U.S. House of Representatives: Committee on Energy and Commerce, RepublicansPrepared Witness Testimony: Ergen, Charlie

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

Mr. Charlie Ergen
CEO
EchoStar
1233 20th Street, NW
Suite 701
Washington, DC, 20036

Mr. Chairman, Mr. Markey, and distinguished members of this Subcommittee, on behalf of EchoStar Communications Corporation, I want to thank you for inviting our company to discuss video competition issues and how the merger of EchoStar Communications Corporation (EchoStar) and Hughes Electronics Corporation (Hughes) will promote competition and provide much needed benefits for American consumers. We would also like to outline for you why we believe the merger should and will win antitrust approval from the Department of Justice (DOJ) and regulatory approval from the Federal Communications Commission (FCC).

EchoStar started 21 years ago providing large, C-band satellite TV dishes to rural Americans. In 1996, we launched the small dish satellite TV service called DISH Network and it has become the leader in the pay television industry in offering low prices for superior, digital television products.

Program access rules need to remain intact because cable remains the dominant platform and has an incentive to withhold programming. We cannot, however, offer consumers a competitive product if we do not carry the programming that consumers expect, including cable-owned networks. By prohibiting cable-owned programmers from refusing to sell their product to us, the program access law opened the door to meaningful competition against cable.

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. EchoStar has recently filed with the FCC a petition suggesting alternative frequencies, including the "CARS" frequencies - which are "next-door neighbors" to satellite TV frequencies as well as the MMDS frequencies, in an effort to find a suitable home for Northpoint's plan. We hope that Congress will see that we are not opposed to competition. Rather, we welcome competition, so long as it does not interfere with satellite TV service for approximately 15 million Americans receiving service from the new EchoStar.

On behalf of EchoStar, I thank you for allowing us to testify here about our proposed merger and other video competition issues, and we look forward to working closely with Congress and the appropriate governmental agencies in their reviews.

I. EchoStar's Long History of Competing Against Cable

EchoStar started 21 years ago providing large, C-band satellite TV dishes to rural Americans. The demand grew quickly as consumers, schools and businesses sought television service in areas untouched by cable or off-air network TV signals. In 1996, we launched the small dish satellite TV service called DISH Network to provide competitive television services to urban and suburban consumers as well as those in rural areas. Since its debut, EchoStar's DISH Network has been the leader in the pay television industry in offering low prices for superior, digital television products. Other notable items about EchoStar include the following:

a) EchoStar began lowering its prices for satellite TV equipment to offer affordable or even free equipment and switched its annual programming fees for consumers to monthly rates, all in an attempt to compete better with cable companies.

b) Today, DISH Network offers consumers four main programming packages starting with America's Top 50 for $21.99 per month for over 60 channels that include the best in entertainment, sports, news and children's programming. The top programming package available from DISH Network is America's Everything Pak for $69.99 which offers 200 channels, including premium movie packages such as the popular HBO and Showtime.

c) We have been ranked number one in 2 of the last 3 years in the J.D. Power and Associate's customer satisfaction survey among satellite and cable TV subscribers.

d) A study by the University of Michigan Business School also rated EchoStar's DISH Network number one in overall customer satisfaction in 2001.^[1]

e) We currently have 6 high-power direct broadcast satellites in orbit, and we expect to launch three more satellites within the next 2 years to expand our local TV channel service, to comply with must-carry rules and to offer other services.

f) We have invested billions of dollars and extensive technological resources to compete vigorously in the marketplace with cable and to make satellite technology affordable and accessible for all Americans.

