smaller providers that serve discrete communities in sparsely-populated areas
may not have reported, thereby creating the impression that there is less
high-speed service in rural areas than there may actually be." Id. at Paragraph
35. The Commission further cites a report by the National Telephone Cooperative
Association that "almost 80 percent of respondents to a recent survey of its
members are offering high-speed services to all public centers in the carrier's
service territory." Id. at n.82
(282) Id. at Paragraph 84.
(283) ACA Petition at 7-8 (citing ACA's comments in In the Matter of
Inquiry Concerning High-Speed Access to the Internet over Cable and other
Facilities, GN
(Continued...)
113
According to ACA, small cable systems passed "nearly one million homes with
cable modem service," had invested "about $300 million" in plant upgrades and
equipment, and planned to nearly double the number of homes passed with cable
modem service in the next 12-24 months.(284)
In sum, the merger will do nothing to stifle new entry in the broadband
market. A multitude of new entrants are able to provide broadband service using
a variety of technologies, and will compete with cable modem, DSL and satellite
broadband services.(285) Competition between the various technologies is
consistent with the view expressed by FCC Chairman Powell in recent reports that
"sufficient competition comes from the different types of broadband service
available: via DSL, cable networks, or satellite dishes."(286)
----------
Docket 00-185 (Dec. 1, 2000), and its Reply Comments in that proceeding (Jan.
10, 2001).
(284) See ACA Reply Comments, In the Matter of Inquiry Concerning
High-Speed Access to the Internet over Cable and other Facilities, GN Docket
00-185 (Jan. 10, 2001) at 4, 7 and Table 1. Although the ACA intimates that the
merger will force small cable providers out of business, ACA Petition at 7-8,
this contention is both overblown and inconsistent with the cable industry's
representations to the Commission in other proceedings regarding the aggressive
roll-out of digital upgrades in smaller markets, as discussed in Section II.E.,
supra.
(285) The number of current and up-and-coming participants in the broadband
market make clear that the Commission should give no weight to the claim of
Pappas Telecasting Companies that the merger would create a "broadband
monopoly." See Comments of Pappas Telecasting at 16-17.
(286) Jonathan Krim, "FCC Rules Seek High-Speed Shift," Washington Post
(Feb. 15, 2002), at E1 (reporting on FCC Chairman Powell's view of broadband
competition and observing further "Powell and his supporters argue that it is
difficult to foster competition within each mode of high-speed Internet access
because of the huge cost involved in building networks").
114
D. THE MERGER PROVIDES A MARKET SOLUTION TO THE LACK OF TRUE BROADBAND
AVAILABILITY WHILE AVOIDING THE NEED FOR COSTLY AND CONTENTIOUS
REGULATORY MEASURES
There are two ways to achieve universal broadband deployment: through
adopting a complicated web of regulations, or through private capital
investment. Both Congress and the Commission have recognized the superiority of
reliance on market forces and encouraging private investment. Regulation as a
tool for facilitating broadband deployment, on the other hand, has historically
led to market inefficiencies. Some of the regulatory broadband initiatives
contemplated by the Commission or aspired to by some parties would present
exactly this problem. By contrast, the merger presents a market-based path to
similar results - the creation of a broadband alternative without need for
subsidy, cross-subsidy, franchise rights or any other government support.
Congress's preference for market-based solutions is evident in Section
706 of the Telecommunications Act of 1996, which directed the Commission to:
[E]ncourage the deployment on a reasonable and timely basis of advanced
telecommunications capability to all Americans . . . by utilizing, in a
manner consistent with the public interest, convenience, and necessity,
price cap regulation, regulatory forbearance, measures that promote
competition in the local telecommunications market, or other regulating
methods that remove barriers to infrastructure investment.(287)
The Commission has interpreted this directive to mean:
----------
(287) Telecommunications Act of 1996, Pub. L. 104-104, Section 706, 110
Stat. 153, reproduced in notes under 47 U.S.C. Section 157.
115
[T]he language and spirit of the Act require that we promote advanced
services deployment within a framework that relies significantly on
market forces.(288)
Accordingly, the Commission explained that it is "actively engaged in
removing barriers and encouraging investment in advanced telecommunications,"
and described its efforts as working to:
[E]stablish a rational regulatory framework for these services, to
promote investment through competition and the administration of our
universal service support mechanisms, make efficient use of available
spectrum and ensure that lack of access to public rights-of-way do not
slow deployment.(289)
At the same time, struggling with some intractable problems associated
with the digital divide, the Commission has had to contemplate initiatives that
are not necessarily consistent with this preference for market solutions. These
involve the highly controversial, complicated universal service subsidies that
created so many long-running disputes in the telephone context. For example, in
its Third Report on Advanced Services, the Commission stated that is has
"encouraged investment in [advanced services] infrastructure in high cost areas"
by modifying explicit subsidy provisions, high-cost loop support for rural
carriers and access charges for rate-of-return companies.(290) The Commission
has also noted that it is considering changes to its
----------
(288) Third Report on Advanced Services at Paragraph 33.
(289) Id. at Paragraph 6.
(290) Third Advanced Services Report at Paragraphs 139-40. The Commission
is currently reconsidering its order modifying rules for rate-of-return
carriers. See id. at 56, n.336.
116
controversial physical collocation rules, as well as the definition of "core
services" eligible for universal service support, to facilitate deployment of
advanced services.(291)
If possible, of course, the Commission should strive to promote
broadband deployment without need to resort to universal service funds or any
other system of subsidy. The efficiencies unleashed by the EchoStar/Hughes
merger will facilitate universal broadband service without need for any such
regulation or subsidy. The Applicants propose to use their private investment to
create a true advanced service provider that will go a long way toward resolving
the problem without demanding subsidies, without requesting monopoly rights, and
without precluding entry by other providers.(292)
The single act of approving the merger will set in motion deployment of
the very type of true broadband service Congress and the Commission have sought
to make available to all Americans - competitive, widely available, advanced
service capability.
----------
(291) Id. at Paragraphs 155, 158. The Commission's collocation rules were
vacated in part and remanded in GTE Serv. Corp. v. FCC, 205 F.3d 416 (D.C. Cir.
2000), and the Commission released an order on remand in August 2001. See In re
Deployment of Wireline Services Offering Advance Telecommunications Capability,
16 FCC Rcd. 15435 (2001). Changes to the definition of "core services" are being
considered in the pending rulemaking Federal-State Joint Board on Universal
Service, CC Docket No. 96-45, Public Notice FCC 01J-1 (rel. Aug. 21, 2001).
(292) The merger will require the Commission to do none of the "things"
recently cited by an FCC official as "things government shouldn't do: (1) Agree
to 'give me a monopoly and I'll give you broadband' requests. (2) Favor one
technology over others through subsidies." Edie Herman, "Telecom Experts Debate
Why Broadband Subscription Lacks," Communications Daily (Jan 24, 2002), at 3
(citing comments by FCC Chief of Office of Plans and Policy Robert Pepper).
117
E. NATIONWIDE PRICING WILL HAVE THE SAME BENEFICIAL EFFECT FOR BROADBAND
AS FOR MVPD SERVICES
A number of Petitioners claim that the merger will lead to monopoly in
the broadband market for those persons for whom satellite is the only
alternative. New EchoStar will commit to a nationwide pricing policy for basic
broadband services that will translate effective competition in urban areas into
benefits to all households for broadband service, just as it will for MVPD
services.(293)
IV. THE MERGER WILL HAVE PRO-COMPETITIVE EFFECTS IN THE VIDEO PROGRAMMING
MARKET
Consumers want more channels. MVPDs face bandwidth constraints. When
New EchoStar finds itself with roughly twice the capacity as DIRECTV and
EchoStar individually, it will have an unparalleled opportunity to give
consumers the new channels they desire, and an ability to go beyond the
entrenched programming interests to the independent programmers that
historically have been shut out of the market. This new vitality in the
programming landscape will shake up the MVPD market for the better.
A. THE MERGER WILL PROMOTE, RATHER THAN IMPEDE, COMPETITION IN THE MARKET
FOR VIDEO PROGRAMMING
Several Petitioners contend that the merger will have an
anti-competitive effect on the video programming market, because New EchoStar
allegedly will be the
----------
(293) See Willig Declaration at Paragraph 34.
118
only outlet for programming in markets not served by cable.(294) When it comes
to program diversity, just the opposite is true. By freeing up hundreds of
channels of spectrum for new programming and creating a truly effective
counterbalance to the large, entrenched cable MSOs, New EchoStar will be able to
provide a viable alternative platform to programmers that have been unable to
secure cable carriage. The merger will also help the merged company alleviate
the anti-competitive disparate treatment that EchoStar and DIRECTV now suffer at
the hands of large programmers.(295) While certainly not welcome to those large
companies, that change should translate to lower prices for consumers.
Concerns that New EchoStar could somehow become a bottleneck for
programmers(296) are unfounded. Cable continues to hold 78 percent of the
national market, and any programmer that is unable to reach a satisfactory
arrangement with New EchoStar will have ample alternatives in the form of the
major cable MSOs located throughout the country. Also, with respect to
programming that is created and broadcast locally, as discussed in Section I,
this merger will open up vastly more markets to retransmission of local
programming - all 210 DMAs, equaling all Americans, to be precise - than would
be the case if EchoStar and DIRECTV remain as separate entities. This means that
local broadcasters will be able to reach a wider audience and, as a
----------
(294) NAB Petition at 98; ACA Petition at 14-15; Pegasus Petition at 58.
(295) ACA Petition at 14-15.
(296) ACA Petition at 14-18; Johnson Broadcasting Petition at 2;
Communications Workers of America Petition at 2; Word Petition at 4-6; NAB
Petition at i and 57-58.
119
business matter, will be better able to negotiate favorable retransmission
consent terms with cable operators facing real competition for the first time in
most markets.
The Commission need only look at EchoStar's and DIRECTV's past behavior
to see that the DBS industry, in order to offer an attractive alternative to
cable, historically has been the first to launch new services, rather than pose
a "bottleneck" obstacle to such content. Therefore, withholding new programming
from subscribers not only would turn economic reasoning on its head, but would
contradict the DBS industry's historical affinity for new, unique programming.
Nothing better demonstrates the potential for unleashing new and
exciting content through a New EchoStar than the recently announced transaction
between EchoStar and Vivendi Universal S.A. That transaction is a foretaste of
the types of new content, including new networks and exciting new interactive
services, that will be made available to a substantial nationwide audience.
EchoStar has consummated its transaction with Vivendi and will carry the new
content and service regardless of the outcome of this proceeding, demonstrating
EchoStar's commitment to opening doors to new content and interactive
Applications. From the programmers' point of view, this new demand for
programming can only increase their overall ability to penetrate the
marketplace, and to hold out an additional competitive alternative when
bargaining with the major cable MSOs, many of which are vertically integrated
with established national video programmers.(297)
----------
(297) For example, four of the top six for-profit video programming
networks ranked by subscribership are vertically integrated with a cable
provider, as are four of the top five video programming networks ranked by
prime-time ratings. See Annual Assessment
(Continued...)
120
NRTC and Pegasus have raised objections and concerns over the Vivendi
transaction.(298) Specifically, these Petitioners claim that the investment by
Vivendi in EchoStar is contrary to statements made in the Application that
EchoStar does not intend to pursue a strategy of vertical integration with
programmers after the merger.(299) According to Petitioners, the Vivendi
transaction demonstrates an intent by EchoStar to create a "harmful" vertical
integration strategy that must be investigated and considered by the Commission
when evaluating the Application.
This position is absurd. First, the economic interest that Vivendi has
in EchoStar amounts to about 10% (10.7% of issued and outstanding equity, less
than 10% on a fully diluted basis), and the voting stake is even smaller at
about 2%, before the merger with Hughes is consummated.(300) Post-merger, these
percentages will decrease to less than 5% equity interest and about 1% voting
interest in New EchoStar.(301) Accordingly, post-merger, the equity and voting
interests of Vivendi in EchoStar will sink below the attributable level of
ownership (i.e., 5%) that the Commission typically looks to when applying its
program access rules that regulate the conduct of cable operators and affiliated
programmers.(302) If, in the context of the cable program access
----------
of the Status of Competition in the Market for Delivery of Video Programming,
Eighth MVPD Annual Report, FCC 01-389, App. D, Tables D-6 and D-7 (rel. Jan. 14,
2002).
(298) See e.g., NRTC Petition at 68-72; Pegasus Petition at 73-76.
(299) See e.g., Application at 6.
(300) See Letter from Pantelis Michalopoulos to Magalie Roman Salas at 1-2
(Dec. 18, 2001) ("Vivendi Notification Letter").
(301) Id. at 2.
(302) See 47 C.F.R. Section 76.1000.
121
rules, the Commission does not have concerns with ownership interests that are
below 5%, the Commission should similarly have little concern over the
relationship of Vivendi and the merged EchoStar-Hughes entity.(303) Indeed, with
voting rights below 5%, Vivendi will not have the ability to exercise any
control or influence over the merged EchoStar-Hughes entity. Second, a
programmer like Vivendi could not survive based on New EchoStar's 17% market
share; it needs carriage on the major cable MSOs and could not discriminate
against them. Similarly, New EchoStar needs programming from all the important
networks, and most if not all of the smaller networks, to compete in the MVPD
market and nothing about the merger or the Vivendi transaction changes that.
Third, as EchoStar and Hughes stated in the Application, acquiring
EchoStar does not have a strategy of acquiring control over programmers with the
purpose of influencing the management decisions for any programming service. The
agreement with Vivendi does not change this and Petitioners' attempts to
bootstrap the parties public statements to suggest otherwise falls flat. The
Vivendi transaction is in substance an arrangement for the carriage of new and
innovative programming. By committing a limited amount of spectrum to this
programming, the deal provides pro-competitive incentives for Vivendi to invest
in the programming, an investment that would be questionable if it had to rely
solely on the integrated MSOs for its carriage. It is
----------
(303) In addition to voting and equity interests below 5% in the merged
EchoStar-Hughes entity, the Vivendi transaction also contemplates that Vivendi
will receive one seat on EchoStar's board of directors. Importantly, however,
the Vivendi-EchoStar agreement specifically provides that this board member will
not participate in any decisions relating to other programmers and will not
receive any competitively sensitive information about other programmers'
dealings with EchoStar or the new merged company.
122
not based on any strategy by EchoStar and Hughes of acquiring control of
programming assets.
If EchoStar had a vertical integration strategy it presumably would
have invested in Vivendi -- not the other way around -- in an effort to somehow
lock up programming from its competitors.(304) Instead, Vivendi invested in
EchoStar and the two companies have entered into an arrangement that is the
opposite of exclusive. As Vivendi observes in its comments:
[T]he terms of the EchoStar-Vivendi Universal carriage agreement enable
-- in fact, require -- Vivendi Universal to expand this initial
viewership [of its new programming] to other MVPD platforms. Not only
is the carriage agreement non-exclusive, but Vivendi Universal is
required by the agreement to obtain carriage of these networks from
cable operators such that within three years Vivendi Universal is able
to reach at least as many viewers via cable as Vivendi Universal
reaches over EchoStar's DBS platform.(305)
The non-exclusive character of EchoStar's relationship with Vivendi is hardly
the type of relationship that should draw any concern from the Commission as
having negative consequences for consumers.
----------
(304) Significantly, the Commission's cable program access rules are
phrased in terms of a "cable operator that has an attributable interest in a
satellite cable programming vendor. . . ." as opposed to vice versa. 47 C.F.R.
Section 76.1002(a)(emphasis added). While EchoStar has an option to acquire a
10% interest in the new programming services to be developed by Vivendi, this is
strictly a potential investment in the potential economic upside from these
services. Far from being inspired by any nefarious exclusionary intent, the
agreement is conditioned on the services achieving significant penetration on
other distribution platforms.
(305) Vivendi Comments at 7.
123
In short, EchoStar's relationship with Vivendi promises to bring
tremendous benefits to consumers, including new, interactive services,
programming diversity and more competition among programmers.(306) However, to
provide the additional benefits set forth in the Application, including more of
the kinds of diverse programming and enhanced services the Vivendi deal
promises, EchoStar and Hughes will need the spectrum that will be made available
because of the EchoStar-Hughes combination. Indeed, the new Vivendi services
specifically illustrate one of the important consumer benefits associated with
the EchoStar-Hughes merger - the creation of an attractive outlet for new
independent programming and additional video diversity. The merger will
eliminate the duplicative use of different DBS spectrum for the same
programming, and free up that spectrum for many new exciting services from
independent distributors of the kind envisioned in the alliance with
Vivendi.(307) The agreement with Vivendi helps jumpstart this effort to reach an
audience of critical mass for new content and achieve broad penetration on both
satellite and cable, to the benefit of American consumers. EchoStar and Hughes
believe that the merger will create an
----------
(306) See id. at 3.
(307) A number of Petitioners argue that the Vivendi transaction shows that
EchoStar and DIRECTV can obtain substantial new programming benefits without the
merger. See e.g., Pegasus Petition at 61. To the contrary, however, because of
spectrum constraints and the need to carry duplicative national and local
channels, the existing satellite carriers are severely limited in their ability
to expand programming with innovative new offerings. It is beyond dispute that
the merger will vastly increase the spectrum available for new programming such
as that offered by Vivendi.
124
enhanced conduit for many other sources and types of new content to reach the
U.S. public.(308)
B. THE MERGER IS NECESSARY TO PROMOTE COMPETITION AMONG MVPD'S FOR VIDEO
PROGRAMMING, PARTICULARLY IN LIGHT OF FORTHCOMING CABLE CONSOLIDATION
AND RECENT JUDICIAL ACTION
While the merger creates increased incentives for new and more diverse
programming, it will also give the combined entity a greater ability to achieve
programming costs comparable to those of competing cable MSOs. Because of their
relatively small market shares, EchoStar and DIRECTV have not enjoyed the market
position necessary to obtain the favorable programming deals available to cable.
As noted by the CEO of Viacom in a recent interview: "[W]hat a lot of people
don't know is that satellite broadcasters pay us more for the same programming
than cable
----------
(308) Some Petitioners have claimed that EchoStar's failure to disclose the
Vivendi transaction at the time of the Application should reflect negatively
with respect to EchoStar's character qualifications and should delay processing
of the Application. See e.g., NRTC Petition at 72; Pegasus Petition at 75 - 76.
EchoStar and Hughes strongly disagree with these statements. At the time the
Application was filed, an agreement between Vivendi and EchoStar had not been
executed. While the Application assumed that there would be a $1.5 billion
equity issuance by EchoStar to someone prior to the consummation of the merger,
see Application at Attachment F, the Applicants could not appropriately
speculate about Agreements that had not been reached. As a result, there was no
reason or requirement to disclose anything about the transaction -- there was no
guarantee that the transaction was actually going to take place. Shortly after
the transaction was entered into and made public, EchoStar and Hughes filed a
letter pursuant to Section 1.65 of the Commission's Rules notifying the
Commission of the transaction and its relevant details. See Vivendi Notification
Letter at 1. This went above and beyond EchoStar's obligations under the rules.
The transaction was not even ready to close when EchoStar filed its notification
letter.
125
operators."(309) For example, with fewer subscribers, EchoStar and DIRECTV are
not able to realize the maximum benefit from various "volume discount"
arrangements whereby the fee paid per subscriber for programming declines as the
number of potential viewers grows. In the Applicants' view, another explanation
for the disparity between cable and DBS programming terms is the
anti-competitive leverage enjoyed by the large programmers and the perverse
incentives of cable-controlled programmers. Notably, the comments of ACA -
although critical of the merger overall - lend support to this point. ACA notes
that a "core component of the merger plan is to extract major concessions from
programmers."(310) According to ACA, doing so will give the combined entity a
"structural cost advantage" over small cable companies that lack the bargaining
leverage of major cable outlets.(311) This effect is not anti-competitive,
however. It is a necessary part of allowing DBS to compete with its principal
competitors, the cable MSOs with tens of millions of subscribers. It is
consumers who will benefit from the elimination of the unwarranted premiums now
paid by EchoStar and DIRECTV.
Perhaps nothing more clearly illustrates the need for EchoStar and
Hughes to stay competitive through the merger than the pending purchase of AT&T
Broadband by Comcast. If consummated, this transaction will further increase
cable and program
----------
(309) Los Angeles Times, Q&A - Redstone Sees More Growth for Viacom, Nov.
18, 2001, at C1 (statement of Sumner Redstone), available in 2001 WL 28929748.
(310) ACA Petition at 14.
(311) Id. at 15.
126
ownership concentration.(312) The resulting cable behemoth will dwarf New
EchoStar in terms of numbers of subscribers nationwide, and will far surpass the
individual subscriber bases of EchoStar and DIRECTV separately.(313) Such a
giant would have the leverage to extract even greater cost concessions from
video programmers, putting the DBS firms at an even larger competitive
disadvantage. Moreover, if the behavior of Comcast is any indication, the new
cable grant will continue Comcast's anticompetitive practice of excluding
regional sports and other vertically integrated programming interests from DBS.
The merger of EchoStar and Hughes will only begin to redress this imbalance,
giving the combined entity the legitimate leverage to try to eliminate existing
disparities.
Finally, if the AT&T/Comcast merger is not enough to portend heightened
cable power, the recent D.C. Circuit decision in Fox Television Stations, Inc.
v. FCC(314) should be. In that case, the court vacated entirely the
cable/broadcast cross-ownership
----------
(312) The Washington Post, Giant Cable Merger Planned, AT&T, Comcast Set
$72 Billion Deal, Dec. 20, 2001.
(313) The merged entity - AT&T Comcast - would have roughly 22 million
subscribers. However, that figure does not include the MVPD subscribers served
by entities in which AT&T Broadband currently has an interest; for example, AT&T
Broadband has a 25 percent interest in Time Warner's cable systems. According to
AT&T Broadband, "[i]f [Time Warner Entertainment] and [Time Warner, Inc.]
subscribers were nonetheless added to AT&T's totals, AT&T would be attributed
with approximately 32,926,000 subscribers." See Letter from Douglas Garrett to
Magalie Roman Salas, Ex Parte Submission, MM Docket No. 92-264, CS Docket No.
99-251, Dec. 18, 2001, at 2. If attributable subscribers are thus included, the
combined AT&T Comcast would have more than 40 million subscribers - nearly 33
million AT&T subscribers and roughly 8 million Comcast subscribers -
representing approximately half of all MVPD subscribers.
(314) See Fox Television Stations, Inc. v. FCC, Case Nos. 00-1222, 00-1263,
00-1359, 00-1381, and 01-1136, 2000 WL 233650 (D.C. Cir. Feb. 19, 2002).
127
("CBCO") rule,(315) reasoning that "the probability that the Commission would be
able to justify retaining the CBCO is low and the disruption that vacatur will
create is relatively insubstantial..."(316) The ruling opens the door to
staggering cable power. For the first time ever, a cable operator will be able
to own up to two broadcast stations in a market - a crucial link in any
competing distributor's attempt to provide local-into-local service in that
area. To the DBS operator negotiating retransmission agreements with cable-owned
broadcasters, the playing field will be far from level - it will look more like
a cliff that the DBS operator must scale.
C. THE MERGER WILL NOT IMPAIR COMPETITION FOR LOCAL CHANNEL RETRANSMISSION
In its petition, NAB claims that local broadcasters will be harmed by
an EchoStar-Hughes combination because in monopoly markets local broadcasters
will "face a monopsonist purchaser in retransmission consent negotiations for
their local signals."(317) According to NAB, as a result, broadcasters will not
"fare as well as they might if they had two rival DBS companies with which to
negotiate."(318) Apparently, the NAB is concerned that local broadcasters will
not be able to extract as high a royalty fee for retransmission of local
broadcast stations from a merged EchoStar and Hughes entity,
----------
(315) 47 C.F.R. Section 76.501(a).
(316) Fox Television Stations, Inc. at *24.
(317) NAB Petition at 58.
(318) Id.
128
as opposed to negotiating with them separately. NAB's concern, however, is not a
genuine competitive marketplace consideration.
First, broadcasters enjoy an unusual failsafe: they need not worry that
a satellite carrier will not carry them in any area in which it provides local
service - they can simply elect must-carry. Second, any remaining concern can
only exist (even as a theoretical matter) in a local DMA that is not served by
any cable provider. Wherever cable service exists (even analog cable), local
broadcasters will still have ample ability to bargain for retransmission fees
based on their right to withhold retransmission consent from a satellite carrier
while providing it to the local cable franchisee. For channels with significant
market appeal, this is a potent threat, owing to the significant competitive
disadvantage to a satellite carrier if it is not able to offer the same line-up
of local network affiliates that is provided on cable. Thus, this concern is, at
most, one of quite limited scope.
Second, because the few areas with no cable service at all are
generally lightly populated areas not currently served with local-into-local
transmissions by either EchoStar or DIRECTV, the notion that the merger will
deprive local broadcasters of the ability to play one satellite carrier off
against the other is quite far-fetched. In fact, local broadcasters in those
markets do not have that ability today, and are extremely unlikely to have it in
the foreseeable future without this merger, because of the twin constraints of
spectrum scarcity and compulsory must-carry obligations. Thus, it is the market
situation in those DMAs, not the merger, that dampens today the ability of local
broadcasters in a few locations to negotiate higher retransmission consent fees.
Indeed, by extending local-into-local service to all 210 DMAs, the merger will
open up the opportunity for
129
retransmission consent fees to many local broadcasters that otherwise would have
no such opportunity for many years (if ever). In short, the merger will be the
only foreseeable way to make local satellite transmission available in those
markets in the first place, which is virtually certain not to occur without the
merger.
Third, if this theory were valid, it would be expected that
retransmission consent fees would be significantly higher in those markets where
both EchoStar and DIRECTV currently provide local-into-local service than in
those markets where only one DBS provider currently provides such service.(319)
As discussed in the Willig Declaration, however, there are no substantive
differences between the retransmission rights obtained in the six markets in
which DIRECTV provides local service and EchoStar does not, and the 35 markets
in which both DBS firms provide local service.(320)
Finally, the very fact that EchoStar and DIRECTV have to pay for
rebroadcasting local channels into local markets is something of a market
anomaly. Local broadcast channels are already available to local television
households for free over the air. Particularly in an area with limited cable
services this means that virtually all television consumers already receive
local programming using an over-the-air antenna. When New EchoStar offers
local-into-local service in such a market, all it is doing is providing the same
programming primarily to the same consumers, thereby benefiting the
----------
(319) Currently, DIRECTV provides local-into-local service in 41 markets
(in six of which EchoStar is not present), and EchoStar serves 36 markets (in
one of which DIRECTV is not present). Thus, there are 35 markets where the two
companies overlap, and 7 where they do not.
(320) Willig Declaration at n.17.
130
broadcaster (whether or not the broadcaster extracts an additional premium in
the form of a higher retransmission consent fee).(321) The merger's potential
downward price pressure on broadcasters' fees simply means that the market would
work to bring such fees more closely in line with their true value.
V. MANY PETITIONERS SUPPORT THE MERGER, AND MANY OPPONENTS' MOTIVES ARE
UNRELATED TO THE PUBLIC INTEREST
Notwithstanding the merger's important consumer benefits, a handful of
commenters oppose the Application, claiming that the merger will adversely
affect consumer choice and competition. Notably absent from this category of
commenters is the constituency with the most direct stake in matters of
competition and consumer choice - the Consumer Groups themselves. The Consumer
Groups, in fact, support conditional approval of the merger.(322) Instead,
concerns about competition are pressed mostly by companies or groups that either
compete against EchoStar or DIRECTV
----------
(321) The Copyright Office has determined that retransmission of local
signals should not require payment of a royalty to the original copyright holder
because the fair market value of such retransmission is essentially zero: "The
copyright owners have already sold the rights to transmit their programming to
the entire local market. They have been fully compensated and are not injured by
retransmission into the same market. We recognize that copyright owners are free
to attempt to obtain additional compensation for this separate use of their
work. We simply believe that they would likely fail in that endeavor." See
Docket No. 96-3 CARP-SRA, Arbitration Panel Report (Aug. 29, 1997) at 51-52,
modified in Rate Adjustment for the Satellite Carrier Compulsory License, Final
Rule and Order, 62 Fed. Reg. 55742 (Oct. 28, 1997); see also 17 U.S.C. Section
122(c).
(322) See Consumer Groups at 21 ("Because of these potential positive
benefits, we urge the Commission to approve the transaction with conditions.").
131
(NRTC, Pegasus, ACA) or would like to improve their bargaining positions in
miscellaneous disputes with the Applicants (NAB, other broadcast interests,
Northpoint) or both (NRTC, Pegasus). The real motives of these Petitioners
appear to relate to the benefits flowing from the merger - lower prices and more
choices - and the impact this would have on Petitioners' bottom line, not to any
harms that are cognizable in the Commission's analysis.(323)
Certain consumer interests recognize that, with conditions, the merger
of EchoStar and DIRECTV will create a new competitor with the mix and reach of
assets, capabilities, and customer bases necessary to compete nationwide with
the likes of Comcast and other cable operators that neither company could muster
on its own.(324) They explain that, despite competition from DBS, rates for
cable service have continued their upward climb. In fact, "cable rate increases
were larger with the presence of an expanding satellite sector than without
it."(325) The Consumer Groups appreciate the
----------
(323) See FCC v. Sanders Bros. Radio Station, 309 U.S. 470, 475-76 (1940)
(mere economic injury is not actionable or cognizable under the Communications
Act, unless it can be shown to impact adversely upon the public); Carroll
Broadcasting v. FCC, 258 F.2d 440, 443-44 (D.C.Cir.1958) ("Private economic
injury is by no means always, or even usually, reflected in public detriment.
Competitors may severely injure each other to the great benefit of the
public."); Abilene Radio and Television Company (KRBC-TV), 1 FCC 2d 979 (1965)
("It is not enough to show that the petitioner may suffer private economic
injury, but it is incumbent upon petitioner to make at least a prima facie
showing of injury to the public interest."). Compare Brooke Group Ltd. v. Brown
& Williamson Tobacco Corp., 509 U.S. 209, 223 (1993) ("It is axiomatic that the
antitrust laws were passed for the protection of competition, not competitors.")
(citation and internal quotations omitted).
(324) See Comments of Consumer Groups at 13-14.
(325) Comments of Consumer Groups at 9.
132
difference that the merger of DIRECTV and EchoStar will make in the competitive
capabilities of DBS compared to either company alone. For this reason, the
Consumers Groups support conditional approval of the merger.
In the face of the Consumers Groups' support, the Petitioners'
"protestations in favor of vigorous competition ring hollow." United States v.
FCC, 652 F.2d 72, 97 (D.C. Cir. 1980) (en banc). The objections are nothing more
than transparent attempts to prevent the merger's pro-competitive benefits or
extract additional conditions designed to give them an artificial and
unwarranted advantage in the marketplace. To the extent that these protestors
are injured, the injury flows from the merger's pro-competitive benefits.
It is not surprising that Pegasus and NRTC, for example, urge the
Commission to reject this Application. While they shed crocodile tears over the
threatened plight of rural consumers, they do not explain how these laments are
consistent with their own pricing in rural areas: both Pegasus and NRTC now
charge $34.99 for the expanded basic DIRECTV package in their territories -
$3.00 more than DIRECTV charges for the same package in other areas and EchoStar
charges for the equivalent package in the same areas. The sincerity of Pegasus'
concerns about competition is further called into doubt by its representations,
made to the press only a few days after filing its Petition to Deny, that
Pegasus is waiting in the wings ready to be bought out by EchoStar.(326) As for
the ACA, it has been even more forthcoming about
----------
(326) See Pegasus: Contract Bars Post-Merger Competition, Multichannel
News, Feb. 18, 2002 (quoting Pegasus executive vice president Howard Verlin as
predicting that EchoStar will strike a deal with Pegasus and buy it out because
that would make the most financial sense for both companies).
133
acknowledging its motives: the fear that the merged entity will be able to
charge a lower price in rural areas.(327) This type of threatened injury to a
competitor is the opposite from the harm to competition that the Commission is
charged with evaluating - it is a clear benefit for rural consumers.
In contrast to the commenters who assert their parochial concerns, some
firms who support a more competitive MVPD marketplace have strongly supported
the merger. Electronics manufacturers, for example, have an unmitigated interest
in greater competition and innovation in the MVPD marketplace because it spurs
sales of their products. They have a particularly vital interest in developments
that will increase the bandwidth available for advanced services like HDTV.
Anything that would reduce competition or reduce output in the complementary
MVPD market would be anathema to them. The promise of greater competition and
expanded output and innovation is exactly why sophisticated manufacturers like
Thomson and Sharp have come out strongly in favor of this merger. National
retailers have a similar self-interest in greater competition in the MVPD
market. Any development that threatened to raise prices to consumers or
otherwise reduce output would threaten their sales, while increased competition
will undoubtedly spur their sales. Their belief that this merger will increase
competition is why retailers like Circuit City have come out in favor of the
merger.
----------
(327) See ACA Comments at 15-16. NAB's members may also have reason to
fear increased competition from New EchoStar with over-the-air broadcast
offerings [including digital television], but articulate no respect in which
this additional competition is bad for the consumer.
134
VI. THE COMMISSION MAY ADOPT THE ONE NATION, ONE RATE CARD COMMITMENT AS A
CONDITION FOR APPROVAL, BUT SHOULD REJECT OPPORTUNISTIC ATTEMPTS TO
IMPOSE COSTLY, NON-MERGER SPECIFIC CONDITIONS
A. APPLICANTS ACCEPT THEIR COMMITMENT TO ONE NATION, ONE RATE CARD AS A
CONDITION
EchoStar and DIRECTV will make specific commitments that are narrowly
tailored to address the Commission's specific merger-related concerns. To
reassure the Commission that this merger will not interfere with competitive
pricing, EchoStar and DIRECTV are willing to accept a commitment to uniform
national pricing as a condition for approval of the merger.(328)
This condition possesses attributes that the Commission has found
appealing in other merger cases. First, the condition mitigates any concern
about a loss of potential competition by EchoStar and DIRECTV against one
another for the 2.9% of homes not passed by cable.(329) Rural consumers who have
long been ignored by cable will receive price benefits from the intense
competition occurring in urban areas. For this
----------
(328) The Commission has previously adopted voluntary merger conditions as
a basis for approval of the proposed merger. E.g., Applications of GTE
Corporation, transferor, and Bell Atlantic Corporation, transferee, for Consent
to Transfer Control of Domestic and International Section 214 and 310
Authorizations and Applications to Transfer Control of Submarine Cable Landing
License, Memorandum Opinion and Order, 15 FCC Rcd. 14032, 14036 Paragraph 4
(2000) ("GTE-Bell Atlantic Order") ("We believe that the voluntary merger
conditions proposed by the Applicants and adopted in this Order will not only
substantially mitigate the potential public interest harms of the merger, but
also provide public interest benefits that extend beyond those resulting from
the proposed transaction.").
(329) Eighth MVPD Competition Report at Paragraph 17.
135
reason, the Consumer Groups support imposing the condition.(330) Second, as
explained above, the condition is easy to enforce and difficult to evade. It
will not burden the agency with a series of enforcement responsibilities that
may tax its resources. In fact, this is the unusual case where the Commission
can be reassured by concrete evidence - the Applicants' past practice of
national pricing. Moreover, as stated with respect to above, the Applicants are
willing to submit themselves to reasonable requirements to ensure that national
pricing is an effective constraint on New EchoStar's behavior.
B. THE CONDITIONS PROPOSED BY MERGER OPPONENTS ARE PUNITIVE AND NON-MERGER
RELATED
A handful of merger opponents, nevertheless, call for additional
conditions to the Commission's approval of the transfer. These opponents consist
primarily of parties with preexisting disagreements with EchoStar and DIRECTV.
These parties urge the Commission to hold the merger hostage and address their
individual unrelated grievances through merger conditions.
----------
(330) See Comments of Consumer Groups at 22-23; Letter from Senator Olympia
Snowe dated November 1, 2001; Letter from Congressman Tom Udall dated November
14, 2001. Because Applicants agree to codify the national pricing plan as a
condition to the merger, the Commission need not address the Consumer Groups'
alternative request that it impose a structural remedy such as divestiture of
satellites. See Comments of Consumer Groups at 4, 23. However, even if the
Commission were to reach the issue, the Consumer Groups have not offered
sufficient grounds for concluding that the extreme step of divestiture is
required. In fact, divestiture of the very assets whose consolidation is
essential to efficiency and competition would undo much of the precise benefit
that the parties seek to achieve through the merger. In addition, as the merger
condition on national pricing diminishes concerns about market concentration in
some rural areas, the Commission need not address the argument advanced by
Northpoint and the Consumer Groups that MVDDS licensing should precede the
merger's approval. See Comments of Consumer Groups at 21-22.
136
The merger opponents, however, ignore the relevant legal standard. The
Commission is not free to attach conditions to a merger in order to enhance the
pro-competitive benefits offered by the transaction; instead, any condition
attached must be narrowly tailored to a specific anti-competitive risk or harm
created by the merger itself.(331) Congress invested the Commission with only
limited authority to attach conditions to its approval of merger
transactions.(332) In recent merger cases, the Commission has consistently
acknowledged its limited authority to impose conditions only "where necessary
* * * to ensure that the public interest is served by [a] transaction."(333)
The Commission, moreover, will not entertain merger conditions if the benefits
accruing from the merger outweigh any perceived harms.(334)
----------
(331) In the AT&T-TCI and MCI-WorldCom merger proceedings, the Commission
repeatedly declined invitations to impose conditions not directly related to
anti-competitive effects of those transactions. In the AT&T-TCI proceeding, for
example, the Commission declined to impose a condition granting competitors a
right of access to the merged company's multichannel video programming
facilities in light of its conclusion that the merger would be "unlikely to
result in the loss of a significant source of current or future competition in
MVPD services." Application for Transfer of Control of Tele-Communications,
Inc. to AT&T, ("AT&T-TCI Order"), 14 FCC Rcd. 3160, 3173 Paragraph 22 (1999).
Likewise, because the Commission concluded that the MCI-WorldCom merger was "not
likely to have anticompetitive effects on the provision of * * * private line
service on any U.S. international route," it refused to condition its approval
on a divestiture of any such facilities. Application for Transfer of Control of
MCI Communications to WorldCom, Inc. ("MCI-WorldCom Order"), 13 FCC Rcd. 18025,
18101, Paragraph 135 (1998).
(332) Section 214(c) of the Communications Act permits the Commission to
attach to a certificate only "such terms and conditions as * * * the public
convenience and necessity may require." 47 U.S.C. Section 214(c). Likewise,
section 303(r) of the Act restricts the Commission to "prescrib[ing] such
restrictions and conditions * * * as may be necessary to carry out the
provisions of the chapter." 47 U.S.C. Section 303(r) (emphasis added); see also
GTE-Bell Atlantic Order, 15 FCC Rcd. at 14,047 Paragraph 24.
(333) See, e.g., AT&T-TCI Order, 14 FCC Rcd. 3160, 3169 Paragraph 15
(1999); MCI-WorldCom Order, 13 FCC Rcd. at 18032, Paragraph 10; Qwest
Communications International,
(Continued...)
137
The parties calling for conditions to this merger have failed to
satisfy the public interest standard. They fail to link their proposed
conditions to a specific identifiable harm arising out of the transaction, and
they ignore the merger's clear benefits. Contrary to the 1996 Act's goal of
promoting deregulation, these parties urge the Commission to subject New
EchoStar to heavy-handed regulation, far beyond the level of regulation deemed
necessary for the protection of the public interest by both Congress and the
Commission's rules. Some Petitioners would have this Commission, rather than the
consumer choice, dictate what programming New EchoStar carries. Other proposed
conditions are simply poison pills designed to kill the merger in order to keep
a competitive New EchoStar out of the market, or at least significantly hinder
its ability to become a vigorous competitor.
First, some parties request that approval be conditioned on compliance
with the Commission's existing rules on carriage of local stations.(335)
However, those
----------
Inc. and U S WEST, Inc. Applications for Transfer of Control of Domestic and
International Sections 214 and 310 Authorizations and Application to Transfer
Control of a Submarine Cable Landing License, Memorandum Opinion and Order, 15
FCC Rcd. 5376, 5381 n.24 & Paragraph 46 (2000) ("Qwest-US West Order").
(334) Qwest-US West Order, 15 FCC Rcd. at 5399, 5406 Paragraphs 46,62.
(335) E.g., Paxson Communications Petition at 18-19; Family Stations, Inc.
and North Pacific International Television, Inc. Petition at 5; Petition to Deny
of Eagle III Broadcasting LLC, at 4. Northpoint also makes a gratuitous remark
that the Applicants should be ordered to "refrain from engaging in
anti-competitive conduct designed solely to derail their competitors," and
comply with competition statutes and regulations." See Petition to Deny of
Northpoint Technology, Ltd., at 4. EchoStar and DIRECTV have objected to
Northpoint's proposals solely on the grounds of harmful interference, whose
threat has been confirmed by independent tests. They welcome competition from
Northpoint and have not objected to Applications filed by many other wireless
cable companies proposing to use LMDS, MMDS or other frequencies.
138
rules are what they are and will apply to the merged company just as to any
other. As the Commission concluded in declining to impose a condition mandating
AT&T-TCI's compliance with the program access rules, because "nothing in the
merger transaction would shield the merged company from the program access rules
* * * [a] condition therefore is unnecessary."(336) The same answer applies
here.
For example, Johnson Broadcasting and Family Stations argue that
EchoStar and DIRECTV denied specific requests to carry local television
stations.(337) But these commenters do not credibly suggest that the issue they
pose arises out of the merger--the grant or denial of this Application will not
resolve their complaints.
To the extent that parties are asking the Commission to impose carriage
rules above and beyond those specified by its regulations, such a request should
be rejected as unneeded and wholly unjustified.(338) In analogous circumstances,
the Commission has refused to impose merger conditions that go beyond what
Congress and the Commission have already found sufficient to protect the public
interest.(339) Consumers' choice, rather than the Commission, should dictate
what programming New
----------
(336) AT&T-TCI Order, 14 FCC Rcd. at 3179, Paragraph 34; see also id. at
3179-81, Paragraphs 35-40.