The planned merger with Hughes resulting in the new EchoStar will be a huge advance in our long-standing mission to compete with the dominant and entrenched cable companies. Satellite TV providers have limited, scarce spectrum to broadcast programming, and right now, DISH Network and DirecTV each broadcast hundreds of duplicate channels. For instance, both companies broadcast the same two C-SPAN channels, the same Disney channels, and so on. The merger will end this wasteful redundancy and offer consumers more programming such as the following: local broadcast channels available via satellite to more markets; greatly expanded high-definition television programming; pay-per-view and video-on-demand services and educational, specialty and foreign-language programming; and other new and improved product offerings, including interactive TV services. The merger will also allow us to reduce the rates we pay programmers which will create greater value for consumers, especially by ending the practice of programming providers charging satellite TV companies higher rates than they do cable companies. The combined company will also help bridge the rural/urban "digital divide" through the rapid development of an affordable, satellite-based, two-way, always on, high-speed Internet access product available to both rural and urban areas. New and better products, efficient operations, and more vigorous competition are precisely those things that the antitrust laws are meant to promote. That is why we believe that this merger will win the support of the DOJ and FCC.

We want to talk to you today about how Congress can spur competition in the MultiChannel Video Programming Distribution (MVPD) marketplace. Specifically, Congress should: (1) support the efforts of EchoStar and Hughes in combining their satellite TV resources and spectrum to create an aggressive competitor to cable; and (2) continue to address and improve upon the role of program access regulation in preserving a competitive and diverse MVPD landscape; and (3) encourage new entrants to the MVPD market without damaging the viability of existing providers.

III. The Proposed Combination of EchoStar and Hughes Will Allow Satellite TV to Become a Truly Effective Competitor to Cable

Providing competition against cable remains the single most important focus of satellite TV. DirecTV and DISH Network are the nation's third and sixth largest MVPD providers, which after the merger would consist of about 15 million combined subscribers, or 17% of the MVPD market. By contrast, the dominant and entrenched cable companies control about 80% of the MVPD market with nearly 70 million subscribers, according to the FCC's Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming.^[2] In fact, the top 10 largest cable firms such as AT&T, AOL-Time Warner, Comcast, Charter, and others account for over 61 million cable customers.^[3]

Satellite TV has worked diligently to compete with cable by offering technologically superior products and services, such as 100 percent digital channels and expansive channel choices. However, despite satellite TV's lower pricing and better products, EchoStar and Hughes' ability to compete with cable has been hampered by several barriers, such as the following:

1) We are constrained in offering local broadcast TV channels and other desirable programming to consumers due to constraints on scarce and limited satellite spectrum allocated by the government,

2) We have a small market share of customers compared to cable operators which creates difficulties in purchasing necessary programming from cable programmers at reasonable rates,

3) The burden of complying with must-carry rules, which force satellite TV providers to add hundreds of less popular channels in markets where we carry local network TV channels,

4) Satellite companies today do not have a high speed Internet service option that can effectively compete against cable's bundled Internet and video services.

This competitive imbalance has permitted cable companies to maintain their dominant market share while raising their prices an average of 6% per year over the last 10 years, more than twice the rate of inflation^[4]. At the same time, satellite TV has maintained low monthly rates for service with minimal rate increases and even then, well below the rate of inflation. Satellite TV equipment prices have dropped, and the equipment has even been offered for free in competitive promotions. In contrast to cable's recently announced round of rate increases, our recent "I Like 9" promotion offered consumers over 100 channels for only $9 a month for one year.

Over the past several years, to its credit, the cable industry responded to the competitive threat of satellite TV by introducing new products like digital cable, broadband, and telephony. The only way to remove the barriers to competition for satellite TV and realize a more competitive marketplace is by taking advantage of the extraordinary efficiencies and synergies created by combining EchoStar and Hughes. Currently, the two satellite TV providers broadcast approximately 200 of the same entertainment, news and sports channels, and with the advent of must carry rules on Jan. 1, 2002, both satellite TV companies will broadcast over 300 more of the same local and national TV channels for a total of over 500 duplicated channels. In other words, approximately 90% of the DBS spectrum will be wastefully repeated. These redundant transmissions are an inefficient use of limited, scarce satellite spectrum, and they prevent satellite TV providers from delivering other much needed content, such as local TV channels into more local areas or more high definition TV channels.