(337) Johnson Broadcasting Petition at 4-7; Family Stations, Inc. and North
Pacific International Television, Inc. Petition at 4.
(338) See Petition to Deny of Paxson Communications Corp. at 19; Comments
of the Association of Public Television Stations and the Public Broadcasting
Service at 4-5.
(339) Cf. AT&T-TCI Order, 14 FCC Rcd. at 3180 Paragraphs 37-38 (refusing to
condition the merger on "restrictions that are beyond the scope of the
Commission's program access rules"); see id. at Paragraph 29 (rejecting common
carrier conditions that exceed the congressional mandate.)
139
EchoStar carries beyond what the Commission's rules require. The merger
opponents, moreover, have not credibly shown that the proposed merger will
exacerbate their concerns about carriage of local programming. The proposed
merger will actually have the opposite effect. Because the merger will generate
efficiencies, New EchoStar "will be able to offer substantially more local
programming as a combined entity than either of them would be able to do
alone."(340)
Second, although Applicants firmly believe the additional spectrum
freed up by the merger will permit New EchoStar to offer all local channels in
all 210 DMAs on a single satellite dish, the Commission should reject attempts
by PBS to impose a special condition on the combined company that it carry all
its "must-carry" stations so that they are received on the same dish, nor
entertain the argument of Pappas Telecasting Companies that EchoStar's current
policy violates the must-carry requirements of Section 338.(341) This issue, as
PBS readily concedes, is the subject of a pending Petition for Clarification or
Modification filed by NAB and forcefully contested by EchoStar. That proceeding,
not the instant one, is the proper forum for the Commission to issue a
determination based on a full briefing by affected parties.(342) In prior merger
proceedings,
----------
(340) Comments of Consumer Groups at 13-14.
(341) See Comments of the Association of Public Television Stations and the
Public Broadcasting Service at 7. Comments of Pappas Telecasting Companies in
Opposition to Application at 9-13; see also Petition to Deny of Carolina
Christian Television and LeSea Broadcasting Corp. at 4-9; Petition to Deny or
Conditionally Grant of Paxson Communications Corp. at 12-13; Petition to Deny of
Brunson Inc. at 6-9; Petition to Deny of Eagle III Broadcasting, LLC at 3-4.
(342) E.g., AT&T/TCI Order, 14 FCC Rcd. at 3180 Paragraph 38. The
Applicants will not burden the record in this unrelated proceeding with a
detailed recitation of EchoStar's defense to NAB's petition. Suffice it to say,
EchoStar's decision to implement the
(Continued...)
140
the Commission repeatedly refused to consider disputed issues subject to a
separate proceeding, and that same answer applies here.(343) Nevertheless,
Applicants recognize and confirm their continuing obligations, and the
obligations of the merged company, under federal law.
Third, and for substantially the same reasons, the "set aside"
conditions proposed by Consumer Groups should be rejected.(344) The Consumer
Groups ask that New EchoStar set aside eight percent of its total channel
capacity for noncommercial education programming, but it fails to demonstrate a
legal foundation for its request. Far from curing any harm from the merger, this
requested condition seems to relate to a significant merger benefit, which will,
however, accrue without need for any condition. Part of the whole point of these
proceedings is to merge two companies into one and use the freed-up spectrum for
non-duplicative programming. As a single DBS provider, New EchoStar will have a
four percent public interest set-aside obligation under the
----------
second dish plan rested directly on the text of the Commission's must-carry
regulation, which applies only where the subscribers acquire the second dish "at
their own expense" and for "an additional carrier charge." See 47 C.F.R. Section
76.66(i)(4).
(343) Applications for Consent to Transfer of Control of Southern New
England Telecommunications Corp., 13 FCC Rcd. 21292, 21306, Paragraph 29 (1998)
("The Commission has regularly declined to consider in merger proceedings
matters that are the subject of other proceedings before the Commission because
the public interest would be better served by addressing the matter in the
broader proceeding of general applicability."); see also Applications for
Consent to the Transfer of Control of Licenses and Section 214 Authorization
from TCI, Inc. to AT&T Corp., 14 FCC Rcd. 3160, 3180 Paragraph 38 (rel. Feb. 18,
1999) ("If the parties believe any existing exclusivity agreements violate the
program access rules, the program access complaint process is the appropriate
forum in which to resolve any such grievance.")
(344) Comments of Consumer Groups at 15-16.
141
Commission's rules.(345) Because the set-aside programming choices available on
EchoStar and DIRECTV today overlap to a fairly significant extent, the merger
means simply that New EchoStar will have much more set-aside capacity to carry
more qualified programmers. The 4% set-aside rule will be applied to a much
larger capacity "pie," to the benefit of qualified noncommercial programmers
that may today be unable to obtain carriage. As for programmers that are now
carried by only one of the two companies (such as Word Network),(346) the merger
will give them access to many more millions of subscribers compared with their
visibility today. The Consumer Groups' fear that New EchoStar will not maximize
diversity in noncommercial programming is entirely unfounded and
speculative.(347)
The Consumers Groups revisit also an issue upon which the Commission
has previously ruled. It asks that the Commission "reverse course" and require
that EchoStar relinquish to an independent body the ability to make judgments on
a programmer's qualifications to select the set-aside noncommercial programming
to be carried in cases where the demand for set-aside capacity exceeds the
available capacity.(348) However, the Commission has already previously rejected
such an
----------
(345) See Implementation of Section 25 of the Cable Television Consumer
Protection and Competition Act of 1992, Direct Broadcast Satellite Public
Interest Obligations, Report and Order, 13 FCC Rcd. 23254 (1998).
(346) See Petition to Deny of the Word Network at 5-7.
(347) The Commission has routinely rejected similar requests to deny
proposed transactions based on such unsupported allegations. See e.g.
Application of WorldCom, Inc., and MCI Communications Corporation for Transfer
of Control, 13 FCC Rcd. 18025, 18134, 18145-58, Paragraphs 73-74, 193, 211, 213
(1998).
(348) See Comments of Consumer Groups at 4, 15.
142
arrangement, and for good reasons: it exceeds the statutory scope and raises
substantial constitutional concerns. The Consumer Groups have not offered any
factual evidence, new policy arguments, or nexus of any sort that would provide
a basis for the Commission to depart from its prior ruling and impose such an
extreme step of requiring that New EchoStar cede control over set-aside
noncommercial programming to an independent body. As a result, and consistent
with its prior ruling, the Commission should reject the Consumer Groups' call to
impose such a condition in this case.
Fourth, Northpoint also seeks to employ this transfer of control
proceeding to raise an issue involving an entirely unrelated business dispute.
Northpoint asks for a merger condition that would require New EchoStar to adopt
a set-top box compatible with its technology.(349) This "proposed condition" is
nothing more than an opportunistic and exploitive attempt to extract an
individual benefit from the merger. Northpoint does not credibly show that the
condition addresses a perceived harm resulting from the transfer - both EchoStar
and DIRECTV now use technology that is incompatible with Northpoint's. Plus, in
order to transition to a new technology platform, both companies would have to
swap out all of their subscribers' set-top boxes - a process that would be
expensive and time consuming. In any event, the Commission has already decided
to exempt from its interoperability requirements all MVPDs supporting boxes that
operate, and are available from unaffiliated vendors, nationwide. See 47
C.F.R. Section 76.1204 a(2). This proceeding is not the appropriate forum for
the Commission to repeal that rule, and Northpoint offers no persuasive reason
why the
----------
(349) See Northpoint Petition at 11-12.
143
Commission should do so. The Commission has repeatedly rejected similar efforts
by parties using the transfers proceedings as a way to extract benefits from the
merger partners that have no nexus to the merger.(350) It should do so again
here.
Fifth, the Consumer Groups and Northpoint raise a non-merger-specific
issue involving the MVDDS rulemaking, asking that the Commission delay this
Application's adjudication until those separate proceedings are complete.(351)
Yet, the Consumer Groups' admission that the MVDDS docket is not "directly
implicated in this proceeding" should be dispositive.(352) As noted, the
Commission has remained firm in its policy of limiting the focus of its merger
review proceedings to issues causally linked to the specific transaction itself.
The Consumer Groups' request is also contrary to Commission precedent holding
that transfer Applications will not be influenced by generic issues subject to a
separate proceeding.(353) The Commission should refrain from
----------
(350) The Commission recently noted that it "recognizes and discourages the
temptation and tendency for parties to use the license transfer review
proceeding as a forum to address or influence various disputes with one or the
other of the Applicants that have little if any relationship to the transaction
or to the policies and objectives of the Communications Act." In re Applications
for Consent to the Transfer of Control of Licenses and Section 214
Authorizations by Time Warner, Inc. and America Online, Inc, Transferors, to AOL
Time Warner, Inc., Transferee, Memorandum Opinion and Order, 23 Communications
Reg. (P & F) 157 (2001); see also Joint Applications of Global Crossing Ltd. And
Citizens Communications Company for Authority to Transfer Control of
Corporations Holding Commission Licenses and Authorizations Pursuant to Sections
214 and 310(d) of the Communications Act, 16 FCC Rcd. 8507, 8511 Paragraph 11
(rel. Apr. 16, 2001).
(351) See Comments of Consumer Groups at 4, 21.
(352) See id. at 21.
(353) E.g. Applications of Capital Cities/ABC, Inc. and The Walt Disney
Company, 11 FCC Rcd. 5841, 5859 at Paragraph 27(1996) ("transfer and assignment
process is not the appropriate forum to consider changes in its rules."); see
id. at 5858 Paragraph 22 ("nor can we
(Continued...)
144
entangling this Application in a matter that remains the subject of ongoing
industry debate and a separate rulemaking proceeding. Indeed, that requested
condition might, perversely, undermine some of the benefits to flow from the
merger. The Applicants' concerns with the Northpoint proposal have everything to
do with interference and nothing to do with competition. Harmful interference
from an MVDDS service operating in the same spectrum may hamper New EchoStar in
its attempts to make maximum use of the freed-up spectrum and improve quality of
service.
Finally, the Commission should reject the Consumer Union's call to
impose open access conditions on this merger. There is no open access "problem"
involving New EchoStar's facilities that would require a solution.(354) In light
of New EchoStar's lack of market power or bottleneck characteristics, such a
condition is inappropriate here, whether or not it would be appropriate for a
cable merger.
In the AT&T-TCI Order, the Commission indicated that market forces
rather than government mandates were the best vehicle to further development and
deployment of competitive broadband services. It reached this conclusion after
finding significant actual and potential competition affording consumers
adequate choice across existing and emerging platforms:
Currently, there are a large number of firms providing Internet access
services in nearly all geographic markets in
----------
conclude that a transfer proceeding is the proper forum in which to consider
changes in the applicable program access or retransmission consent rules.")
(354) See Comments of Consumer Groups at 23-24; see also AT&T/TCI Order, 14
FCC Rcd. 3160, at Paragraphs 93-94.
145
the United States, and these markets are quite competitive today. . .
Although AT&T-TCI together might be able more quickly to deploy
high-speed Internet access services and win a significant number of
residential Internet access customers, it appears that quite a few
other firms are beginning to deploy or are working to deploy
high-speed Internet access services using a range of other
distribution technologies.(355)
As a result, the Commission concluded that the proposed merger would
not threaten competition among Internet access services.(356) The Commission
added that, in any event, "the open access issues would remain equally
meritorious (or non-meritorious) if the merger were not to occur."(357) Whether
or not this reasoning was correct in that case, it certainly applies to this
transaction.
C. THE REMAINING GRIEVANCES DO NOT BELONG IN THESE PROCEEDINGS
Several other commenters try to link their own private grievances
regarding DIRECTV and EchoStar to the merger. These grievances range from the
scope of EchoStar-DIRECTV's specific obligations under the must-carry rules, to
contractual or regulatory disputes, to the alleged quality of customer service.
----------
(355) AT&T/TCI Order 14 FCC Rcd. 3160, at Paragraphs 93-94 (footnote
omitted); see also Inquiry Concerning the Deployment of Advanced
Telecommunications Capability, 14 FCC Rcd. 2398, Paragraph 101 (1999) ("We
observe further that the record, while sparse, suggests that multiple methods of
increasing bandwidth are or soon will be made available to a broad range of
customers.")
(356) See Separate Statement of Chairman E. Kennard, AT&T/TCI Order ("We
have taken a de-regulatory approach, an approach that will let this nascent
industry flourish.").
(357) See AT&T/TCI Order, 14 FCC Rcd. at 3207 Paragraph 96.
146
But the merger opponents have failed to demonstrate that this merger
proceeding is the appropriate forum for resolving such issues. Clearly, it is
not. Fundamentally, the commenters fail to demonstrate how grant of the
Application and consummation of the merger would cause the specific harms they
claim; for that reason they lack standing to raise them here.(358) These
commenters also fail to recognize that other more appropriate forums exist for
airing their issues, including the federal and state regulatory complaint
processes. Indeed, in most cases the merger opponents already have taken
advantage of those vehicles. Like the must-carry issues discussed above, other
complaints regarding EchoStar's service performance,(359) or regarding its
dealings in the collective bargaining context,(360) are equally out of place.
Nor should the Commission accept the attempts by Paxson and PrimeTime24
to inject into this proceeding issues from copyright and contract litigation
----------
(358) See California Ass'n of the Physically Handicapped, Inc. v. FCC, 840
F.2d 88, 91 n.6 (D.C. Cir. 1988) ("CAPH v. FCC") (opponents of broadcast license
transfer lack standing where their objections are based on alleged practices of
transferor and speculative assertions that transferee will perpetuate those
practices). The merger opponents, like the Petitioners in CAPH v. FCC, cannot
trace the harms they allege, pertaining to EchoStar's obligations under the
"must carry" rules and other related issues, to the transaction at issue.
Instead, their "real plea is that the transfer will furnish no cure--it will not
cause the injury to abate." California Ass'n of the Physically Handicapped, Inc.
v. FCC, 778 F.2d 823, 825 (D.C. Cir. 1985). But this plea is not sufficient to
establish standing. Id. See also Microwave Acquisition Corp. v. FCC, 145 F.3d
1410, 1413 (D.C. Cir. 1998) (appellant lacked standing because, inter alia, the
relief sought would not remedy the alleged injury).
(359) Letter of Toni Dockter dated August 1, 2001, at 1. As the Commission
concluded in the AT&T-TCI Order, the "enforcement of state regulations [is] best
carried out at the state level." AT&T-TCI Order Paragraph 58.
(360) CWA Petition at 5.
147
regarding the retransmission of distant signals. Both companies fail to credibly
show that the issue is relevant here, and the Commission has already rejected a
similar attempt by PrimeTime 24 in the past.(361)
In sum, many individual complaints about EchoStar and DIRECTV lack the
required type of nexus to the merger and are not relevant here. Commenters
should pursue their issues in the other proceedings and forums that are
available to them. While the merger may injure EchoStar-DIRECTV rivals, such
injury arises from the pro-competitive benefits flowing from the merger, and
will be accompanied by an equal if not greater degree of merger-related benefits
to American consumers.
VII. CONCLUSION
Four long-sought goals of Congress and the Commission are:
o to create meaningful competition for the entrenched cable industry in
order to moderate its pattern of constantly spiraling prices;
o to secure satellite carriage of as many local stations as possible;
o to ensure that true broadband services are affordably available to all
Americans, urban and rural alike; and
o to foster increased choice and diversity of video programming content.
----------
(361) Paxson Communications Petition at 6-9; Comments of PrimeTime 24 Joint
Venture at 7-11; see also Application of MCI Telecommunications Corporation,
Assignor, and Echostar 110 Corporation, Assignee, Order and Authorization, FCC
99-109. Paragraph 30 (rel. May 19, 1999).
148
By approving the merger of EchoStar and Hughes, the Commission can
achieve each of these four critical goals faster, more directly, and with less
need for burdensome regulation than through any other conceivable action it
could take. Stated another way, what years of legislative and regulatory
initiatives have largely failed to achieve, the Commission can accomplish with
one stroke by approving this pro-competitive merger.
RESPECTFULLY SUBMITTED,
--------------------------------------- -----------------------------------
Gary M. Epstein Pantelis Michalopoulos
James H. Barker Philip L. Malet
John P. Janka Rhonda M. Bolton
Arthur S. Landerholm STEPTOE & JOHNSON LLP
LATHAM & WATKINS 1330 Connecticut Avenue, N.W.
555 11(th) Street, N.W. Washington, DC 20036-1795
Suite 1000 202-429-3000
Washington, DC 20004
202-637-2200
Counsel for General Motors Corporation Counsel for EchoStar
and Hughes Electronics Corporation Communications Corporation
149
DECLARATION
I, David K. Moskowitz, hereby declare under penalty of perjury
that the foregoing is true and correct to the best of my knowledge, information
and belief.
/s/
-----------------------------------
David K. Moskowitz
Senior Vice President and
General Counsel
ECHOSTAR SATELLITE CORPORATION
5701 South Santa Fe
Littleton, CO 80120
(303) 723-1000
Dated: February 25, 2002
DECLARATION
I declare under penalty of perjury under the laws of the United
States that the foregoing is true and correct. Executed on February 25, 2002.
/s/
-----------------------------------------
Eddy W. Hartenstein
Corporate Senior Executive Vice President
Hughes Electronics Corporation
CERTIFICATE OF SERVICE
I, Todd B. Lantor, hereby certify that on this 25th day of February
2002 a true and correct copy of the foregoing was served via hand delivery
(indicated by *) or by first-class mail, postage pre-paid upon the following:
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/s/ Todd B. Lantor
-----------------------------------
Todd B. Lantor
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
Application of
ECHOSTAR COMMUNICATIONS CORPORATION,
GENERAL MOTORS CORPORATION,
HUGHES ELECTRONICS CORPORATION
Transferors, CS DOCKET NO. 01-348
and
ECHOSTAR COMMUNICATIONS CORPORATION
Transferee,
For Authority to Transfer Control
DECLARATION OF DR. ROBERT D. WILLIG
ON BEHALF OF
ECHOSTAR COMMUNICATIONS CORPORATION, GENERAL MOTORS
CORPORATION, AND HUGHES ELECTRONICS CORPORATION
I. QUALIFICATIONS
1. My name is Robert D. Willig. I am Professor of Economics and
Public Affairs at the Woodrow Wilson School and the Economics Department of
Princeton University, a position I have held since 1978. Before that, I was
Supervisor in the Economics Research Department of Bell Laboratories. My
teaching and research have specialized in the fields of industrial organization,
government-business relations, and welfare theory.
2. I served as Deputy Assistant Attorney General for Economics in
the Antitrust Division of the Department of Justice (DOJ) from 1989 to 1991. I
also served on the Defense Science Board task force on the antitrust aspects of
defense industry consolidation and on the Governor of New Jersey's task force on
the market pricing of electricity.
3. I am the author of Welfare Analysis of Policies Affecting
Prices and Products, Contestable Markets and the Theory of Industry Structure
(with William Baumol and John Panzar), and numerous articles, including "Merger
Analysis, IO Theory, and Merger Guidelines." I am also a co-editor of The
Handbook of Industrial Organization, and have served on the editorial boards of
the American Economic Review, the Journal of Industrial Economics and the MIT
Press Series on regulation. I am an elected Fellow of the Econometric Society
and an associate of The Center for International Studies.
2
4. I have been active in both theoretical and applied analysis of
telecommunications issues. Since leaving Bell Laboratories, I have been a
consultant to AT&T, Bell Atlantic, Telstra, and New Zealand Telecom, and have
testified before the U.S. Congress, the FCC, and the public utility commissions
of about a dozen states. I have been on government and privately supported
missions involving telecommunications throughout South America, Canada, Europe,
and Asia. I have written and testified on a wide range of telecommunications
issues, including the scope of competition, end-user service pricing and
costing, unbundled access arrangements and pricing, the design of regulation and
methodologies for assessing what activities should be subject to regulation,
directory services, bypass arrangements, and network externalities and universal
service. On other matters, I have worked as a consultant with the Federal Trade
Commission, the Organization for Economic Cooperation and Development, the
Inter-American Development Bank, the World Bank, and various private clients.
II. PURPOSE AND SUMMARY OF STATEMENT
5. I have been asked by EchoStar Communications Corporation,
General Motors Corporation, and Hughes Electronics Corporation to reply to
comments submitted to the Federal Communications Commission (FCC) in opposition
to the proposed merger between EchoStar and DIRECTV (a subsidiary of Hughes). In
particular, I will respond
3
to the declarations submitted by Dr. Paul MacAvoy, Dr. Daniel Rubinfeld, and Mr.
J. Gregory Sidak.(1)
6. To summarize the results of my analysis, I conclude that (a)
the proposed merger will allow the combined entity to provide local broadcast
programming to every area of the country, and neither firm could provide such
universal local service absent the merger; (b) the proposed merger will result
in benefits from significant scale economies and a significant improvement in
the productivity of the spectrum employed, which will allow the combined entity
to provide an enlarged array of new or expanded services (e.g., more
High-Definition Television channels, more interactive services, and more
specialized programming); (c) the combined entity will be able to offer a more
price competitive satellite-based broadband service, thereby making it more
likely that satellite-based broadband is adopted by residential consumers; (d)
the combined entity's national pricing will be driven by a weighted average of
competitive forces from various regions' cable systems, with larger markets
playing a more important role - that is, the benefits from competition in
larger, more competitive DMAs will likely be "exported" to smaller rural markets
and non-cable passed areas; (e) the efficiency improvements will make the
combined entity a more effective competitor to cable providers than either
company could be on its own, and could perpetuate a virtuous cycle of
competitive innovation; (f) the available churn data from EchoStar and DIRECTV
indicate that the
----------
(1) Declaration of Paul W. MacAvoy, Exhibit I to the Petition to Deny of the
National Rural Telecommunications Cooperative, CS Docket No. 01-348 (filed
February 4, 2002) ("MacAvoy Declaration"); Affidavit and Report of Daniel L.
Rubinfeld, Attachment A to the Petition to Deny of Pegasus Communications
Corporation, CS Docket No. 01-348 (filed February 4, 2002) ("Rubinfeld
Declaration"); Declaration of J. Gregory Sidak, Appendix B to the Petition to
Deny of the National Association of Broadcasters, CS Docket No. 01-348 (filed
February 4, 2002) ("Sidak Declaration").
4
degree of competition between the two entities is dwarfed by the degree of
competition between DBS and cable - such a finding suggests that cable would
continue to effectively constrain the prices of the combined entity in the
post-merger world; (g) the analyses of the competitive effects of the proposed
merger by Dr. MacAvoy, Dr. Rubinfeld, and Mr. Sidak are fundamentally misguided,
because they are predicated on flawed data, incorrect assumptions, or overly
simplistic statistical techniques; and (h) the combined entity would likely find
it difficult to price discriminate between areas with cable and areas without
cable.
III. THE MERGER WILL CREATE SIGNIFICANT BENEFITS FOR CONSUMERS
7. The merger of EchoStar and DIRECTV, by realizing significant
scale economies and by significantly elevating the productivity of the spectrum
employed, will create substantial benefits for consumers. I understand that if
the merger is completed, "New EchoStar" will offer local channels in every local
market in the United States, thereby directly creating significant consumer
benefits and making Direct Broadcast Satellite (DBS) more competitive with cable
providers throughout the country. An increase in the availability of spectrum
will also allow New EchoStar to offer additional programming, and higher-quality
advanced services, such as expanded interactive television, High-Definition
Television (HDTV), and video-on-demand, which appear to be important services
for DBS to stay increasingly competitive with cable.
8. New EchoStar's marginal costs - such as programming costs -
will also be lower than the existing firms' marginal costs. Such a reduction in
marginal costs will
5
exert downward pressure on the price charged by New EchoStar. Finally, the
combined subscriber base will also make the combined entity's satellite-based
broadband service more competitive versus the extant high-speed Internet access
technologies, thereby making it more likely that this satellite-based service
will be adopted by consumers. All of these efficiencies, contrary to what was
stated in various opposition filings in this proceeding, deserve to be given
weight in the merger's public interest evaluation.
INCREASE IN THE PROVISION OF LOCAL CHANNELS
9. New EchoStar has committed to offer local channels in every
local market in the country. Because of spectrum constraints and financial
considerations, neither firm could provide such universal local service absent
the merger. As discussed in more detail below, it is clear that subscribers
value local channels as part of a satellite video package, as evidenced by the
increase in subscriber growth experienced by the two firms in the Designated
Market Areas (DMAs) in which local channels have been introduced. Opponents of
this merger correctly note that this efficiency should be given weight only if
the merger is necessary for it to occur. In making this determination, it is
important to evaluate not only whether the DBS firms would be technically able
to serve these DMAs on their own, but also whether it would be in the firms'
financial interests to serve these DMAs. Opponents of this merger have only
focused on technical feasibility, while ignoring the crucial issue of economic
costs and benefits.(2) In addition to technical feasibility issues, it is a key
point from the economic perspective that without the merger
----------
(2) Even the declarations by economists opposed to the merger ignore the
economic costs and benefits of providing local service. See, for example,
Rubinfeld Declaration at Paragraphs 72-77 and Sidak Declaration at Paragraph 88.
6
it would not be profitable for the two firms on their own to expand their
offerings of local channels to reach all 210 DMAs. With the merger, however, New
EchoStar has committed to provide local service to the entire country.
10. When the DBS companies separately consider their decisions
concerning where local channels should be added, they attempt to assess the
expected returns from adding local channels to various DMAs. Not surprisingly, a
key factor in determining the expected return from adding local channels is the
size of the DMA: According to both DBS firms, larger DMAs, all else being equal,
are associated with larger expected revenue - primarily because the expected
increases in total new subscribers are greater in larger DMAs.(3) Consequently,
by and large, the DBS firms have introduced local service in the largest DMAs
first. Another important factor is the penetration that the DBS firm has in that
DMA, since many existing subscribers "take" local channels.(4) According to
DIRECTV executives, for example, DIRECTV is concerned about losing its installed
base in a DMA to the incumbent cable provider, so it is more likely to introduce
local channels in DMAs in which it has a high penetration rate.(5)
----------
(3) The DBS firms also factor population growth by DMA into their analysis. That
is, a DMA that is growing more rapidly, but currently is somewhat smaller (in
terms of population) may get service before a DMA that is somewhat larger, but
is currently experiencing no population growth.
(4) In addition, DIRECTV executives note that a high DBS penetration rate may be
a "signal" of other factors that could make the introduction of local service
more profitable. For example, a high DBS penetration rate may indicate that the
local cable provider offers an inferior product. A high DBS penetration rate may
also be a signal that the area is conducive to DBS service - that is, many
households can "see" the southern sky where the DBS satellites orbit the earth.
(5) In a limited number of examples, other factors have affected the benefits of
entering a particular market. For example, DIRECTV introduced local service in
Austin, Texas before it introduced the service in some larger DMAs. The decision
to serve Austin "out of order" partly reflected the fact that DIRECTV had
introduced a package of programming targeted at Hispanics. The Hispanic
programming was being carried at the 119(degree) slot, and the available
spectrum for local programming was also at the 119(degree) slot. Since customers
were going to need an upgraded dish to "see" the 119(degree) slot anyway,
DIRECTV targeted its local service roll-out at a somewhat smaller market, but
one with a higher percentage of Hispanics.
7
11. Another key component in assessing the provision of local
service is the cost of providing local channels in a particular market. Much of
the cost that is caused by the provision of local service to a given area is
"fixed" (and does not vary) with respect to the number of subscribers. The local
channels are aggregated at local collection facilities in each DMA, compressed,
and backhauled from the local areas to the firms' uplink facilities. These costs
are incurred regardless of the size of the DMA. Some variation can occur in the
costs of serving a market depending on how far the signals need to be
transported. Another factor influencing the costs of serving a particular local
area is the number of local channels that need to be transported from that area
to the firms' uplink facilities.(6)
12. A critical cost of providing local service is its opportunity
cost.(7) Each DBS firm has a finite amount of spectrum: EchoStar has 50
full-CONUS frequencies and DIRECTV has 46 full-CONUS frequencies. Any frequency
that is used to provide local service cannot be used to provide programming or
other services on a full-CONUS basis. Introducing local service therefore has
opportunity costs (in terms of the competitive and commercial impacts of reduced
national programming or other services), which should be accounted for in any
analysis of the economic costs and benefits of local service provision.
----------
(6) The number of channels that the DBS firms carry in a local market is the
function of two factors: First, the channels that the DBS entity wants to carry
(e.g., the major networks, such as ABC, NBC, CBS, and Fox), and second, the
number of stations that the DBS providers "must carry." Under the "must carry"
rules, if a satellite carrier elects to transmit even one local broadcast
station in a local market, it must also carry, upon request, the signals of all
other qualified broadcast stations in that market. See 47 C.F.R. Section 76.66.
This requirement is a condition of the carrier's use of the compulsory copyright
license granted by the Satellite Home Viewer Improvement Act of 1999. See 47
U.S.C. Section 338.
(7) Commenters appear to ignore the opportunity costs of providing local
service. For example, Dr. Rubinfeld argues that the two DBS firms could
"possibly" expand local service to all 210 DMAs, but he does not consider the
opportunity costs of providing such local service. See Rubinfeld Declaration at
Paragraph 77.
8
13. EchoStar and DIRECTV thus attempt to assess the net present
value of adding local channels, and only decide to expand local channel coverage
that will bring them a sufficient return. As the sizes of DMAs decrease, it is
less likely that the return from adding local stations in these areas will make
financial sense. That is, the increased revenue potential decreases as the size
of the DMA decreases, but the backhaul and opportunity costs stay relatively
constant.
14. There are two primary reasons why neither firm could serve all
210 DMAs on its own, even if it were technically feasible. First, the DBS firms
would have to forgo national programming channels or other advanced services,
which would adversely affect each firm's core business. Given the current state
of technology and assuming the use of a new spot-beam satellite, a significant
number of additional frequencies would be required to provide local service to
all 210 DMAs.(8) For example, for each additional frequency needed to provide
local broadcast service, the DBS firms would be unable to carry roughly 10
channels of national programming or to expand advanced services by an equivalent
amount. Expanding local service to all 210 DMAs therefore would prevent DIRECTV
or EchoStar from carrying so many national channels in its programming line-
----------
(8) DIRECTV currently uses six frequencies to provide local service to 41
markets from its DIRECTV-4S satellite and can provide local service to 29
additional markets using three frequencies from its DIRECTV-7S satellite when it
is launched. To provide local service to the remaining DMAs, DIRECTV would have
to launch another spot-beam satellite and transfer a significant number of
frequencies to local service from full-CONUS programming or other services.
Given EchoStar's current and expected satellite fleet, EchoStar would likely
have to transfer even more frequencies than DIRECTV from full-CONUS programming
or other services to carry local channels in every market.
9
up or from offering more robust advanced services that it would likely have a
significant adverse effect on the DBS firms' competitiveness and
profitability.(9)
15. Second, each firm would face an additional cost: neither firm
can provide service to every market in the United States with its current and
expected fleet of spot-beam satellites. Once DIRECTV launches its DIRECTV-7S
satellite in late 2003, it will have the technical capacity to serve 103
DMAs.(10) To provide local service to the remaining 107 DMAs, DIRECTV would have
to launch another spot-beam satellite.(11) Spot-beam satellites typically cost
between $220 million and $300 million to construct, launch, and insure. The
expected benefits of providing local service to these 107 DMAs would therefore
have to be large enough to cover the opportunity costs of forgoing national
programming (or advanced services) and the expected costs of providing the
service including the cost of the new spot-beam satellite. Absent the merger,
expanding local service to all 210 DMAs would not be profitable. That is, the
DBS firms would be unlikely to forgo so many national channels (or the advanced
services that could be
----------
(9) Because EchoStar would have to transfer even more frequencies than DIRECTV
from full-CONUS programming (or other services) to provide local service in all
210 DMAs, EchoStar would have to forgo carrying even more channels (or advanced
services) than DIRECTV.
(10) DIRECTV can serve 70 DMAs using six spot-beam frequencies on DIRECTV-4S and
three spot-beam frequencies on DIRECTV-7S (once it is launched in late 2003).
The technical capacity to serve 103 DMAs arises because DIRECTV can transfer one
additional frequency from full-CONUS programming to carry local channels via
another spot-beam frequency on DIRECTV-7S. But, in the absence of the merger,
transferring a full-CONUS frequency to local service is associated with
significant opportunity costs, especially when compared to the expected returns
from serving these markets. As noted above, an important factor in DIRECTV's
decision to serve a local market is DIRECTV's penetration rate in that DMA.
Without the merger, the expected returns from serving all 103 DMAs for DIRECTV
on its own would thus be lower than for a combined entity. As DIRECTV executives
state, given the opportunity costs and expected returns, it is likely that
DIRECTV will serve only 70 DMAs - and it may end up serving even less. It
appears as though the National Rural Telecommunications Cooperative (NRTC)
agrees with this assessment. In another proceeding, NRTC argued that it was
"highly unlikely" and "unrealistically optimistic" that EchoStar and DIRECTV on
their own would serve more than 65 DMAs. See Comments of the National Rural
Telecommunications Cooperative, CS Docket No. 00-96 (dated July 14, 2000), at
4-5.
(11) Assuming that EchoStar's two spot-beam satellites are successfully
deployed, EchoStar would be able to realistically serve roughly 50 DMAs from
these spot-beam satellites, in light of its satellite architecture, economic
feasibility considerations, and estimated redundancy needs.
10
carried in lieu of these channels) and would be unlikely to recover the costs of
constructing, launching, and insuring the new satellite, along with the other
various costs associated with introducing local service.
16. Following the merger, however, the economics of providing
local service to additional DMAs are altered. The combined current and potential
subscriber base of the two DBS firms raises the returns on the investment in
providing local service to smaller markets by spreading the fixed cost of
providing local service over the larger expected revenue that would come from a
larger subscriber base.(12) Furthermore, the opportunity costs of transferring a
significant number of frequencies from use for national programming (or advanced
services) to use for local service are sharply reduced. In fact, combining the
spectrum of EchoStar and DIRECTV and eliminating the duplication of programming
offered by the two firms would provide New EchoStar with enough spectrum to
offer local service to all 210 DMAs, while expanding the depth and breadth of
advanced services (described below), offering more niche and specialty
programming, increasing the number of HDTV channels, and expanding the number of
national programming channels.(13) As noted above, in the absence of the merger,
the individual firms would not be able to serve these communities. Therefore,
the merger is necessary to achieve this efficiency.
----------
(12) Besides the revenue from potential new subscribers, the
larger-than-expected revenues are generated by two factors: first, the ability
to sell the local service to a larger existing subscriber base, and second, the
ability to protect a larger subscriber base from switching to cable - as noted
below in the text, carrying local channels is an important service to maintain
extant subscribers.
(13) To be sure, the opportunity cost of using spectrum for local service rather
than for some other purpose is still positive. But assuming that the returns to
the other purposes (e.g., more advanced services, national programming, or HDTV
channels) are diminishing in the amount of spectrum devoted to them (in other
words, the highest value activities are undertaken first and subsequent
activities are of declining value), the opportunity cost is lower than in the
absence of the merger because of the spectrum efficiencies created by the
merger.
11
17. Lack of local channels had placed DBS at a competitive
disadvantage to cable:(14) For example, according to a January 2000 survey by
Forrester Research, 47 percent of cable subscribers would not subscribe to
satellite television because they do not "want to lose reception from the major
networks (e.g., ABC, NBC, CBS)."(15) The fact that consumers value carriage of
local channels as part of a DBS offering has been clearly demonstrated in the
DMAs in which EchoStar and DIRECTV have already offered local channels. For
example, after launching local service, EchoStar's DMA-level subscriber growth
rate increased by an average of 30 percent in the 36 local markets it introduced
local service. Similarly, when DIRECTV rolled out its local service in 41
markets, its subscriber growth rate in those markets rose by an average of 17
percent.(16) It is important to note that the increase in DBS subscriber growth
is evidence that the introduction of local channels in particular areas has
provided direct benefits to consumers and has additionally placed more
competitive pressure on cable in those areas. New EchoStar's commitment to
expand the provision of local channels to every market will therefore introduce
additional competitive pressure throughout the country to the incumbent cable
providers.(17)
----------
(14) The Department of Justice concluded that, "to the extent that DBS cannot
offer subscribers local broadcast channels, it has a competitive disadvantage
relative to cable because many viewers demand local news and weather and popular
network programming." See Comments of the U.S. Department of Justice, In the
Matter of the Application of MCI Telecommunications Corporation and EchoStar
Communications Corporation, File No. SAT-ASG-19981202-00093, January 14, 1999,
available at http://www.usdoj.gov/atr/public/comments/2173.htm
(15) Author's calculation based on Forrester Research, Technographics(R)Survey,
January 2000.
(16) The impact of local service on subscriber growth was estimated after
controlling for DMA-level economic conditions (proxied for by the unemployment
rate in those states where the DMA is located), the previous month's penetration
rate of each DBS provider, national business cycle and other factors that affect
all DMAs each month, and persistent differences in DMA-level subscriber growth
rates.
(17) The National Association of Broadcasters has claimed that local
broadcasters will be hurt because the merger will not result in more markets
being served and local broadcasters will face a loss in competition in the
purchase of local retransmission signals. Such arguments are misguided. First,
as discussed above, the
12
REDUCTION IN PROGRAMMING COSTS
18. A significant component of the marginal cost of providing DBS
service is the cost of acquiring the programming distributed by the DBS
providers. As a result of the merged entity's larger subscriber base, New
EchoStar's programming costs will be lower since the price for programming tends
to decline as the number of subscribers increases.
19. Opponents of this merger have not disputed this point, but
only dispute whether the size of these savings would be large enough to outweigh
any risk of a price increase after this merger.(18) However, these opponents
have not attempted to quantify the size of these cost savings. Many existing
contracts between programmers and either EchoStar or DIRECTV include "volume
discount clauses." Since the merger will increase the customer base of New
EchoStar substantially, such volume discount clauses - which in at least some
cases include additional discounts for subscriber bases above the levels that
are currently achieved by each firm alone - would allow the combined entity to
benefit immediately from lower programming costs.
--------------------------------------------------------------------------------
merger will result in every local market receiving local channels. As described
above, without the merger, neither firm could provide local service to every
market in the country. Second, New EchoStar would have every incentive to offer
local channels, since customers value local channels and its primary competitor
(cable) carries such channels. Furthermore, if, for some reason, New EchoStar
decided not to carry a particular channel, that channel would have the ability
to file for "must carry" rights. New EchoStar would then be required to carry
the station, which would benefit from increased advertising revenue as a result
of the larger subscriber base from the merger. Finally, DIRECTV notes that there
are no substantive differences between the retransmission rights obtained in the
six markets in which DIRECTV provides local service and EchoStar does not, and
the 35 markets in which both DBS firms provide local service.(18) Rubinfeld
Declaration at Paragraph 79; Sidak Declaration at Paragraphs 92-94.
13
20. The larger customer base could also allow New EchoStar to
obtain future programming contracts that are more consistent with the prices
paid by the larger cable operators. This benefit will largely accrue over time
as New EchoStar renegotiates programming contracts, but some benefits will
result immediately. Specifically, certain contracts have "most favored nations"
clauses that indicate that EchoStar or DIRECTV is entitled to the same price
that is received by any other MVPD entity that has a similar subscriber base.
New EchoStar's larger subscriber base should allow it to obtain future
programming contracts that are more consistent with the prices paid by cable
operators with comparable subscriber bases. (19) Importantly, this efficiency is
merger specific because neither DBS firm would be able to achieve such
programming cost savings on its own.
INTRODUCTION OF NEW PROGRAMMING AND ADVANCED SERVICES
21. Currently, EchoStar and DIRECTV each broadcast roughly 600
cable channels and broadcast station feeds with substantial overlap - that is,
they both use spectrum for identical programming (e.g., CNN, HBO, local network
affiliates, etc.). By combining the spectrum of EchoStar and DIRECTV and
eliminating the duplication of programming offered by the two firms, spectrum
will be freed up to expand programming and advanced services, such as
interactive television, HDTV, and video-on-demand.
----------
(19) DBS executives note that they often face higher programming prices than
cable firms, which appears to be confirmed by the Chairman and CEO of a major
programmer: In November 2001, Sumner Redstone, the Chairman and CEO of Viacom,
stated that, "what a lot of people don't know is that satellite broadcasters pay
us more for the same programming than cable operators." See Sallie Hofmeister,
"Q&A: Redstone Sees More Growth for Viacom," Los Angeles Times, November 18,
2001, page C1.
14
22. Increasing the diversity of television programming is an
explicit goal of the FCC.(20) As the FCC recently noted, many programming
services have been planned, but have not been able to launch. One factor that
has limited the launch of these new networks is the lack of channel capacity,
particularly among analog cable systems.(21) The spectrum efficiencies and
expanded channel capacity resulting from the merger will allow New EchoStar to
expand specialized programming offerings. Such programming could include ethnic,
foreign language, educational, or other programs that appeal to specific
audiences. Therefore, the proposed merger between EchoStar and DIRECTV will
likely result in an increase in the programming offerings available to
consumers.
23. Advanced services -- such as, interactive television, HDTV,
and video-on-demand -- are bandwidth intensive and each firm is limited in its
ability to offer these services in the absence of the merger. Such limitations
on advanced service offerings pose a particular threat to effective competition
in the MVPD market. As cable expands its digital offerings, it will be able to
roll out more of these advanced services and it will become more difficult for
DBS to compete with such digital offerings. Observers of the environment in
which cable and DBS compete have noted the importance of these
----------
(20) See, for example, Federal Communications Commission, Report and Order, 3
FCC Rcd 5299, 5310 (1988) stating that "One good indicator of whether a policy
enhances the objective of using competition to carry out the Commission's goals
under the Communications Act is whether that policy increases the supply and
diversity of programming demanded by viewers." See also United Video, Inc. v.
FCC, 890 F.2d 1173, 1181 (D.C. Cir. 1989), which concluded that "Increasing
program diversity is a valid FCC goal..."
(21) See Federal Communications Commission, Annual Assessment of the Status of
Competition in the Market for the Delivery of Video Programming, Eighth Annual
Report, ("Eighth Annual Cable Competition Report") at Paragraph 160.
15
advanced services to consumers and the potential advantage cable would have in
its ability to offer them.(22)
24. Cable also has an advantage with respect to interactive
television. Cable's infrastructure is more readily capable of two-way
transmission, while the DBS spectrum available for serving customers is one-way
only. Cable's inherent two-way capability provides it with a competitive
advantage in the area of interactive services. The DBS companies indicate that
they could match cable's two-way transmission capability, but only through a
"virtual" system.(23) To provide such a virtual two-way system requires a
substantial amount of bandwidth, but, as stated above, the DBS firms are
currently bandwidth-constrained without the merger. The potential competitive
disadvantage of DBS is accentuated by the fact that each DBS company operates
with a fixed amount of spectrum, while a cable company can make investments that
allow it to expand continually its effective bandwidth. Thus, given the current
state of technology, DBS has an output constraint that may limit the dynamic
nature of competition between cable and DBS (which is discussed in more detail
below).
----------
(22) In fact, it is already the case that, of those consumers who have been
recently upgrading to digital service of one type or another, about two-thirds
appear to be going to cable, while only one-third are going to DBS. See Morgan
Stanley Dean Witter, Industry: Broadband Cable Television, July 3, 2001 ("Morgan
Stanley") at 3.
(23) In such a "virtual" system, the DBS provider broadcasts a large amount of
data repeatedly from the satellite to the customer's set-top receiver. These
"data carousels" may consist of weather information associated with hundreds of
locations, current stock quotes for thousands of companies, or other
information. If a consumer wants to receive a stock quote, software in the
satellite receiver would process the customer's request by searching the
appropriate data carousel (which contains data for thousands of companies),
"grab" the requested data, and display it to the consumer. Since cable can
transmit information in both directions, the request for a stock quote would be
sent to a cable server, which would subsequently transmit the specific data to
the consumer's cable set-top for display on the television. From a consumer
standpoint, each of these provides a similar "interactive" experience, but the
DBS approach is more bandwidth intensive.
16
25. The situation with respect to video-on-demand is similar. It is
estimated that cable operators will roll out video-on-demand capabilities across
25 percent to 30 percent of their footprints by the end of this year and roll
out these services to all subscribers by 2005.(24) Such video-on-demand
capabilities should strengthen the competitive position of cable operators. But
EchoStar and DIRECTV cannot perfectly match cable's "true" video-on-demand
offering. Rather, EchoStar and DIRECTV can provide "near video-on-demand"
programming, which offers pay-per-view movies at relatively frequent start
times. For such near video-on-demand to compete effectively against cable's true
video-on-demand, it must have a large selection of movies and the movies must
start on a frequent enough basis. The availability of additional spectrum will
allow New EchoStar to enhance its "near video-on-demand" programming by offering
more pay-per-view titles at more frequent start times. In addition, New EchoStar
has the potential of offering true video-on-demand services to its customers
through the combination of its satellite broadcast network and personal video
recorder technology.(25) The merger will thus allow New EchoStar to introduce a
more effective competitive option because of the availability of additional
spectrum.
26. The merger will also allow the combined entity to provide consumers
with additional high-definition programming. Each company currently offers only
two to four channels of HDTV programming, largely because HDTV is extremely
spectrum
----------
(24) Morgan Stanley at 4.
(25) Through such personal video recorder technology, a DBS operator can
deliver and store video content on the set-top box's hard disk for
subsequent viewing by a customer on an "on-demand" basis. The merger
will not only allow the combined entity to choose the most efficient
means of achieving a true video-on-demand product, but will expand the
depth and robustness of the video-on-demand services available to
consumers.
17
intensive: By freeing up additional spectrum, the combined entity will be able
to offer more HDTV channels than either firm could carry on its own.(26) This
commitment of spectrum to HDTV programming will provide additional incentives
for consumers to invest in HDTV hardware, and for producers to invest in HDTV
content. The proposed merger may also force cable providers to offer additional
HDTV channels.(27) As Circuit City noted in its comments, "the broader offer of
HDTV content by a satellite MVPD provider will most certainly spur competition
in this area from cable operators and necessarily help speed the rollout of this
technology nationally. It should further drive the sales of these displays,
leading to additional reductions in their cost.(28) The proposed merger may thus
help to jump-start the sluggish HDTV adoption process.
27. It has been argued that efficiencies resulting from the elimination
of spectrum duplication should not be given any weight in the evaluation of this
merger because they should be viewed as fixed cost savings, not marginal cost
savings.(29) The argument is that only reductions in marginal costs will be
passed on to consumers, since only reductions in marginal costs will lead to
lower prices. In the context of new services, this argument is misguided.
----------
(26) EchoStar currently offers four HDTV channels (including a pay-per-view
channel), while DIRECTV offers two channels. In addition to a HDTV HBO channel,
DIRECTV provides a combination of live and taped sports and entertainment
programming and pay-per-view programming on one of its HDTV channels. (The
sports and entertainment programming is broadcast for roughly 18 hours per day,
while pay-per-view is available for approximately six hours per day.)
(27) As Mark Smith, a spokesperson for the National Cable and Telecommunications
Association, recently noted, "The cable industry has always been waiting for
HDTV because it is an advanced service we can offer to our customers. Now that
you have EchoStar and DirecTV getting into the HDTV game, it is incumbent for us
to get into the game." See http://www.ilovehdtv.com/anniversary.html
(28) Circuit City Comments at 5.
(29) Sidak Declaration at Paragraph 96.
18
28. One traditional metric of the economic benefits associated with a
specific good or service is consumer surplus, the value that consumers place on
the good or service above the price charged for it. A number of academic papers
have focused on the potentially large consumer surplus gains from the
introduction of new goods or services, especially telecommunications
services.(30) Without the merger, new advanced services may be delayed, rolled
out on a smaller scale, or not rolled out at all. In particular, to the degree
that the merger reduces the fixed costs of new advanced services, it increases
the likelihood that new advanced services will be provided or expanded. Since it
appears that consumers value the new services that New EchoStar will be able to
offer once the spectrum duplication is eliminated, the consumer surplus gains
from the increased availability of advanced services could potentially be quite
substantial. This analysis is consistent with the Department of Justice/Federal
Trade Commission Horizontal Merger Guidelines ("Merger Guidelines"). The Merger
Guidelines do not limit themselves to marginal cost reductions as the sole
source of efficiencies. Section 4 of the Merger Guidelines states, "Efficiencies
also may result in benefits in the form of new or improved products, and
efficiencies may result in benefits even when price is not immediately and
directly affected.(31) An evaluation of efficiencies generated by the merger
should thus not be limited to the impact of marginal cost reductions conditional
on the offering of a service, but should more broadly consider the effect of the
efficiencies on the availability of the service itself.
----------
(30) See, for example, Robert Willig, Welfare Analysis of Policies Affecting
Prices and Products (Garland Press, 1980); Timothy Bresnahan and Robert Gordon,
editors, The Economics of New Goods, (Chicago, IL: University of Chicago Press,
1997); and Amil Petrin, "Quantifying the Benefits of New Products: The Case of
the Minivan," National Bureau of Economic Research Working Paper Number 8227,
April 2001.
(31) See http://www.ftc.gov/bc/docs/horizmer.htm
19
A MORE COMPETITIVE SATELLITE-BASED BROADBAND SERVICE
29. EchoStar and Hughes currently offer satellite-based Internet access
products, but consumer acceptance of these products has so far been limited.
Hughes currently has only about 100,000 residential and small business
subscribers, while EchoStar has only about 40,000 subscribers, through its
marketing of the StarBand product. For comparison, the FCC's recently released
broadband report concludes that residential and small business high-speed
Internet access via cable lines totaled 5.0 million and via Digital Subscriber
Lines (DSL) totaled 2.6 million in June 2001.(32) The FCC broadband report also
indicates that broadband services are still not available in large portions of
the country: For example, the report indicates that 22 percent of all zip codes
in the United States do not receive any broadband service.(33) These zip codes
tend to be concentrated in rural areas not served by cable modem and DSL
technologies.(34) Indeed, the FCC cites analyses that have predicted that up to
20 to 30 million homes may never have access to cable modem or DSL services, and
that "about 25 to 30 percent of rural telephone subscribers are not likely to
have access to high-speed services in the near future.(35) Despite the fact that
satellite-based Internet access is technically available in all areas of the
United States, the low penetration rate of this technology - even in areas
without any access to DSL or cable modem service - raises questions about
whether households in both rural and urban areas are likely to accept it on a
large scale. In
----------
(32) Federal Communications Commission, In the Matter of the Deployment of
Advanced Telecommunications Capability, CC Docket 98-146, Third Report at
Appendix C, Table 3. I report the combined number of residential and small
business Asymmetric Digital Subscriber Lines (ADSL) and "other wireline"
services, which includes symmetric DSL.
(33) Id at Appendix C, Table 9.
(34) Id at Appendix C, Table 10.
(35) Id at Paragraph 78 and Paragraph 113.
20
particular, consumers appear to be very sensitive to the price of broadband
services.(36) Such price sensitivity is particularly detrimental to extant
satellite broadband services, which tend to have high upfront costs and the
perception of inferior performance relative to cable modem and DSL services.(37)
But the merger will help New EchoStar overcome these challenges by making
satellite-based broadband more price competitive vis-a-vis the alternative
high-speed Internet access technologies.
30. Prior to the merger, EchoStar's commitment to residential broadband
service in the Ka-band has also been relatively modest, with only plans to
construct a minimal number of spot-beam transponders on its Ka-band satellites.
On the other hand, Hughes has already dedicated significant funds to developing
its Spaceway product. Through economies of scale, Hughes hopes to achieve lower
costs per subscriber than the current Ku-band broadband offerings. With the
Ku-band services, executives note that the economies of scale are exhausted
fairly quickly, since each transponder can only serve a limited number of
subscribers. Once the maximum subscriber limit is reached, it is necessary to
lease additional transponders. Thus, reductions in the average satellite cost
per subscriber are limited to what can be achieved within individual
transponders. Ka-band service, on the other hand, involves significant fixed
costs (e.g., to build, launch, and insure the satellites), but lower marginal
costs than Ku-band service. As Hughes has designed its Ka-band system, it is
capable of handling a larger number of subscribers
----------
(36) For example, Hal Varian of the University of California at Berkeley
concluded that, "Users are not willing to pay very much for higher bandwidth for
accessing today's applications." See Hal R. Varian, "The Demand for Bandwidth:
Evidence from the INDEX Project," University of California, Berkeley, September
2001, pages 14-15. See also Austan Goolsbee, "Subsidies, the Value of Broadband,
and the Role of Fixed Costs," presented at the AEI-Brookings Joint Center for
Regulatory Studies Conference on Broadband Communications, October 4-5, 2001.
(37) See McKinsey & Company and J.P. Morgan, "Broadband 2001: A Comprehensive
Analysis of Demand, Supply, Economics, and Industry Dynamics in the U.S.
Broadband Market," April 2, 2001, pages 45-47.
21
without any deterioration of connection speeds and with declining average costs.
In other words, each Hughes Spaceway satellite will effectively operate as a
single large transponder.
31. Hughes thus expects that when optimally utilized its Ka-band
satellites will have satellite costs per subscriber that are lower than its
current Ku-band offerings. The expectation is that Spaceway will be able to
offer satellite broadband service at a price point that will increase consumer
acceptance of the technology. Such a reduction in the price of satellite-based,
high-speed Internet access will benefit households in all areas, whether they
have access to terrestrial alternatives or not. The ability to offer a price
competitive broadband product, however, depends critically on attracting a large
number of subscribers. In particular, on its own, Hughes would have to utilize a
significant share of the Ka-band satellite's capacity to achieve the economies
of scale necessary to justify a lower price. On its own, Hughes may have
substantial difficulty - and, at least, would face significant uncertainty -
regarding whether it were possible to obtain the needed subscriber base. The
combined firm's larger satellite video subscriber base from which they are more
likely to draw broadband subscribers would help to ensure that the scale
economies were captured and that satellite Internet access from the Ka-band was
price competitive with cable modem and DSL services.
32. The proposed merger would better enable both companies to achieve
the required economies of scale and lower equipment costs, both of which are
necessary to capture residential as well as enterprise subscribers. Hughes'
Spaceway business plan
22
envisions the sale of satellite broadband products primarily to enterprise
customers - and to the extent financially feasible, to residential customers as
well. While time-of-day usage patterns for residential and enterprise customers
vary somewhat - which may allow Hughes to share a portion of its satellite
capacity among these two groups of subscribers - absent the merger, the costs of
acquiring residential customers will remain relatively high, which makes it more
difficult for Hughes to keep upfront costs low. As discussed above, studies of
broadband demand suggest that it is unlikely that households will subscribe to a
satellite-based broadband product that has a high upfront cost. The merger,
however, will help lower subscriber acquisition costs, help make satellite-based
broadband price competitive with cable modem and DSL services, and thereby help
to attract residential subscribers to the product.
33. These lower subscriber acquisition costs could be achieved because
the merger will allow New EchoStar to sell satellite-based broadband services to
a larger subscriber base. Current satellite video subscribers are more likely to
subscribe to satellite broadband services than other households. Such MVPD
subscribers have already demonstrated the ability and willingness to place the
necessary equipment on their houses. In fact, half of the subscribers to Hughes'
current satellite broadband service also subscribe to DIRECTV and a somewhat
higher percentage of StarBand's customers subscribe to EchoStar's video
services. Thus, the ability to market broadband service to the combined
subscriber base of the two DBS firms will lower customer acquisition costs.
Increased sales of satellite-based broadband will also have the benefit of
reducing manufacturing costs. As the volume of satellite broadband equipment
that
23
needs to be manufactured increases, the average costs of producing the equipment
will decline. The combination of a larger subscriber base and lower average
equipment costs should help New EchoStar reach the necessary critical mass of
subscribers to make satellite-based broadband price competitive with cable modem
and DSL services.
34. New EchoStar has committed to a national pricing policy for its
basic broadband product. Therefore, the areas of the country that are unlikely
to receive cable modem or DSL services in the foreseeable future will benefit
from the increased competition between satellite, cable modem, and DSL in larger
markets. That is, without the merger, it is possible that price competitive
satellite-based broadband will be generally unavailable, which may leave many
rural areas without an attractive broadband product. With the merger, such a
price competitive broadband product is not only possible, but likely. (See below
for a discussion of how national pricing in the context of video services can
"export" competitive pressures in larger markets to smaller and more rural
markets.)
IV. THE MERGER'S IMPACT ON COMPETITION
35. A number of opposition commenters argue that the proposed merger
between EchoStar and DIRECTV will have a significant adverse impact on
competition in the MVPD market.(38) To understand why the proposed merger will
not have such effects and why such comments are misguided, it is important to
underscore the role that
----------
(38) See, for example, MacAvoy Declaration, Rubinfeld Declaration, and Sidak
Declaration.
24
national pricing will play in "exporting" competition from the larger to smaller
DMAs, to incorporate the merger-specific benefits that will enable New EchoStar
to more effectively serve consumers and compete against cable providers, and to
characterize correctly the degree of existing competition between the two DBS
firms.
36. This section first develops a static analysis of how a combined
entity would determine a national price. It then explores various factors that
indicate that any potentially negative competitive effects are likely to be
small relative to the dynamic benefits of the merger because the degree of
existing competition between the two DBS firms appears to be significantly less
intense than the degree of ongoing competition between the DBS firms and cable
providers. I then proceed to review the competitive analyses of the economists
who filed declarations opposed to the merger.
HOW NEW ECHOSTAR WOULD SET ITS NATIONAL PRICE
37. According to the FCC, cable firms provided service to 78 percent of
all MVPD subscribers in 2001.(39) To expand its subscriber base, New EchoStar
would need to price its products to attract cable subscribers. The experience of
the DBS firms suggests that many consumers are reluctant to pay the upfront
costs of equipment and installation to obtain DBS service. As a result, over the
past five years, both EchoStar and DIRECTV have reduced upfront costs, while
also pricing programming at competitive levels vis-a-vis most cable providers.
----------
(39) According to FCC, cable television "still is the dominant technology for
the delivery of video programming to consumers in the MVPD marketplace." See
Eight Annual Cable Competition Report at Paragraph 5.
25
38. EchoStar and DIRECTV currently price their products on a national
basis. New EchoStar has committed to maintaining such a national pricing policy.
As described below, our analysis of the churn data from both EchoStar and
DIRECTV suggests that the number of DBS subscribers who consider cable as their
"second choice" for MVPD services dwarfs the number of subscribers who consider
the other DBS provider as their second choice. Such evidence suggests that New
EchoStar will be unlikely to have the incentive and ability profitably to raise
its national price because it would not want to lose customers to cable. The
combined entity's national price will tend to be driven down by the cost savings
from the merger and gauged, as are current DBS prices, against a weighted
average of competitive forces from various regions' cable systems, with larger
and potentially more competitive markets playing a greater role. New EchoStar's
national pricing policy, therefore, will help to ensure that cable competition
in the larger DMAs is "exported" to smaller markets and non-cable passed areas.
39. Standard economic theory shows that when deciding on a price, a
rational firm selling its product in several geographic markets, but charging
the same price in all markets, will place greater weight on conditions in those
markets in which it expects to sell more. As Mr. Sidak notes, a
profit-maximizing firm will set its post-merger national price based on "the
relative shares of consumers living in rural and urban areas, and the relative
own-price elasticities of demand for each group of consumers of DBS
service."(40) For example, if I assume for simplicity that New EchoStar engages
in differentiated products Bertrand price competition with cable and other MVPD
providers in K
----------
(40) Sidak Declaration at Paragraph 56.
26
geographic markets,(41) New EchoStar would choose a single nationwide price for
DBS to maximize the following profit function:
k k
SUM pq (p) - C(SUM 9 (p)) (1)
i i
i=1 i=1
where p is the uniform national DBS price levied by New EchoStar, (qi) (p) is
the demand for DBS in market i at price p, and C( ) is the total cost of
providing DBS service.
40. Given this model, New EchoStar's price-cost margin (or more
accurately, the ratio of price minus marginal cost to price) when it is pricing
to maximize static profits in total among the K markets can be expressed as
follows:
p-c 1
---------- = ---------
p k (2)
SUM E S
i=1 i i
where p is the uniform national DBS price levied by New EchoStar,c' is the
marginal cost per subscriber (i.e., the derivative of total New EchoStar cost
with respect to the number of nationwide subscribers), (Ei) is the (absolute
value of) the own-price elasticity of demand for DBS in geographic market i, and
(si) is the share of New EchoStar's subscribers in market i.
41. Equation (2) shows that the more price sensitive DBS service
demand is in those areas in which New EchoStar has more current or potential
subscribers, the lower the post-merger margin and price. DBS demand in the
bigger markets served by New EchoStar will be more price elastic if New EchoStar
faces greater competition in such
----------
(41) Bertrand price competition, a standard model of competition, was also
applied to the MVPD market by Mr. Sidak. See Sidak Declaration at Paragraphs
44-48.
27
markets.(42) The key factors in this theoretical model are thus (1) the
geographic distribution of current DBS subscribers (as well as potential DBS
subscribers), and (2) whether demand for DBS services is more price sensitive in
larger markets. Furthermore, as discussed in more detail below, to the extent
that households in larger markets have higher demand for complementary products
(e.g., satellite-based broadband), this pricing model may understate the
influence of the larger markets on the post-merger DBS price.
Geographic distribution of current and potential DBS subscribers
42. According to data from both EchoStar and DIRECTV, New EchoStar
will likely draw most of its subscriber base from the larger DMAs. For example,
while the largest 15 DMAs accounted for less than 30 percent of the two DBS
firms' subscriber base in January 2001, these DMAs accounted for roughly half of
total DBS subscriber growth in 2001. Such evidence suggests that the number of
DBS subscribers has grown faster in the larger DMAs than in smaller DMAs. In
addition, the percentage of households that are "extremely" or "very" interested
in DBS is greater in larger markets than in smaller markets: According to
January 2000 survey data from Forrester Research, respondents in the largest 30
DMAs (and the largest 15 DMAs) were significantly more interested in subscribing
to satellite television than respondents not residing in the top
----------
(42) There are a number of reasons to expect that DBS demand will be more price
sensitive in bigger markets. In large markets, rivals are more likely to offer
more and better substitutes for DBS. For example, DBS is more likely to compete
against digital cable in the larger DMAs. As noted below in the text, digital
cable is a more formidable competitor with DBS because it eliminates the quality
and channel capacity advantages that DBS has traditionally enjoyed. It therefore
offers DBS subscribers a better substitute than other extant MVPD offerings.
Another reason that New EchoStar may face greater competition and a more elastic
demand in the larger DMAs is the presence of other DBS substitutes, such as
overbuilders and satellite master antenna television (SMATV) competition for
multiple dwelling unit (MDU) and commercial multiple tenant unit (MTU) residents
in the larger DMAs.
28
DMAs.(43) It is therefore reasonable to expect that future DBS subscriber growth
will be disproportionately concentrated in the larger markets. In other words,
New EchoStar's national price will be determined by putting additional weight on
cable prices in the largest DMAs.
Elasticity of demand for DBS services in larger versus smaller markets
43. The available evidence indicates that larger DMAs are more
competitive and offer more and better substitutes for DBS, which would suggest
that DBS' own-price elasticity of demand would be higher in these larger DMAs.
For example, even commenters opposed to the merger acknowledge that digital
cable is a more effective competitor to DBS than analog cable.(44) Since cable
systems in larger DMAs are more likely to offer digital cable,(45) DBS'
own-price elasticity of demand would be higher in these larger DMAs.(46) In
addition, my research on the number of competitors in the top major metropolitan
areas suggests that each of the top 15 DMAs has one or more non-cable, non-DBS
MVPD provider that is currently operating or has been licensed to operate.(47)
For example, in New York City - the largest DMA - the incumbent cable firms face
competition from SMATV providers and RCN, an overbuilder, which is also
----------
(43) Author's calculation based on Forrester Research, Technographics(R) Survey,
January 2000.
(44) See, for example, MacAvoy Declaration at Paragraph 9 and Rubinfeld
Declaration at Paragraph 61. Dr. Rubinfeld stated that he believes "that only
digital cable will be able to compete successfully with DBS.''
(45) For example, the Warren data indicate that the ratio of homes passed by
digital cable to DBS subscribers is higher in larger DMAs than in smaller DMAs.
More generally, the Claritas data suggest that channel capacity is significantly
higher in the larger DMAs than in the smaller DMAs.
(46) It is important to emphasize that the fact that digital cable may be a more
effective competitor to DBS does not imply that analog cable is not part of the
relevant product market. As described below, churn data from the DBS firms
indicate that many departing customers switch to analog cable, as well as to
digital cable.
(47) These non-cable, non-DBS providers include "overbuilders," multi-channel
multi-point distribution service (MMDS), private cable or SMATV systems, and
incumbent local exchange carriers (ILEC) using Very High-Speed Digital
Subscriber Lines (so-called VDSL).
29
providing service in six of the nine next largest DMAs.(48) Consistent with
these findings of more competition in larger DMAs, the basic fees for cable
service appear to be lower in larger DMAs and the number of channels in use
appears to be higher.(49)
44. Overbuilders have historically played an important role in
constraining the prices of cable providers, which is indicative of their
effectiveness as competitors in the MVPD market. The FCC's most recent report on
competition in the MVPD market suggests that a new class of overbuilders -
so-called Broadband Service Providers (BSPs) - may provide even more effective
competition in the future. The FCC notes the "growing importance" of BSPs, who
are overbuilding incumbent cable systems with "state-of-the-art systems that
offer a bundle of telecommunications services."(50) Overbuilders have faced -
and continue to face - a number of challenges in providing effective competition
to incumbent cable firms, but the FCC concluded that:
"BSPs appear to be attempting to overcome [these] difficulties of
overbuilding by taking advantage of regulation new to the 1996 Act
(most notably the open video system rules), carefully selecting
communities with favorable demographics, such as high population
density, and building systems that are more advanced than the incumbent
cable operators'. Building advanced systems allows BSPs the ability to
offer a bundle of services, such as video, voice, and high-speed
Internet access, which may increase per subscriber revenue and decrease
churn."(51)
----------
(48) See "RCN Announces Third Quarter Results," Press Release, November 7, 2001.
In past filings, a number of cable providers have noted the competition that
SMATV providers impose in urban areas: For example, Cablevision recently argued
that, in New York City, it "faces significant competition from various providers
of SMATV service." See Reply Comments of Cablevision Systems Corporation, In the
Matter of Annual Assessment of the Status of Competition in the Market for the
Delivery of Video Programming, Notice of Inquiry, CS Docket No. 01-129, (dated
September 5, 2001), at 3-4. The association of cable providers has also asserted
that SMATV provides "vigorous" competition to cable systems in MDUs and MTUs.
See Decker Anstrom, President and CEO of National Cable Television Association,
Testimony Before the House Judiciary Committee, September 24, 1997.
(49) Author's calculations, based on data from Claritas.
(50) Eighth Annual Cable Competition Report at Paragraph 107.
(51) Eighth Annual Cable Competition Report at Paragraph 107. Footnote omitted;
emphasis added.
30
As the FCC stated, the new overbuilders are targeting larger markets, which are
typically densely populated. The upshot of such a finding is that larger markets
are more likely to become even more competitive in the future, as BSPs roll out
their service in "high-population density areas."
45. A review of the academic literature on the impact of competition in
the MVPD market, along with the responses of cable firms to the entry of
overbuilders, suggests that quality-adjusted cable prices will be lower in these
larger, more competitive markets. Although the literature on the impact of
overbuilders on competition in the MVPD market may have shortcomings, a dozen
academic studies - including four analyses by the FCC - have found that prices
in markets with overbuilders are between 8 and 34 percent lower than in markets
without them.(52) The responses of local cable firms to the entry of an
overbuilder into the local MVPD market also suggest that overbuilders
----------
(52) See Thomas Hazlett and Matthew Spitzer, Public Policy Toward Cable
Television: The Economics of Rate Controls, (Cambridge, MA and Washington, DC:
MIT Press and AEI Press, 1997), ("Hazlett and Spitzer"), pages 30-31. For
example, as part of its February 1994 cable rate regulation rulemaking, the FCC
used 1992 data on cable prices by area and found that communities with
head-to-head competition between cable providers and overbuilders had 16 percent
lower cable prices than communities with a monopoly cable operator. See Federal
Communications Commission, In the Matter of Implementation of Sections of the
Cable Television Consumer Protection and Competition Act - Rate Regulation, Buy-
Through Prohibition, Third Report and Order, MM Docket 92-266 and MM Docket No.
92-262 (adopted February 22, 1994; released March 30, 1994). In 1996, Jith
Jayaratne, then an economist at the Federal Reserve Bank of New York, improved
upon the FCC's analysis: He concluded that cable prices in areas with
overbuilders "are, on average, 12 percent lower than monopoly rates." See Jith
Jayaratne, "A Note on the Implementation of Cable TV Rate Caps," Review of
Industrial Organization, Volume 11, 1996, ("Jayaratne") pages 823. Similarly, a
paper published in the RAND Journal of Economics in 1997 concluded that cable
prices in areas with overbuilders were 17 to 22 percent lower than areas without
them. See William Emmons and Robin Prager, "The Effects of Market Structure and
Ownership on Prices and Service Offerings in the U.S. Cable Television
Industry," RAND Journal of Economics, Vol. 28, No. 4, Winter 1997, pages
732-750. Communities with competition from overbuilders also appear to have
higher levels of service that are not fully accounted for in the above-cited
literature: The evidence suggests that subscribers in overbuilt areas have more
choices of non-broadcast channels and lower installation prices. See Jayaratne,
page 823; Hazlett and Spitzer, page 29; and Jennifer Fearing and Charles
Lubinsky, "Qualitative Differences in Competitive Cable Markets Prior to Rate
Regulation," mimeo, October 1997. Fearing and Lubinsky conclude that
installation fees are 16 to 36 percent lower in competitive markets than in
monopolistic markets.
31
play an important role in constraining cable prices. As the FCC recently noted,
"in Boston, Massachusetts, in response to RCN's entry, the incumbent cable
operator in Boston, Cablevision of Boston ("Cablevision"), `moderated' its
regional rate increase in the Boston area and agreed to improve its commitment
to public and educational channels."(53) Moreover, the competitive effect of
overbuilders may extend to neighboring communities that are not currently served
by the overbuilder. To the extent that cable operators in nearby communities
fear the entry of an overbuilder, they may respond to the potential competition
from overbuilders by lowering prices or upgrading their infrastructure.(54) The
impact of overbuilders may thus be broader than their current geographical
footprint.
46. In summary, New EchoStar has committed to a national pricing
strategy. The churn data presented below suggest that cable is each DBS firm's
primary competitor. Thus, cable will continue to constrain the national price
charged by New EchoStar. In addition, economic theory shows that the choice of
New EchoStar's national price will put greater weight on the competitive
conditions in those markets in which it sells more of its product. As noted
above, larger DMAs appear to be more competitive than smaller DMAs. For example,
larger DMAs are more likely to have digital cable systems which are a more
formidable competitor to DBS, since they
----------
(53) See Eighth Annual Cable Competition Report at Paragraph 198. Similarly,
when RCN introduced service in Somerville, Massachusetts, the local cable
provider, Time Warner, froze its rates - even though it had "announced a 10%
price increase for its standard cable services in 82 Massachusetts communities."
See Federal Communications Commission, Annual Assessment of the Status of
Competition in the Market for the Delivery of Video Programming, Sixth Annual
Report, ("Sixth Annual Cable Competition Report"), at Paragraph 230.
(54) As the FCC recently stated, RCN "contends that in anticipation of its entry
in Fairfax County, a suburb of Washington, D.C., the incumbent Cox announced an
upgrade of its plant." See Eighth Annual Cable Competition Report at Paragraph
201.
32
eliminate DBS' quality and channel capacity advantages. Therefore, New
EchoStar's national price will allow smaller, more rural DMAs to benefit from
the more intense competition in larger DMAs.
DYNAMIC ANALYSIS OF COMPETITIVE EFFECTS
47. The national pricing model presented above is static, but the MVPD
market is dynamic, with new products and services being introduced regularly.
This dynamism of the MVPD market is also expected to promote competition between
New EchoStar and cable, and impose corresponding constraint on the prices
charged by the combined entity. For example, the greater geographic coverage of
local channels, the increased ability to broadcast specialty, ethnic, and
foreign language programming, the improved interactive television services, and
the capacity to offer expanded video-on-demand should help New EchoStar to
compete more vigorously against the cable industry, especially since the cable
providers can upgrade unilaterally their bandwidth to provide these services on
a digital-cable tier. The Merger Guidelines contemplate the role efficiencies
can play in improving competition. Specifically, the Merger Guidelines state
that, "Efficiencies generated through merger can enhance the merged firm's
ability and incentive to compete, which may result in lower prices, improved
quality, enhanced service, or new products."(55)
----------
(55) See the Department of Justice/Federal Trade Commission Horizontal Merger
Guidelines, Section Four, available at http://www.ftc.gov/bc/docs/horizmer.htm
33
48. The commenters fail to acknowledge that the efficiencies
generated specifically by the proposed merger of EchoStar and DIRECTV will have
a dynamic impact on bolstering competition and programming diversity in the MVPD
market. In particular, DBS has historically held an advantage relative to analog
cable in terms of channel capacity, and DBS consumers have indicated a strong
preference for such capacity. For example, a survey of new DBS subscribers found
that the leading reason for switching to DBS was "more channels."(56) That
revealed preference, in turn, has pressured the cable firms to invest in
increased channel capacity. As National Cable and Telecommunications Association
(NCTA) President and CEO Robert Sachs recently stated, "Being digital from the
start, and having the advantage of substantially greater channel capacity, DBS
spurred cable operators to replace hundreds of thousands of miles of coaxial
cable with fiber optics so that they too could offer consumers hundreds of
channels of digital video and audio services."(57) In 1999, Comcast emphasized
to the FCC the role that DBS competition has played in pushing it to upgrade its
systems:
"DIRECTV and EchoStar, respectively, offer a total of 211 and 193
digitally delivered channels. These channel capacities exceed those
of even the most advanced analog cable systems.... In response to
this competitive challenge in its service areas and in order to
remain competitive, Comcast undertook the massive investments
necessary to upgrade its systems, increase channel capacity, and
offer new services."(58)
----------
(56) According to a survey by The Yankee Group, the top five reasons for people
switching to DBS were more channels (79 percent), greater movie selection (69
percent), clearer picture and sound (66 percent), dissatisfied with cable (46
percent), and cable was too expensive (44 percent). See Satellite Broadcasting &
Communications Association Press Release, "Study Shows Satellite TV Increasing
Urban Penetration," August 14, 2000.
(57) See Robert Sachs, Testimony Before Subcommittee on Antitrust, Business
Rights, and Competition, Committee on the Judiciary, United States Senate, April
4, 2001, pages 2-3.
(58) See Reply Comments of Comcast, In the Matter of Annual Assessment of the
Status of Competition in the Market for the Delivery of Video Programming,
Notice of Inquiry, CS Docket No. 99-230, (dated September 1, 1999), at 9.
34
The channel capacity advantage of DBS has thus pressured the cable firms to
invest in increased channel capacity.(59) (It is important to note that the
increase in channel capacity has also provided new opportunities to programmers,
which is a specific goal of the FCC.)
49. As described above, EchoStar and DIRECTV are now constrained in
the services that they can each provide on their own. In the absence of the
merger, the pressure that DBS firms exert on cable providers to innovate and to
increase capacity may be attenuated. The proposed merger between EchoStar and
DIRECTV, however, will eliminate spectrum redundancies and allow for expanded
channel capacity - which will likely spur the development of new programming and
new innovative services. Such an expansion of channel capacity will likely force
cable systems to continue to upgrade their network infrastructure. Relative to
today's cable infrastructure, an upgraded cable system will exert even more
competitive pressure on DBS pricing - thus perpetuating the virtuous cycle of
competitive innovation.
50. Indeed, the history of the MVPD market clearly demonstrates the
pressure to upgrade systems to meet the competition. DBS channel capacity begat
cable system upgrades, which in turn has exerted pricing pressure on the DBS
firms. That competitive pressure manifests itself in lower levels of DBS
subscriber growth, ceteris paribus.(60) Mr.
----------
(59) Even opponents of the proposed merger of EchoStar and DIRECTV acknowledge
that DBS is "the main source of pressure on cable to expand channel capacity."
See American Antitrust Institute Comments at 2.
(60) For example, Goldman Sachs concluded that "We see the bundling of [cable]
services as the most significant threat to DBS because of its potential not only
to slow gross additions, but also to win back subscribers (seen through higher
churn). Both have the obvious effect of slowing net subscriber growth for DISH
Network and DIRECTV." See Goldman Sachs, "Satellite Communications: DBS
Operators," December 18, 2000 at 1. Lehman Brothers similarly concluded that,
"cable will become a far more
35
Sidak cites evidence that "DBS growth has slowed dramatically where digital
cable has been rolled out."(61) Jerry Kent, the former Chief Executive Officer
of Charter Communications, recently stated that "A couple of years ago, frankly,
cable had an inferior product. Now [cable providers] have as many or more
channels than satellite. And we are more competitive from a price-value
standpoint."(62)
51. This process of competitive responses benefits DBS and cable
subscribers. The danger is that, in the absence of the merger, the competitive
cycle will be impeded by the constraints facing the DBS firms. If that were to
occur, both DBS and cable subscribers could suffer.
52. The competitive cycle may also have other benefits in related
markets. For example, the proposed merger of EchoStar and DIRECTV may have two
important effects on competition in the broadband market: First, as described
above, it would better allow the combined entity to offer a price competitive
satellite-based, high-speed Internet service, which would increase competition
in the broadband market. Second, it would likely pressure cable providers to
upgrade their infrastructure so that connection speeds do not deteriorate as the
subscriber base increases. Such upgrades would increase the
--------------------------------------------------------------------------------
significant foe, and will likely relegate satellite television to a deep
second-class status in most urban markets." See Lehman Brothers, "Satellite
Communications: Industry Update," February 8, 2002 at 1.
(61) Sidak Declaration at Paragraph 34, quoting Salomon Smith Barney Equity
Research, DBS Industry Update, January 17, 2002 at 22.
(62) See Jerri Stroud, "Satellite, Digital Cable Companies Wage War for
Subscribers," St. Louis Post- Dispatch, May 21, 2001 at 8.
36
speed at which extant cable modem subscribers connect to the Internet or allow
more broadband users at any given connection speed.(63)
53. Moreover, the proposed merger will bolster competition between DBS
and cable providers by increasing New EchoStar's ability to offer a price
competitive satellite-based broadband service bundled with expanded programming
and advanced services. Just as bundled packages make cable providers a more
effective competitor with DBS, a satellite-based bundled package will make DBS
more effective in competing with cable providers.(64) To the benefit of
consumers, bundled packages could start a series of competitive responses. Such
competition between cable and DBS could spill over into the anticipated
competition between cable and DSL service; for example, if cable operators make
a competitive offer to respond to New EchoStar, DSL providers may be forced to
respond to the cable offer to remain competitive in the broadband market. (65)
In the absence of the merger, however, it is possible that the competitive cycle
----------
(63) Cable providers dedicate a portion of their system capacity to provide
high-speed Internet access. Cable providers usually assign the equivalent of
roughly one television channel, which allows for about 40 million bits per
second of downstream capacity. This downstream capacity, though, must be shared
among many subscribers. If traffic increases, the connection speed of each
individual user falls. If demand for high-speed Internet service grows and the
typical connection speed is significantly reduced, a cable provider has two
choices: it can either dedicate more bandwidth to data services (and reduce the
number of television channels) or upgrade its infrastructure. A cable system
upgrade induced by competition from DBS can therefore have a positive impact on
connection speeds for cable modem users.
(64) Cable operators often bundling cable television (and especially digital
cable television) with cable modem service at a discount of $5 or $10 per month.
Deutsch, DIRECTV: Category Review and Competitive Analysis, August 2001.
(65) Gerald Faulhaber, the former Chief Economist at the Commission, recently
argued that, "customers desiring broadband Internet connections were greatly
advantaged by the desire of Americans to watch high quality television, and the
competition for that market initiated by the introduction of satellite. This
provided the impetus for cable firms to deploy broadband access in their search
for a low incremental investment revenue stream. In turn, cable deployment
provided the impetus for RBOCs to deploy DSL for fear of being attacked in their
core business by the cable firms." See Gerald R. Faulhaber, "Broadband
Deployment: Is Policy in the Way?" presented at the AEI-Brookings Joint Center
for Regulatory Studies Conference on Broadband Communications, October 4-5,
2001.
37
will not be as intense, which would harm both DBS and cable subscribers (and
perhaps DSL subscribers as well).
54. The ability of New EchoStar to offer bundled packages may also produce
lower prices for video services. As described in Section III, the proposed
merger will allow New EchoStar to improve and expand the menu of complementary
products (such as interactive services, video-on-demand, high-speed Internet
service, HDTV, etc.) to existing MVPD services. With the introduction and
expansion of complementary products by New EchoStar, the firm would have an
incentive to reduce the price of existing DBS video services to attract
customers to other bundled products. The profits forgone on video services would
be more than offset by the margins on the additional complementary products.
55. Another factor that will continue to constrain DBS prices is the need
to capture cable subscribers soon, before the widespread adoption of digital
cable and bundled packages of digital cable and high-speed Internet access.
Among other reasons, the incentive to attract cable subscribers as soon as
possible arises from the "stickiness" of digital cable and bundled-package
subscribers. Such stickiness results from higher switching costs (e.g.,
switching e-mail addresses) after an individual has subscribed to a digital
cable bundle. Consumers who commit to a digital cable/cable-modem bundle may
perceive fewer benefits to moving to DBS (relative to analog cable
customers).(66) Indeed, a Cox Communications executive recently stated that
"there is clear evidence that
----------
(66) Goldman Sachs similarly notes that "As cable operators upgrade their
networks and roll out new service, cable subscribers will have less
incentive to `churn' to DBS." See Goldman Sachs, "Satellite
Communications: DBS Operators," December 18, 2000, page 33.
38
bundled services provide stickiness."(67) An AT&T Broadband executive similarly
noted that digital cable has lowered the rate of churn.(68)
56. Indeed, digital cable subscribership is growing at a very rapid pace:
according to the NCTA, the number of digital cable subscribers has increased
nine-fold in the past three years, rising from 1.5 million in 1998 to 13.7
million in November 2001.(69) While meaningfully forecasting future penetration
rates of a new technology is an inherently difficult task, analysts have
estimated that more than half of all cable subscribers will have digital cable
within three or four years.(70) Such an expected digital cable market share
would impose significant constraints on the DBS industry in the future.
Therefore, New EchoStar will need to price its product competitively following
the merger, so that it can attract cable subscribers before they sign-up for
bundled packages.
THE DEGREE OF COMPETITION BETWEEN ECHOSTAR AND DIRECTV
57. In their comments, Dr. MacAvoy and Mr. Sidak present some evidence
that they claim purports to show that DIRECTV and EchoStar compete vigorously.
The
----------
(67) Jane Black, "Why Cox Is Leading Cable's Comeback," Business Week Online,
February 14, 2001, quoting Frank Loomans, Cox Communications' Vice
President for Finance. A different Cox Communications executive noted that
"churn among bundled customers is 33% to 50% less than that of
single-product customers." See Cox Communications Press Release, "Cox
Communications Announces One Million `Bundled' Customers," November 26,
2001, quoting Joe Rooney, Cox Communications' Vice President for
Marketing, available at http://www.cox.com/PressRoom/Default.asp?LocalSys=
(68) Jim McConville, "Let The Tiers Flow," Electronic Media, September 18,
2000, quoting Doug Seserman, AT&T Broadband's Senior Vice President for
Marketing.