By eliminating this duplication, we will be able to offer hundreds of new channels of attractive content such as high definition television and local channels in more markets. This extraordinary increase in capacity will permit satellite TV to offer a wide variety of additional programming and services to consumers, including these benefits:

a) The new EchoStar will expand local network television coverage from the current 42 markets the companies serve to over 100 markets, with local TV channels offered in at least one city in each state, including Alaska and Hawaii. This will provide local TV service to about 85% of U.S. households. This increase in the ability to serve local communities will eliminate the reason that consumers cite most often when deciding not to subscribe to satellite TV - the inability to receive their local broadcast channels.

b) The efficiencies from the merger will also allow the new EchoStar to offer more bandwidth-intensive HDTV programming with a minimum of 12 different channels. By offering a critical mass of HDTV programming, satellite TV could help jumpstart HDTV adoption, which has stagnated due to lack of the necessary bandwidth and the slow conversion by broadcasters and cable operators to this new medium. Our commitment to HDTV will provide incentives for programmers to increase HDTV programming, for manufacturers to market their HDTV sets more aggressively, for consumers to buy more HDTV sets, and for competitors like cable and network broadcasters to upgrade their HDTV capabilities, all resulting in lower prices for equipment and more HDTV channel choices for consumers.

c) As a result of the merger, the efficiencies that are created will make more bandwidth available for additional pay-per-view services as well as the necessary bandwidth and equipment development needed to compete against cable's new video-on-demand technologies.

d) Provide increased educational programming such as tele-medicine for rural areas, as well as more specialty and foreign-language programming,

e) The additional bandwidth will also allow the development of new and expanded interactive services such as localized weather and traffic, detailed point-and-click news and sports information, and television commerce shopping.

f) The merger will also allow the new company to expedite the introduction of affordable, always-on, two-way, high-speed satellite Internet access.

The enhanced product offerings enabled by the merger will make satellite TV a much stronger competitor to cable and will force cable to respond in a similar manner. The American consumer ultimately wins by having a better satellite TV competitor to cable in the MVPD landscape.

IV. Program Access Rules Brought Real Competition and Should be Preserved and Strengthened
The program access statute that Congress enacted in 1992 is a true policy success story. No single governmental act is more responsible for the success of the satellite TV industry and for MVPD competition generally. We cannot offer consumers a competitive product if we do not carry the programming that consumers expect, including cable-owned networks. In fact, as was the case when Congress enacted the statute in 1992, many of today's highest rated program networks are owned in part or wholly by cable operators, including HBO, TNT, and CNN. By prohibiting cable-owned programmers from refusing to sell their product to us, the program access law opened the door to meaningful competition against cable.

Congress gave the FCC the ability to either let this prohibition on exclusive contracts sunset next year or to extend it. As we told the FCC yesterday in our comments concerning this proceeding, we believe that the prohibition on exclusivity is as important today as it was when Congress first enacted it. First, the fully competitive market that Congress envisioned stemming from the program access rules has not yet materialized. Cable remains the dominant platform and has an incentive to withhold programming from companies that take away its subscribers. We see this most clearly in the regional sports networks, which I will describe in more detail, where cable refuses to sell popular programming to satellite TV companies, giving up a huge potential source of revenue in order to hobble a competitor.

Second, the ability of satellite TV to compete would be severely undermined by exclusive deals covering popular networks that are vertically integrated with cable operators and exclusive deals covering relatively minor networks. In both instances, consumers would be left with less than the full complement of channels. One of our industry's primary competitive advantages is that of price - offering the American consumer the same or more for less money. That is the competitive pressure Congress sought to impose on the cable industry. However, if we are forced to offer fewer channels for less money, our ability to effectively compete against cable evaporates.

Third, EchoStar is not vertically integrated with program producers. Because we do not own or create the programming content, we are totally dependent on an open and competitive programming market to serve our customers.