(69) For data on the growth of digital cable, see the NCTA website at
http://www.ncta.com/industry_overview/indStats.cfm?statID=14.
(70) See Goldman Sachs, "Satellite Communications: DBS Operators," December 18,
2000, page 35. Goldman Sachs estimates that digital cable subscribership
will reach 34.5 million in 2004, 39.5 million in 2005, and 43.5 million in
2006.
39
evidence they present, however, is flawed. For example, they claim that there is
evidence of vigorous competition in the fact that five days after DIRECTV
announced that it was beginning to offer local service at $5.99 per month,
EchoStar announced it was going to start providing a similar line-up of local
channels for $4.99. These events occurred in late November 1999. The commenters
fail to note a crucial event that also occurred in late November 1999: The
Satellite Home Viewer Improvement Act (SHVIA) of 1999 allowed EchoStar and
DIRECTV to carry "local-into-local" service for the first time starting on
November 29, 1999. Therefore, vigorous competition between the two DBS firms is
not evidenced by the fact that they had announced at roughly the same time that
they were going to provide local service.
58. Similarly, the commenters cite the fact that both firms announced the
availability of HDTV compatible set-top receivers within one day of each other.
But the announcements of both EchoStar and DIRECTV occurred at the 2000 Consumer
Electronics Show in Las Vegas, Nevada.(71) Since firms generally announce new
services and equipment at large electronics shows, such as the Consumer
Electronics Show, this purported evidence of head-to-head competition is more
likely a coincidence than a competitive response. The commenters also claim that
both DBS firms announced on December 27, 2001 that they were going to carry more
local channels in each market. But, once again, the commenters ignore other
events. On January 1, 2002, the DBS firms' must-carry obligations went into
effect and both firms were required by law to
----------
(71) See EchoStar Press Release, "EchoStar's DISH Network Offers New HDTV
Satellite TV Receiver," January 6, 2000, and Panasonic Press Release,
"Panasonic to Manufacture and Market HDTV DIRECTV Systems," January 5,
2000.
40
offer more local channels. The incidents cited by opponents of the merger thus
do not provide persuasive evidence of intense competition between the two DBS
firms.
59. While the commenters claim that competition between EchoStar and
DIRECTV is intense, the only evidence that they provide is a series of purported
responses of one firm to the other firm's promotions. Indeed, the commenters
have tried to frame the key question as whether EchoStar and DIRECTV compete at
all. They argue that if they compete at all, the merger will have a significant
and adverse effect on competition in the MVPD market. The more relevant question
for analyzing the impact of the merger on competition in the MVPD market,
however, is not whether they compete at all. Rather, it is the degree of
competition between EchoStar and DIRECTV in a market including DBS providers,
cable operators, other MVPD providers, and perhaps even broadcast television.
60. To analyze the degree of competition between DBS and cable and between
DBS firms, it is instructive to examine the distribution of the video services
to which DBS customers previously subscribed, as well as what percentage of
customers depart DIRECTV for a broad set of "cost" or "price" reasons and then
subscribe with EchoStar, digital cable, analog cable, or simply use an
antenna.(72)
----------
(72) The following disconnect reasons provided by survey respondents were
categorized as "cost" or "price" reasons: "Too expensive;" "Too many
additional charges/Need to purchase additional receivers for other TVs;"
"Can't afford/Financial problems;" "Catch up on my bills;" "Cable is
better deal/Cable is cheaper;" "Too expensive with Cable and DirecTV;"
"Charge for additional outlets;" "Raised the price."
41
61. Each month, DIRECTV surveys a random sample of roughly 350 current
subscribers and asks them a series of questions, including whether they have
ever subscribed to cable or another DBS service.(73) Such data can therefore be
used to examine what share of DIRECTV subscribers had previously been cable and
EchoStar subscribers. The data suggest that less than nine percent of DIRECTV's
new subscribers were previously subscribers to EchoStar.(74) By comparison,
roughly 61 percent of DIRECTV's new subscribers are either previous or current
cable subscribers.(75) Although such figures are not necessarily conclusive,
they confirm the views expressed by DBS executives - namely that the "objective
of each firm is to gain market share by luring consumers away from the leading
cable providers," not the customers of the other DBS firm.(76)
62. I also utilize each firm's churn data for indications of the degree of
competition between the DBS firms. DIRECTV conducts a monthly telephone survey
of former subscribers who are randomly selected from the pool of subscribers who
----------
(73) Since August 2000, the DIRECTV customer satisfaction survey has asked
subscribers whether they were a cable subscriber before subscribing to
DIRECTV. In April 2001, DIRECTV added a question about whether subscribers
had ever subscribed to EchoStar.
(74) The DIRECTV customer satisfaction survey asks "prior to subscribing to
DIRECTV, have you ever subscribed to EchoStar/The Dish Network."
Respondents can answer "yes," "no," or "don't know." Of the approximately
350 DIRECTV subscribers surveyed on a monthly basis, roughly 40 to 70
respondents are "new subscribers" (i.e., those who subscribed to DIRECTV
within the past 90 days of the survey interview). If one were to focus on
the entire sample interviewed by the customer satisfaction survey, rather
than on new subscribers, the fraction of subscribers that were previously
EchoStar subscribers is also less than nine percent.
(75) The DIRECTV customer satisfaction survey also asks, "Which of these best
describes your cable TV situation before you had DIRECTV?" Respondents can
answer "I used to subscribe to cable TV and still do;" "I used to
subscribe to cable TV but not now;" "I did not subscribe to cable TV then
or now;" "I did not subscribe to cable TV then but do now;" "Cable TV was
not available in your area;" or "Don't know." If one were to focus on the
entire sample interviewed by the customer satisfaction survey, rather than
on new subscribers, 57 percent of respondents were previous or current
cable subscribers.(76) See Robert D. Willig, Declaration On Behalf Of
EchoStar Communications Corporation, General Motors Corporation, and
Hughes Electronics Corporation, EchoStar Communications Corporation,
General Motors Corporation, and Hughes Electronics Corporation Seek FCC
Consent For A Proposed Transfer Of Control, CS Docket No. 01-348,
(released December 21, 2001), ("Willig Declaration") at Paragraph 10.
42
disconnect voluntarily or are disconnected by DIRECTV for not paying their bill.
The survey is undertaken two to six weeks after subscribers depart DIRECTV and
is conducted by an independent polling firm. EchoStar also collects churn data,
but only began doing so on a systematic basis in August 2001. A random subset of
the people who call to disconnect their service are asked why they are leaving
EchoStar and what alternative MVPD service they are switching to instead. Since
the EchoStar churn data are based on a sample of subscribers obtained during the
call to disconnect service, EchoStar's churn data have a high non-response rate.
I therefore base most of my analysis on the more reliable DIRECTV data.
63. From an antitrust perspective, a more informative analysis may involve
examining the churn data surrounding the DIRECTV price increase in the late
summer of 2000. For several months following DIRECTV's announcement of its price
increase, it asked a sample of those subscribers who disconnected whether they
were aware of the price increase and whether the price increase influenced their
decision to disconnect. Among those subscribers sampled who disconnected between
August 2000 (when the price increase was announced) and November 2000 and cited
cost/price issues as their main reason for departing DIRECTV, 3.1 customers
churned to cable and 1.2 customers churned to an antenna for every one customer
who churned to EchoStar. One potential concern with this analysis is that the
sample size is relatively small (under 100 respondents). Nevertheless, such
evidence provides support for the conclusion that there is only limited
competitive interaction between the two DBS firms.
43
64. I also examined the churn data from 2001 when DIRECTV did not change
prices. (Some customers may nonetheless have experienced a price increase during
this period, as their previous promotions had expired; others may have perceived
a price increase because of changing usage patterns and the different prices
attached to different services.) These data are consistent with data from the
months surrounding DIRECTV's price increase: For every one customer who left
DIRECTV for EchoStar because of cost or price reasons in 2001, 3.4 customers
churned from DIRECTV to cable and 1.6 customers churned from DIRECTV to an
antenna. Such a finding is consistent with the conclusion that DBS' primary
competitor is cable. EchoStar's churn data are also consistent with these
results.
65. As an aside, Dr. MacAvoy and Dr. Rubinfeld attempt to argue that the
relevant product market for DBS includes digital cable, but not analog
cable.(77) The churn data from both DIRECTV and EchoStar suggest that excluding
analog cable from the relevant product market would be inappropriate. Indeed, of
the customers who disconnected from DIRECTV for cost or price reasons and then
subscribed to cable in 2001, roughly one-half subscribed to digital cable and 46
percent subscribed to analog cable.(78) Such findings suggest that analog cable
should be included in the relevant product market, especially since the
percentage of customers churning to analog cable is
----------
(77) See, for example, MacAvoy Declaration at Paragraph 9 and Rubinfeld
Declaration at Paragraph 61.
(78) The remaining five percent of subscribers that switched from DIRECTV to
cable did not know if their cable service was digital or analog.
44
substantially greater than the percentage of customers churning to the other DBS
provider (which all commenters agree should be included in the relevant product
market).(79)
66. For the purposes of examining the competitive effects of the proposed
merger, it may be more relevant to analyze where customers are going to churn in
the future. One potential way to consider such future changes is to look at more
mature MVPD markets - where digital cable systems are generally built out - as
an indicator of what form competition may take in other markets in the future.
Such an approach has a number of flaws (e.g., some smaller markets may never
receive digital cable or overbuilder competition), but it is nonetheless
insightful as an indication of future trends. Analysis of churn from DIRECTV in
the top 15 DMAs(80) indicates that this switching rate to EchoStar is somewhat
lower than the switching rate for the country as a whole. Indeed, the DIRECTV
churn data suggest that for every one customer who left DIRECTV for EchoStar
because of cost or price reasons in 2001 in these 15 DMAs, 4.1 customers churned
from DIRECTV to cable and 1.6 customers churned from DIRECTV to an antenna.
Among those subscribers in these 15 DMAs who disconnected when DIRECTV raised
its prices, an even lower share went to EchoStar. (It should be noted that the
sample size is so small that this result must be viewed as imprecise.) These
data suggest a somewhat lower degree of competition between DIRECTV and EchoStar
in larger, more mature markets, which may anticipate what future churn rates
between the two companies will look like.
----------
(79) One potential criticism of this analysis is that digital cable is not
available in every region of the country. I therefore examined the
switching rates from DBS to digital and analog cable in the 15 largest
markets, where digital cable is widely available. The results are
consistent with the findings for all markets, suggesting that digital
cable availability does not significantly bias our results.
(80) I used Nielsen's 2001 rankings based on the total number of TV households
in each DMA.
45
67. As I stated in my declaration submitted to the FCC with the
Application, "the smaller the diversion of subscribers from one DBS firm to the
other, the smaller would be the expected price increase from conceivable
unilateral competitive effects after the merger."(81) In other words, the data
on churn between EchoStar and DIRECTV suggest that cable would continue to
constrain the price of New EchoStar in the post-merger world.
OTHER POTENTIAL CONSTRAINTS ON THE PRICING OF NEW ECHOSTAR
68. The merger will likely reduce marginal costs through, for example, a
reduction in the cost of programming per additional subscriber (as described in
Section III), thereby offsetting or countering any potential impetus for a price
increase in the post-merger world. As the Merger Guidelines specifically state,
"marginal cost reductions may reduce the merged firm's incentive to elevate
price."(82) Therefore, even if some subscribers would be diverted from one DBS
firm to the other after a price increase, a reduction in marginal costs
resulting from the merger could cause New EchoStar to lower its price.(83)
69. In addition, New EchoStar may face another constraint on its ability
to raise prices: The churn data suggest that broadcast television cannot
necessarily be
----------
(81) Willig Declaration at Paragraph 31.
(82) See the Department of Justice/Federal Trade Commission Horizontal Merger
Guidelines, Section Four, available at
http://www.ftc.gov/bc/docs/horizmer.htm
(83) Carl Shapiro, "Mergers with Differentiated Products," Remarks before the
American Bar Association, 1995.
46
dismissed as part of the relevant product market.(84) While Dr. Daniel Rubinfeld
argues that "the services offered by firms in the MVPD market are different and
distinct from traditional public broadcast television services," he provides no
evidence to support this assertion. FCC Commissioner Kevin Martin similarly
complains that the FCC's Eighth Annual Report "eliminates broadcasters from the
analysis," and that he would have "preferred either to analyze the market for
all video programming (and therefore include broadcasters as competitors), or to
explain in a direct fashion why an analysis of only the multichannel video
programming marketplace is more appropriate."(85)
70. In nearly every analysis of the churn data that I conducted, the
percentage of former DIRECTV customers who were using an antenna two to six
weeks after leaving DIRECTV's service was consistently higher than the
percentage of former subscribers who signed up with EchoStar. For example, among
the people who left due to cost or price reasons in 2001, more than one
quarter were using an antenna, which is substantially higher than the percentage
switching to EchoStar. EchoStar's churn data are consistent with this finding
that more people churn to an antenna than to the other DBS provider.
----------
(84) It is important to emphasize that broadcast television may indirectly,
rather than directly, constrain the prices of premium DBS packages. It is
possible that basic DBS prices (and analog cable) are constrained by
broadcast television, premium prices are in turn constrained by basic
prices, and therefore, premium prices are indirectly constrained by
broadcast television. A variety of academic papers has examined such
"ladder" or vertically differentiated markets and concluded that such
outcomes are possible. See, for example, Michael Mussa and Sherwin Rosen,
"Monopoly and Product Quality," Journal of Econometric Theory, vol. 18,
1978, pages 301-317; Michael Katz, "Firm-Specific Differentiation and
Competition Among Multiproduct Firms," Journal of Business, vol. 57, Issue
1, Part 2: Pricing Strategy, 1984, pages S149-S166; and John Kwoka,
"Market Segmentation by Price-Quality Schedules: Some Evidence from
Automobiles," Journal of Business, vol. 65, no 4, 1984, pages 615-628.
(85) Separate Statement of Commissioner Kevin J. Martin, Annual Assessment of
the Status of Competition in the Market for the Delivery of Video
Programming, CS Docket No. 01-129 (released January 14, 2002).
47
71. The implication of this finding is simple, but inconvenient for those
who oppose the merger. The Merger Guidelines delineate the relevant product
market by analyzing what set of products has "sufficiently inelastic demand as a
group that a hypothetical profit-maximizing monopoly supplier of the set would
impose at least a `small but significant and nontransitory increase in
price.'"(86) The relevant product market is determined by starting with the
narrowest set of products and then by expanding the market out until the
hypothetical monopoly supplier would profit from a five-percent price increase.
The churn data suggest that both digital and analog cable would be in the
relevant product market for DIRECTV. The data also imply that one would add
broadcast television to the relevant product market for DIRECTV before EchoStar
was added to the relevant market. (EchoStar's churn data suggest a similar
conclusion.) Whether or not broadcast is in the relevant market, the churn data
suggest that opponents of the merger cannot argue that antenna should not be in
the relevant product market, but that the degree of competition between the two
DBS firms is intense. The survey data of the merging parties are inconsistent
with such a position.
ANALYSIS OF POTENTIAL COORDINATED EFFECTS
72. A price increase as a result of coordinated interaction is also
unlikely following the proposed merger, in part due to the way the DBS and cable
industries are structured. To set their national prices, DBS firms examine the
prices charged by the various cable systems around the country and use these
cable prices as a benchmark for
----------
(86) Robert D. Willig, "Merger Analysis, Industrial Organization Theory and
Merger Guidelines," Brookings Papers on Economic Activity: Microeconomics,
1991 at 283.
48
setting their prices. Cable firms, on the other hand, set price on a local
franchise-by-franchise basis, and prices can differ depending on many factors
that are specific to the market in which the franchise is located. Although New
EchoStar will face competition from at least one cable firm in any particular
franchise area, tacitly reaching an agreement on a coordinated price is not
simply a question of reaching an agreement with one other firm. New EchoStar
will set its price based on a function of what cable firms are charging in the
various franchise areas. From the perspective of the cable firms, the optimal
price for New EchoStar to charge would likely differ from firm to firm, making
an agreement all the more difficult to reach. Thus, a coordinated price increase
after the merger would require an agreement among multiple cable firms and New
EchoStar, not just an agreement between two firms.
73. Mr. Sidak claims that New EchoStar and cable providers will enter into
a "tacitly collusive strategy of market allocation" in which "DBS would keep the
rural customers and cable would be free to take the urban customers."(87) Mr.
Sidak implicitly argues that New EchoStar would give up tens of millions of
potential subscribers in urban areas and cable providers would not build out
systems to currently non-cable passed areas. Such a "tacitly collusive strategy"
does not seem to be in New EchoStar's financial interests. New EchoStar would
lose the opportunity to serve the major DMAs - markets in which the DBS firms
are currently experiencing their fastest subscriber growth(88) - in exchange for
an implicit commitment by cable operators to stay out of areas
----------
(87) Sidak Declaration at Paragraph 58.
(88) According to subscriber data from the two DBS firms, roughly one-half of
DBS subscriber growth in 2001 occurred in the top 15 DMAs.
49
that cable operators would have probably found unprofitable. In other words, New
EchoStar would gain only a little and potentially lose a lot from such a deal.
A REVIEW OF THE ECONOMIC ANALYSES OF DR. MACAVOY AND MR. SIDAK
74. Some commenters have argued that the proposed merger of EchoStar and
DIRECTV will result in substantially higher prices and significant consumer
welfare losses. For example, Dr. MacAvoy argued that in rural areas, "higher
(monopoly) prices and/or lower quality of service has to result from the
merger... the proposed merger of EchoStar and DirecTV, by creating a monopoly,
would generate significant welfare losses for millions of households."(89) Mr.
Sidak similarly stated that "the proposed merger would lead to an increase in
price that harms consumers."(90) These conclusions, however, are erroneous,
because they are predicated on flawed assumptions. Fundamentally, neither Dr.
MacAvoy nor Mr. Sidak had the information required to estimate the competitive
effects of the proposed merger.
A review of Dr. MacAvoy's analysis
75. Dr. MacAvoy attempts to estimate the impact of the proposed merger by
relying on incorrect assumptions, flawed data, and overly simplistic statistical
techniques. He incorrectly assumes that the merger will generate no cost
savings; in fact, the merger is expected to generate considerable
merger-specific efficiencies which, as Mr. Sidak
----------
(89) MacAvoy Declaration at Paragraphs 4-5.
(90) Sidak Declaration at Paragraph 9.
50
correctly notes in his comments, should be included in any reasonable analysis
of the merger. Dr. MacAvoy assumes that New EchoStar will price discriminate and
charge rural subscribers a higher price; on the contrary, New EchoStar has
committed to pricing on a national basis. Even if, for the sake of argument, New
EchoStar were to price differentially across regions, Dr. MacAvoy significantly
overstates the effects of the merger on DBS price and consumer welfare in rural
areas because he underestimates the elasticity of demand for DBS services.
76. Dr. MacAvoy estimates rural DBS demand elasticity using a regression
in which the dependent variable is the number of subscribers in 83 DMAs and in
which the price (average monthly revenue per subscriber including equipment and
installation) of DIRECTV is one of the independent variables.(91) Based on this
analysis, Dr. MacAvoy concludes that the demand elasticity for DBS services is
-1.55. For at least two reasons, this result under-estimates the demand
elasticity.
77. First, Dr. MacAvoy's statistical technique does not reflect the fact
that the price is endogenous: It reflects shifts in the demand curve as well as
movements along that demand curve. By failing to account for the endogeneity of
the price, Dr. MacAvoy's technique tends to reduce the estimated demand
elasticity. Textbook treatments of the topic have long recognized this to be a
problem and routinely recommend the use of "instruments" (such as factors that
drive marginal cost) to generate
----------
(91) MacAvoy Declaration at Paragraph 28. Dr. MacAvoy provides scant
information on the underlying data in his analysis. For example, he
neither explains the methodology used to collect the data from retailers
nor does he detail whether the dependent variable only includes
subscribers in areas not passed by cable or if it includes all subscribers
in the 83 DMAs.
51
unbiased estimates of demand elasticity.(92) Austan Goolsbee and Amil Petrin,
economists at the University of Chicago, recently stated that not using
instruments in attempting to estimate the elasticity of demand for DBS services
was "naive" because the kind of statistical technique used by Dr. MacAvoy
underestimated the demand elasticity of satellite television.(93)
78. Second, Dr. MacAvoy's estimate of demand elasticity suffers from the
additional problem that he inaccurately measures DBS prices in rural areas. In
particular, he does not describe his data in detail and he appears to have had
access to price data only for DIRECTV (not EchoStar). Nonetheless, Dr. MacAvoy
attempts to estimate the total number of DBS subscribers, not DIRECTV
subscribers. The appropriate price measure should therefore include both
EchoStar and DIRECTV prices. Unless EchoStar prices are perfectly correlated
with DIRECTV prices across the DMAs used, the price variable used will introduce
some measurement error of actual DBS price variation. The resulting measurement
error represents an "errors in variables" problem that tends to reduce the
elasticity estimate as well.(94)
79. Dr. MacAvoy's measure of DBS prices has other problems. For example,
it appears as though the price is driven, in part, by customers in different
areas choosing different programming packages. Such price variation across areas
thus does not
----------
(92) See, for example, Robert Pindyck and Daniel Rubinfeld,Econometric Models
and Forecasts (New York: McGraw-Hill, Inc., 1991), pages 293-296.
(93) Austan Goolsbee and Amil Petrin, "The Consumer Gains from Direct Broadcast
Satellites and the Competition With Cable Television," National Bureau of
Economic Research Working Paper Number 8317, page 28.
(94) See, for example, Jeffrey M. Wooldridge,Introductory Econometrics: A
Modern Approach (Cincinnati: South-Western Publishing, 1999), pages
294-296.
52
represent real price variation (on a quality-adjusted basis). He states that the
price data were provided to him by the National Rural Telecommunications
Cooperative (NRTC). It is unclear if the data are from retailers in NRTC regions
or from the entire DMA. Thus, Dr. MacAvoy has not established that the price
information he uses is representative of the DMAs or sub-regions of those DMAs
that he is examining.
80. Dr. MacAvoy's underestimate of the demand elasticity for DBS services
means that he overstates the effect of the merger on rural subscribers (even if
New EchoStar were to price discriminate). To illustrate the sensitivity of Dr.
MacAvoy's methodology to the estimated elasticity, I computed the results from
Dr. MacAvoy's model using the elasticity of DBS demand in rural areas assumed by
Mr. Sidak.(95) As described below, Mr. Sidak does not justify his assumed DBS
demand elasticity on an empirical basis, but rather asserts that it is -2.5 for
areas not passed by cable.(96) While I believe that -2.5 may be a conservative
estimate of the true demand elasticity, using this figure nonetheless produces
an inconvenient result for Dr. MacAvoy. In particular, applying Mr. Sidak's
assumed elasticity to Dr. MacAvoy's methodology produces a margin for the
monopoly DBS provider of 40 percent.(97) But according to the price and marginal
cost data cited by Dr. MacAvoy, DIRECTV's current margins exceed 40 percent in
all but one of the 14 geographical clusters he examined.(98) Using Mr. Sidak's
----------
(95) There may be reasons for why Dr. MacAvoy's methodology does not equate the
Lerner Index to the inverse of the estimated demand elasticity for DBS (e.g. a
multi-product firm when all the products are not included in the monopoly Lerner
Index). But Dr. MacAvoy asserts that the relationship between the Lerner Index
and the estimated demand elasticity should hold in this case. To show the
sensitivity of his analysis, I assume solely for argument's sake that his
assumption is correct.
(96) Sidak Declaration at Paragraph 36.
(97) The margin for a DBS monopolist would equal the inverse of the absolute
value of the elasticity of demand, or 1/2.5, which equals 40 percent.
(98) MacAvoy Declaration, Table Five at 46.
53
elasticity of DBS demand, I find that Dr. MacAvoy's methodology suggests that
the merger will not increase prices in 13 of the 14 geographical clusters, and
in the fourteenth cluster - the Upper Midwest - prices would rise only slightly,
from $44.13 to $44.67. The point of this exercise is neither to model specific
price effects of the merger nor to imply that Dr. MacAvoy's use of the Lerner
Index is appropriate, but to highlight how sensitive Dr. MacAvoy's results are
to the estimated demand elasticity - a parameter that Dr. MacAvoy's statistical
techniques measure poorly.
81. More generally, Dr. MacAvoy argues that his estimates "clearly
indicate low price-cost margins to be associated with very substantial
competition between EchoStar and DirecTV in broad clusters of rural markets
where cable has not been available."(99) By implication, Dr. MacAvoy argues that
the merger eliminates such competition and elevates prices significantly.
However, Dr. MacAvoy fails to establish that the low margins he observes in
rural areas are due to competition between EchoStar and DIRECTV. He also fails
to note an alternative, and perhaps more likely, reason for the low margins in
rural areas: Each DBS provider sets a national price for programming, a price
that is constrained by competition from cable systems in the larger DMAs. Dr.
MacAvoy appears to assume incorrectly in his model that DIRECTV sets prices in
rural areas based on conditions in those areas. Such an assumption is
inconsistent with DIRECTV's current national pricing strategy. Thus, the
monopoly markup (or Lerner Index) model Dr. MacAvoy uses to estimate price
increases is inappropriate. It fails to consider the effect that cable
competition has on national prices, even in areas where there is no cable.
----------
(99) MacAvoy Declaration at Paragraph 37.
54
A review of Mr. Sidak's analysis
82. Mr. Sidak's analysis of the competitive effects of the merger in
non-cable passed areas is similarly flawed. First, Mr. Sidak assumes that New
EchoStar can identify areas with significant non-cable-passed households and
price differentially on the basis of that information. Mr. Sidak does not
provide an explanation as to how New EchoStar can overcome the practical
difficulties of achieving this ability to price discriminate perfectly. As
described below, in reality, it is quite difficult for New EchoStar to find, let
alone price discriminate against, households that are not passed by cable.
Moreover, while Mr. Sidak estimates merger effects separately for areas passed
by cable and areas not passed by cable ("cabled" and "uncabled" areas,
respectively), he does not include in his analysis that New EchoStar has
committed to price its product uniformly throughout the nation.
83. Second, Mr. Sidak assumes that the elasticity of demand for DBS
service is -2.5 for uncabled areas and -2.75 for cabled areas. The only basis he
provides for these numbers is that the FCC cites -1.95 as the own-price
elasticity of demand for cable television and it is "reasonable to use a higher
(in absolute value terms) own-price elasticity for DBS service, because DBS is a
new product whose demand is likely to be more price-sensitive than the demand
for the product of the entrenched monopolist."(100) In other words, there does
not appear to be any empirical evidence for Mr. Sidak's assumed elasticity of
demand for DBS. In fact, academic research by Drs. Goolsbee and
----------
(100) Sidak Declaration at Paragraph 36.
55
Petrin has estimated that the elasticity of DBS demand is in the range of -4.1
to -4.9.(101) Using a higher elasticity of demand would lower Mr. Sidak's
estimated price increase and would suggest that a modest reduction in marginal
costs could prevent prices from rising after the consummation of the merger.
84. In his analysis of the competitive effects in cabled areas, Mr. Sidak
assumes that the MVPD market can be represented by two traditional economic
models - a Cournot model and a Bertrand model. Based on these two models, Mr.
Sidak estimates a price increase of roughly seven percent as a result of the
proposed merger.(102) Within such models, a higher elasticity of demand than
-2.75 would reduce the price increase estimated by Mr. Sidak. For example, an
elasticity of demand of -4.5 for DBS service would cut Mr. Sidak's estimated
price increase by 44 percent.
85. Finally, Mr. Sidak does acknowledge that marginal cost reductions of
four to seven percent would be large enough to prevent a price rise in cabled
areas after the merger.(103) If Mr. Sidak had assumed a higher elasticity of DBS
demand, the price increase predicted by Mr. Sidak would be even less
significant. Therefore, the marginal cost reductions necessary to attenuate any
projected price increase could be even smaller than Mr. Sidak argues.
----------
(101) See Austan Goolsbee and Amil Petrin, "The Consumer Gains from Direct
Broadcast Satellite and the Competition with Cable TV," mimeo, February
20, 2002, pages 29-30.
(102) Sidak Declaration at Paragraphs 38-48
(103) Sidak Declaration, Table Five at 59.
56
SUMMARY OF THE MERGER'S IMPACT ON MVPD COMPETITION
86. Some commenters have argued that the proposed merger between EchoStar
and DIRECTV will have a significant adverse effect on competition in the MVPD
market. As shown above, these analyses are generally based on incorrect
assumptions, flawed data, and/or overly simplistic statistical techniques. My
analysis suggests that New EchoStar's national pricing commitment will help to
ensure that competitive pressures in larger markets are transferred to smaller
rural markets. In addition, a number of factors will continue to constrain New
EchoStar's prices in the future. First, most DBS subscribers seem to view cable
as their "second choice," so a price increase by New EchoStar would push many
current DBS subscribers to switch to cable. Second, the merger-specific
efficiencies should help New EchoStar compete more vigorously with cable, which
will benefit cable and DBS subscribers. And third, the merger will likely reduce
marginal costs through, for example, a reduction in the cost of programming per
additional subscriber, thereby offsetting or countering any potential price
increase in the post-merger world. Moreover, each entity's churn data indicate
that opponents of the merger cannot simultaneously argue that broadcast
television should not be in the relevant product market and that the degree of
competition between the two DBS firms is intense. As noted above, such a
position would be internally inconsistent.
57
V. NEW ECHOSTAR WOULD HAVE LIMITED ABILITY TO PRICE DISCRIMINATE
87. Opponents of this merger have argued that the relevant geographic
market in which to analyze this merger is a local one, either a DMA(104) or the
cable franchise area in cable passed areas or aggregations of areas not passed
by cable.(105) However, Dr. MacAvoy also points out that the FCC has accepted
the proposition that it is appropriate to look at markets in the aggregate, if
these areas face similar supply conditions.(106) In the MVPD market, supply
conditions do vary locally depending on whether cable is present in that area or
not. However, for the purposes of characterizing the competitive climate, it is
not necessary to make a distinction between cable and non-cable passed areas.
The key question is whether New EchoStar would be able to price discriminate
between areas with cable and areas without cable. As argued below,
discrimination on this basis would not generally be successful.
88. As already discussed, the pricing decisions of both DBS firms are
largely driven by competition with cable. The price for programming tends to be
set nationally. As described in more detail below, there are reasons why it
makes sense for DBS firms to set a national price. Even if this were not the
case, it would be extremely difficult to identify with precision which consumers
had cable available and which ones did not have cable available.
----------
(104) Rubinfeld Declaration at Paragraph 36; Sidak Declaration at Paragraph 22.
(105) MacAvoy Declaration at Paragraph 12-13.
(106) Id at Paragraph 10.
58
89. It is also true that, by and large, national pricing holds with
respect to both programming and equipment. Equipment is sold either directly by
the DBS firms on a national basis, by local or regional retailers, or, in most
cases, by large, national retail chains that also set a national price. These
chains are present in so many areas that consumers, regardless of whether they
have cable as an option, will be able to take advantage of these national
offers. To the extent that there are local deviations in equipment and
installation prices, this does not suggest the market is local since, despite
these variations, prices likely move together across regions and these
deviations are not a function of the availability of cable in a particular
region. Indeed, equipment and installation price differences across regions may
reflect idiosyncratic differences within local retail markets, not regional
price discrimination by the DBS firms.
90. As noted throughout this declaration, New EchoStar has committed to
pricing on a national basis. New EchoStar has indicated that it is willing to
accept requirements reasonably necessary to ensure that its national pricing
practice operates as an effective mechanism for avoiding price discrimination
and for exporting competition from larger markets to rural and other areas
throughout the country. Such restrictions should attenuate any concerns that New
EchoStar would use targeted local promotions to price discriminate or to
undermine the effectiveness of its national pricing commitment.
59
LOCAL VARIATIONS IN PROGRAMMING PRICE WOULD BE INEFFICIENT FOR NEW ECHOSTAR
91. Both EchoStar and DIRECTV have always used national pricing with
respect to programming. Both firms offer a national service and offering a
national price allows the firms to take advantage of this national footprint
when marketing their services. National television advertising, for example, can
be employed and the price of the service can be made a part of these campaigns.
Customer service and direct sales also are done on a national basis and
implementing local price variations would require these customer service
representatives to be knowledgeable about a wide range of prices, only some of
which would be available to any particular customer.
92. While it is true that some local variations exist with respect to
promotions, these are largely with respect to equipment, installation, and
value-added gifts (e.g., an umbrella).(107) Dr. Rubinfeld argues that some
variation in program pricing on a regional basis does exist today, because the
two DBS firms charge separately for local channels and local channels are only
available in certain markets.(108) Though this is true, it is not clear how this
is relevant to the competitive analysis of this merger. Each firm charges the
same price for the local channel option across all markets, so this is just
another example of a national price for programming, with the only difference
being that only certain consumers are able to purchase this option. Eligibility
for this option is strictly on a DMA basis, not on the basis of whether cable is
available to that consumer or not.
----------
(107) For example, EchoStar has only offered one local programming promotion;
for a limited time, EchoStar offered free local service to subscribers in Simi
Valley, California.
(108) Rubinfeld Declaration at Paragraph 35.
60
93. As further evidence of the difficulty of charging different
programming prices in different areas, it is important to note that where an
NRTC affiliate, Pegasus Satellite Television ("Pegasus"), sells DIRECTV service,
it charges $3 a month more than does DIRECTV for the same service.(109) However,
EchoStar could maintain its competitive position vis-a-vis DIRECTV and charge an
extra $1 or $2 in the NRTC areas served by Pegasus. The fact that EchoStar does
not react to this price disparity and charge higher prices in the areas where it
competes with Pegasus (or other NRTC members and affiliates with disparate
pricing) is prima facie evidence of the inefficiencies of regionally pricing DBS
services. The DBS firms charge the same price for programming everywhere because
to do otherwise would involve transactions costs - costs that I understand make
this practice inefficient.(110)
94. As described in the next subsection, it is also likely that EchoStar
would not be able to identify customers in non-cabled passed areas with enough
accuracy to make a price discrimination strategy profitable. In particular, it
would be necessary for EchoStar to be wrong only in a relatively small number of
cases to make it unprofitable to charge different prices to non-cabled and
cabled customers.(111) Let us suppose that EchoStar attempted to charge five
percent more to consumers in what it thought was a non-cabled area. If EchoStar
cannot precisely identify non-cabled and cable areas, some percentage of the
people who are targeted for this price increase in the "non-cabled" area
----------
(109) For example, Pegasus sells the DIRECTV's Total Choice(R) package for
$34.99, while DIRECTV sells it for $31.99; Pegasus sells the Total Choice(R)
Plus package for $38.99, while DIRECTV sells it for $35.99. See
http://www.pegsattv.com/ and http://www.directv.com/
(110) For example, many DBS customers move and reconnect their DBS service at
their new home. DBS executives note that it would be hard to explain to such
customers why they were being changed different prices based on where they
reside.
(111) Jerry Hausman, Gregory Leonard and Christopher Vellturo, "Market
Definition Under Price Discrimination," Antitrust Law Journal, Volume 64, 1996,
page 367-386.
61
would, in fact, have cable as an option - and some percentage of these customers
would be inclined to switch to cable in response to the DBS price increase. To
analyze the profitability of the price increase, EchoStar would compare its
profits before the price increase and after the price increase. The profit
earned before the price increase would be equal to (P - C)N, where P is the
price, C is the marginal cost of producing the service, and N is the number of
consumers in the targeted area. The profit after the price increase would be
(1.05P - C)XN, where X is the percentage of people who do not switch to cable
(so that 1-X is the percentage of targeted customers who switch to cable). The
breakeven value for X is equal to:(112)
P
-- - 1
C (3)
---------------
P
1.05 ---- - 1
C
The percentage of people who do not switch needs to be greater than this ratio
for the price discrimination attempt to be profitable. For example, if the ratio
of price to marginal cost is about 1.67 - which is about what Dr. MacAvoy argues
it is for EchoStar - only 11 percent of the households targeted with the price
would have to switch away from DBS in order for it to be unprofitable to attempt
to price discriminate against customers in rural areas.(113)
----------
(112) Id at 374.
(113) Id at 375.
62
IDENTIFYING WHETHER CABLE IS AVAILABLE TO A CONSUMER IS EXTREMELY DIFFICULT AND
IMPRECISE
95. Dr. MacAvoy and Mr. Sidak both present a series of maps that purport
to show areas where cable is available and where cable is not available and
purport to show that it is possible to identify these areas with a great deal of
precision. However, it cannot be concluded from these maps that New EchoStar
could implement a price discrimination scheme based on whether customers had
cable available or not. First, it is important to realize that these maps are
based on information that is provided to Warren Communications ("Warren") by the
cable companies. To the extent this information is inaccurate or not kept
current, Warren's information will not be accurate.
96. I independently tested the accuracy of the Warren data in two ways:
First, I analyzed the DIRECTV churn data and examined whether any customers who
lived in zip codes that the Warren data suggest were not passed had churned from
DIRECTV to cable. That is, the data that Dr. MacAvoy and Mr. Sidak present
suggest that a large number of zip codes are not passed by cable. But the
DIRECTV data indicate that more than one quarter of the customers who lived in
these supposedly non-cable passed zip codes and who left DIRECTV, left for a
cable provider. To ensure that the problem is not with misreporting in the
DIRECTV churn data, I asked Ginsberg Lahey, LLC, a Washington-based research
firm, to check the accuracy of these results by contacting the local cable firms
to ensure that subscribers in these zip codes could receive cable service.
For a significant number of these zip codes, Ginsberg Lahey was able to confirm
the accuracy of the DIRECTV churn data by verifying with the local cable
provider that
63
cable service was indeed available. Second, Ginsberg Lahey contacted local cable
firms in zip codes that the data used by Dr. MacAvoy and Mr. Sidak suggested
were not passed by cable. In the past two weeks alone, they discovered that at
least 20 zip codes were in fact cable passed that the data indicated were not
passed by cable.(114)
97. While such findings raise questions about the data used by Dr. MacAvoy
and Mr. Sidak, the point of the analysis is not to undermine the data collected
by Warren. Rather, it is to highlight how difficult it is to identify cable
passed areas. Given the substantial uncertainty involved with targeting
non-cable passed households, it is not surprising that the two DBS firms have
not tried to price discriminate against them in the past and why New EchoStar
would likely not find it profit-maximizing to price discriminate against them in
the future.
98. Opponents of the merger have also dismissed the data on cable passed
homes from Paul Kagan Associates ("Kagan"), a telecommunications consulting
firm.(115) These commenters prefer the Warren data, which suggest significantly
fewer households are passed by cable:(116) Commenters indicate that Warren finds
that 92 million homes are
----------
(114) Ginsberg Lahey found that cable service was available in the following zip
codes: 13635, 13690, 24649, 25040, 25205, 30045, 30297, 30127, 37191, 40165,
46175, 47145, 42085, 55783, 63966, 66040, 70577, 72073, 77561, and 77650. The
Warren database suggests that each of these zip codes is not passed by cable.
(115) See NRTC Petition to Deny at Paragraphs 9-32; Pegasus Petition to Deny at
15-18; National Association of Broadcasters Petition to Deny at 45-47; Sidak
Declaration at Paragraphs 73-75.
(116) A number of commenters have suggested that the percentage of homes not
passed by cable may increase in the future, since small, rural cable providers
may be forced into bankruptcy. See, for example, Sidak Declaration at Paragraph
32 and Rubinfeld Declaration at Paragraph 39. These commenters cite a Credit
Suisse First Boston report that looks at the poor economic health of many rural
cable systems and suggests many will fail. See Credit Suisse First Boston,
Natural Selection: DBS Should Thrive As the Fittest to Serve Rural America,
October 12, 2001. However, these commenters ignore the section of the Credit
Suisse report which states that "cable systems are constantly traded between
MSOs in an effort to create cable clusters. As a result, some smaller systems
may be acquired by larger MSOs that can justify digital video/cable modem
64
passed by cable,(117) while the Kagan data suggest that 104 million homes are
cable passed.(118) No commenter has provided any evidence that the Warren data
are more accurate than the Kagan data, which the FCC has cited over the years as
its source on the number of homes passed by cable.(119) In the end, the
significant debate over the percentage of homes passed by cable is only relevant
if New EchoStar is able to "find" the non-cable passed homes. As emphasized
throughout this section, it is extremely difficult and costly to find such
homes.
99. In addition, even if the Warren (or Kagan) maps and data were
accurate, it is not the case the cable franchise areas correspond to geographic
designations such as DMAs, counties, or even zip codes. Thus, even if New
EchoStar were to price differently based on the zip code of a customer, the zip
code of a customer will not tell them precisely whether that customer is passed
by cable or not. As argued above, if New
--------------------------------------------------------------------------------
investments in these systems as a means of maintaining competitiveness against
DBS, even though the actual investment may be economically irrational in and of
itself." In other words, even though rural cable providers may not be
financially viable, rural households will continue to receive cable service. One
such example comes from the recent experiences of Classic Communications, a
rural cable provider. Classic filed for bankruptcy protection in November 2001.
It did not, as commenters suggest, "go dark." See Rubinfeld Declaration at
Paragraph 39. Rather, Classic "intends to continue to conduct business as usual,
with no changes in service or pricing." It sold two of its subsidiaries -
Universal Cable Communications, Inc. and Universal Cable Holdings - to raise
cash. Classic intends to "emerge quickly from bankruptcy with a strong regional
presence in its core markets of operation." See Classic Communications Press
Release, "Classic Communications, Inc. to Restructure Operations Under Chapter
11; Company to Continue To Conduct Business as Usual," November 13, 2001. While
rural cable firms may go bankrupt in the future due to competition, the evidence
appears to suggest that rural customers will continue to have a cable option, as
bankrupt companies sell their infrastructure to larger cable providers or
restructure their own operations under the relevant bankruptcy laws.
(117) See Pegasus Petition to Deny at 3.
(118) Eighth Annual Cable Competition Report, Appendix B, Table B-1.
(119) See, for example, Eighth Annual Cable Competition Report, Appendix B,
Table B-1. Kagan sends a questionnaire to cable operators and asks for the
number of "homes passed" by each cable operator. Some commenters have noted that
the definition of homes passed is "confusing" and "sometimes contradictory." The
commenters point to a series of potential definitions, ranging from the number
of homes for which "cable television is or can be readily available" to the
number of homes that have "feeder cables in place nearby." See Sidak Declaration
at Paragraph 75. Although the definition of homes passed does appear to be
confusing, the broadest definition - the number of homes that have the potential
for being connected to the cable system - appears to be the most appropriate.
65
EchoStar is often wrong about which customers receive cable, price
discrimination may not be profitable.
VARIATIONS IN EQUIPMENT AND INSTALLATION PRICES CANNOT BE USED TO DISCRIMINATE
PROFITABLY AGAINST NON-CABLED CUSTOMERS
100. Programming prices are only one component of the price to a customer
of receiving DBS service. Equipment and installation prices are another
component of the total price of receiving the service. However, though there are
temporary variations in this part of the price on a local level, it does not
appear to be profitable for New EchoStar to attempt to use variations in this
part of the price as a way to discriminate against non-cabled customers. As
with programming, promotions and pricing on equipment are driven to a large
extent by the need for DBS to remain competitive with cable and the fact the
customers perceive an advantage for cable with respect to smaller upfront costs.
101. EchoStar and DIRECTV rely heavily on national retail chains, such as
Circuit City, Best Buy, Blockbuster, Sears, and Radio Shack for sales of their
equipment. For example, national chains accounted for more than 50 percent of
DIRECTV's retail equipment sales in 2001. These national chains also prefer to
promote their products uniformly on a national basis, as this is the most
efficient way for them to market their promotions. National retailers prefer to
be compensated uniformly on a national basis, and therefore, any effort by New
EchoStar to compensate them differently based on whether a customer is passed by
cable would be resisted by the retailers. Indeed, national retailers would
likely oppose any plan that imposes additional costs on them to identify
66
which customers would be eligible for particular promotions based on the
customers' residences. In addition, as with the programming discrimination
discussed above, such a scheme would be subject to error since it is hard to
identify precisely which customers are passed by cable.
102. Retailers, particularly those that are independent, would be free to
offer their own promotions and Dr. MacAvoy includes various examples of this
happening in the past. (120) However, it is unlikely that such promotions could
be used to harm consumers after this merger. First, retailers would be still
competing with each other to make sales of New EchoStar equipment and this
should discipline any attempt to discriminate against customers. Second,
customers in non-cable passed areas have extensive access to the national
retailers that sell DBS equipment.
103. To analyze the extent to which households in areas not passed by
cable had access to at least one national retailer, I used the same data
utilized by Dr. MacAvoy and data from DIRECTV on the location of national
retailers.(121) I examined the presence of national retailers in the areas that
Dr. MacAvoy suggested had a high-proportion of non-cable passed zip codes.(122)
In the maps presented by Dr. MacAvoy, I found that the average distance from
towns without cable to the nearest national retailer was often less than 20
miles. For example, in Dr. MacAvoy's "Carolinas" region, the average distance
from towns without cable to a national retailer was just 11.1 miles. For the
towns without cable in his "Hoosier" region, I found that the nearest national
retailer was an average of
----------
120 MacAvoy Declaration at Paragraph 20.
121 I included Blockbuster, Best Buy, Circuit City, Radio Shack, and WalMart in
our analysis.
122 See MacAvoy Declaration at 12-25.
67
13.8 miles away. The evidence therefore suggests that consumers in non-cable
passed areas will be able to take advantage of equipment and installation offers
from these retailers, which are set on a national basis. Moreover, uniform
national pricing by national retailers will minimize regionally differentiated
DBS pricing by regional retailers. If a regional retailer in a rural area
charges a higher price than the national price charged by national retailers,
the regional retailer will lose sales to the national retailer.
If households did not have access to a national retailer, they could always take
advantage of direct sales from New EchoStar, or could purchase their equipment
over the Internet.
104. Thus, though it is true that the video choices available to any
particular consumer are dictated by the choices available in any particular
area, it is still appropriate to analyze this merger in a national context. DBS
prices are set nationally and driven by the need for DBS to compete with cable.
Customers in non-cable areas benefit from this, as well as from the prices set
for equipment and installation set by national retailers, which are also driven
by the need to compete with cable.
CUSTOMER SERVICE DATA SUGGEST NO NON-PRICE DISCRIMINATION
105. Some opponents of the proposed merger between EchoStar and DIRECTV
have argued that New EchoStar would utilize non-price forms of discrimination.
These opponents argue, for example, that New EchoStar would provide lower levels
of customer service to subscribers in rural areas than in urban areas.(123) To
test this
----------
123 See Robert Pitofsky, Testimony before the House Judiciary Committee,
December 4, 2001, page 8, available at
http://www.house.gov/judiciary/pitofsky_120401.pdf
68
hypothesis, I analyzed DIRECTV's customer satisfaction survey to determine
whether DIRECTV currently engages in any form of non-price discrimination. The
results suggest that rural customers are just as satisfied with DIRECTV's
overall service and customer service as non-rural customers.(124) For example,
90 percent of cable-passed households and 88 percent of non-cable passed
households were either "very satisfied" or "satisfied" with DIRECTV's service,
and 80 percent of both cable-passed and non-cable passed households reported
that DIRECTV's customer service was "excellent" or "good." Such evidence
provides support for the conclusion that the DBS firms do not use non-price
discrimination today against rural (or non-cable passed) households.
VI. CONCLUSIONS
106. The proposed merger of EchoStar and DIRECTV offers the possibility of
substantial efficiency improvements, especially in radio spectrum use, which
would directly benefit DBS consumers by providing an expanded array of services
(e.g., the provision of local broadcast programming to every DMA in the country,
more High-Definition Television channels, more interactive services, and more
specialized programming), and also benefit a broader number of consumers by
increasing competition with the cable industry. The merger will also make the
combined entity's satellite-based broadband service more competitive versus
other high-speed Internet access technologies, thereby making it more likely
that this satellite-based service will be
----------
124 I examined the satisfaction of customers in the largest 15 DMAs versus the
smallest 100 DMAs, and households that reported that they were passed by cable
versus households that reported they were not passed by cable.
69
adopted by residential consumers. These efficiencies are not available without
the merger.
107. Furthermore, the combined entity's national pricing will be driven by
a weighted average of cable prices, with larger markets playing a more important
role - that is, competition in larger, more competitive DMAs will likely be
"exported" to smaller rural markets and non-cable passed areas. The nature of
MVPD market competition makes it unlikely that a merger of EchoStar and DIRECTV
would result in higher prices and lower output through either coordinated
behavior among the participants in the MVPD market or unilateral behavior by the
merged firm. Moreover, the efficiency improvements will also make New EchoStar a
more effective competitor to cable providers than either company could be on its
own, and could perpetuate a virtuous cycle of competitive innovation. The
proposed merger of EchoStar and DIRECTV is thus in the public interest.
70
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
--------------------------------------------------
Application of
ECHOSTAR COMMUNICATIONS CORPORATION,
GENERAL MOTORS CORPORATION,
HUGHES ELECTRONICS CORPORATION
Transferors, CS DOCKET NO. 01-348
and
ECHOSTAR COMMUNICATIONS CORPORATION
Transferee,
For Authority to Transfer Control
--------------------------------------------------
DECLARATION OF DR. RICHARD J. BARNETT
ON BEHALF OF
ECHOSTAR COMMUNICATIONS CORPORATION, GENERAL MOTORS
CORPORATION, AND HUGHES ELECTRONICS CORPORATION
EXECUTIVE SUMMARY
This Declaration addresses the technical arguments raised by NRTC, NAB and
Pegasus in their recent Petitions in this proceeding.
Those Petitioners have attempted to show that both EchoStar and DIRECTV,
operating as individual companies, could technically implement satellite systems
that would provide local TV programming to all 210 DMAs without utilizing an
unacceptably large number of their licensed full-CONUS DBS frequencies.
The claims made by these Petitioners are flawed for the following reasons:
1. Their capacity calculations rely on improvements in technology that are
either (a) not yet available and unlikely to become available in the
near future, or (b) impractical from a business perspective because they
would require all subscribers to transition to new set-top boxes. Each
of the proposed technological developments is addressed in this
Declaration;
2. The new satellite designs that they propose are superficial concept
designs only and have not been rigorously developed to establish their
feasibility, cost, schedule or performance. In fact several key aspects
of these satellite concept designs are demonstrated in this Declaration
to be seriously in error to the point that they are simply not feasible.
All predictions of capacity achieved and spectrum used by these new
satellites are therefore seriously in error;
1
3. They do not give sufficient consideration of the need for more national
programming channels in the future to allow for new types of services
(such as HDTV) or expansion of existing services. They instead are
intent on trying to demonstrate the capability to provide local TV
programming at the expense of the future of national programming.
2
I. QUALIFICATIONS
1. My name is Richard Barnett. I am the President of
Telecomm Strategies L.L.C., a Maryland company providing engineering
consultancy services to a wide range of satellite projects and for many
clients throughout the world. The principal consultants in the company,
including myself, are all qualified engineers, and the company
specializes in the technical design and technical regulatory aspects of
satellite projects. My own personal experience is in the field of RF
engineering, satellite communications system design and international
satellite regulatory analysis. I have been working in the field of
Direct Broadcast Satellite ("DBS") design since the early 1980s. My
resume, is given in Appendix 1 of this Declaration.
II. PURPOSE AND SCOPE OF STATEMENT
2. I have been retained by the Applicants to review and
comment on the technical aspects of the Petitions received in the
EchoStar/Hughes merger proceeding. In particular I have focused on the
Petitions received from NRTC, NAB and Pegasus, which are the only ones
with significant technical content.(1),(2),(3) These three Petitioners
have appended technical declarations to their petitions from Walter
Morgan (for NRTC)(4), Richard Gould (for NAB)(5)
------------------------
(1) Petition to Deny by the National Rural Telecommunications Cooperative,
February 4, 2002, CS Docket No. 01-348.
(2) Petition to Deny of National Association of Broadcasters, February 4,
2002, CS Docket No. 01-348.
(3) Pegasus Communications Corporation's Petition to Deny, February 4, 2002,
CS Docket No. 01-348.
(4) Declaration of Walter L. Morgan in Support of Petition to Deny by the
National Rural
3
and Roger Rusch (for Pegasus)(6) and these will be referred to throughout this
document as the "Morgan", "Gould" and "Rusch" declarations respectively, or
collectively as the "Petitioners".
III. TRADE-OFF BETWEEN LOCAL AND NATIONAL PROGRAMMING
3. One common theme in the Morgan, Gould and Rusch declarations is
the preoccupation with the provision of local programming at the expense of
national programming. In practice EchoStar and DIRECTV must take into account
both types of programming and strike the appropriate balance between them in
offering a competitive service to the public.
4. In particular the two companies need to plan for the likely
evolution of High-Definition TV ("HDTV") to the point where it becomes an
essential national programming product with vast audience appeal. The recent
technical innovations and price reductions of large-screen TVs, and the
corresponding increase in their sales, are clear indicators that the public is
heading in the direction where its demands for HDTV will increase exponentially
over the coming years. At present it is only possible to accommodate one HDTV
channel in each 24 MHz satellite transponder, although it is possible that this
could increase to two HDTV channels per transponder with further technical
innovations.
5. The increased requirement for transponder capacity capable of
carrying national programming is not limited to HDTV. Other areas of growth in
programming include new
-------------------------------------------------------------------------------
Telecommunications Cooperative, Exhibit O of Petition.
(5) Declaration of Richard G. Gould.
(6) Affidavit and Report of Roger J. Rusch, Attachment B to Petition.
4
national networks and additional pay-per-view, video-on-demand, interactive and
educational channels.
6. Therefore, EchoStar and DIRECTV must plan for a growth in
requirements for transponders with the ability to provide national programming.
The more of the scarce orbit-spectrum resource is used up for local programming
the less is available to cater for this growth in national requirements. Each
DBS operator has been licensed to use a limited amount of radio frequency
spectrum and orbital slots and the operating companies must plan for the
long-term. They must use their entire licensed spectrum as efficiently as
possible, taking into account commercial realities and future growth in key
areas of public demand.
IV. SPECTRUM REQUIREMENTS FOR LOCAL PROGRAMMING
7. The essence of the Petitioners' technical arguments is their
claim that the carriage of all of the local programming in all 210 DMAs in the
United States by each DBS company is technically feasible in the absence of a
merger. However, what might be technically feasible is not necessarily
commercially reasonable because of important operational and economic factors.
One of the key aspects of this determination is an understanding of the number
of licensed DBS frequencies that will be used up by the local programming, and
that issue is addressed in this section, and indirectly in the remainder of this
Declaration.
8. The conclusions of the Petitioners are generally that all (or at
least the vast
5
majority) of the DMAs can be served with local programming (a total of around
1,500 TV channels) using an "acceptably" low number of DBS frequencies.(7) Here
is a summary of their claims in this respect:
9. NAB: Gould's assessment is that DIRECTV and EchoStar would
require between 17 and 19 DBS frequencies each for local programming (out of a
total of 46 full-CONUS frequencies licensed to DIRECTV and 50 full-CONUS
frequencies licensed to EchoStar). Although not absolutely clear in this regard,
Gould appears to be suggesting that this would require new satellites that
differ in design from the planned EchoStar and DIRECTV spot beam satellites
already under construction (or already launched). Gould goes on to suggest that
the number of DBS frequencies required for local programming (and national
programming) could be reduced using improved compression, modulation, coding,
etc, but he does not give the resulting number of DBS frequencies that would, in
his estimation, be then required for the local programming.
10. NRTC: Morgan assumes for DIRECTV that both the DIRECTV 4S and
DIRECTV 7S spot beam satellites will each use six DBS frequencies for local
programming, and that this can be supplemented by a new satellite that would use
a further three DBS frequencies, making a total of 15 DBS frequencies. With all
these DBS frequencies Morgan predicts that 187 of the 210 DMAs can be served
with local programming by DIRECTV.
----------------------
(7) These conclusions are neither correct nor appropriate, and more details
on this are given in
6
11. For EchoStar, Morgan assumes that the EchoStar-7 and EchoStar-8
spot beam satellites will each use five DBS frequencies for local programming,
and that this can also be supplemented by a new satellite that would use a
further three DBS frequencies, making a total of 13 DBS frequencies. With all
these frequencies Morgan predicts that 160 of the 210 DMAs can be served with
local programming by EchoStar.
12. Pegasus: Rusch initially indicates that each company could serve
all 210 DMAs with local programming using only 16 DBS frequencies each, using
technology similar to their current spot beam satellites, although this
assertion by Rusch is not backed up by any specific analysis. Obviously aware of
the critical need to reduce this number of DBS frequencies allocated to local
programming (approximately one third of each provider's full-CONUS DBS
capacity), he then goes on to develop an alternate approach which involves
discarding the planned spot beam satellites already under construction (or
launched) and assuming each company builds a satellite along the lines of his
"super-satellite" design. With this design Rusch claims that the number of DBS
frequencies required by each company for local programming will reduce to 12.
The technical failings of the Rusch "super-satellite" are discussed in detail in
Section VII of this Declaration.
13. The Petitioners are generally correct in their understanding
that the number of DBS frequencies that can economically be assigned by EchoStar
and DIRECTV to provide local programming must be minimized in order to keep it
in economically reasonable proportion
--------------------------------------------------------------------------------
subsequent sections of this Declaration.
7
to the number of DBS frequencies available for national programming. However,
there are at least two fundamental problems with their conclusions, as follows:
14. Problem #1: Where the Petitioners conclude that between 16 and
19 DBS frequencies should be allocated to local programming, these are still
unacceptably high numbers in relation to the number of licensed full-CONUS
frequencies available to each company (46 for DIRECTV and 50 for EchoStar). The
remaining number of DBS frequencies available for national programming is
insufficient for future growth in key areas of national programming that are and
will become in demand. Furthermore, the costs to each company of operating so
many local channels are excessive, as explained in the Declaration of Dr. Robert
Willig which is also attached to Opposition of the Applicants.(8) By contrast,
after the merger, the allocation of 16-19 DBS frequencies to local programming
out of a pool of 96 full-CONUS frequencies leaves adequate capacity for adding
new national programming into the foreseeable future. The economic burden of
operating this number of local channels is also reduced when carried by the
merged company. See Declaration of Dr. Willig.
15. Problem #2: Where the Petitioners (Morgan and Rusch) propose
exotic satellite designs to reduce the number of DBS frequencies consumed by
local programming to what they consider to be an acceptable number (such as 12
in the case of Rusch), their satellite designs are simply not viable. The
designs they propose are mere concepts, and rigorous
----------------------------
(8) See Declaration of Dr. Robert D. Willig on Behalf of EchoStar
Communications Corporation, General Motors Corporation, and Hughes
Electronics Corporation in CS Docket No. 01-358 (Feb. 25, 2002).
8
analysis of their performance is distinctly lacking. Apart from this, the
implementation of such satellite designs (if they were possible) would create
huge technical risk, unacceptably long delays before they could ever be brought
into service, and carry very high and unacceptable costs. These issues are dealt
with in more detail in Section VII below.
V. TECHNICAL FACTORS AFFECTING CAPACITY
16. In order to attempt to "squeeze in" as many local TV channels as
possible, the Petitioners rely in part on certain technical innovations, which
are addressed in the sub-sections below. In each of these technological areas
they take existing reality and hypothesize a development that is either
inappropriate (for example, in terms of the quality of service to the public),
impractical (for example, requiring expensive changeover of all subscribers to
new set-top boxes), or just simply impossible (such as the claims of DMA
coverage and service).
V.1 COMPRESSION
17. In the Joint Engineering Statement that was part of the
Application it was stated that the normal compression ratio in use at that time
was 10:1.(9) This is the level of compression achievable today which provides
minimally acceptable TV picture quality - compression levels above this start to
show unacceptable "digital artifacts" which can be very distracting to the
-----------------------
(9) This means that 10 TV channels can be combined and transmitted in
digital format on a single 24 MHz bandwidth satellite transponder.
9
viewer.(10) The extent of the manifestation of these digital artifacts depends
on the combined amount of picture detail and movement that exists for all the
combined TV channels at any point in time, and is very difficult, if not
impossible, to quantify. For example, if situations arise in which a lot of
detailed picture changes are occurring simultaneously in a number of the TV
channels that are being combined, then some of those channels will start to show
these artifacts, typically in the form of the jerky movement of picture blocks
across the TV screen. Subjective tests have shown users to be very intolerant of
these picture degradations, and they need to be avoided to the maximum extent,
consistent with efficient use of the transponder bandwidth.
18. The Joint Engineering Statement went on to predict that, in the
future, it is likely that this compression ratio might reach a level of 12:1,
while still preserving acceptable picture quality. At the present time such
performance is not possible for all types of TV programs, depending on their
picture content. Despite this, both EchoStar and DIRECTV have been obliged to
recently operate a small number of transponders carrying local TV channels with
compression ratios up to 12:1. This has been necessary as a result of the need
to comply with the SHVIA requirements for local TV carriage, and generally
occurs in situations where it was necessary to put all the candidate TV channels
in a particular DMA into the same transponder. Neither EchoStar nor DIRECTV are
satisfied with the resulting picture quality in these
---------------------
(10) Recent upgrades to the software algorithms used by the compression
systems did not achieve the anticipated levels of improvement expected.
As a result, instead of achieving desirable video quality at 10:1
compression levels, the quality is only minimally acceptable. Based on
these results, it is currently believed that the next major release of
software algorithms will not afford any additional channel capacity,
instead affording the opportunity to restore quality to the normal
levels the customers have come to expect.
10
transponders as situations inevitably arise when the unwanted digital
artifacts are apparent. In other words, operation at 12:1 compression ratio is
an "evil necessity" in a small number of cases at the present time, and not a
normal or desirable mode of operation.
19. Petitioners clearly are unaware of the variety of demands on
the raw bandwidth of a DBS transponder. They have assumed higher compression
ratios in their analysis than is currently achievable from an operational DBS
system with real requirements and limitations if high picture quality is to be
guaranteed. Gould states that "The transponder capacity can be shown to be
between 12 and 14 NTSC channels using standard methods of modulation."(11)
Rusch states that "... 12 television signals can be transmitted on each
frequency block ..."(12) Morgan states that his assumption in his analyses is
"... a video compression rate of 12:1."(13) Their theoretical capacity
estimates are grossly in error due to such optimistic assumptions about
compression, as well as other erroneous assumptions addressed below.
20. For example, Petitioners appear to have ignored that fact that
approximately 20% of the available bandwidth on every transponder in the network
is needed for non-video purposes. The compression systems require available
"headroom" bandwidth within the overall bit stream within every transponder.
This bandwidth is necessary for the systems to perform their compression and
multiplexing functions and is unavailable for use by the satellite provider.
Many channels also broadcast an alternate language audio channel in addition to
the primary
----------------
(11) Gould Declaration, page 7.
(12) Rusch Declaration, page 5.
(13) Morgan Declaration, page 4.
11
language, in support of bilingual viewers. Additionally, Dolby Digital (an
enhanced audio format) is broadcast as a secondary audio source on many DBS
channels, and it alone is equivalent to two normal audio channels, bringing the
total for those channels to three equivalent audio channels. Furthermore, every
transponder carries a set of data tables necessary to communicate critical
information from the uplink systems to the individual set top receivers. This
information is needed by the receiver to be able to understand which satellite a
given program is located on, which of the multiple data streams within the
transponder contains the video, which audio streams are associated with the
video, whether the customer has appropriate rights to the video, and a host of
other details elemental to the operation of a digital video system.
21. Lastly, one transponder at every satellite location includes a
complete Electronic Program Guide, as well as software downloads for every model
of every receiver ever produced. One third of the available capacity of this
"home" transponder is dedicated to supporting this application. As the size of
the network and the number of customers grows, so does the bandwidth
requirements on each and every transponder.
V.2 VIDEO CODING
22. Both Rusch and Gould make strong statements about the future use
of MPEG-4 video coding in place of MPEG-2, suggesting that the change to this
coding standard would make dramatic further reductions in the data rate required
for broadcast quality video signals, and hence increase the number of TV signals
per transponder. Gould states that "Moreover, new generation algorithms such as
MPEG-4 are being designed and implemented to
12
provide even more digital compression than is available now with MPEG-2. With
greater compression, the required data rates will decrease and the number of TV
channels that can be supported on a single transponder will increase beyond the
assumptions made above".(14) Rusch states that "For even greater gains, the
recently adopted MPEG-4 standard can provide a reduction in data rates by a
factor of two or three as compared to MPEG-2".(15)
23. These statements demonstrate a popular misconception about the
role and applicability of MPEG-4 to broadcast quality video transmissions. The
fact of the matter is that MPEG-4 is currently designed to allow more effective
video bit-rate reductions only for signals of a much lower quality than are
transmitted to the public by DBS satellites. Applications intending to exploit
MPEG-4 are therefore ones where data rate is severely limited and quality
considerations are of secondary importance, such as video streaming over the
Internet. For the quality required for DBS satellite transmissions, which is
effectively "broadcast quality," MPEG-4 provides no reduction in required
bit-rate compared to MPEG-2, and therefore cannot seriously be considered at the
present time for use by EchoStar or DIRECTV for their conventional broadcast
services.(16)
24. Furthermore, the use of MPEG-2 allows for significant cost
savings in
----------------
(14) Gould Declaration, page 14.
(15) Rusch Declaration, page 11, para. 39.
(16) There are long-term developments aimed at achieving broadcast quality
encoding at 1 MBit/sec but it is not certain whether this will be MPEG-4
or a new evolving standard called H26L. Neither format is yet suitable
to achieve such a low bit rate consistent with reasonable quality. At
bit rates of 2 MBits/sec and higher there is very little difference in
terms of picture quality between MPEG-2 and
13
manufacturing receivers as compared to MPEG-4 and has greater economies of scale
due to its widespread use.
25. Finally, it should be noted that a transition to MPEG-4 would
require all new set-top boxes, with negligible, if any, revenue or capacity
benefit.(17)
V.3 MODULATION AND CODING
26. Currently both EchoStar and DIRECTV use QPSK for their satellite
transmissions. This has been, and remains, the right choice from the point of
view of spectral efficiency, satellite power requirements and ease of
implementation in the user equipment.
27. However, Gould proposes that EchoStar and DIRECTV's current QPSK
transmissions be replaced by 8PSK or even higher order modulation transmissions.
Gould's justification for this is "Modern spacecraft are capable of providing
the greater power that is needed in order to achieve the higher spectral
efficiency afforded by 8PSK modulation discussed earlier, and by other,
higher-order, modulation methods ...".(18) Rusch similarly proposes the change
from QPSK to 8PSK, also citing the relative ease of generating additional power
on the satellite as justification. Such comments, however, ignore the fact that
satellite power is always at a premium, and therefore its efficient use cannot
be so easily dismissed as Gould and Rusch have done. The requirement to generate
between 30% and 50% more RF
--------------------------------------------------------------------------------
MPEG-4.
(17) Transition issues where new set-top boxes are required are addressed in
Section V.3.
(18) Gould Declaration, page 13.
14
power, as might be required for the use of 8PSK, could have the effect of
increasing the satellite platform DC power requirements from typically 10 kW to
between 13 and 15 kW. Such an increase would have considerable impact on the
satellite and launch vehicle costs, and reduce the scope of potential spacecraft
suppliers and platform products.
28. Both Gould and Rusch separately promote a change in the coding
of the EchoStar and DIRECTV transmissions to make use of the latest turbo coding
techniques. However, Rusch in particular creates a false impression here that
turbo coding, in and of itself, will make dramatic improvements to the spectral
efficiency of the DBS satellites. He states "One method of increasing channel
capacity or throughput is called turbo coding. This method is currently being
used on some satellite services to improve the signal robustness (lowering the
required Eb/No) substantially, by as much as a factor of two. This could double
the effective channel capacity."(19) This proposed doubling of the channel
capacity by the use of turbo coding is simply not the case when applied to the
existing satellite transmissions used by EchoStar and DIRECTV, because of the
coding levels already in use. Turbo coding merely improves the signal's
robustness without as much coding overhead as would be required with
conventional coding. It does not affect the spectral efficiency directly.
29. While the combined use of 8PSK and turbo coding might be an
attractive alternative to QPSK and conventional coding for new systems, and
result in an overall spectral efficiency improvement on the order of 30%,
depending on the conventional and turbo coding
----------------
(19) Rusch Declaration, page 10, para. 35.
15
levels employed, further tests are necessary before it can be confirmed that the
existing satellite transponder frequency response and linearity specifications
are sufficient for this new modulation and coding scheme. Operation in a
self-interference environment, such as a spot-beam satellite where spatial
frequency re-use is employed between multiple spot beams, also needs to be
investigated further before such a new scheme can be relied upon. In the context
of EchoStar and DIRECTV's current operations, however, any such change would
require new (and more expensive) set-top boxes for all subscribers if it were to
be applied to both the local and national programming channels. Evolutionary
transition schemes, as suggested by Rusch, will only address a relatively small
percentage of the subscribers. (20) At some point in time, the entire population
of viewers must get new set-top boxes installed before the main (national)
channels in the system are transitioned to the new modulation and coding scheme.
V.4 ADMINISTRATIVE CHANNELS
30. In assessing the TV channel capacity of the EchoStar and DIRECTV
satellite systems, it is important to note that some channels are required to
carry "administrative" information and data to the subscribers. Not all
"available" channel capacity can be used to transmit revenue-generating TV
programs. The administrative channels are used for "TV Guide" information as
well as data communications to the subscribers' set-top boxes. This matter is
also addressed in Section V.1 above.
--------------------------------------------------------------------------------
(20) Rusch Declaration, page 11, para. 39.
16
V.5 BEAM COVERAGE AND EFFECT ON CAPACITY
31. All of the Petitioners, either directly or indirectly, make
assumptions about the spot beam coverage of the satellites. In the case of
Morgan, he addresses both the existing (and under construction) satellites, as
well as his proposed additional spot beam satellites. In the case of Rusch and
Gould, they address only new satellite designs. The spot beam coverage of these
satellites is the key to determining their capacity, in terms of local TV
channels in the various DMAs. None of the Petitioners has adequately addressed
this issue in their technical submissions.
32. Designing the beam coverage for local programming to the defined
DMAs is a very challenging exercise. The DMAs are not conveniently sized or
located in a way that is amenable to optimum coverage by satellite. Inevitably,
compromises have to be made, and the resulting performance, in terms of the
number of DMAs served, falls far short of the ideal. There are several reasons
for this, as follows:
33. DMA size and shape: The DMAs vary widely in their geographic
size, depending on their population densities, and they are irregularly shaped
(see Figure 1 below). By contrast the easiest spot beams to generate, from the
satellite design and performance perspective, are ones that are circular as
viewed from the satellite. There are also severe limitations on how small the
spot beams can be made, and it is preferable by far to maintain a constant, or
near-constant, spot beam size if possible. The inevitable result of all these
constraints is that spot beams on DBS satellites are made to be relatively large
compared to the
17
smaller DMAs, and therefore each one encompasses several DMAs, or at least parts
of several DMAs. The beams are also often too small to encompass the largest
DMAs. In the example shown in Figure 1 the spot beam is the -3 dB contour of a
beam generated with a 3 meter satellite antenna reflector. Note that it covers
two adjacent DMAs completely, but only parts of some other DMAs in the vicinity.
Figure 1: Example of DMAs in Eastern part of the USA
[MAP]
34. Relative priority and geographic location of the DMAs: To re-use
the same frequencies between spot beams requires that those spot beams are
spaced a certain distance apart. Unfortunately, the DMAs to be given higher
priority for coverage are not conveniently spaced the required distance apart,
and so the ideal frequency re-use cannot be achieved.
35. Numbers of local TV channels to be carried for each DMA: There
are a certain number of TV stations associated with each DMA and all of these
are potential
18
candidates for carriage under SHVIA rules if any one of them is carried.
Therefore it is necessary to serve, within a single beam, an aggregate number of
channels that just fills the allocated number of transponders (e.g., one or two
per beam). This may mean that, although a beam provides coverage of a particular
DMA, there may be insufficient capacity in the allotted number of transponders
to actually provide service to all of the TV channels required by that DMA. In
that case, the DMA cannot be served at all by that beam.
VI. CAPABILITY OF ECHOSTAR AND DIRECTV SATELLITES ALREADY LAUNCHED
OR UNDER CONSTRUCTION
36. In this section I address the claims made by Morgan concerning
the amount of local programming that could be carried with the four spot beam
satellites already launched or under construction by EchoStar and
DIRECTV.(21,22)
37. In the time available since the Petitions were filed with the
FCC it has not been possible to replicate the detailed analysis presented by
Morgan. Although Morgan has endeavoured to describe an objective methodology for
his analysis, he admits that certain of his steps involved him making subjective
determinations. For example, he states that "... the assignment (if capacity was
available) was made in concert with the other demands in
----------------
(21) These spot beams satellites are EchoStar-7, EchoStar-8, DIRECTV D4S and
DIRECTV D7S.
(22) Only Morgan provides an analysis of the number of local TV stations
(and DMAs) that he believes could be carried by the existing spot beam
satellites (including those under construction). Rusch and Gould both
hypothesize only about future new satellite designs when addressing
overall local TV channel capacity.
19
each beam ..."(23), but he doesn't define what those demands are. Elsewhere he
states "... I made educated decisions as to how the beams and frequencies could
be used ..."(24). Therefore, Morgan's results cannot necessarily be replicated
without full knowledge of some of the decisions he was forced to make as he
progressed in his analysis. But more importantly, Morgan's results cannot be
completely accurate as he made certain assumptions that are not consistent with
the actual design of the spot beam satellites. For example, he assumed that
DIRECTV 7S would use six DBS frequencies for local spot beam service whereas in
fact it is designed to use only four DBS frequencies.
38. Despite the inevitable inaccuracies in Morgan's analysis, his
conclusions, in terms of the combined capacity of the DIRECTV 4S and DIRECTV 7S
spot beam satellites, are relatively accurate. However, in the case of the
EchoStar-7 and EchoStar-8 spot beam satellites, his conclusions regarding local
channel capacity are considerably higher than the actual satellites are known to
be capable of, and the reasons for this are not yet clear.
39. In any event, when Morgan proceeds beyond estimating the
capacity of the current satellites, he makes assumptions that are seriously in
error. These relate to the design of his additional satellite, which he assumes
would require only three additional DBS frequencies (see more details of this in
Section VII below). He claims, for example, that the three additional DBS
frequencies on his third satellite for DIRECTV can be used, in conjunction with
----------------
(23) Morgan Declaration, page 9.
(24) Morgan Declaration, page 11.
20
DIRECTV 4S and DIRECTV 7S, to provide full local programming service to a total
of 187 DMAs.
40. It should also be pointed out that Morgan's analysis is based
only on considerations of the available spectrum, and it does not consider in
any way the important economic factors that are relevant to the provision of
local TV service in the different DMAs. This is in fact one of the main drivers
in deciding which DMAs can be served, and is addressed in the Declaration of Dr.
Willig.
VII. POTENTIAL NEW SATELLITE DESIGNS PROPOSED BY PETITIONERS
41. All three Petitioners propose, in one way or another, new
satellite designs that they claim will enable the full complement of DMAs to be
served. Each Petitioner takes a different approach to this problem:
42. Gould: Although Gould does not provide details of a new
satellite design, his argument is essentially that the available spectrum could
be used, with a suitable new satellite design, and other changes to the system,
to serve all 210 DMAs. Because of his lack of specific design detail he is
forced to estimate the capacity of the new satellite by using capacity related
parameters derived from the design of the existing (and under construction) spot
beam satellites. In this regard, he assumes that the average frequency re-use of
the spot
--------------------------------------------------------------------------------
21
beams, for all 210 DMAs, is 7.33.(25) This level of re-use is derived from the
DIRECTV 4S satellite design, which serves only 41 DMAs. This same level of
re-use cannot be maintained if more DMAs are served by adding spot beams
because, as indicated above, the DMAs are not conveniently located or sized to
suit the spot beam re-use pattern. Therefore the average frequency re-use will
become progressively less as more spot beams are added and more DMAs are served.
Without going through a detailed and complex spot beam satellite design exercise
it is impossible to quantify what average frequency-re-use factor could be
achieved.
43. Rusch: Rusch proposes a single dedicated local TV broadcast
satellite that employs 58 spot beams (16 large and 42 small), with 12
transponder frequencies in use and an average of 9.33 times frequency re-use to
achieve a total capacity, using 8PSK modulation, of 1792 TV channels. This
number of channels is presumed to be sufficient to provide the 1475 local TV
channels to the 210 DMAs allowing for the DMA "edge effects". 26 This new
satellite is presumed to replace the existing spot beam satellites already
launched or under construction. Because of the use of two sizes of spot beams on
this new satellite, and the inevitable self-interference between them, an
interference cancellation technique is proposed. To reduce the number of uplink
sites to six the system uses on-board processing. This design is
----------------
(25) In fact, Gould states on page 4 of his Declaration that the frequency
re-use could be as high as 10 or greater. There is no basis for such an
assertion, and the exercise of going through the detailed design of a
spot beam satellite for service to all of the DMAs would demonstrate
that such a high level of average frequency re-use is far from
achievable.
(26) Rusch uses the term "edge effects" to describe the fact that the
available channels do not fit conveniently into transponders to achieve
the required number of channels in the required beam for the DMAs. Rusch
assumes that a factor of 20% is sufficient for these "edge effects", but
there is no basis for this number. In practice the factor may need to be
much greater than 20%, depending on the specifics of the design.
22
not viable for a number of reasons, which are addressed in detail in the
following sub-sections.
44. Morgan: Morgan proposes that each company should build another
spot-beam satellite that complements its existing (and soon to be launched) spot
beam satellites in order to provide local TV service to additional DMAs. In the
case of DIRECTV the total number of DMAs that Morgan asserts could then be
served would be 187, and for EchoStar the number is 160. These new satellites
each use only three additional DBS frequencies, and either 50 beams (EchoStar)
or 46 beams (DIRECTV). They are intended to achieve a high level of frequency
re-use (17:1 for EchoStar and 15:1 for DIRECTV). Again, such as design is not
viable for the reasons noted in the following sub-sections.
VII.1 SPECIFIC TECHNICAL PROBLEMS WITH THE PROPOSED DESIGNS
45. In this section I will explain why the proposed new satellite
designs of Rusch and Morgan are flawed, and the performance levels claimed could
never be achieved in practice. These proposed designs are concepts only - they
have not been through the scrutiny of a real design by companies that
manufacture satellites - and we are confident that if these designs were ever
explored in detail with a view to actual implementation then their predicted
performance levels (or even feasibility) would change dramatically.
VII.1.1 REALIZATION OF THE SPOT BEAMS
46. Rusch proposes spot beams that are significantly smaller than
those used on any of the DIRECTV or EchoStar spot beam satellites. The smaller
the spot beams the larger the
23
antenna reflectors on the satellite, and Rusch states that his design requires a
6 meter reflector. This compares with the antenna reflectors on the existing
(and under construction) DIRECTV and EchoStar spot beam satellites, which have
maximum antenna reflector dimensions as follows:
DIRECTV 4S: 2.8 meters
DIRECTV 7S: 3.5 meters
EchoStar-7: 2.7 meters
EchoStar-8: 2.8 meters
47. Accommodation of the antenna reflectors on the satellite is a
major driver in the overall satellite design. Large reflectors can be very
difficult to accommodate within the physical envelope of the launch vehicle, and
create other stability problems for the satellite's attitude control system.
Although larger antenna reflectors have been used on some commercial satellites
(e.g., ACeS, Thuraya), these satellites have operated at much lower frequencies
where unfurlable mesh antennas can be used. At the Ku-band frequencies used for
DBS by EchoStar and DIRECTV the satellite antenna reflectors must be solid
surfaced reflectors, and so accommodation of reflectors larger than about 3.5
meters requires breaking the reflector into smaller pieces that are then hinged
together. Such an approach is expensive, high-risk, and suffers poor sidelobe
performance. The latter problem is particularly important for a multi-beam
design with spatial frequency re-use, as it increases the self-interference
within the system.
48. Not only is the size of an individual satellite antenna
reflector of critical
24
importance, but the number of such reflectors is equally important. The more
large reflectors there are on the satellite the greater the problems in
configuring them in a manner that orientates them in the right directions
relative to the feed positions, not to mention the additional antenna stowage
and deployment problems. Both the Rusch and Morgan designs are based on an array
of contiguous beams, and such an approach requires multiple reflectors in order
to achieve the sidelobe performance necessary to reduce self-interference (from
co-frequency, spatially separated beams) to an acceptable level. Typically, in
these designs, the geographically adjacent beams will not be generated from the
same antenna reflector, as otherwise the antenna feed performance has to be
compromised and the sidelobe performance suffers. Therefore, a contiguous spot
beam design will require at least three reflectors to generate an array of high
performance beams. In the case of the Rusch design this number could be as high
as six reflectors, because of the use of two different sizes of beams. In this
case three smaller reflectors would be needed to generate the array of larger
beams.
49. In conclusion, the antennas required in the Morgan and Rusch
satellite designs could not be accommodated on a single spacecraft. No
commercial satellites have been flown with such large numbers of large solid
reflectors operating at Ku-band frequencies. The Petitioners do not seem to have
given any consideration to this fundamental failing in their designs.
50. Another problem that is exacerbated by the use of smaller beams,
as is used in the Rusch designs, is the antenna pointing error. All satellite
antennas are subject to pseudo random pointing errors and perturbations. On
large beams the effect of this mispointing is
25
insignificant. However, as the beam size becomes smaller, the relative effect of
the mispointing increases. In the case of a 0.3(degrees) spot beam, as proposed
by Rusch, the typical pointing error could be typically 0.12(degrees), which
means the beams may be pointing anywhere within 0.12(degrees) of the nominal
pointing direction.(27) This has the effect of reducing the guaranteed service
area of the beam to only 0.06(degrees) (i.e., 0.3(degrees) minus 2 x
0.12(degrees)). In other words the useful beam area becomes exceedingly small
and effectively useless for a local programming type of service.(28)
Furthermore, the antenna pointing error will cause increased interference
between spatially separated beams, if they are generated by different antenna
reflectors that are prone to uncorrelated pointing errors. In this case, a
co-frequency beam would appear to be closer to another beam operating at the
same frequency than the nominal pointing directions would indicate, and the
self-interference would be correspondingly increased. Again, neither Rusch nor
Morgan even mention antenna pointing errors in relation to their proposed
designs for new spot beam satellites. In particular, Morgan has ignored these
effects when calculating the DMAs served by his spot beam design.
VII.1.2 SELF-INTERFERENCE
51. Whenever frequency re-use is employed in a satellite there is
the potential for
----------------
(27) This amount of pointing error is typical of open-loop designs. If
sophisticated closed-loop RF sensing is employed, the pointing error
could be reduced to 0.05(degrees), but this performance would be very
difficult, if not impossible, to maintain across the whole array of spot
beams.
(28) For DBS the users are stationary and the satellite beams are assumed to
be stationary. Only in this way can a subscriber's receiver rely on
receiving signals according to a fixed frequency plan. This is very
different from, for example, an MSS (Mobile Satellite Service) system,
such as ACeS, Thuraya, GlobalStar or Iridium, where the users are
assumed to be moving across the boundaries between beams, and the
transmission scheme and frequency plan allows for the subscriber
terminal
26
self-interference. The higher the amount of frequency re-use the greater the
risk of unacceptable levels of self-interference. This is particularly important
if higher order modulation schemes (such as 8PSK or higher) are to be employed
in the system, as these require higher C/(N+I) (carrier to noise+interference
ratio) performance than if conventional QPSK is used.