Fourth, even after EchoStar and Hughes combine, the dominant and entrenched cable industry collectively will still control about 80% of the MVPD market and will be able to invest jointly in programming ventures much more heavily than the new EchoStar ever could. Such programming, if allowed to be a cable exclusive, would be leveraged to the disadvantage of satellite TV providers and consumers.

Cable's activities in the regional sports programming context not only shine light on how far cable is willing to go to undermine satellite TV competition, but they expose a shortcoming in the existing law that Congress and the FCC should address. Specifically, the 1992 statute defined the relevant programming as "satellite cable programming," meaning that the cable operator receives programming at the headend via satellite. That was an accurate technological description in 1992, but today with the abundance of terrestrial fiber, many cable operators are delivering programming to the headend terrestrially, thereby avoiding the program access rules.

Comcast, for example, is a dominant cable company that owns two-thirds of the Philadelphia Flyers, the Philadelphia 76ers, and holds a stake in the Philadelphia Phillies while also holding investments in the teams' arenas and other related interests. In 1997, it launched its own sports network called Comcast SportsNet, which owns the rights to the televised games of each of these popular sports teams. Comcast refuses to make this wildly popular sports network available to its competitors in the Philadelphia market, using the program access loophole as protection.

Cablevision, which provides service in the New York area, owns the New York Rangers, Knicks, and their TV home, the Madison Square Garden Network. In early 1999, Cablevision revised its sports programming distribution system from satellite to terrestrial so as to preclude RCN's carriage of their sports network. Last year, RCN filed a complaint against Cablevision because Cablevision would not provide access to the Madison Square Garden Network, claiming a terrestrial exception from the program access rules.

EchoStar's inability to provide local team sports programming has a direct effect on our ability to compete in these markets. Just as we would not be able to compete effectively with cable nationwide if we did not offer HBO, we cannot compete effectively in Philadelphia if we do not carry the Flyers or 76ers.

Congress and the FCC can address these anomalies in the competitive landscape by closing the terrestrial loophole and extending program access rules. Technology has changed since 1992 and the law should reflect that. The means of delivering programming should not determine whether the MVPD market is competitive.

V. New Entrants Should be Permitted to Enter the MVPD Market Provided They Do Not Cause Spectrum Interference

According to the FCC, only 3.4 percent of rural American homes are not passed by cable,^[5] constituting a small amount of homes. While the majority of these homes will have a choice between video services provided by the National Rural Telecommunications Cooperative (NRTC) and their affiliates, the new EchoStar or other MVPD providers such as the C-Band providers, we are sensitive to the concern that competition in rural America could potentially be reduced. That is why we have committed to nationwide pricing where all consumers, including rural Americans, will get the same price benefits from the intense competition occurring in urban areas. We offer nationwide pricing today and we're willing to commit to this going forward so that rural areas will get the advantages of competitive prices occurring in urban areas for more entertainment channels, high definition television, greater access to local TV channels, specialty and educational channels and high speed Internet.

The new company will also continue to honor DirecTV's contract with the NRTC, which gives the co-op and its corporate partner, Pegasus, the ability to offer competitive DBS service from a single orbital position that covers the entire country. This will not change with the merger. In addition, consumers will be able to purchase service from DISH Network, which will likely continue to offer its brand name in these regions, and from its established network of dealers who have proven extremely effective at serving rural America. It is our hope that Pegasus and NRTC will continue to sell their product and continue to be aggressive in their territories as a competitive participant in the MVPD marketplace.

There will be other competitors in this region besides the NRTC. C-Band, which offers a new digital service driven by Motorola, is strong in rural America. Cablevision and Dominion are video providers who also have FCC licenses to offer satellite TV service and have announced plans to expand their MVPD services in the near future. Proposed terrestrial and other wireless spectrum technologies, such as MMDS and those proposed by Northpoint Technologies, will also offer additional options for rural customers. EchoStar is not opposed to any of these technologies or similar competitors. However, like any other wireless licensee in other spectrum frequencies, such as cellular services or digital services offered by network broadcasters, we are opposed to having interference from other providers within the same spectrum in which we operate.