52. In a spot beam satellite design, where spatial frequency re-use
is employed (as is the case with the EchoStar and DIRECTV spot beam satellites
as well as the Rusch and Morgan designs), great care must be taken to ensure
that the co-frequency beams are sufficiently far apart that they do not
interfere with each other. When the spot beams are a contiguous array, as in the
case of both the Rusch and Morgan designs, a frequency re-use scheme must be
established that avoids co-frequency operation in immediately adjacent beams.
53. Rusch employs a four-frequency group scheme, which means that
the available spectrum is divided (not necessarily equally) into four parts, and
each part is then assigned to one of a set of four contiguous beams. This same
assignment is then continued across the whole array of beams to ensure that the
maximum beam isolation is achieved. This is shown in Figure 2 where a section of
an infinite array of beams operating with a four-frequency group scheme is
shown. (Note the proximity of the nearest co-frequency beam is one complete
beamwidth away and that there are four co-frequency beams that are this same
distance away.) All these beams, as well as those further away, contribute to
the interference experienced in the center beam. To maintain the aggregate
interference to an acceptably low level, the sidelobes of these
--------------------------------------------------------------------------------
to be frequency agile and capable of switching seamlessly between beams.
27
co-frequency beams must be maintained to a very low level in the directions of
the center beam (as well as other co-frequency beams).
FIGURE 2: FOUR-FREQUENCY GROUP RE-USE SCHEME
[GRAPH]
54. Morgan, on the other hand, uses an even more aggressive
approach, presumably to keep the number of channels used by his spot beam
satellite design to only three. In his design, a three-frequency group scheme is
used, as shown in Figure 3. Note that with this scheme the nearest co-frequency
beam is now closer than it was with Rusch's design, and there are now six
co-frequency beams spaced this same distance away. The result of this is that
the self-interference levels are even higher with this three-frequency scheme
than with the four- frequency scheme.
28
FIGURE 3: THREE-FREQUENCY GROUP RE-USE SCHEME
[GRAPH]
55. Experience in the design of spot beam satellites, however, has
shown that the theoretical four-frequency and three-frequency re-use schemes are
impractical in many cases because the aggregate self-interference is
unacceptably high. Instead system designers have resorted to schemes with less
spatial re-use, such as seven-frequency re-use schemes. Such a scheme is shown
in Figure 4. Note that the nearest co-frequency beam is almost two full
beamwidths away and there are still only six such beams in the immediate
vicinity. The self- interference with a scheme like this is much less than with
the three or four-frequency schemes proposed by Morgan and Rusch.
29
FIGURE 4: SEVEN-FREQUENCY GROUP RE-USE SCHEME
[GRAPH]
56. Therefore it is extremely unlikely that the spot beam designs
and frequency re-use schemes proposed by Rusch and Morgan will work in
practice, as they would exhibit extremely high self-interference levels. As
mentioned above, high self-interference is incompatible with the use of high
order modulation schemes (such as 8PSK and higher) as proposed by Rusch, Morgan
and Gould.
57. Finally, the self-interference problem is made much worse when
a mix of spot beam sizes is employed, as proposed by Rusch. In these cases the
small spot beams suffer greater interference from the large spot beams unless
they are given additional geographic separation. The Rusch design does not
provide this additional separation, but rather resorts to a
30
flawed interference cancellation technique that is addressed in the next
section.
VII.1.3 INTERFERENCE CANCELLATION
58. Rusch rightly points out that his mix of large and small spot
beams, in a contiguous spot beam array, will result in unacceptable levels of
self-interference. To overcome this problem Rusch proposes the use of "... an
accepted technique known as "signal nulling" or "signal cancellation." This
technique involves deliberate (directional) coupling of a small part of the
signal from the interference beam into a beam location where the interference
would otherwise occur. Since the same signal appears in two beams, a user on
Earth receives the same signal from two sources."(29) Unfortunately, this scheme
will simply not work.
59. The interference cancellation technique proposed by Rusch is not
an "accepted technique" in any sense, at least in the commercial satellite
world. It has never been employed in direct broadcast TV satellites. It may have
limited applications in very specialized government satellite systems, but it
cannot produce interference-free operation across the service area of the beam.
At best it will cancel the interference over a relatively small swath of the
beam, but it will in fact increase the interference in other parts of the beam.
VII.1.4 FREQUENCY RE-USE FACTOR
60. A high frequency re-use factor in a spot beam satellite is the
key to maximizing
31
the capacity with the minimum usage of spectrum. EchoStar-7 re-uses the same
frequencies five times in its spot beam design. DIRECTV 4S re-uses the
frequencies an average of 7.33 times across its beams. Both Rusch and Morgan
push this parameter to impractical levels, taking into account the DMA service
areas and necessary spot beam characteristics. Rusch proposes a re-use factor of
9.33 and Morgan proposes a re-use factor of 15 times for his DIRECTV design and
17 times for his EchoStar design. In reality, the ability to achieve a high
frequency re-use factor is constrained by practical limitations on the design
and layout of the spot beams and how this relates to acceptable levels of
self-interference, and this is addressed in more detail in Sections V.5 and
VII.1.2.
61. Neither of these Petitioners shows the necessary justification
to support such high frequency re-use factors. To adequately do this they would
have to demonstrate that the levels of self-interference are at an acceptably
low level, taking account of realistic antenna sidelobe performance and antenna
pointing errors, as well as the actual antenna configurations that they propose
(single or multiple reflectors, reflector mountings, etc). Without this their
claims of frequency re-use are baseless.
VII.1.5 ON-BOARD PROCESSOR
62. Rusch proposes the use of an on-board processor with at least 71
active 16-QAM on-board demodulators, each operating at approximately 100
MBits/sec. This would be
--------------------------------------------------------------------------------
(29) Rusch Declaration, Exhibit C, page 16, para. 27.
32
the first direct broadcast satellite to employ such a device, and would be a
huge technological step for this type of application.
63. Although on board processing is technically feasible, the
inclusion of an on-board processor of the type described by Rusch would
negatively impact a satellite project in the following ways:
- High development, manufacturing and testing costs, probably in
excess of $50 to $100 million, and possibly much more;
- Long program schedule, adding at least two years to the normal
satellite schedule, and possibly more;
- Large demands on the spacecraft platform (or "bus"). The
on-board processor would be large, heavy, consume significant
electrical power and dissipate large quantities of heat. All of
these factors will place additional demands on the spacecraft
platform, and lead to a very large and expensive satellite;
- High risk. Such a crucial item of equipment could result in a
catastrophic failure of the satellite if it should fail. Such a
risk is significant and likely to be unacceptable to a DBS
operator.
64. Rusch's claims that "Implementation of a full local-into-local
service would require two or three years for design, construction and launch of
appropriate new satellites"(30) is therefore completely incompatible with his
proposal to include the on-board processor that he describes.
----------------
(30) Rusch Declaration, page 8, para. 23.
33
VII.1.6 PAYLOAD CAPABILITY OF CURRENTLY AVAILABLE SPACECRAFT PLATFORMS
65. Rusch implies that his "1475" design can be accommodated on a
readily available spacecraft platform, but no evidence is presented to support
this point. Based on my initial calculations, using the limited amount of
information available concerning Rusch's design, it far exceeds the payload
capability of current platforms, and therefore would require the development of
a large new spacecraft.
66. Morgan does not present any evidence to demonstrate that his
design will fit onto any available spacecraft.
VII.2 UNACCEPTABLE TECHNICAL RISK
67. The satellite design proposed by Rusch is too complex and
requires significant advances in the state of the art for operators such as
EchoStar and DIRECTV to consider using. Its novel on-board processor and
interference cancellation techniques are fraught with potential problems,
including high costs, long program schedules, and the risk that they will not
work. The spot beam design has not been shown by Rusch to be viable in terms of
self- interference, or the ability to actually serve the territories of the DMAs
with the TV channel capacities required.
68. The additional technical risk introduced by Rusch's design also
would severely impact the insurability of the satellite, or result in insurance
costs that are commercially unacceptable.
34
VII.3 DELAYED SCHEDULE FOR IMPLEMENTATION
69. As mentioned in Section VII.1.5 above, Rusch's claims that "
Implementation of a full local-into-local service would require two or three
years for design, construction and launch of appropriate new satellites " is not
consistent with the satellite design that he suggests. If the satellite he
suggests were to be designed and built, it would likely be between four and five
years, if not more, before service could begin once a decision to proceed was
made. This assumes that ways could be found to overcome the technical problems
in his design that are addressed in Section VII.1 above.
70. Such an extended schedule is incompatible with the objectives of
EchoStar and DIRECTV, which is to provide high quality programming and a range
of TV broadcast services to the public in a timely manner.
VII.4 UNACCEPTABLE COSTS
71. Rusch's claims that "The new satellites would cost approximately
$250 million each (satellite, launch vehicle and insurance). In addition, there
would be the need for four-to six additional uplink Earth stations that should
cost approximately $30 million in total capital costs".(31) This estimate is
much too low for the system design he proposes. In particular:
----------------
(31) Rusch Declaration, page 8, para. 23.
35
- A satellite with on-board processing, and the antenna
configuration required for his proposed spot beam design, would
likely cost in excess of $400 million; and
- The additional uplink earth stations, and associated ground
equipment for the off-air reception and backhaul of the local TV
channels, would likely cost in excess of $100 million, taking
into account the transition to 8PSK and the higher levels of
compression.
72. Furthermore, it should be noted that both EchoStar and DIRECTV
have already committed to building and launching their spot beam satellites, and
these costs cannot be recouped. These entire investments would be wasted if the
companies were to attempt to build the proposed Rusch satellite design. Rusch
suggests that the existing EchoStar and DIRECTV spot beam satellites that have
not yet been launched could be modified to achieve the capability of his
proposed new satellite, and states that "We would estimate that these
modifications would require no more than 18 months and cost $10-$20 million".
(32) Although difficult to quantify at this stage, bearing in mind the advanced
stage of construction and testing of EchoStar-8, Rusch's number is a gross
underestimate, and the likely cost, if it were even feasible, would be in excess
of several hundreds of millions of dollars per satellite. The schedule impact
would also likely be well in excess of 2 years.
----------------
(32) Rusch Declaration, page 8, para. 24.
36
APPENDIX 1
RESUME FOR DR. RICHARD J. BARNETT
Dr. Barnett graduated from Southampton University (UK) in 1973 with a B.Sc.
(Hons) degree in Electronic Engineering, and from the same university in 1977
with a Ph.D. degree based on research into computer modeling of microwave
devices.
He then worked in the research and development laboratories of the Plessey
Company and the Independent Broadcasting Authority in the UK before moving to
France in 1981. There he was employed by Thomson-CSF in Paris as the payload
systems engineer on the Scandinavian Tele-X satellite before joining EUTELSAT
where, as operations engineer, he was responsible for the operational planning
of the EUTELSAT satellites for all TV applications.
In 1982 he returned to the UK and joined British Aerospace where he held a
variety of engineering management positions during the period 1982 to 1990, all
involved with the communications engineering and associated regulatory aspects
for future commercial satellite communications projects. Dr. Barnett came to the
USA in 1990 as the Vice President of Engineering for Asia Pacific Space &
Communications (a company affiliated to Orion Satellite Corporation).
Since 1991 Dr. Barnett has been President of Telecomm Strategies LLC - an
international satellite communications consultancy company specializing in the
technical design and technical regulatory aspects of satellite projects
including national licensing and international (ITU) frequency registration and
coordination of satellite systems. In the domestic US arena he has chaired
several US industry working groups that have developed consensus positions
relating to Ka-band GSO/FSS, including the 1st round Ka-band orbital assignment
plan, Ka-band blanket licensing rules and the preparation of US ITU filings for
Ka-band and V-band satellite networks. In the ITU forum he is a participant in
the groups related to satellite communications, particularly Working Party 6S
and Working Party 4A, as well as the World Radio Conferences. He regularly
participates in international frequency coordination meetings on behalf of
various satellite operators, involving systems at S, C, X, Ku and Ka-bands.
A1-1
CERTIFICATION OF PERSON RESPONSIBLE
FOR PREPARING ENGINEERING INFORMATION
I hereby declare under penalty of perjury that I am the technically
qualified person responsible for preparation of the engineering information
contained in the foregoing submission, that I am familiar with Part 25 of the
Commission's rules, that I have either prepared or reviewed the engineering
information submitted in this pleading, and that it is true and correct to the
best of my knowledge and belief.
/s/
--------------------------------
Richard J. Barnett, PhD, BSc
Telecomm Strategies, L.L.C.
6404 Highland Drive
Chevy Chase, Maryland 20815
(301) 656-8969
Dated: February 25, 2002
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
-------------------------------------------
Application of
ECHOSTAR COMMUNICATIONS CORPORATION,
GENERAL MOTORS CORPORATION,
HUGHES ELECTRONICS CORPORATION
Transferors, CS DOCKET NO. 01-348
and
ECHOSTAR COMMUNICATIONS CORPORATION
Transferee,
For Authority to Transfer Control
-------------------------------------------
DECLARATION OF MR. ARNOLD FRIEDMAN
ON BEHALF OF
ECHOSTAR COMMUNICATIONS CORPORATION, GENERAL MOTORS
CORPORATION, AND HUGHES ELECTRONICS CORPORATION
I. QUALIFICATIONS
1. My name is Arnold Friedman. I have been involved in the
telecommunications industry for over 20 years and am intimately familiar with
the design and operation of satellite systems that operate in the Fixed
Satellite Service (FSS) and the Direct Broadcast Service (DBS), as well as the
use of satellite capacity to provide broadband service to businesses and
residences. I hold a Bachelor of Science in Engineering from the University of
Pittsburgh (1978).
2. For sixteen years, I was employed by Lockheed Martin
Corporation, where I served as a Special Director, Telecommunications, and as a
Chief Systems Engineer. In those capacities, I successfully directed complex
projects for the development of satellite technology. I also led a team that
created the Astrolink Ka band broadband satellite project. Among other things, I
developed the initial architecture of the Astrolink system and determined its
spectrum requirements.
3. For four years, I served as Vice President, Ventures, at Space
Systems/Loral. In that capacity, I was responsible for directing the analysis of
potential telecommunications investments and new services in the United States
and around the world. I also was responsible for over $1 Billion in sales to
telecommunications service and broadcast companies, and was instrumental in
system architecture design, pricing and financing strategies.
4. More recently, I was a founder, and served as the President, of
ProntoCast Services, LLC, which was formed to provide new consumer
telecommunications services via satellite, including content delivery to homes
and Internet devices. Currently, I am advising a number of companies on the
deployment of broadband services to businesses
2
and consumers and on the design of their system architectures.
II. PURPOSE OF STATEMENT
5. I have been asked by EchoStar Communications Corporation,
General Motors Corporation, and Hughes Electronics Corporation to reply to
certain comments submitted to the Federal Communications Commission (FCC) in
opposition to the proposed merger between EchoStar and Hughes Electronics
Corporation. Among other things, I respond to the declaration submitted by
Walter L. Morgan and the affidavit submitted by Roger J. Rusch.(1)
III. THE BROADBAND SATELLITE MARKET
6. There are two U.S. companies that provide two-way
satellite-based broadband services to residential consumers today through
Ku-band spacecraft: Starband Communications Inc., which offers its Starband
service, and Hughes Network Systems, Inc. (HNS), which offers its DIRECWAY(TM)
service (formerly also known as DirecPC). Each company offers its consumer
service through a network of distributors.
7. DIRECWAY(TM) and Starband have achieved a much lower broadband
service residential subscriber base than cable operators or DSL operators have
been able to achieve. As of January 2002, DIRECWAY(TM) had obtained only about
100,000 residential and small business subscribers, while Starband had obtained
only about
----------
(1) Declaration of Walter L. Morgan, Exhibit O to Petition to Deny of the
National Rural Telecommunications Cooperative, CS Docket No. 01-348 (Feb. 4,
2002) ("Morgan Decl."); Affidavit and Report of Roger J. Rusch, Attachment B to
Petition to Deny of Pegasus Communications, CS Docket No. 01-348 (Feb. 4,
2002).
3
40,000 subscribers.(2) In contrast, at the beginning of this year, there were
reported to be 11 million cable modem and DSL subscribers.(3)
8. The growth of residential subscribers to satellite broadband
services has been limited by the high total cost of the satellite broadband
service---the cost of equipment, the cost of installation, and the cost of
monthly service. The experience of DSL and cable modem providers is
similar---many residential users simply will not subscribe to a high-cost
broadband solution. They will stay with dial-up Internet service instead.
9. The total cost to residential users today for satellite
broadband services is higher than the total cost to residential users for cable
modem or DSL service. DIRECWAY(TM) service now can be obtained through its
distributors for a monthly service charge of $59.99, and $898.00 for equipment
and installation (less a $300 rebate currently being offered with a one year
service commitment).(4) Starband can be obtained for a monthly service charge of
$69.99 (plus a $5 per month access fee), and $748.00 for equipment and
installation.(5) In contrast, representative costs to consumers today for
----------
(2) Starband Wraps Up 2001 as American's Leading Consumer Satellite Internet
Provider, Press Release, Jan. 7, 2002
.
(3) Morgan Stanley, "BYOB: Cable Brings Its Own Backbone to the Party, January
3, 2002. As of June 30, 2001, the FCC reported that residential and small
business high-speed Internet access via cable, DSL and other wireline
technologies (including ADSL) totaled 7.6 million lines. Federal Communications
Commission, In the Matter of the Deployment of Advanced Telecommunications
Capability, CC Docket 98-146, Third Report (released February 6, 2002) at
Appendix C, Table 3.
(4) See http://dtv.direcway.com/home/order/order_now.html.
(5) See http://www.starband.com/wheretobuy/dishsplash.htm.
4
cable modem service is approximately $30-60 for monthly service(6) with
equipment and installation charges of approximately $69-199,(7) and
representative costs to consumers today for DSL service is about $50.00 per
month for monthly service, and no equipment or installation charge.(8)
10. Two-way satellite broadband services today must be
professionally installed for two main reasons: (i) in order to ensure that the
transmitting antenna is pointed accurately, and (ii) in order to comply with
conditions that the Federal Commissions Commission has imposed in the earth
station licenses that HNS and Starband use to provide service to consumers. The
typical charge for professionally installing a residential Ku band antenna is
$199.(9)
11. In contrast, cable modem and DSL service are moving toward a
business model that allows consumers to self-install and therefore obtain
broadband service at a
----------
(6) Comcast offers a $ 40-55 per month price range for cable modem service. See
www.comcast.com. Cox Communications-Northern Virginia offers a high-speed
Internet access service for $30-40 per month. See www.coxcable.com/Fairfax/
RoadRunner/rates.asp. Time Warner Cable advertises high-speed Internet access in
Bergen County, New Jersey for $45-60 monthly including the cost of modem rental.
See www.timewarnercablenj.com/road_runner/faq.html#gq13.
(7) See, e.g., www.comcast.com; www.coxcable.com/Fairfax/ RoadRunner/rates.asp;
www.timewarnercablenj.com/road_runner/faq.html#gq13.
(8) See, e.g., Verizon, DSL Prices and Packages,
www.verizon.net.pands/dsl/packages.
(9) See Starband, www.starband.com/whertobuy/dishsplash.htm;
Valueelectronics.com, DIRECWAY offered through DIRECTV,
www.vaueelectronics.com/pcsys.htm.
5
lower cost. For 2001, JPMorgan estimated that 70% of DSL subscribers
self-installed, and 25% of cable modem subscribers self-installed.(10)
12. The high cost of Ku band satellite service is driven in part by
the current configurations of Ku band spacecraft and the high cost of Ku band
transponder capacity. Starband and HNS acquire the satellite capacity over which
they provide broadband service by leasing transponders from Ku band satellite
operators. The Ku band spacecraft that serve the U.S. are configured with
individual transponders, each of which uses a discrete amount of spectrum,
typically 24 or 36 MHz in each direction (uplink and downlink). Each transponder
is associated with a national antenna beam pattern, many of which are designed
to provide service to the 48 contiguous United States, and can also cover
Alaska, Hawaii, Puerto Rico and the U.S. Virgin Islands. Ku band transponders
have been designed in this manner primarily to facilitate the distribution of
video, audio and data across the entire United States using antennas that range
from 10 meters to 1.2 meters in diameters. Each kilobit of service used by a
satellite broadband customer consumes a corresponding portion of frequencies on
the transponder (typically 1.15 bits/Hertz), and therefore (in the case of a
CONUS beam) prevents those same uplink and downlink frequencies from being
simultaneously reused on the spacecraft anywhere else in CONUS. Thus, there are
limits on the number of broadband users that can simultaneously receive
broadband service on the same transponder. Moreover, there are FCC imposed power
limits that are designed to avoid interference with networks
----------
(10) JPMorgan Securities, Inc. Industry Analysis, Broadband 2002, A
Comprehensive Analysis of Demand, Supply, Economics, and Industry Dynamics in
the U.S. Broadband Market, April 2, 2002, at 69 ("JPMorgan").
6
operating on adjacent satellites at lower power, which also limit the use of
small Ku band antennas.
13. In order to achieve certain operating and economic efficiencies,
HNS and Starband each has sought to obtain groups of transponders on the same
satellite, and to obtain transponders on spacecraft within a certain part of the
orbital arc. This allows them to increase the amount of transponder capacity
that possibly could be used by any subscriber whose antenna is pointed toward a
given satellite (or satellites within a certain range), and to obtain economic
and operational efficiencies with the minimum number of expensive hub earth
stations that are required to provide service.
14. For more than 20 years, the Ku band FSS satellite spectrum has
been used for many commercial purposes other than DIRECWAY(TM) and Starband
broadband service. Satellite operators have already committed many Ku band
transponders for such other uses, and DIRECWAY(TM) and Starband must compete
with many other companies who need access to Ku band capacity. As a result, Ku
band capacity is expensive, and often is difficult to obtain on the spacecraft
where HNS and Starband have already located existing broadband subscribers. In
today's market, the cost to lease a single 36 MHz transponder is approximately
$2,000,000 per year. The cost of acquiring space segment capacity from third
parties is a large component of the total monthly service charge for satellite
broadband service. Thus, the cost of acquiring space segment capacity increases
the cost to provide DIRECWAY(TM) and Starband service, relative to the cost to
provide DSL and cable modem service.
15. In 1995, fifteen companies, including Hughes and EchoStar,
applied for the first generation of FSS Ka band satellite systems to serve the
United States. Many
7
proponents of those systems believed that they could deliver by satellite a very
high speed broadband service that had never been offered before, and anticipated
being able to deliver that service on a ubiquitous basis throughout the United
States to business and residences alike. Unlike today's Ku band satellites that
are used for a wide range of purposes, and have not been optimized for broadband
service, many of these Ka band systems were designed from the outset to be
dedicated almost exclusively for the provision of state-of-the-art broadband
service. Among other things, the use of many small spot beams facilitates the
provision of point-to-point service by many different users with a high rate of
efficient frequency re-use.
16. The new Ka band systems, however, require the use of new and
commercially unproven technology, the development of brand new satellite network
architectures, and the infusion of billions of dollars of investment. In light
of these risks, and problems raising financing, many companies have terminated,
scaled back or refocused their programs. For example, the Teledesic system has
been scaled back from a system with 840 Low Earth Orbit (LEO) spacecraft to 288
LEO satellites, and just last month to one with only 30 Middle Earth Orbit (MEO)
spacecraft. Astrolink recently reported that it has terminated its construction
contract with Lockheed Martin after having completed construction of 90% of its
first spacecraft, having spent $710 million on its satellite broadband program,
and finding itself unable to finance the remaining cost of implementing the
Astrolink broadband system. The recent burst of the Internet bubble and the
general retraction of the capital markets has exacerbated the problems already
facing these ambitious satellite broadband proposals.
8
17. In light of the continuing challenges in the financial markets,
and the demands of investors, HNS has informed me that it has focused its
SPACEWAY Ka band broadband initiative on commercial customers. Targeting
established customer bases, and marketing primarily to commercial users of
satellite capacity who historically are not as price-sensitive as residential
consumers, provides a higher level of certainty that HNS can recover the large
capital costs of its SPACEWAY system. In light of similar challenges, EchoStar's
current Ka band program is limited to a small number of spot beams on its
Ka-band spacecraft.
18. Nevertheless, in order to offer residential subscribers a
competitive alternative to terrestrial offerings such as DSL and cable modem
service, and in order to be attractive to residential consumers in general,
satellite-based broadband services need to reduce the total cost to the consumer
of obtaining service. There are two main ways to bring the cost to the consumer
down to the cost of cable modem or DSL service: reducing equipment and
installation charges, and reducing monthly service charges.
19. One means of reducing the equipment and installation costs for
residential subscribers is for the satellite broadband provider to subsidize the
cost of the equipment and installation. This already occurs to some extent
today. However, doing so requires significant cash outlays by the satellite
broadband provider. These are outlays that the satellite provider, for the most
part, does not need to make in order to obtain a commercial subscriber. And they
are outlays that the investment community may be reluctant to fund because of
high expected subscriber "churn." It is a very risky proposition for satellite
broadband providers to subsidize consumer acquisition costs on a large scale,
considering that cable modem and DSL service providers are starting to lock
9
in their market share (satellite has about 1/10 of 1% of all broadband users),
the subscriber acquisition costs for DSL and cable modem subscribers are
continuing to fall,(11) cable modem and DSL service providers increasingly are
able to rely on customers to perform self-installations,(12) and the cost of
monthly service has to be competitive with cable modem and DSL service in order
to be attractive to residential consumers. This level of investment makes sense
only if the cost of the subsidy is sustainable by the expected revenue stream
from the residential subscriber, taking into account the expected rate of
subscriber "churn."
20. The proposed merger provides another way to reduce equipment
costs for the residential subscriber. Namely, the merger would allow EchoStar
and Hughes to develop a single equipment standard and achieve economies of scale
through the higher rate of production of a common product. As in the cable
modem, DBS and cellular phone business model, this "economy of scale" savings
could be passed onto consumers in the form of reduced upfront costs. By way of
example, cable modem pricing was $300 at 500,000 units, and it dropped to $100
at 8.2 million units.
21. The merger also could reduce the monthly costs of service for
residential satellite broadband subscribers. In addition to the cost of space
segment, monthly service charges include a portion of the provider's subscriber
acquisition costs-the cost of marketing and sales to new subscribers. New
Echostar will be able to market and sell satellite-based broadband services to a
much larger residential customer base than either
----------
(11) JP Morgan projects that cost to acquire DSL customers will fall 37% by 2005
to $500 per subscriber. Similarly, for cable modem service, the acquisition cost
per subscriber is expected to drop 10% in that same time period, to $420 per
subscriber. JPMorgan at 70 (Charts 43, 44).
(12) Id.
10
Hughes or EchoStar has today. The combined base of satellite video
subscribers is in excess of 16 million. Current satellite video subscribers
are more likely to subscribe to satellite broadband services than other
households because they have already demonstrated the ability and willingness
to place the necessary equipment on their houses. Moreover, they already have
a clear line-of-sight to the geostationary orbital arc. Furthermore, the
ability to bundle and sell a combined video and broadband service should
provide the opportunity to attract entirely new customers.
22. The monthly service charge also contains elements of the cost
of operating network control centers, call centers, customer service, and
billing/collection. The merger would allow the combined company to
consolidate the functions and facilities of what otherwise would be separate
network operations, call centers, customer service, and billing/collection
functions, and thereby achieve significant savings in operational expenses,
and potentially in up-front capital expenditures as well. Moreover, the
combined company might be able to eliminate redundant back-up satellite
capabilities that ensure service continuity in the case of satellite or other
network failures.
IV. RESPONSE TO MR. WALTER MORGAN
23. Although the new Ka-band spot beam satellites offer
substantially more capacity than the leased Ku-band transponders that HNS and
Starband use today, neither company acting alone would be able to serve the
numbers of subscribers posited by Mr. Walter Morgan in his Declaration in
support of NRTC's Petition to Deny.
24. Among other errors, Mr. Morgan incorrectly assumes that
SPACEWAY has a full 1000 MHz of uplink and downlink capacity available to it
in each orbital slot.(13)
-------------------------------
(13) See Morgan Decl. at 36.
11
In fact, 280 MHz of this spectrum is unavailable for provision of ubiquitous
broadband services because it must be shared with fixed terrestrial users, and
cannot be blanket licensed the way that today's Ku band VSATs are licensed.
This problem, in conjunction with the fact that the SPACEWAY design and system
architecture is built around 500 MHz downlink carriers, effectively leaves
SPACEWAY with only 500 MHz of usable spectrum in each direction at each of its
licensed orbital locations.
25. Similarly, Mr. Morgan wrongly assumes that EchoStar has 1000
MHz available to it in each of its two orbital slots.(14) The FCC has licensed
EchoStar only 500 MHz of Ka band spectrum in each direction at 83(Degrees) and
121(Degrees) W.L. As for EchoStar's 113(Degrees) W.L. orbital location, the same
problems that SPACEWAY has with terrestrial use of 280 MHz of spectrum, and the
unavailability of blanket licensing in that band, limit the bandwidth available
for ubiquitous consumer services.
26. Mr. Morgan makes another fundamental mistake by grossly
overstating the number of subscribers that could be served in the Ka band
spectrum that is available. Mr. Morgan wrongly relies on dial-up subscriber
usage statistics.(15) These figures simply do not apply to broadband users,
who spend substantially more time online, and are much more likely to watch
movie trailers, watch streaming video, listen to streaming audio and download
software on demand.(16) Thus, Mr. Morgan's assumption of an
------------------------------------------------------------------------------
(14) Id.
(15) See id.at 38.
(16) See @Home Study: Broadband Users Surf More, SkyREPORT.com Daily E-News,
Oct. 6, 2000. According to the study, broadband consumers spend 55
percent more time on line, compared to narrowband users. They are also
more likely to watch movie trailers (46 percent broadband vs. 18 percent
dial-up); watch streaming video (58 percent broadband vs. 31 percent
dial-up); listen to streaming audio (52 percent broadband vs. 31
12
"average busy hour demand" of 2.75 kbps per subscriber" is flawed. As a
result of these errors and others, Mr. Morgan substantially overstates the
number of broadband subscribers that each company could serve.
V. RESPONSE TO MSSRS. RUSCH AND MORGAN ON LOCAL CHANNEL ISSUES
27. Finally, based upon my experience working on a variety of
satellite projects at Lockheed Martin and Loral, I have reviewed the satellite
design proposals of Mssrs. Rusch and Morgan that purport to identify
satellites that could be feasibly deployed by either DIRECTV or EchoStar as a
means of offering local channel service to every Designated Market Area in the
United States. I have also reviewed the Declaration of Dr. Richard Barnett,
also submitted today by the Applicants in support of the merger. I agree with
Dr. Barnett's assessment that these proposals are "mere concepts and rigorous
analysis of their performance is distinctly lacking," and that these proposals
present very challenging technical, cost and other business issues. In my
opinion, a reasonably prudent DBS operator would not assume the risk of
building such a satellite in light of those problems.
------------------------------------------------------------------------------
percent dial-up); and get software on demand (48 percent broadband vs. 30
percent dial- up).
13
I declare, under penalty of perjury, that the foregoing is true and
correct to the best of my knowledge, information and belief.
/s/
------------------------
Arnold Friedman
February 26, 2002
14
[The news clippings set forth below were posted on the Hughes Internet World
Wide Website in the form below and contains formatting irregularities.]
Cable Rate Hike Clips
#1
Austin American Statesman November 28. 2001,
Wednesdav Time Warner is upping cable rates Amv Schatz.
American-Statesman Staff
The Associated Press State & Local Wire - Reno, NV November 26. 2001, Monday,
BC cycle
Cable television rates to jump in northern Nevada
#3
Westchester Telegram - GAZETTE
November 26. 2001 Monday, RT. 9 EAST EDITION
Cable rate hearing slated; AT&T Broadband plans 8.5 percent increase
#4
The Associated Press State & Local Wire - Boston November 22. 2001, Thursday,
BC cycle
AT&T Broadband to raise cable rates 8.5 percent
#5
The Boston Globe
November 22, 2001, Thursday,THIRD EDITION
AT&T BROADBAND WILL HIKE CABLE RATES 8.7% INCREASE IS SECOND SINCE SUMMER; FIRM
CITES HIGHER SERVICE COSTS
#6
The Times Union (Albany, NY)
November 22, 2001 Thursday THREE STAR EDITION
Higher cable TV bills coming; Time Warner hiking cost for most popular "Basic
with Standard" option
#7
The Associated Press State & Local Wire - Newark, NJ November 21, 2001,
Wednesday, BC cycle
Cablevision raising NJ rates 4.7 percent
NEWARK, N.J.
#8
The Commercial Appeal (Memphis, TN) November 21. 2001 Wednesday Final Edition
TIME WARNER RAISING CABLE RATES FOR 6TH YEAR IN A ROW; BASIC SERVICE 25 CENTS
MORE, SMARTLINK UP $3.07 A MONTH
#9
The Boston Herald - EDITORIAL November 18. 2001 Sunday ALL EDITIONS OP-ED:
DOWNTOWN JOURNAL; Boston subscribers at the mercy of cable rate
hikes
#10
St. Petersburs Times November 12. 2001. Monday Correction Appended
Cable rate jump not bad for everyone
#11
Wyoming Tribune-Eagle November 9, 2001 Fridav AT&T BROADBAND SETS RATE HIKE TO
KICK IN JAN. I
#12
Cable World November 5, 2001 Cable rates rise amid slow economy; Operations.
#13
Daily Varietv November 5, 2001 CABLE RATES ON RISE
#14
The Hollywood Reporter November 05, 2001
AT&T Broadband plans rate increase for Jan. 1 BYLINE: Georg Szalai
#15
The Pueblo Chieftain November 5, 2001, Monday AT&T Plans Cable Rate Hike in
Pueblo, COLO.
#16
Atlanta Journal and Constitution November 3, 2001, Saturday AT&T Broadband to
Raise Cable TV Fees for Metro Atlantans BYLINE: By Kathy Brister
#17
The Columbian (Vancouver, WA.) November 3, 2001, Saturday
CABLE TV RATES TO INCREASE 9 PERCENT
#18
The Miami Herald
November 3, 2001 Saturday FINAL EDITION AT&T TO RAISE CABLE RATES
BYLINE: From Herald Staff, wire reports and Bloomberg News
#19
Saint Paul Pioneer Press
November 3. 2001 Saturdav CITY EDITION
CABLE RATES GOING UP AT&T SAYS COSTS ARE BEHIND 5.5% INCREASE
#20
The Seattle Times
November 3. 2001. Saturday Fourth Edition AT&T to raise cable-TV fees 5.5
percent BYLINE: Bloomberg News
#21
The Bradenton Herald November 2. 2001, Friday Time Warner to Increase Cable
Rates BYLINE: By Steve Hollister
#2,
Sarasota Herald-Tribune
November 2. 2001 Friday Manatee Edition Cable rates going up 5 percent in 2002.
Time Warner's Manatee rates are already slightly higher than Comcast's in;
Sarasota and Charlotte.
#23
The Oregonian
November 3, 2001 Saturday SUNRISE EDITION AT&T'S CABLE RATES GOING UP SOURCE:
JEFFREY KOSSEFF - The Oregonian
#24
The San Francisco Chronicle
NOVEMBER 3.2001, SATURDAY, FINAL EDITION AT&T hikes cable rates; Increase is
about $1.50 a month
#25
The Record
November 2. 2001, Friday
Stockton. Calif-Area Cable Rates to Increase 5.5 Percent, AT&T Broadband Says
#26
The Orange County Register October 24. 2001, Wednesday O.C. cable TV rates
heading up again // Media The cost of expanded basic service is already higher
than the national average.
#27
St. Louis Post-Dispatch
September 26. 2001 Wednesday Five Star Lift Edition
CHARTER PLANS TO RAISE CABLE RATES BY END OF YEAR;
COMPANY UPGRADES NEW SERVICES, HIRES DAN AYKROYD FOR ADS
#28
The Philadelphia Inquirer
SEPTEMBER 9, 2001 Sunday CITY-D EDITION Satellite TV puts cable on notice,
Dishes shrink. subscriber rolls swell as onetime gimmick gets serious.
#29 CABLEFAX September 7. 2001 Snipe Hunt: Competition Commenters Trade Shots
#30
TIME WARNER RAISES CABLE RATES AGAIN
Digital cable subscribers to get I 1 new channels Saturday, December 1, 2001
By William LaRue
#I
Austin American Statesman November 28. 200,1. Wednesdav Time Warner is upping
cable rates Amy Schatz. American-Statesman Staff
When Time Warner Cable increased its rates in August as part of a major
realignment of its standard and digital cable service, many customers hoped that
Would be the last increase for a while. Now the cable giant plans to raise rates
for customers with digital and standard service by almost $2 a month starting
Jan. 1. The cost of a converter box -- required for digital service -- also will
rise by almost a dollar to $ 5.95 a month.
That means an Austin customer who has switched to digital cable will be
writing a check to Time Warner for about $60 a month next year, after taxes and
fees have been added.
"We have tried to keep cost increases to a minimum. The increase that we're
having is something that we have had to pass on to the customer because of our
programming costs," said Lidia Agraz, a Time Warner spokeswoman.
Time Warner has about 310.000 customers in Central Texas. The company this
year twice raised rates for some of its services, most notably its standard
service, which includes broadcast networks and channels such as Home & Garden
TV, ESPN and MTV. At the beginning of the year, standard cable subscribers paid
$37.74 a month. In August, they began paying almost $2 more a month. In January,
they'll begin paying $41.67. That's an increase of more than 10 percent in one
year.
Time Warner also announced it WILL add five channels for digital service
subscribers on Dec. 11: the Do It Yourself Network, the National Geographic
Channel and three Fox Sports regional channels.
The cost of basic cable, which includes broadcast and community-access
channels. will remain $8.58. That rate is set by the city, which has an
agreement with Time Warner that allows the cable giant to offer services
locally.
The cost of reconnecting cable service or changing service WILL rise almost 80
percent in January, from $17.21 to $30.57.
"Our prices reflect the costs of programming and doing business," said Agraz,
who noted those rates had not changed in several years. "The programming and
technology we offered in 1999 compared to now has improved tremendously. It's
not like its the same product and you've just raised the price over and over."
Although Time Warner raises its rates every year, it also has added channels.
In 1999. the company's standard cable package offered 64 channels for about $37
a month. which included the converter box. Next year's standard cable package
has 72 channels at a cost of 5-11.67.
In August. Time Warner lowered the rate for digital cable, partly as an
incentive to persuade customers to switch to its newly expanded service. But six
months later. the price has Bone back up to 5=16.67 a month. plus the $3.95 a
month converter box fee
"Nobody likes rate increases. If you see value in what you're buying, you're
willing to pay for that." Agraz said.
A growing number of consumers are choosing to go with digital satellite
service.
Nationally, the increase in customers of digital satellite systems has grown
from 5 million households in 1997 to more than 13 million last year, according
to a Federal Communications Commis- sion study released earlier this year.
Digital satellite subscriptions are increasing at a rate of about 30 percent a
year, the FCC study found, and new cable subscriptions are increasing by less
than 2 percent annually.
Rate increases often prompt many cable customers to consider their options,
satellite system providers said. "In the past. any time Time Warner has raised
their rates, it's helped our business." said Jason Penile, general manager of
Cellnet Wireless and Satellite. which operates four Austin-area stores that sell
wireless phones and satellite service.
"Every time they raise their rates, we see an influx of people who are just
disgusted with cable and call us," said Steve Dunlap, a dealer who's been
installing digital satellite dishes on Central Texas homes for seven years.
"Cable is not a bad idea if you have a lot of TVs in the house. If you only
have one or two. then satellite is a better fit," he said.
Even so, digital satellite service is often not much cheaper than cable,
Dunlap acknowledges. Although consumers pay less in taxes and fees, they
normally must sign yearly contracts and purchase receivers.
Although Time Warner is the only cable company to serve all of Austin, Grande
Communications Inc. is building its own cable network in Austin and San Antonio
and began offering services in limited areas in Austin in May. The company plans
to eventually have the ability to offer service throughout the area.
Information was not available about any rate increases by two other cable
companies that offer services in Central Texas: Heartland Cable Television and
Cox Cable, a unit of Cox Communications Inc., a division of Atlanta-based Cox
Enterprises. the parent company of the Austin American-Statesman.
You may contact Amy Schatz at aschatz!_a)statesman.com or (512) 912-5932.
American-Statesman staff reporter Claudia Grisales contributed to this report.
Time Warner's rate increases Digital cable
1999 $43.95
2000 S46.69
2001 $44.69
2002 $46.67
Change 1999-2002 6.2%
Standard package
1999 $34.20
2000 $37.74
2001 $39.69
2002 $41.67
Change 1999-2002 21.8%
Basic service
1999 $8.58
2000 S8.58
2001 $8.58
2002 $8.58
Chanee 1999-2002
0% Converter box
1999 $3.07
2000 $4.99
2001 $4.99
2002 $5.95
Chance 19991-2002 93.8%
Chance in service
1999 $17.21
2000 $17.21
2001 $17.21
2002 $30.57
Chanee 1999-2002 77.6%
Source: Time Warner Cable
National subscriber growth trends
Although cable TV has shown modest growth -- about 1.5 percent in 2000
-satellite TV subscription rates outpaced those of cable operators. In 2000,
more than 13 million households subscribed to digital cable, a 29 percent
increase from 1999. Satellite TV subscribers now account for about 15 percent of
the market.
Subscribers
(in millions) 1996 1997 1998 1999 2000
Cable 63.5 64.2 65.4 66.7 67.7
Digital satellite 4.3 5 7.2 10.1 13
Source: Federal Communications Commission LOAD-DATE: November 28, 2001
#2
The Associated Press State & Local Wire - Reno. NV November 26, 2001, Monday, BC
cycle Cable television rates to jump in northern Nevada Cable television
subscribers in northern Nevada WILL pay more for programming beginning next
month. Cl-rter Communications said the rate hike is necessary to pay for system
up: aes and cover the increased cost of broadcasting sporting events.
Basic service will remain at $12.34 cents a month. But all other service
packages will cost more.
The standard service in the Reno area will jump 15 percent, from $34.64 to $
39.99 in areas where the cable system has been upgraded.
The cost of the top programming package will increase from $74.99 to $80.49 in
upgraded areas. Areas still awaiting, system upgrades WILL pay $78.49. Charter
serves about 156,000 customers from Reno to Douglas County and along the
Interstate 80 corridor to Wells in northeastern Nevada. News of the increase is
not sitting well with some customers, who argue they will be paying more for
less service. "If Charter Communications was not a monopoly, it would not be
doing this to its customers," said Tammy Morrow of Carson City.
"The % know they are not likeiy to lose customers even though they have
infuriated them because if you want cable you have no choice," she said.
Morrow also criticized Charter's plans to move some basic stations and all
premium movie stations to its digital service, which is more expensive and needs
a special receiver box.
Marsha Berk Bigler, Charter's director of government relations, said the
channel realignment makes sense and WILL benefit customers. With the premium
channels on the highest tiers, it will be easier to add more channels, she said.
Unlike other utilities. cable TV doesn't have to undergo public or governmental
oversight of rate hikes and can charge what the market will bear.
The federal government deregulated the cable industry in 1999 to stimulate
competition and drive prices down. Instead, the opposite has happened, with
cable rates increasing at more than three times the rate of inflation,
according to the Federal Communications Commission.
In northern Nevada, the rate for standard cable, which includes basic
channels and such expanded channels as CNN. ESPN and Animal Planet. was $16.45
in 1990. From 1991 to 1998 the expanded basic rate went up 75 percent to $28.73.
After deregulation. the same rate soared 39 percent. including the coming
increases.
LOAD-DATE: November "". 2001
#3
Westchester Telegram - GAZETTE
November 26. 2001 Mondav. RT. 9 EAST EDITION
Cable rate hearing slated: AT&T Broadband plans 8.5 percent increase Elaine
Thompson: TELEGR ~%M & GAZETTE STAFF
- A public hearing on new AT&T Broadband cable television rates will be held in
City Hall on Dec. 12. beginning at 1 1 a.m. in Memorial Hall.
The hearing. conducted by the state Department of Telecommunications and
Energy's Cable Television Division, will investigate AT&T Broadband's basic tier
programming and the equipment and installation rates that went into effect July
l.
Rob Wilson, spokesman for the state agency, said public hearings normally occur
after the new rates are implemented.
If for some reason we don't think they should get the rate increase, customers
will get their money back," Mr. Wilson said. Last week. AT&T Broadband announced
that it plans to raise the average rate for its standard cable package by 8.5
percent in January. The basic or standard rate varies from town to town and
generally costs no more than $10. Marlboro's current basic rate is about $6.
Alicia C. Matthews, director of the Cable Television Division, said this is the
first time in several Years that the state has reviewed AT&T cable rates. The
state only regulates + rates for equipment and basic programming, which usually
encompasses channels 2 through 13. They were previously under a rate settlement
agreement whereby the rates were regulated by the Federal Communications
Commission.
This year they have given the rates to us in a clear presentation so we can look
at the rates and assess whether they're reasonable," Ms. Matthews said.
The FCC had also regulated rates for the medium-tier service, which includes
Lifetime and the History Channel, until that was deregulated March 31, 1999.
There has never been regulation of rates for the premium-tier service, which
includes HBO, Showtime, Starz, and The Movie Channel, Mr. Wilson said.
Ms. Matthews said the public is encouraged to attend the hearing to give
testimony and to see the evidentiary hearing in process. Certainly. we encourage
the public to give us comments on anything they think would be relevant to our
review of the rates." she said.
The hourly service charge decreased from $43.24 to $27.99. But several services
that were part of the hourly charge, now cost a separate fee. Those include:
$5.99 to connect VCR at the initiation of service; $12.99 to connect
VCR after initiation of service: $18.99 to relocate an outlet: $15.99 to go to a
customer's home to do an upgrade. and 59.99 to go to a home to do a downgrade.
Ms. Matthews noted that the cable company is prohibited from charging a
downgrade fee to a customer who requests a downgrade within a 30-day notice of a
rate change.
For example. if a customer gets a notice that the cable rates are going up
next month and they don't want to pay the higher rates. they can call up and say
1 want to downgrade my service. They can do that and the company has to waive
the fee." Ms. Matthews explained.
Cable equipment, installation rates
The current equipment and installation rates followed by previous rates in
parentheses.:
Hourly service charge: $27.99 ($43.24)
Install for unwired home: $41.99 ($36.03)
Install for prewired home: $24.99 ($28.83)
Install additional outlet at
initiation of service: $13.49 ($28.83)
Install additional outlet
separate from initial installation $19.99 ($36.03)
*Other install, relocate outlet: $18.99
*Other install, upgrade
(nonaddressable): $15.99
*Other install, downgrade
(nonaddressable): $9.99
Other install. upgrade/downgrade
addressable (send out message
through box): $1.99 ($1.99)
*Connect VCR at initiation of service: $5.99
*Connect VCR after initiation of
service: $12.99
Remote control: 35 cents (35 cents)
Converter box for basic service: $1.85
(Many people do not need this
box to set basic service.)
Converter box for all others: $3.95 ($2.65)
*These items were not itemized previously. They were a function of the hourly
service CHARGE. BY number of hours it took to complete the job.
Source: State Department of Telecommunications and Energy's Cable Television
Division.
LOAD-DATE: November 29, 2001
#-4
The Associated Press State & Local VVire - Boston November 22. 2001. Thursday,
BC cycle AT&T Broadband to raise cable rates 8.5 percent
AT&T Broadband plans to raise the average rate it charges for its standard
cable package in New England by 8.5 percent in January.
The increase. announced by the company Wednesday. works out to an average of
$3 a month for the company's 2 million customers in Massachusetts, parts of
Connecticut and 58 communities in southern New Hampshire. Manchester, Nashua.
Concord. Portsmouth and Derry are the largest New Hampshire communities. The
increase is AT&Ts second rate hike in a year. The company raised rates this
summer to cover the cost of switching the New England Sports Network from a
premium channel to part of its standard offering. Including both rate increases,
cable customers will pay an average of 12 percent more next year than they paid
in January 2001 for the standard package. AT&T officials say they need to
increase rates because of higher costs of providing services, particularly the
fees programmers charge for content. In 2002. AT&Ts programming costs will rise
about 15 percent, company officials said. "The decision to raise prices is
always a difficult one; however, this increase reflects the increased cost of
doing business," said Richard D. Jenkinson. a spokesman for AT&T Broadband. "We
feel it's still a competitive value since customers WILL still be paying about
$1.26 a day for standard service." Standard service is a combination of
over-the-air broadcast channels plus the first tier of cable offerings,
including ESPN, TNT, CNN, and The Weather Channel.
AT&T is also raising the price of its bronze digital package to $3.50 a month.
from $2.95. The Bronze Package, the lowest tier of digital programming offered
by AT&T, includes channels such as ESPN, National Geographic and Independent
Films.
There WILL be no price increases for cable box rentals or other services.
The other 53 New Hampshire communities served by AT&T Broadband are: Alexandria,
Allenstown, Antrim, Auburn, Bedford, Boscawen, Bow, Brentwood, Brideewater.
Bristol, Candia, Canterbury, Chichester, Deering, Dover, Durham, East Kingston.
Epping, Epsom, Exeter, Fremont, Goffstown, Greenland, Hampstead, Hampton.
Hampton Falls, Hebron, Henniker, Hillsboro, Hooksett, Hopkinton, Kensington,
Lee, Loudon, Madbury, Newfields. Newington, New Hampton, New Castle, Newmarket,
North Hampton, Pembroke. Nottingham, Plaistow, Raymond, Rollinsford,
Rve. Salem. Sando%vn. Seabrook. Somersworth. Stratham and Weare. LOAD-DATE:
November ?3. 2001
#5
The Boston Globe
November 22, 2001, Thursday .THIRD EDITION
AT&T BROADBAND WILL HIKE CABLE RATES 8.7% INCREASE IS SECOND SINCE SUNIiMER:
FIRM CITES HIGHER SERVICE COSTS
By Mep- Vaillancourt. Globe Staff
AT&T Broadband. the state's dominant cable television provider, said yesterday
that it is raising the average rate it charges for its standard cable package by
8.5 percent in January.
The increase, AT&Ts second in a year, works out to an average of $3 a month
for the company's 2 million customers in Massachusetts, southern New Hampshire,
and parts of Connecticut.
AT&T raised rates this summer to cover the cost of switching the New
England Sports Network, which televises Red Sox and Bruins games, from a premium
channel to pan of its standard offering. Including both rate increases, AT&Ts
cable customers WILL pay an average of 12 percent more next year than they paid
in January 2001 for the standard package, with access to the additional
programming. Last year, AT&T increased rates an average of 5 percent.
While consistent on a percentage basis, the dollar amount of the rate increases
varies from community to community. In Boston and Brookline. customers who
receive the standard package WILL see their rates rise from $38.28 a month to
$41.53. In Arlington, the package will go from $35.37 to $38.38; Quincy, $ 36.88
to $40.01: and Newton, $36.04 to $39.01.
AT&T officials cited the higher cost of providing services, in particular the
fees programmers charge for the right to carry their content, for the price
increase. In 2002, for example, AT&Ts programming cost will rise about 15
percent, they said, with sports programming accounting for the largest portion
of that increase.
"The decision to raise prices is always a difficult one; however. this increase
reflects the increased cost of doing business," said Richard D. Jenkinson,
spokesman for AT&T Broadband. "We feel it's still a competitive value since
customers will be still be paying about $1.26 a day for standard service."
In addition to the higher rate for standard service, AT&T is also raising the
price of its bronze digital package to $3.50 a month, from $2.95. The lowest
tier of digital programming offered by AT&T, the Bronze Package includes
channels such as ESPN, National Geographic, Independent Films, and Oxygen. There
WILL be no increased charges for cable box rentals or other services.
Standard service is a combination of over-the-air broadcast channels plus the
first tier of cable offerings, including ESPN, TNT, CNN, and The Weather
Channel.
AT&T, which covers more than 200 Bay State communities, was the last cable
operator in the area to move NESN onto standard service. The switch extended
NESN's reach to 3.6 million homes across New England. It also increased the
value of the network just as the Red Sox were preparing to sell their majority
stake in NESN.
The move from a premium channel to standard increased the number of NESN's
potential viewers tenfold. ;1o a result, the network could charge higher ad
rates and in-the-ballpark signage fees. NESN officials declined to specify how
much the move to standard meant. Media analvsts estimated the switch could
generate S 10 to S 1 5 million ir. iew revenue for the Red Sox.
The Red Sox own 80 percent of NESN: 20 percent is owned by the Boston Bruins.
whose owner, Jeremy Jacobs, is one of seven bidders for the team. Included in
the Red Sox sale are the Yawkey Trust's 54 percent stake in the team, its share
of NESN, and roughly 12 acres of land in and around Fenway Park.
Meg Vaillancourt can be reached at vaillancourt0globe.com.
LOAD-DATE: November 24, 2001
#6
The Times Union (Albany. NY)
November 22. 2001 Thursday THREE STAR EDITION
Higher cable TV bills coming: Time Warner hiking cost for most popular "Basic
with Standard" option BYLINE: Mark Mcguire:Staff Writer
For the third time in a year. Time Warner Cable WILL raise monthly rates for
"Basic with Standard." its most popular service. This time. the cost will rise
an average of S 1.70.
The price hikes. which go into effect in January, range from $1.25 (for
Whitehall residents) to $2.50 (Middleburgh). In addition. the cost for some
converter boxes WILL also rise.
Time Warner, which announced these latest changes Wednesday, also had rate
hikes in August, when Basic with Standard service increased by amounts ranging
from $1 to $1.95. Rates for Basic with Standard were increased last January by
an average of $1.58.
In the last year, rates have been lowered or remained constant in most Time
Warner Cable services besides Basic with Standard, and some channels have been
added to other tiers. In the latest rate changes, the cost for Basic service
will will go up in some areas, or go down or remain the same in others. Channels
are also being added to those with digital service.
Increased costs charged by programmers -- particularly in the realm of sports
-- is one of the reasons for the increases, according to Peter Taubkin, Albany
Time Warner's vice president of government relations and public affairs.
"In each of the last five years, our programming costs have gone up an average
of 15 to 20 percent," he said. "If we were to take the increased costs as we get
them and pass them along directly on to the customer, there would be a big
difference in what we would charge."
Still. consumer groups express the concern that rate hikes have outdistanced
inflation. Mark Cooper, director of research for the Consumer Federation of
America. based in Washington, D.C.. said Time Warner is "one of the biggest
programmers around." and that all the subscription increases can't be written
off predominantly to increased programming costs. He blames the lack of
competition for the hikes.
"The simple fact of the matter is that they know they can pass through all
those increases." Cooper said. "The only people who raise prices in the middle
of a deep recession are the monopolists. They use market power to force those
increases through to the public."
According to the National Cable & Telecommunications Association, an industry
advocacy group, cable rates across the country have increased 5.2 percent
annually since 1998. Between 1996 and 2000, programming costs paid by cable
operators rose to S36 billion -- roughly 75 percent more than the $20.6 billion
spent during the previous five vears.
A survey released in Februarv by the Federal Communications Commission found
that cable operators increased monthly rates for cable and equipment by 5.8
percent during the 12-month period ending July 1. 2000. This is compared to an
increase of 5.2 percent for the year ending in July 1. 1999. For the year ending
July 1. 2000. cable operators attributed more than 40 percent of their rate
increases to higher programming costs.
Locally. rates in January 2000 went up 72 cents to $1.62 per month, and the
year before that the cable company raised rates an average of $1.48 a month. The
Basic with Standard package includes broadcast stations and cable channels 2
through 81. (Basic service includes channels 2 through 20.) This does not
include digital programming or premium services like HBO. Taubkin said there are
no plans to create a new tier between Basic and Basic with Standard that could
be more cost-friendly to some consumers. He said creating such a service could
carry infrastructure costs that would wipe out any savings for viewers.
Cable is in a battle with satellite dish companies for customers. Taubkin
said there is always an issue with adding channels and services, and increasing
fees.
"Our concern always is to provide a product that is one our customers want and
is one that brings the most value possible." he said. "No question people look
at the bottom line rate and we need to be sensitive to the bottom line rate."
Meanwhile. the monthly rental cost of converters and remotes will change.
Addressable and Digital Converters will increase from $3.99 to $5.60 per
month. non-addressable converters will decrease from .88 to .68 per month; and
remotes will decrease from .37 to .35. The $1 for the Digital Navigator on
additional outlets will be eliminated.
Digital customers will start receiving the National Geographic Channel (Ch.
115): V H I Classic (Ch. 176) and DIY-Do it Yourself (Ch. 119). In addition,
these customers will receive the Hollywood package -- Fox Movie Channel, Flix,
IFC and Sundance. This comes at no extra cost to Digital customers with at least
one premium service.
FACTS:NEW CHARGES
Rate changes are different by geographic area and are effective Jan. 1: Albany:
Basic service will change from $7.20 to $7.30; the rate for Basic with Standard
will change from $36.75 to $ 38.55.Rensselaer/Bethlehem: Basic service will
change from $10.25 to $10.75; the rate for Basic with Standard will change from
$35.75 to $37.70.Saratoga: Basic with Standard will change from $35.45 to
$37.70.Schenectady: Basic with Standard
will change from S35.15 to S36.90.Trov: Basic service will chance from S6..;5 to
56.-30; the rate for Basic with Standard will chance from $36.75 to $38.55.
LOAD-DATE: November 26.2001
#7
The Associated Press State &: Local Wire - Newark. N1 November' l. 2001.
Wednesday. BC cycle Cablevision raising NJ rates 4.7 percent
NEVfARK. N.J.
Cablevision is raisine rates for its northern New Jersey customers by an
average of 4.7 percent starting in February.
The company also is raising rates for New York customers by 5.5 percent.
The increases do not affect high-speed Internet access. The company serves more
than 900.000 customers in New Jersey.
Company spokeswoman Kate Murphy attributed the price hikes to a 12 percent
increase in programming costs, and customer service improvements.
"We're working to minimize the portion of the costs that are passed through to
the customer while retraining competitive," she said.
That was little comfort to David Butler, a spokesman for the Consumers' Union
in Washington, D.C. He noted cable rates have climbed continually since the
federal government deregulated the industry in 1996. New Jersey deregulated
its cable industry two years ago.
"OVERALL. IN the last five years. cable rates have increased 35 percent
(nationally). and that's nearly three times the rate of inflation," he said.
In New Jersey, cable rates have risen an average of 10 percent in 1999 and 9
percent in 2000, according to an analysis by Sen. Richard Codey, D-Essex,
earlier this vear.
This time last year, Cablevision, the state's second-largest cable provider,
raised its rates by 6.8 percent.
#8
The Commercial Appeal (Memphis, TN) November 21. 2001 Wednesday Final Edition
TIME WARNER RAISING CABLE RATES FOR 6TH YEAR IN A ROW: BASIC SERVICE 25 CENTS
MORE. SMARTLINK UP $3.07 A MONTH BYLINE: Tom Walter, Walter@eomemphis.com
For the sixth vear in a row, Time Warner will raise rates for cable
television customers beginning in January. Monthly rates for basic service
will increase 25 cents. standard service by $
2. Customers with converter boxes (SmartLink and digital) will pay an additional
$3.07 a month, the company said.
Customers will be notified of the hike beginning this week. With the rate
increase, customers with standard service will pay $39.99 per month, not
including sales tax or franchise fees. In Memphis, basic service (19 channels,
some shared) will now cost $12.50 a month. Customers who have the lowest level
of SmartLink service will now pay $ 45.99. The least-expensive digital package
will cost $52.49, which includes all the channels on standard service, plus 34
digital channels, 40 music channels and 70 pay-per-view channels. "Time Warner
has absorbed some costs, but the cost of program content is a major factor,"
said director of public affairs Joe Williams.
Time Warner added 10 new channels to its analog standard service this year.
Customers with digital service got those channels, plus an additional 18. At
that time, the rate for standard service went up $2, but the cost of basic,
SmartLink and digital service did not change.
SmartLink converter boxes are no longer available to new cable customers.
Those who want premium services such as HBO now will need a digital converter
box and WILL have to pay digital package prices.
Time Warner sees this as part of an industry move toward digital television.
"As new customers come on to the system, particularly those who want premium
movie packages and pay-per-view, we're going straight to the digital service
with those," Williams said. "It doesn't make sense to pump a lot of new advanced
analog converters into the system."
Under the new rules, if new customers take one premium service (for example,
HBO with 14 screens) with the digital tier, it WILL cost $61.49.
People who already have SmartLink boxes can keep them. Cable customers with
cable-ready sets who want basic or standard service don't need a box.
The breakdown in costs for other services includes an additional $1.75 for
standard service (plus the 25 cents for basic). and an increase of $1.07 for use
of the primary converter to customers who have converter boxes.
The company has ?25.000 customers in 52 communities in Tennessee. Mississippi
and Arkansas. Millington is the only immediate area served by another cable
company. - Tom Walter: 529-?581
#9
The Boston Herald - EDITORIAL November 18. 2001 Sunday ALL EDITIONS OP-ED:
DOWNTOVk'N JOURNAL: Boston subscribers at the mercy of cable rate hikes
BYLINE: By Monica Collin,
Cable rates. Gotcha. Before the eves glaze over, consider the fact that Boston
cable prices are expected to rise nearly 10 percent next year.
Have the orbs popped out of the head yet?
Already. the average household cable bill can run in excess of $ 50 a month.
With prices for premium channels and equipment rentals going up, you soon could
be paying as much to the cable company as to the mortgage company. What happened
to good old-fashioned competition?
Unfortunately, RCN, the company that's supposed to be giving AT&T a run for
the money in Boston. has barely made a dent in wiring the city. That's why AT&T
can do whatever it wants, without apology - because the cable provider still
monopolizes Boston.
Where's Mayor Thomas M. Menino's cable office when we need it? Out to lunch.
In these perilous times. the cable office for the city of Boston has become
obsolete. Once a watchdog - albeit one with a very gentle bite - the cable
office has lost its teeth entirely.
The situation is not unique to Boston. Cable companies are held to lesser
standards. No municipality holds the power anymore to control and monitor a
cable franchise. Once. that governmental oversight was a powerful tool to stave
off steep rate hikes. No more.
And even when Boston customers begin to pay through the nose, the increased
fees might not even save the neck of our cable company. In sir months, the
Boston business could be bounced off to another corporate giant - without
apologies or promises.
AT&T Broadband. the arm of the telecommunications giant that provides Boston's
cable SERVICE. IS fending off takeover bids. And both the mother ship, AT&T. and
the satellite company, AT&T Broadband, are struggling to find their way through
the business universe.
For AT&T Broadband, the whole messy situation of rate hikes and corporate
survival hits very close to home. Amos Hostetter, the AT&T board member who
founded Continental Cablevision, is one of Boston's most successful businessmen.
Hostetter recently installed William Schlever. a close ASSOCIATE. AS head of
AT&T Broadband.
When Schlever was announced to replace Daniel Somers. the strategy was seen as
Hostetter's.move to solidify control of AT&T Broadband and to shore up the cable
unit against the advances of competitors. including Philadelphia-based Comcast.
that want to gobble it up.
Ultimatelv. if efforts are successful to keep the predators at bay, AT&T
Broadband could spin oft completely and become its own corporate entity, free of
any allegiance to a fractured AT&T. Hostetter and Schlevver are seen as likely
moguls to run that new company.
Whatever happens, by raising rates. AT&T adds more value to its Broadband
division. We customers WILL be worth more in a corporate sale or spinoff if we
pay more to watch cable TV. We are pawns in a high-stakes corporate game.
Throughout the country, AT&T will raise its cable rates by 5.5 percent.
Customers throughout Massachusetts, however. WILL pay much more. AT&T has not
yet shared publicly the exact percentage of increase but industry observers
expect that subscriber fees could go up as much as 10 percent. What cost
benefits will we customers receive, aside from deeper holes in our pockets? In
Boston, subscribers aren't even treated as well as animals. In fact, we don't
even get the Animal Planet channel. How could we possibly expect much more? The
much-vaunted broadband Internet access is available only to fancy suburban
swells.
The cable system in Boston is grossly behind the times. While customers in other
AT&T Massachusetts markets get cable modem high-speed connectivity to the World
Wide Web, the Boston system does not have that digital capability.
AT&T is supposed to be rebuilding the Boston system, adding the fiber optic
lines necessary for hooking up to the future. With the company's future in
doubt, however. the rebuilding of the city's cable infrastructure seems a low
priority for AT&T Broadband.
When he ran for re-election, Menino did not even make promises about
technological improvements in the city's cable system. The whole subject is off
his radar screen.
Menino must have known to avoid the hot topic. Boston customers will bear the
brunt of the rate hikes because the system in the city is outdated with no
indications that the service will get any better. And there is no recourse for
subscribers right now, except to suck up the increase - or cancel the cable.
Talk back to Monica Collins online at bostonherald.com.
# 10
St. Petersbure Times November 12, 2001. Monday
Correction Appended
Cable rate jump not bad for eN ervone BYLINE: SAUNDRA AMRHEfN
For those who love to hate the cable company, you just got another reason.
Time Warner Cable has announced plans to raise rates again in January, by about
$ 2 a month for basic service and the preferred value package.
But while the news will undoubtedly make some residents gnash their teeth,
others are rubbing their hands in delight.
Usually, cable television rate increases are good news for owners of satellite
TV stores, which have become an option for Hernando County residents fed up with
the biggest cable game in town.
"I would say over 50 percent of my business is people upset with Time Warner,
and they switch over," said Vicki Richards, owner of Computer Satellite Inc., a
Dish Network dealer in Brook svMe. "I haven't had a blast of calls, but I have
had some people call and switch over because of the rate increases."
Richards has instal!ed satellite service for about 1,000 customers in both
Hernando and Pasco counties over the past several years. She said that Hernando
accounts for most of her business, which has grown by 30 percent from last year.
At TCL Electronics on Cortez Boulevard west of Brooksville, business usually
spikes when Time Warner's rates do.
"Every time they raise their rates, a certain amount call who have been putting
up with it." said Tom Longo. the owner. Longo offers both DirecTV and Dish
Network and has set up about 500 to 600 customers in Hernando County in the past
five years.
"Probably only about 20 percent come over from cable (rates). The rest of them
have seen commercials or read a magazine or watched something on TV about it."
Longo said.
Linda Chambers, spokeswoman for Time Warner Cable, said the growth in the Tampa
area means there's enough business to go around for everybody, even though she
considers Time Warner service superior.
"We lose a few (to satellite providers), and we get some back," she said. "I
think what's good for this area is that this whole Tampa area is a growth area
to begin with. and that's good news for everybody. There's room for all video
providers to offer service."
The rate increase takes effect Jan. 1. a year after the company's last increase.
In Hernando. where Time Warner has 35.000 customers. the company's limited basic
service package. with channels from about 2 to 22. goes from S 9.95 to S 11.95.
The preferred value nackage, with up to 80 channels. climbs from $ 39.25 to S
-11.25.
Prices for Road Runner, the fast-speed Internet access rolled out in Hernando
earlier this year by Time Warner. increased from $ 39.95 to $ 44.95 in October.
The basic and preferred packages are typically reviewed on an annual basis to
keep up with new programming, Chambers said.
"The increase is due to the basic increase in the overall cost of doing
business," she said. "The increase ... is not just from additional channels, but
the programming costs themselves have gone up an average of about 17 percent."
New channels that have been added to the Time Warner preferred value package
recently include Food TV, Women's Entertainment and ESPN Classic Sports, she
said.
For a comparison to satellite prices, Dish Network is currently offering the
satellite dish and receiver at a cost of $ 199, with free installation and about
100 channels for $ 9 a month for cne year. That's a discount from the regular
charge of $ 31 a month for that package.
Local charnels can be added for another $ 5 a month. Additional televisions in
the house could raise the price. Providing local stations has proved to be a
boon to satellite companies, which were permitted to do so after a change in
federal legislation two years ago.
Before then, some customers were reluctant to make the switch to satellite,
company representatives said. Both company and county officials say the public's
frustration with Time Warner and its dominance of the Hernando market has pushed
more customers into the arms of satellite companies.
"I haven't seen the numbers, but when they call me and tell me to tell Time
Warner to go to hell and that they're going to satellite, I take it to heart
that that's what they are doing," said Chuck Lewis. the county's regulatory and
franchise administrator. Lewis answers the angry phone calls that pour in
whenever Time Warner raises its rates. But he said there is nothing he or the
county can do.
The federal Telecommunications Act of 1996 says local governments and the
Federal Communications Commission have no authority over rates for tiered
service. which is anvthinQ above Channel 13.
The past two years. Lewis said. he has sent out more than 100 letters to
potential competitors to Time Warner. But the cost to lay cable and set up the
technology to compete - hundreds of thousands of dollars. if not more - scares
them away.
"To make that initial investment. the companies have taken a look here and said.
"Wow,' " he said. "We haven't grown enough yet" for the cost to be worth it to
other cable companies.
Some residents aren't waiting around for other cable competitors.
When Frank Otis moved back to Port Richey this summer after a year in the
state of Washington, he and his wife, Charmyn, decided not to return to Time
Warner. which has announced similar rate increases in Pasco County. Instead,
they bought an 18-inch satellite dish for their roof.
"I made up my mind, I wasn't going to deal with Time Warner," he said. "I
didn't like the rates for one thing." There is a drawback. however, to satellite
dishes, he added. "When you get a pretty good storm, you lose your signal pretty
quick." Also, owners are responsible for maintenance on the satellite equipment.
For others. even though they gripe about Time Warner and its hold on the area,
they won't make the leap to a satellite.
"There are tons of channels, but it means nothing if you don't want that kind
of stuff." said Lois McIntyre of Spring Hill. "1 don't care if they give me a
thousand channels. You can't watch that many."
- Times staff writer Saundra Amrhein covers business and development in
Hernando County and can be reached at 848-1434. Send e-mail to
amrheinrsptimes.com. Time Warner Cable's preferred value package in Hernando
County includes 72 channels. The analog service is capable of delivering up to
80 channels, including premium channels such as HBO. A story in Monday's Times
was unclear on the number of channels in the preferred package.
*11
Wvominu Tribune-Eagle November 9. 2001 Friday AT&T BROADBAND SETS RATE HIKE TO
KICK IN JAN. 1 BYLINE: Chris George
CHEYENI~IE -- AT&T Broadband of Cheyenne announced Thursday that cable
television prices in the Cheyenne area will be going up Jan. 1.
The higher rates are designed to cover the increased costs of programming and
new, high-speed data equipment the company has installed, said Curtis Syme,
general manager AT&T Broadband.
Rates for the standard cable package will increase from 536.21 a month to $
38.62 a month, a 6.6 percent increase, Syme said. The bronze package will go
from $39.99 to $42.99 a month and the cable schedule will go from $1.50 to $1.75
a month, Syme said.
Programming costs have risen I S to 20 percent for 2002. The rate increase will
happen at the same time the programming costs go up, he said. James Hooks, 55,
pays more than $60 a month for digital cable.
He said he's not happy with his service, and if the rates increase. he'd look
around for another programming provider. "I don't want them (the rates) to go up
any higher," he said.
Julie Tucker, 60, also said she doesn't want her cable bill to go up.
"I'm on a fixed income, and that's the only entertainment I have," Tucker, 60,
said. "If they (the rates) go up, I'm going to have to give it up."
LOAD-DATE: November 27, 2001
#12
Cable World November 5. 2001 Cable rates rise amid slow economy.
Operations. BYLINE: Neel. K.C.
In what has become a year-end ritual. cable operators are preparing to send
out rate hikes to subscribers over the next few weeks.
AT&T Broadband told customers last week it will raise rates an average of 5.4%
beginning in January. Time Warner Cable is mailing increase notices to its
customers now, although a spokesman declined to reveal any numbers. Cox
Communications. which hikes rates throughout the year in different systems, says
it plans to increase prices an average of 5.6% in 2002.
Rate hikes are a sensitive subject, especially in a slowing economy. Rampant
and abusive rate-increase practices led to the industry's reregulation during
the last RECESSION. IN 1992. Since then operators have tried to put the brakes
on excessive hikes, generally capping rate adjustments at around 5%. But the
hikes still remain higher than the cost of inflation, leading consumer groups
and city regulators to complain every year that cable operators continue to
gouge their customers. The inflation rate for the 12-month period ending last
September is 2.6%, according to the Bureau of Labor Statistics.
"Everyone tries to cushion the blow," says Yankee Group analyst Michael
Goodman. "But at some point, the operator has to bite the bullet and raise rates
to pay for his rising costs."
Operators find themselves in a quandary. Operating costs, particularly
programming costs, continue to spiral at double-digit rates each year.
Competition from direct broadcast satellite firms remains fierce, as evidenced
by campaigns such as EchoStar Communications' recent $ 9 a month promotion for
100 channels of service, which often lure thousands of customers from the cable
fold. And all the while, Wall Street analysts and investors are pressuring
operators to improve their cash flow margins.
"Cable operators have to be able to raise rates to cover their costs," says
Bear Steams analyst Ray Katz. "I have never understood what the cost of bread,
which is included in the CPI, has to do with cable television. So cable rates
have risen faster than inflation. Cable rates have gone up less than a barrel of
oil. Clearly, they have to find a happy medium."
That happy medium seems to have been around 5% for most operators in recent
years. Still, MSO executives say that's not enough to cover their costs.
Moreover, most consumers don't care that the operators' costs are spiraling out
of control. They just know that they are paying more to watch the same six
channels they always watch.
Yet in focus groups that Cox held earlier this year, nine out often people
thought programmers paid cable operators to carry their signal.
"We can't expect our customers to like the idea of rate hikes." says Cox
spokesman Ellen East. "But if we educate them more about our business. they
might understand why we have to raise rates."
AT&T Broadband. which has moved the bulk of its increases from Julv to
January. plans to raise rate,- for its expanded-basic customers an average of $
1.93 a month beginning two months from now. Basic-only customers--about 1.5 of
the 13.8 million customers AT&T serves around the country-will see their rates
go up in July. That's still below AT&Ts increased operating costs, says
spokesman Andrew Johnson. Programming costs alone are projected to climb 15% in
2002, he says. And of that, 20% is directly related to sports fees. The cost of
filling trucks' gas tanks and the cost to operate and power the networks has
also risen faster than the cost of inflation over the last vear.
In fact, the averages can be a bit deceiving. AT&Ts average customer currently
pays $ 35.63 a month. The average rate increase for the entire customer base is
5.4%, or $ 1.93 a month. But a closer look shows that the basic-only customers
will see their bills rise an average 4.6%, while expanded-basic customers will
experience total rate hikes that average 7.3%.
Last year Cablevision Systems ran into some trouble when it announced it was
increasing rates by an average of 7%, but actually raised rates in some
communities by almost 25%. Few news reports take into account the operators'
reasons for raising rates. And satellite companies use the hikes as fodder for
acquisition campaigns. "Rate hikes are great for the satellite guys," Katz says.
"They can use [them] to market their services, and they can use them as an
umbrella by being able to raise their rates but stay just under what the cable
guy charges."
#13
Daily Variety November 5, 2001 CABLE RATES ON RISE BYLINE: JILL GOLDSMITH
HIGHLIGHT:
AT&T Broadband to raise prices 5.5% Jan. 1
NEW' YORK --- AT&T Broadband. the nation's largest cable operator, said Friday
it plans to raise prices an average of 5.5% on Jan. 1, citing higher programming
costs as well as general expenses of "providing service and operating the
business."
Move comes as parent AT&T considers merging the cabler with Comcast or a handful
of other potential suitors. Some regulators and public interest groups have
opposed consolidation in the industry precisely due to fears that ever larger
behemoths will have more and more power to raise rates, as well as to act as
gatekeepers for content. One group, Consumers' Union, noted that cable service
rates have risen 35% in the past five years. AT&T, like all operators who boost
prices, noted that programming costs have risen significantly --- and will be up
by about 15% in 2002. Sports programming costs will rise 20%. And "everyday
costs such as putting gas in field trucks and paying competitive wages to
customer care personnel and technicians have increased." Company said the price
increase affects standard and some basic and digital customers.
#14
The Hollywood Reporter November 05. ?001
AT&T Broadband plans rate increase for Jan. 1 BYLINE: Geora Szalai
AT&T Broadband. the biggest U.S. cable operator, has said it WILL hike its cable
rates by an average of 5.5% next year to counter rising costs.
The price increase WILL take effect Jan. 1 for standard cable packages, as well
as some basic-only and digital service customers.
The company said Friday that the expected programming cost increases WILL be
about 15% to S1.8 billion next year, driven by sports content expenses and
higher personnel costs.
A spokesman said the size of the rate hike will vary depending on local
markets and type of service, but most of AT&Ts 14 million cable users will be
affected. He said most subscribers WILL see cable bills rise by an amount close
to the 5.5% average, meaning local discrepancies will be relatively minor. The
spokesman could only break out planned price hikes for the Los Angeles market
(5.7%), San Francisco (4.8%) and basic service (4.7%). Analysts said the new
price structure is in line with annual rate hikes in recent years by AT&T and
its peers. Guzman & Co. analyst David Joyce called the increase "fair," given
high costs for sports content and ongoing digital upgrades of cable systems.
# 15
The Pueblo Chieftain November 5, 2001. Mondav AT&T Plans Cable Rate Hike in
Pueblo. Colo.
AT&T Broadband, the cable company serving Pueblo, announced Friday that it
would increase prices on average by 5.5 percent beginning on Jan. 1.
The Enolewood-based subsidiary of AT&T Corp. said the increase reflects its
higher day-to-day costs to provide service as well as higher programming
charges. The company said fees to programmers for the right to carry content is
expected to rise about 15 percent next year. Sports programming accounts for the
larges portion of that increase, a hike of 20 percent.
Price increases will vary from market to market, AT&T Broadband said in a
release, and affects standard cable customers and some basic-only and digital
value package customers.
It said it has begun notifying customers with notices in cable bills and legal
notices in local newspapers.
#16
Atlanta Journal and Constitution November 3. 2001, Saturday AT&T Broadband to
Raise Cable TV Fees for Metro Atlantans BYLINE: By Kathv Brister
Most metro Atlantans WILL pay about 7 percent more for cable TV when AT&T
Broadband increases monthlv fees in late December.
AT&T Broadband -- which serves more than 600.000 metro area homes -primarily
blames higher programming costs for the fee increase. Reg Griffin. a local
spokesman for the cable company. said Friday that AT&T Broadband will spend 15
percent more next year on the sports. news and entertainment channels it
delivers.
About 80 percent of AT&T Broadband's metro Atlanta customers will see higher
bills starting Dec. 26. While monthly packages differ, the standard rate for
customers who live in areas where digital cable service is available will be $
39.91. up from $ 37.27. In areas where the service hasn't been upgraded,
residents will pay, $ 37.55, up from $ 35.06. The company last increased rates
in January.
Charter Communications, which serves pockets of metro Atlanta, plans to raise
rates between 7 percent and 10 percent for most customers. In January, it raised
some local cable rates by as much as 9 percent.
Cox Communications, with headquarters in Atlanta but no metro cable systems.
plans to increase subscription fees about 5 percent. Cox is majority held by the
owner of The Atlanta Journal-Constitution. AT&T. Charter and Cox say they will
use much of the revenue from increased fees to pay for sports programming. But
cable companies also are trying to get some return on the more than $ 50 billion
they've spent since the mid-1990s to upgrade networks from analog to digital.
An ESPN spokeswoman said costs to produce sports programming increase as
broadcasters and cable channels bid for rights to air high-profile games. She
said sports events are cable's top draw.
The cable industry has bumped up subscription costs about 5 percent a year
since cable fees were deregulated in 1999. From 1990 to 1999, basic cable
rates rose more than 70 percent, according to research firm Paul Kagan
Associates.
AT&T Broadband customer DuPree Jordan. who has cable connected to four TVs in
his Roswell home. said the increase on top of "terrible" customer service might
push his family toward satellite TV. "We'll certainly be looking for
alternatives." he said.
#17
The Columbian (Vancouver. WA.) November 3. 2001, Saturday
CABLE TV RATES TO INCREASE 9 PERCENT BYLINE: MIKE ROGOWAY, Columbian staff
writer Cable television rates will go up $ 3 a month next year for most Clark
County cable subscribers.
The 9 percent increase is the largest in several years. Rates WILL remain
unchanged for customers who subscribe only to basic cable, however, and cable
customers can get a discount if they also subscribe to AT&T Broadband's
high-speed Internet service or digital local phone service.
Roughly 75.000 Clark County households are AT&T cable subscribers. according to
the City-County Cable Television Commission. Most subscribers receive "Standard
Cable," a 66-channel package that includes all the Portland-area broadcast
channels, plus national cable networks such as ESPN, CNN, A&E, TBS and MTV.
Standard cable subscribers now pay $ 32.99 a month, plus taxes; beginning Jan.
l. they will pay $ 35.99 a month. The higher rates reflect the rising
programming costs that AT&T pays to cable networks. according to Lindy Bartell,
spokeswoman for the cable company in Portland. Programming fees will rise more
than 15 percent next year, she said.
The number of cable subscribers in Clark County has been flat in recent months.
even though the county's population has continued to grow. Bartell said AT&T
believes cable is still a good entertainment value. "We know that raising prices
isn't popular, and we want to keep them down as much as possible," she said.
About 2.400 Clark County households subscribe to Basic Cable, a 26-channel
package that includes only local broadcasters, home-shopping channels and a
handful of national cable networks. Monthly Basic Cable rates will stay $ 11.85
next %ear.
Rates for some premium movie channel packages will go up next year, but rates
for some top-tier packages will not. Additionally, customers who subscribe to
multiple AT&T Broadband services -- cable TV, high-speed cable Internet, or
digital local phone service -- will be eligible for a $ 5 discount for each
service they use. Standard Cable and premium cable rates are unregulated, so
AT&T can charge what it wants. Basic Cable rates are subject to approval by the
local cable commission. but AT&T hasn't tried to raise the price of Basic Cable
in three years.
Customers won't like the higher cable rates. but the news isn't unexpected.
according to Jim Demmon. cable TV manager for the local cable television
commission.
"All other bills seem to be going up. 1 don't think anybody's going to be
thrilled by it." Demmon said.
CABLE RATE HISTORY IN CLARK COUNTY
Basic Percent Standard Percent
Year Cable increase Cable increase
---- ----- -------- ----- --------
1998 $ 11.30 0% $ 29.09 4.9%
1999 $ 11.30 0% $ 30.99 6.5%
2000 $ 11.85 5% $ 32.50 4.9%
2001 $ 11.85 0% $ 32.99 1.5%
2002 $ 11.85 0% $ 35.99 9.1
#18
The Miami Herald
November 3. 2001 Saturdav FINAL EDITION AT&.T TO RAISE CABLE RATES
BYLINE: From Herald Staff. wire reports and Bloomberg News
AT&T (T). owner of the largest U.S. cable-television business. will raise cable
prices an average of 5.5 percent in 2002 to counter higher costs.
The price increases. effective Jan. l, will affect subscribers to AT&T
Broadband's standard. basic and digital packages. Most of the company's 14
million subscribers will have higher rates, spokeswoman Sarah Eder said.
Englewood, Colo.-based AT&T Broadband said the rate increase reflects higher
expenses in providing cable service. including a 15 percent rise in programming
fees to $1.87 billion next year.