While EchoStar does not oppose the emergence of new competitors in the MVPD market, we are opposing the proposal by Northpoint, one of the companies seeking to enter the multichannel delivery market by using "wireless cable technologies" because NorthPoint's current proposal would interfere with the satellite reception of our established satellite TV customers. EchoStar's concerns about the electrical interference that Northpoint would cause to our customers' satellite TV signals have been confirmed by an independent arbiter: after conducting tests required by Congress, the MITRE Corporation has concluded that such a new service would threaten "significant interference" for the satellite TV service, and that the benefit of any mitigation methods must be weighed against their cost as well as the interference that would remain.^[6] In the spirit of constructiveness, not obstruction, EchoStar has recently filed with the FCC a petition suggesting alternative frequencies, including the "CARS" frequencies - which are "next-door neighbors" to satellite TV frequencies as well as the MMDS frequencies, in an effort to find a suitable home for Northpoint's plan.

The FCC has identified the CARS spectrum as a suitable place to increase spectrum usage. CARS spectrum is not currently used to serve consumers directly, eliminating any major interference concerns. Like the satellite TV spectrum, the CARS spectrum can be used to deliver MVPD service. Also similar to satellite TV spectrum, the CARS spectrum is used for point-to-point and point-to-multipoint technology, suggesting that a directional service like that proposed by Northpoint would be feasible on a spectrum-sharing basis. Finally, like satellite TV, CARS offers a full 500 MHz of spectrum, meeting one of the conditions sought by Northpoint.

With our filing yesterday concerning this proposed solution, we hope that Congress will see that we are not opposed to competition. Rather, we welcome the competition, so long as it does not interfere with satellite TV service for approximately 15 million Americans receiving service from the new EchoStar.

Competition in the MVPD marketplace is developing but will only reach fruition if satellite TV is allowed to become a truly effective competitor to the dominant and entrenched cable companies. Through the proposed combination of EchoStar and Hughes, a continued ban on exclusive agreements between cable-owned programmers and the cable operators, an improved program access rule addressing the terrestrial loophole, and a reasonable approach to allowing new MVPD competitors without damaging existing ones, Congress can help make truly effective competition a reality and provide new product benefits to the American consumer.

Charlie Ergen

Charlie Ergen started EchoStar Communications Corporation in 1980 under the name of EchoSphere, which sold C-band satellite TV dishes to rural homes in Colorado. Under his vision and leadership, EchoStar launched DISH Network in 1996, which has become the fastest growing direct-to-home satellite television company in the United States with over 6.4 million customers. In 1988, he received the Home Satellite TV Association Star Award. In June 1991, INC. Magazine named him Master Entrepreneur of the Year for the Rocky Mountain region. In 1996, he was recognized as the Rocky Mountain News Business Person of the Year. In 2000, Aviation Week Magazine named him Space Industry Business Man of the Year. Ergen was instrumental in fighting for consumer rights with the passage of the Satellite Home Viewer Improvement Act in 1999 which gave American consumers the right to watch local TV channels via satellite. He's also testified before Congress regarding other video competition issues on numerous occasions and was a co-founder of the Satellite Broadcasting Communications Association. He received his B.S. in General Business and Accounting from the University of Tennessee and his M.B.A from the Babcock Graduate School of Management at Wake Forest University.

^[1] Source: American Customer Satisfaction Index, University of Michigan Business School, August 2001.

^[2] FCC's Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, published January 2001.

^[3] Source: Cablevision Magazine Database, October 22, 2001. Basic subscriber counts are provided by MSOs and systems to Cablevision Magazine.

^[4] Source: Kagan World Media.

^[5] Source for number of rural consumers unserved by cable: FCC's Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, Footnote #80, December 1.Assessment released January 2001.

^[6] Source: The MITRE Technical Report: Analysis of Potential MVDDS Interference to DBS in the 12.2-12.7 GHz band. April 2001.

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

I. EchoStar's Long History of Competing Against Cable

Charlie Ergen