#19
Saint Paul Pioneer Press
November 3. 2001 Saturdav CITY EDITION
CABLE RATES GOING UP AT&T SAYS COSTS ARE BEHIND 5.5(degree)10 INCREASE BYLINE:
MARTIN J. MOYLAN. Pioneer Press
The folks who supply AT&T Broadband with "The Sopranos," ESPN, "I Love Lucy"
reruns and other programming want more money. And its own costs of doing
business are on the rise, says AT&T.
So get ready to pay a few more dollars a month if you're one of AT&T's 335.000
cable TV subscribers in St. Paul and 87 area suburbs.
AT&T said Friday that it will increase its cable TV rates by an average of 5.5
percent nationally starting in January. That would push the average customer's
monthly bill up from $35.63 to $37.55.
Twin Cities rates have not been finalized but they should be in line with the
national average, the company says. "Our programming costs are going up $240
million in 2002, with 20 percent of that for sports," said AT&T Broadband
spokesman Andrew Johnson. "That's a 15 percent increase. But we're not passing
through the full impact."
AT&T. he said, is "leaving a lot of money on the table," in large part because
of the competition it faces from the two leading satellite TV providers, DirecTV
and EchoStar, as well as competing cable TV providers operating in some markets
around the country.
EchoStar and DirecTV, which hope to merge, have signed up more than 16 million
households for their satellite TV services, including an estimated 363.000 in
Minnesota.
EchoStar. for instance. now offers a package that includes 100 video and audio
channels for $9 a month. Subscribers must buy a satellite dish that serves one
TV for $199, bringing the first-year cost, excluding taxes, to $307.
But AT&T argues that it compares quite favorably with the satellite providers
when consumers consider equipment costs and fees satellite firms charge to serve
additional TV sets and provide local TV signals. At this point, the satellite TV
companies typically offer subscribers four local channels for about $5 a month.
But they don't offer local channels in all markets.
"We stack up pretty well," said Jim Commers, vice president of AT&T Broadband's
Minnesota operations. "We offer more levels of service. Not everyone wants 100
channels. And when you add in multiple TV sets and local channels, we think
we're much cheaper."
Coralie Wilson. executive director of the North Suburban Communications
Commission, argues pay-TV competition is not nearly as intense as it should be.
thoush.
She bemoans the scrapped plans of Everest Connections, Wide Open West and
Serer Innovations to build competing cable systems in the northwest suburbs. And
satellite is not an option for too many people, she contends.
AT&T Broadband's customer service has been declining and there's virtually
nothing local cable commissions can do to control prices. she said.
As long as cable providers can justify their costs. commissions must approve
price increases for local broadcast, public access, education and government
channels. Wilson said. And since 1998, cable commissions have had no price
oversight for other programming, she adds.
"There is not a lot anyone can do about rates," she said.
Commers said AT&T has not seen any increase in customer complaints and most
subscribers are "more than satisfied."
Martin J. Moylan can be reached at mmoylan@pioneerpress.com or (651) 228-5479.
#20
The Seattle Times
November 3. 2001. Saturday Fourth Edition AT&T to raise cable-TV fees 5.5
percent BYLINE: Bloombere News
AT&T. owner of the largest U.S. cable-television business, said it will raise
cable prices an average of 5.5 percent in 2002 to counter higher costs.
The price increase, set for Jan. 1, will affect most of AT&T Broadband's 14
million subscribers to standard-, basic- and digital-cable packages.
Monthly bills for the average customer WILL increase $1.93 to $37.55,
spokeswoman Sarah Eder said. AT&T Broadband said the rate increase reflects
higher expenses, including a 15 percent rise in programming fees to $1.87
billion next year. It also cited higher wages and fuel costs.
Gene Kimmelman, co-director of Consumers Union's Washington, D.C., office, saw
it differently. "This reflects ongoing price gouging by cable monopolies," he
said. "It's particularly astounding that they're raising prices at a time when
the economy is stalled."
Cable rates are up 35 percent since Congress revamped telecommunications laws in
1996 to spur competition, he said.
Cable companies on average raise rates "in the middle single digits on an annual
basis." said Richard Klugman. a telecommunications analyst at Jefferies who has
a "hold" rating on AT&T shares. Comcast, the No. 3 U.S. cable operator, raised
rates for basic service by about 5 percent this year.
AT&T Broadband said it will inform customers of the increase with notices in
their cable bills and legal notices in newspapers.
#21
The Bradenton Herald November 2. 2001. Friday Time Warner to Increase Cable
Rates BYLINE: By Steve Hollister
The cost of Time Warner's cable programming and services is once again on the
rise.
The company announced Thursday that the price of basic service will rise 8.1
percent from $ 12.40 to $ 13.40 per month, and that by adding its second-tier
preferred package, the monthly cost WILL jump 5.1 percent from $ 39.25 to $
41.25.
Premium movie rates will increase from $ 5.95 for either HBO, Cinemax. Show-time
or The Movie Channel to $ 7.95. Digital Stan! will remain $ 7.95.
The cost to have cable installed, or additional outlets added, will go up by
as much as 21 percent. The cost to install additional outlets at the time of
cable installation, for example, will go from $ 18.95 to $ 22.95.
Linda Chambers, the company's vice president of business affairs for the Tampa
Bay region, defended the price hikes, saying Time Warner is absorbing much of
the increases in programming costs and technology upgrades and only passing a
fraction on to the customer.
"It's what it takes to provide the products and services our customers
demand." Chambers said. "We do everything we can to keep rates at a reasonable
level. Our costs are going up far more than our rates are going up."
The company has hiked rates by at least 4 percent each year since purchasing the
local cable system from Paragon Cable in 1996. The Federal Communications
Commission stopped regulating rates for the industry after passage of a federal
telecommunications bill in 1996, and local officials can not legally challenge
basic and second-tier rates.
Rate hikes over the past two years were tied by Time Warner officials to an
upgrade of the local cable system with fiber optic lines. That process was
completed earlier this year and allows Road Runner high-speed Internet access
and enhanced digital service over the cable system.
The new increases, set to show up on January bills, were attributed to the
costs of adding new channels Women's Entertainment, ESPN Classic Sports and
Oxygen to the standard service. Training costs for employees and improved cable
quality also were cited as reasons for the hikes.
Time Warner Cable of Tampa Bay serves over 900,000 customers in Manatee,
Hillsborough. Pinellas. Polk, Citrus, Hernando, Paso. Levy and Hardee counties
and offers more than 225 channels.
#22
Sarasota Herald-Tribune
November 2, 2001 Friday Manatee Edition Cable rates going up 5 percent in 3002:
Time Warner's Manatee rates are alread_N slightly higher than Comcast's in:
Sarasota and Charlotte.
BYLINE: JASON HALL. jason.hall(a`heraldtribune.com
Time Warner Cable is raisine its rates 5 percent next year. saying it needs the
money to pay for higher programming costs and equipment upgrades.
Most Manatee County cable subscribers WILL see their bills go from $39.25 per
month to $41.25 starting in January.
"We are making investments in the future by keeping pace with rapidly changing
technology allowing us to deliver cutting-edge service," said spokeswoman Linda
Chambers.
"As a result of these continued investments and rising costs, it is necessary
for us to make this adjustment in our rates."
The price for the company's limited basic service will go from $12.40 to $
13.40.
Prices for digital cable, a souped up and more expensive type of cable signal,
will not change, nor will the company's Road Runner cable Internet service.
Chambers said the company's cost of business increases yearly, and this
years rate increase won't even cover the company's programming price hikes for
2002. Time Warner's programming costs will go up 17 percent next year, she said.
The hike comes as the economy may be lapsing into a recession and consumer
confidence is down. Chambers thinks customers will understand the need for an
increase. Though federal law doesn't prohibit competitive companies from
offering cable service. very few areas -- none in Southwest Florida -- have
competing cable companies because a new company would have to spend millions of
dollars to lay its own cable line.
Time Warner's rates are slightly higher than Comcast's, which provides service
in Sarasota and Charlotte counties. For its comparable most popular package,
Comcast charges $38.75. Comcast usually raises its rates every April.
#23
The Oregonian
November 3. 2001 Saturdav SUNRISE EDITION AT&T'S CABLE RATES GOING UP SOURCE:
JEFFREY KOSSEFF - The Oregonian
Summary: The compam sa.,s it will boost monthly bills by an average of $2
starting Jan. 1 in response to higher programming costs AT&T Broadband announced
Fridav that it would increase monthly cable bills in Oregon and Southwest
Washington by an average of $2, or 5.6 percent. beginning Jan. 1.
The Denver-based company cited rapidly rising programming costs as it hiked
rates nationwide. AT&T, with about 542.000 customers in Oregon and Southwest
Washington, said it would pay an average of 15 percent more in 2002 to
programmers such as CNN and ESPN.
"We are trying to keep costs as low as possible for our customers," said Lindy
Bartell. a local spokeswoman for AT&T, the largest cable television provider in
Oregon and the nation.
Sports programming costs, the company said, WILL see the largest increase in
2002: nearly 21 percent. "It's been an ongoing trend," Bartell said.
AT&T also must keep prices low as it continues to face aggressive competition
from digital satellite providers, said Royal Harshman, a member of the Mt. Hood
Cable Regulatory Commission, which oversees many of the company's Portland-area
franchises with local governments.
Local governments can regulate prices on the 22-channel basic-cable package,
which isn't seeing a price increase in 2002. But they can't control the prices
of more popular services, like expanded basic cable.
To keep prices low, the commission has tried to lure other cable companies to
build cable networks in the area and compete against AT&T, but most potential
competitors ran out of money as the capital markets dried up in the past year,
Harshman said.
Some were skeptical of cable companies' rationale for raising monthly bills. The
companies often use programming costs as a justification for rate increases,
said David Olson, director of Portland's Office of Cable Communications and
Franchise Management. But cable providers often own stakes in companies that
provide programming.
"It would seem that they would be in a position to control some of those costs
by talking to themselves," Olson said.
About 38 percent of AT&T's subscribers won't receive a rate increase. In
addition to basic-cable subscribers. Platinum and Gold Digital Cable subscribers
and some customers in the Tualatin Valley NKILL not see increases in Januarv.
Cable rate increases are common at the beginning of the calendar year. This past
January. AT&T raised rates by 3.66 percent.
#24
The San Francisco Chronicle
NOVEMBER 3, 2001, SATURDAY. FINAL EDITION AT&T hikes cable rates. Increase is
about S 1.50 a month BYLINE: Todd Wallack
BODY:
Despite the sputtering economy. AT&T said it plans to raise cable television
prices 4.75 percent for its 2 million customers in the Bay Area next year.
AT&T, the region's dominant cable TV player, blamed rising programming costs
and energy prices for the increase. Nationwide, the telecommunications giant
plans to hike prices by 5.5 percent.
"The increase reflects the rising cost of doing business." the company said
in a statement. Locally, AT&T pointed out that the price increase is still below
the 5.1 percent inflation rate recorded in the San Francisco metro area by the
Bureau of Labor Statistics.
But consumer advocates said the decision shows that AT&T faces scant
competition. Only a handful of towns have multiple cable television providers,
though millions of American homes have signed up for television programming via
satellite.
"This reflects ongoing price gouging by cable monopolies." said Gene
Kimmelman, co-director of Consumers Union's Washington office, in an interview
with Bloomberg News. "It's particularly astounding that they're raising prices
at a time when the economy is stalled."
AT&T said the average customer's bill will increase about $1.50 per month,
or S 18 per year. The price increase WILL show up on most customers' bills in
January. except in Oakland, where the change will go into effect a month later.
AT&T typically raises prices each year around the same time. Earlier this
year. AT&T raised rates by 4.9 percent.E-mail Todd Wallack at
twallackr4chronicle.com.
#25
The Record
November 2. 2001. Fridav
Stockton. Calif-Area Cable Rates to Increase 5.5 Percent. AT&T Broadband Sa_vs
BYLINE: By Bruce Spence
Cable television rates WILL be going up about 5.5 percent at the beginning of
the year, AT&T Broadband says.
The increases. which will go into effect for most of the company's 14 million
customers nationwide. are attributed mostly to inflation, and increased costs
for programming and power, AT&T Broadband spokesman Brian Dietz said.
The biggest change will come with a repackaging of the so-called standard cable
package. Currently, that consists of basic cable service of more than 50
channels, including local network and public-broadcasting stations; plus
specialty channels, such as ESPN, Nickelodeon, Fox stations, MTV, C-SPAN and so
on; and several Turner Broadcasting channels.
That package currently costs $ 31.34 a month.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Come January, the standard cable package WILL increase by $ 3.65 a month, to
$34.99.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
But the package will grow by eight channels, adding American Movie Classics,
Comedy Central, VH1, Great American Country (music videos), the Weather Channel,
Fox Movie Channel, the Sci-Fi Channel and the History Channel. Those channels
currently are packaged as the "Next Pack," which costs those who subscribe $
4.67 a month in addition to basic cable fees.
Asked whether the company was worried about a backlash from basic-cable
customers who didn't want to pay more for additional channels, Dietz said
simply: "No."
About 22 percent of cable-TV subscribers already subscribe to the Next Pack,
he said.
"All of these channels are the ones most have requested," he said. "And the
customers who already subscribe will be seeing a price reduction."
Other programming fees, such as for premium movie channels, are going up, too.
For example, HBO movies WILL increase a buck, to $ 13.49 a month. The Starz! and
Encore combination movie package will go up from $ 11.49 to $ 12.49.
Dietz said programming costs have climbed significantly in the past year,
rising 15 percent overall. Sports programming costs have jumped about 20 percent
within the year, he said.
Cable TV rates last went up in March for the estimated 100.000 customers in San
Joaquin. Calaveras and Amador counties.
The cost of two of the company's subscription options went up in February.
Increases ranged from a 4.4 percent boost for standard basic cable to a 5.5
percent raise for standard bi;iz cable with a single HBO premium channel.
The company then cited increased programming costs as the main reason for the
fee increases. Meanwhile. the company expects to roll out its new digital
programming in about two weeks. AT&T Broadband has 80 channels available on its
analog system, but with the rollout. the number of available channels will
increase to nearly 200 television and music channels via the fiber-optic network
laid down in the past couple of years.
Packages that will include digital programming will range from S 42.99 to 79.99
a month.
#26
The Orange Countv Resister October 24. 2001. Wednesday O.C. cable TV rates
heading up again // Media The cost of expanded basic service is already higher
than the national average.
BYLINE: By KATE BERRY. the Orange County Register
Cable TV rates in Orange County, alreadv well above the national average. are
slated to rise more than 5 percent in the coming year -- nearly twice the rate
of inflation.
Cox Communications plans to raise rates by $2 on Nov. 1 to $38.99 a month for
its most popular service, expanded basic, which delivers 75 channels. Time
Warner Cable will raise rates within the next two months by 5.1 percent.
For most cable customers, the increases come as no surprise.
Everybody always says cable rates continue to go up -- that's absolutely
true," said Kip Simonson, vice president of sales and marketing for Cox in
Orange County, which has 85,000 cable customers. Cable rates have gone up every
year I've been in the business. But we consistently give consumers more
product." Cable companies say the higher monthly fees reflect the cost of
upgrading digital systems, adding channels and paying higher program fees,
particularly for highly promoted series such as HBO's The Sopranos," Sex and the
City" and Band of Brothers."
The biggest reason we are adjusting our rates is that the license fees we
pay to the programmers continue to go up," Simonson said.
But in Orange County, cable rates are already 8 percent to 34 percent higher
than the national average. Most cable operators attribute the higher rates to
the cost of doing business in California. where prices for other staples, from
gasoline to milk, are more expensive as well, Simonson said.
Consumers nationwide paid an average of $34.11 a month last year for expanded
basic cable, the most common package with up to 70 channels, according to a
Federal Communications Commission study. That compares with current prices in
Orange County that range from $36.75 a month paid by Adelphia customers in north
county to $45.78 a month paid by Time Warner Cable customers in west county.
Basic cable, installation costs and service fees are the only rates regulated by
the FCC. Basic cable is the most bare-bones service, giving consumers access to
local broadcast stations.
Though many consumers consider some cable-only channels, like CNN, a must, any
cable tier above basic remains unregulated -- so prices can rise to whatever
customers WILL pay.
Most companies lower their prices during a recession. and they generally don't
rise higher than inflation." said Marc Cooper. executive director of the
Consumer Association of America. Contact Berry at (714) 796-2=;5 or
kberry(a-)ocregister.com
#27
St. LOUIS POST-DISPATCH
SEPTEMBER 26, 2001 WEDNESDAY FIVE STAR LIFT EDITION
CHARTER PLANS TO RAISE CABLE RATES BY END OF YEAR.
COMPANY UPGRADES NEW SERVICES. HIRES DAN AYKROYD FOR ADS BYLINE: JERRI STROUD OF
THE POST-DISPATCH
ACTOR AND COMEDIAN DAN AVKROVD MIGHT HAVE A LOT OF EXPLAINING TO DO. CHARTER
COMMUNICATIONS INC., WHICH LOST ITS CHIEF EXECUTIVE MONDAY, IS RAISING RATES IN
DECEMBER BY NEARLY 14 PERCENT TO 26 PERCENT IN THE ST. LOUIS REGION. WITH
SELECTED AREAS GETTING THE HEFTIER INCREASES ALONG WITH ADDED CHANNELS AND
SERVICES.
AYKROYD, THE COMPANY'S NEW ADVERTISING SPOKESMAN, WILL BE TOUTING SOME OF THE
NEW SERVICES ALONG WITH SOME STILL ON THE DRAWING BOARD, SUCH AS VIDEO-PHONE
SERVICE USING THE TELEVISION SET. THE NEW COMMERCIALS ARE ON THE AIR IN SOME
CHARTER MARKETS, AND THEY WILL BEGIN AIRING IN ST. LOUIS OVER THE NEXT TWO
WEEKS.
CHARTER BEGAN NOTIFYING ST. LOUIS AND ST. LOUIS COUNTY OFFICIALS OF THE RATE
INCREASES LAST WEEK, BUT OFFICIALS IN SOME AREAS WERE NOTIFIED AS EARLY AS
AUGUST. THE COMPANY HAD PLANNED TO INCREASE RATES NOV. 1, BUT IT POSTPONED THE
EFFECTIVE DATE TO DEC. 1 AFTER THE TERRORIST ATTACKS ON NEW YORK AND WASHINGTON.
RATES FOR EXPANDED BASIC SERVICE IN ST. LOUIS AND MOST OF ST. LOUIS COUNTY
WILL GO UP BY $3.95 A MONTH. AN INCREASE of MORE THAN 13 PERCENT. EXPANDED-BASIC
RATES IN ST. LOUIS WILL RISE TO $33.85, FOR EXAMPLE. IN WEST AND SOUTH ST. LOUIS
COUNTY. EXPANDED BASIC RATES WILL GO TO $32.18.
BUT SELECTED AREAS WILL SEE INCREASES OF AS MUCH AS $7.95 A MONTH. RATES FOR
CUSTOMERS IN CARLYLE, ILL., WILL RISE TO $39.11 FROM $31.16 A MONTH WHEN ALL
UPGRADES TO THE NETWORK ARE COMPLETED. CHARTER IS ADDING MORE THAN 20 CHANNELS
IN CARLYLE.
CHARTER'S BASIC-CABLE CUSTOMERS WILL SEE THEIR RATES GO UP ABOUT 45 CENTS.
THE RATE INCREASE IS THE SECOND IN 14 MONTHS FOR MOST ST. LOUIS-AREA CUSTOMERS
AND THE FIRST SINCE CHARTER TOOK OVER AT&T'S CABLE SYSTEMS IN JULY. CHARTER
SAID THE INCREASES ARE NEEDED TO COVER THE COST OF ADDED CHANNELS,
NEW EMPLOYEES AND NEARLY $400 MILLION IN UPGRADES TO ITS NETWORK. PROGRAMMING
COSTS ALSO ARE UP ABOUT 30 PERCENT THIS YEAR.
CUSTOMERS WILL GET FOUR TO 25 MORE CHANNELS, WITH THE SIZE of THE RATE
INCREASE REFLECTING THE NUMBER OF CHANNELS AND UPGRADES IN AREAS.
THE CHANNEL LINEUP VARIES. St. LOUIS CUSTOMERS WILL GET CHANNELS SUCH AS
ESPN2, CARTOON NETWORK, OXYGEN AND SOAP. IN SOUTH AND WEST ST. LOUIS COUNTY,
THE
new channels are fX. Hallmark Channel. National Geographic and Inspiration
Network.
"We've invested a lot" to provide new services such as high-speed Internet
access and video-on-demand. said Bill Shreffler. senior vice president for
Charter's central region. "We've put $300 million into the market so far. with
another $100 million to go." he said.
Avkrovd's role WILL be promoting new and future services, which aren't included
in the cable-rate increase. Charter analysts previewed the commercials at a
meeting Sept. 11. but news from the meeting was overshadowed by the attacks that
day.
Aykroyd, who has been a Charter shareholder since the company went public two
years ago, said he is excited about helping to showcase its new digital
products, including cable-modem service and digital cable.
"I'm thrilled to participate in what will become the standard in how we wire
ourselves to the world or how we might sometimes choose to escape from it,"
Aykroyd said in a statement. "No one has assembled as superb a technical team
for this purpose as has Paul Allen with his wired-world vision."
Allen, a co-founder of Microsoft Corp., is Charter's largest shareholder.
The ads depict Aykroyd in a variety of roles, from a baby sitter to a collector
of Pez candy dispensers who relies on the Internet to add to his collection
"We believe that teaming up with Dan Aykroyd will help customers identify with
Charter and deliver a new level of brand recognition to the company," said Mary
Pat Blake, senior vice president of marketing and Charter Media. "We know from
our customers that new technology only matters if it plays a meaningful role in
their lives.
"With Dan's help, we're showing how our products are used in some unexpected -
but fun and understandable - ways. He'll differentiate our company from the
competition with products that are easy and fun to use."
Meanwhile. Charter stock lost 59 cents Tuesday. The stock had lost about 20
percent of its value Monday after Jerald Kent resigned as chief executive, and
it fell $2 a share in early trading Tuesday before recovering to $12.22.
NOTES:
Reporter Jerri Stroud:; e-mail: jerristroud@post-dispatch.com;
Phone: 314-340-8384
GRAPHIC: PHOTO; (1,2) Photo not Available tms; (1) Color PHOTO by CHARTER
COMMUNICATIONS - Dan Aykroyd has agreed to appear in Charter's commercials in a
variety of roles, including as a baby sitter, to promote the company's new
services, such as video-phone service over the television.; (2) Photo by CHARTER
COMMUNICATIONS - In a television commercial, Dan Aykroyd demonstrates how he can
use the time saved bN subscribing to Charter Communications Inc.'s high-speed
Internet access: practicing his golf swing indoors and breaking a lamp in the
process.
#28
The Philadelphia Inquirer
SEPTEMBER 9. 2001 Sundav CITY-D EDITION Satellite TV puts cable on notice:
Dishes shrink. subscriber rolls swell as onetime gimmick gets serious. BYLINE:
Akweli Parker IN(_,)';IRER STAFF
WRITER
BODY:
Long after maverick homeowners began erecting homemade satellite dishes in the
1970s to intercept signals intended for legitimate cable-TV systems, satellite
television was considered more a novelty for tinkerers than a serious threat to
the cable industry.
What a difference a few decades make. With cable rate increases outstripping
inflation. and cable's satisfaction ratings among the lowest of any industry,
satellite-TV providers are seeing their subscriber rolls swell.
Of the 85 million U.S. households that subscribe to some type of pay-TV
service, cable still owns more than 80 percent of the market, with about 69.5
million subscribers.
But the gap is narrowing. Satellite added 3 million subscribers from June
1999 to June 2000, growing from 10 million to 13 million subscribers, according
to the Federal Communications Commission.
That's about three times the number of subscribers added by cable during the
same time, the FCC said in a report on industry competition. And according to
analysts and the satellite industry, another 3 million customers signed up
between July 2000 and July 2001, giving the direct-broadcast satellite industry
more than 16 million subscribers.
"The product really sells itself," said Randee Frankel, who, with partner
Michael McCracken, watched satellite-dish activations at their firm Comtek
Communications Inc. explode earlier this year. In three months, activations grew
from 20 per month to 100 per month.
Philadelphia-based Comtek is a regional distributor for DirecTV, one of the
nation's two big providers of satellite programming. (The other is EchoStar
Communications Corp.'s Dish Network.) Jimmy Schaeffler, subscription-TV
analyst for the Carmel Group, a research firm, called the growth of the
direct-broadcast satellite, or DBS, industry "amazing," considering that seven
years ago it had no customers. "Not too long ago, DBS stood for'don't be
stupid,"' Schaeffler said. "[Critics] didn't think it would work.
They didn't think selling the hardware would work or that programming would be
consistent enough to keep people happy."
For the cable industry. the space-based challengers have been good and bad.
On the one hand. the existence of the satellite services allows cable companies
to argue that there is no need for the government to regulate rates because
there is real competition in the pay-TV industry. On the other hand. satellite
nas become a serious threat to cable's market share. According to the Satellite
Broadcasting and Communications ASSOCIATION. AN industry trade group, 70 percent
of new satellite subscribers live where cable is available.
That competition has put pressure on cable firms to upgrade their networks so
they can provide more channels and features.
"It has absolutely changed the business, I think for the better." said Dave
Watson. executive vice president of sales and marketing for the cable division
of Philadelphia-based Comcast Corp., the nation's third-largest cable-TV
company. "It's forced the cable industry and Comcast to address the product,"
Watson said, by speeding up the rollout of digital cable service that can offer
more than 100 channels and offer advanced features such as video on demand -
features that were impossible over older analog networks. Today, both sides are
engaged in a marketing battle to win viewers. One Dish Network full-page
newspaper ad blared last week: "100 channels. Free installation. $9 a month. Can
your cable company do that?" The $9 monthly fee was part of a temporary,
one-year promotion; that information, though, was mentioned in much smaller
print. "We do target cable companies," Frankel said. Comtek isn't above taking a
cable bill, blowing it up to poster size next to a DirecTV bill, and displaying
it at communitv events.
Frankel. a former schoolteacher, even translates the propaganda into Spanish
to woo the area's burgeoning Latino population with DirecTV's nearly 50 Spanish
channels.
Cable companies have launched a counter assault to preserve their advantage in
the market. Regular cable viewers are no doubt familiar with the television ads
that deride satellite's vulnerability to weather and that highlight the risk of
purchasing soon-to-be-outdated equipment.
Subscribers to satellite services typically must buy a dish - typically about
$'_00 for a dish 18 to 20 inches in diameter, much smaller than the 7-foot
dishes that came before - and a receiver box for their television. There is also
an installation fee, about $200, although it is often waived for special
promotions.
The most popular DBS programming packages start at about $31 a month, offering
more than 100 channels. A package of local channels- costs an extra $5 to $6 and
often includes only the local affiliates of major networks plus a national PBS
feed.
From there. deciding which is the better choice becomes a matter of individual
preference.
For instance. all satellite channels are transmitted digitally, while only
some channels are truly digital with digital cable. Satellite providers say that
means their channels are clearer; cable operators say there's no discernible
difference.
DirecTV offers a broad array of sports programming, including a premium-priced
service offering a wide selection of National Football League games.
But the dish services have an Achilles' heel locally, because Comcast does
not provide its SportsNet programming to them. So local dish subscribers cannot
see many of the 76ers, Flyers and Phillies games that are available over local
cable systems.
"I'll be honest with you, there are a lot of jobs I haven't gotten because of
that," Frankel said. Another programming problem for the satellite services
surfaced last week, when the FCC reaffirmed its "must carry" rule. The rule says
that if a satellite service carries one local station in a market, it must carry
all the local stations in that market.
The rule is "a seriously onerous burden" said James Ashurst, a spokesman for
the Satellite Broadcasting and Communications Association, because DirecTV and
EchoStar lack sufficient broadcasting spectrum to cant' all the local stations
in all the markets thev would like to serve.
"We want to offer as many local channels as we can," Ashurst said, but being
forced to carry the 20 or so local channels in large markets such as New York
WILL prevent satellite firms from carrying local channels in small- to mid-size
markets such as Harrisburg.
And that would put satellite at a competitive disadvantage against cable,
which generally carries all local channels. The industry WILL continue fighting
the rule, Ashurst said.
The satellite-TV industry has other issues, too.
Perhaps the biggest is the proposed purchase of DirecTV by Rupert Murdoch's
News Corp. or DirecTV's smaller rival, EchoStar.
News Corp.'s attempt has bogged down because of the deal's complexity. General
Motors Corp., owner of DirecTV through GM's Hughes Electronics subsidiary. wants
a substantial piece of the purchase in cash rather than stock because of the
uncertain stock market. analvsts say.
While EchoStar is a long :hot to set DirecTV, analysts do not discount the
possibility. EchoStar chairman Charlie Ergen "has a real ability to make
converts" and squeeze money from otherwise tight-fisted financiers. even in
today's arid capital environment. Schaeffler said.
Akweli Parker's e-mail address is aparker@philivnews.com.
Dishing It Up
Of the 102 million television households in the United States, more than 69
million subscribe to cable and more than 16 million subscribe to a
direct-broadcast satellite service.
How the system works: The satellites hurtle in a geosynchronous orbit -
staying above the same spot on the earth - 22,300 miles above the equator. For
this reason, satellite dishes in the United States need an unobstructed view of
the southern sky. Satellite programmers on the ground broadcast signals to a
satellite on which they own or lease space. The satellite amplifies the signal
for the trip back to earth. On the customer's rooftop, an 18-inch dish focuses
the signal onto an antenna. The signal from the antenna is picked up by a
receiver in the home that unscrambles it.
Pros: Picture quality, channel selection, competitive long-term cost.
Cons: Elaborate installation, higher up-front cost, picture vulnerable to foul
weather, some local stations unavailable in some markets. Cost: Equipment and
installation run about $400 through electronics stores and other retailers;
DirecTV and Dish Network routinely cut the price in promotions. Popular
programming packages cost about $31 a month, with premium movie channels extra.
Local channels are an additional $5 to $6 a month.
#29
Time Warner raises cable rates again
Digital cable subscribers to get 1 I new channels
Saturday. December l. 2001
By William LaRue
%sub%Company says increase WILL help pay for higher programming costs.%endSub%
For the second time in less than a year, Time Warner Cable is raising its
rates for standard service at most of its Central New York cable systems. The
charge in suburban Syracuse for 71 unscrambled channels increases Jan. 1 to
$40.15 a month. That's an extra $1.90 a month, an increase of 5 percent - which
follows a 5.4 increase in August and a 5.4 percent increase a year ago.
The number of standard channels remains the same. However, customers who
subscribe to a digital cable box will get 1 1 new channels Dec. 27 at no
additional charge. These include National Geographic Channel. VH1 Classic and
Do-It-Yourself Network. Time Warner Cable is also raising its standard rates for
customers in Oswego, Fulton, Central Square and Oneida. However, rates remain
the same for the company's customers in the cities of Syracuse and Cortland,
where Time Warner follows a long-standing policy of making annual increases in
August. The new rates will help to pay for higher programming costs and other
expenses, according to Jeff Unaitis, spokesman for Time Warner Cable. "Like any
company, we experience increases in employee costs, increases in programming
costs, (and) increases in the investment technology to our network here,"
Unaitis said. He noted that Time Warner in August added several channels to
standard service, including The Disney Channel. The cable company estimated that
more than 35 percent of its 335,000 customers in the Syracuse division saw lower
cable bills at that time because Time Warner eliminated charges for Disney and a
tier of five other channels. Time Warner on Jan. 1 is also reducing the charge
for Stan! movie channel to $7.95 a month, a decrease of as much as $5 for some
customers. The monthly charge for each additional outlet getting digital cable
service is dropping to 95 cents a month, a decrease of $1.
The price for 13-channel basic service in the Syracuse suburbs decreases by four
cents to $7.21 a month. About 4.500 of its 85,000 suburban customers subscribe
to this lineup of mostly local broadcast channels. One consumer group argues
that standard rates at Time Warner have increased too much too fast. Mark
Cooper. director of research for the Consumer Federation of America in
Washington, D.C., said lack of meaningful competition allows Time Warner to
raise rates throughout the country at more than triple the rate of inflation.
"Who raises rates during a recession? Only those with market power," Cooper
said. "If they didn't have market power, they couldn't cram these things down
our throats." The main competition to cable TV are satellite dish services from
DirecTV and The Dish Network, although neither carries Syracuse broadcast
channels. Unaitis said the I 1 new channels on digital cable are heavy with
networks that customers have requested.
They include five educational channels, Discovery Civilization, Discovery Home
& Leisure, TechTV, Do-It-Yourself Network and National Geographic Network. Other
new networks on the digital service are children's networks Boomerang, Nick Gas
and a West Coast feed of Nickelodeon; music networks VH I Classic and Great
American Country, and Christian channel Trinity Broadcasting Network. "We can't
have enough family-friendly programming. I think the two Nick additions,
Boomerang and Trinity Broadcasting certainly reflect that demand," Unaitis said.
The addition of National Geographic Channel follows Time Warner's announcement
last month that it reached an agreement to offer the channel to most of its 12.7
million subscribers in the United STATES. CABLEFAX. AN industry trade
publication. reported that Time Warner Cable is receiving "launch fees" from
National Geographic of $3 to $5 per subscriber.
Time Warner this week is mailing letters to customers notifying them of the
lineup and rate changes. Here are Time Warner's monthly rates for standard
service as of Jan. I in several communities: In Fulton. rates rise 5 percent to
$38.95.
In Oswego. rates rise 5.3 percent to $38.40.
In Central Square. rates rise 8.1 percent to $36.70.
In Oneida and Rome, rates will range $39.90 to $41.20. with monthly charges
varying among several communities. For most, the increase is about 5 percent,
Unaitis said. The Newhouse family. which owns The Post-Standard, also owns
one-third of a partnership - Time Warner Entertainment-Advance/Newhouse - that
owns the local Time Warner cable system.
[COMCAST LOGO]
IMPORTANT CHANNEL AND RATE INFORMATION!
December 2001
Dear Comcast Customer:
Comcast of Alexandria is committed to providing the highest quality
entertainment and service to our customers. This summer FX was added to the
Basic Plus service on Ch 63. FX began offering NASCAR and Winston Cup Races in
2001.
There will be some additional programming changes effective February 1. A
summary of these changes follows.
Channel Additions:
o Outdoor Life-New Basic Plus Service Ch 68.
o Discovery Health-New Basic Plus Service Ch 67.
o CSPAN 3-New Comcast Digital Service Ch 105.
o ESPN Classic-New Comcast Digital Tier Service Ch 103.
Channel Moves:
o Spice (Adult PPV) will move from Ch77 to Digital Ch 251.
o TEN (Adult PPV) will move from Ch 78 to Digital Ch 78.
o Encore will move from Ch 67 to Digital Ch 150.
o Sundance will move from Ch 68 to Digital Ch 165.
Channel Changes:
o ESPNews (Ch 102), SoapNet (Ch 120), Nick Games and Sports (Ch 133) and
VH1 Classic (Ch 143) will be carried on Comcast's Digital Classic
service.
As a result of increased programming charges and other operational expenses, the
rates for your cable service and other associated cable charges are changing
effective February 1, 2002.
PREMIUM & SPECIALTY SERVICES
Service Current Monthly Charge New Monthly Charge
HBO Current Customers $11.20 $12.95
HBO New Customers $11.20 $14.95
Starz! (Digital Service Only) $11.20 $11.35
Cinemax $11.20 $11.35
Showtime $11.20 $11.35
The Movie Channel $11.20 $11.35
ANA (Arab-Network) $11.20 $11.35
Canales (digital service only) $10.95 $10.95
Analog Service - per premium per A/O $ 4.95 $ 4.95
Digital Service - duplicate premium package per A/O $ 4.95 $ 4.95
SERVICE FEES
Service Current Monthly Charge New Monthly Charge
Limited Basic $12.26 $12.26
Expanded Basic (Tier One)(not sold separately) $23.78 $25.91
Basic Plus (includes Limited Basic and Tier One) $36.04 $38.17
Basic Plus on Additional Outlets No charge No charge
Pay Per View Movies * $ 3.99 $ 3.99
Pay Per View Adult Programming* $ 9.99 $ 9.99
Monthly Cable Guide $ 1.50 $ 2.75
'PPV billed per use
www.comcast.com
ONLINE SERVICES
Service Current Monthly Charge New Monthly Charge
Comcast High Speed Internet (Basic Cable Customers) $ 39.95 $ 9.95
Modem Rental $ 5.00 $ 5.00
Comcast High Speed Internet (No Basic Cable Service) $ 44.95 $ 54.95
DIGITAL SERVICES
Service Current Monthly Charge New Monthly Charges
Comcast Digital Classic $ 9.95 $ 9.95
Optional Digital Channels (Cannot be sold
separately) $ 5.00 $ 5.00
EQUIPMENT
Service Current Monthly Charge New Monthly Charge
Digital Converter $ 3.77 $ 3.77
Analog Addressable Converter $ 3.77 $ 3.77
Analog Non Addressable Converter $ 2.74 $ 2.74
Analog Remote Control - one time purchase $ 7.40 $ 7.40
Lost or Damaged Digital Remote - per occurrence $ 16.95 $ 16.95
A/B Switch VCR - one time purchase $ 14.95 $ 14.95
A/B Switch Antenna - one time purchase $ 49.95 $ 49.95
TRANSACTION CHARGES Current New
Service Per Occurrence Per Occurrence
Activation (Prewired home installation) $ 22.14 $ 22.14
New Installation (Unwired home installation) $ 30.04 $ 30.04
Install A/O (same trip) $ 12.65 $ 12.65
Install A/O (separate trip) $ 14.23 $ 14.23
Transfer Service to New Residence $ 22.14 $ 22.14
Change of Services $ 10.00 $ 10.00
Late Fees $ 3.00 $ 3.00
Return Check Fee $ 25.00 $ 25.00
Home Service Call (VCR hookups, TV tuning, etc.) $ 18.97 $ 18.97
Same Day Install / Service Call $ 50.00 $ 50.00
Relocates $ 23.72 $ 23.72
Unreturned Equipment (per set) - Analog $ 300.00 $ 300.00
Unreturned Equipment (per set) - Digital $ 800.00 $ 800.00
Rates exclude franchise and FCC fees and taxes
Additional costs may be incurred for custom installs
Alexandria
Current And New Rates and Service Charges
Effective February 1, 2002
Thank you for choosing Comcast for your cable services. We hope to provide you
with many years of quality service. Please contact our customer service
department at 703-823-3000 when we can be of service.
Sincerely,
/s/ KIRBY BROOKS
Kirby Brooks
Vice President and General Manager Comcast Communications
In connection with the proposed transactions, General Motors Corporation ("GM"),
Hughes Electronics Corporation ("Hughes") and EchoStar Communications
Corporation ("EchoStar") intend to file relevant materials with the Securities
and Exchange Commission, including one or more Registration Statement(s) on Form
S-4 that contain a prospectus and proxy/consent solicitation statement. Because
those documents will contain important information, holders of GM $1-2/3 and GM
Class H common stock are urged to read them, if and when they become available.
When filed with the SEC, they will be available for free at the SEC's website,
www.sec.gov, and GM stockholders will receive information at an appropriate time
on how to obtain transaction-related documents for free from General Motors.
Such documents are not currently available.
General Motors and its directors and executive officers, Hughes and certain of
its officers, and EchoStar and certain of its executive officers may be deemed
to be participants in GM's solicitation of proxies or consents from the holders
of GM $1-2/3 common stock and GM Class H common stock in connection with the
proposed transactions. Information regarding the participants and their
interests in the solicitation was filed pursuant to Rule 425 with the SEC by
EchoStar on November 1, 2001 and by each of GM and Hughes on November 16, 2001.
Investors may obtain additional information regarding the interests of the
participants by reading the prospectus and proxy/consent solicitation statement
if and when it becomes available.
This communication shall not constitute an offer to sell or the solicitation of
an offer to buy, nor shall there be any sale of securities in any jurisdiction
in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such
jurisdiction. No offering of securities shall be made except by means of a
prospectus meeting the requirements of Section 10 of the Securities Act of 1933,
as amended.
Materials included in this document contain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause our actual results to be materially different
from historical results or from any future results expressed or implied by such
forward-looking statements. The factors that could cause actual results of GM,
Hughes, EchoStar, or a combined EchoStar and Hughes, to differ materially, many
of which are beyond the control of EchoStar, Hughes or GM include, but are not
limited to, the following: (1) the businesses of EchoStar and Hughes may not be
integrated successfully or such integration may be more difficult,
time-consuming or costly than expected; (2) expected benefits and synergies from
the combination may not be realized within the expected time frame or at all;
(3) revenues following the transaction may be lower than expected; (4) operating
costs, customer loss and business disruption including, without limitation,
difficulties in maintaining relationships with employees, customers, clients or
suppliers, may be greater than expected following the transaction; (5)
generating the incremental growth in the subscriber base of the combined company
may be more costly or difficult than expected; (6) the regulatory approvals
required for the transaction may not be obtained on the terms expected or on the
anticipated schedule; (7) the effects of legislative and regulatory changes; (8)
an inability to obtain certain retransmission consents; (9) an inability to
retain necessary authorizations from the FCC; (10) an increase in competition
from cable as a result of digital cable or otherwise, direct broadcast
satellite, other satellite system operators, and other providers of subscription
television services; (11) the introduction of new technologies and competitors
into the subscription television business; (12) changes in labor, programming,
equipment and capital costs; (13) future acquisitions, strategic partnership and
divestitures; (14) general business and economic conditions; and (15) other
risks described from time to time in periodic reports filed by EchoStar, Hughes
or GM with the Securities and Exchange Commission. You are urged to consider
statements that include the words "may," "will," "would," "could," "should,"
"believes," "estimates," "projects," "potential," "expects," "plans,"
"anticipates," "intends," "continues," "forecast," "designed," "goal," or the
negative of those words or other comparable words to be uncertain and
forward-looking. This cautionary statement applies to all forward-looking
statements included in this document.
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