Testimony of Echostar Communications Corporation
before the Subcommittee on Courts and Intellectual Property
Committee on the Judiciary
U.S. House of Representatives
February 4, 1998
Mr. Chairman and distinguished members of this Subcommittee, thank you for providing me the opportunity to testify before you today. This hearing is particularly timely and important given the mountain of recent evidence that the reforms you are considering are crucial to assuring protection and a fair return to copyright owners, while creating more effective competition to cable. During 1997, cable rates rose 400% faster than the rate of inflation, continuing a troubling pattern that has proven difficult to control. The disparate treatment of cable and satellite retransmissions under the existing copyright laws is a significant factor hampering effective competition to cable monopolies from satellite distributors like my company. Only with your help can crucial programming, including superstations and local network channels, be delivered to consumers at competitive rates. Only with your help can the otherwise inevitable road towards significantly increased regulation and oversight of the cable industry be avoided. These efforts are equally important to protect copyright owners from the continuing pressure cable interests assert to obtain ownership interests in programmers, and to drive below market pricing for content.
My name is Charlie Ergen. I am the founder and Chief Executive Officer of EchoStar Communications Corporation, a Direct Broadcast Satellite ("DBS") company based in Colorado. I started EchoStar in 1980 as a manufacturer and distributor of C-band satellite dishes and grew the company, by the mid -1980's, into the largest supplier of C-band dishes in the world. I realized, however, that my vision of a dish in every home, school and business in the United States, and true effective competition to cable, could not be realized with large dishes.
Consequently, during 1987, EchoStar filed with the Federal Communications Commission (the FCC) for a DBS license. EchoStar launched its first DBS satellite during December 1995, its second satellite during September 1996, and its third DBS satellite in October 1997. We will launch a fourth satellite this spring. By the middle of this year, we will have invested approximately $2 billion in DBS, working to provide consumers the programming they desire, and create true, effective competition to cable.
With over a million customers to date, EchoStar's Dish Network is doing well. Our growth would not have been possible without the key legislation that Congress has passed to date, which has begun to open the door for entrepreneurial companies like EchoStar to compete. For example:
The first steps towards the creation of competition to cable would not have been possible absent the Cable Television Consumer Protection and Competition Act of 1992, which attempts to provide competitors at least a minimum level of access to popular television programming. Members of the cable cartel have direct or indirect ownership interests
in over 50% of those popular programming channels(1). Then, the Telecommunications Act of 1996 helped strike down certain cable-sponsored state, local and municipal zoning ordinances that prevented subscribers from installing satellite dishes. Finally, the compulsory copyright license provisions of the Satellite Home Viewer Act enables at least some consumers to receive crucial network programming by satellite.
The common purpose of each of these Congressional actions has been to try to force open the door for new companies that want to compete with the incumbent cable monopolies. As a result of these Congressional efforts, a number of companies have attempted to enter the subscription television market, including EchoStar and other DBS players.
Despite the promising start of the DBS industry, most attempts by other nacsent competitors to cable have met with more limited success. Cable still occupies "the dominant position in the Multi-Channel Video Distribution" (MVPD) market, as the FCC details in its recently released Fourth Annual Report on the state of video competition(2). The report confirmed the incessant complaints of victimized consumers, that cable operators increased their rates at nearly four times the rate of inflation (CPI) last year, and continue to fleece the public. The FCC report concludes that the monopoly status of cable reflects an "inability of consumers to switch to a comparable source of video programming".(3)This power also enables cable companies to assert undue influence on content providers. The Commission also found that 26 of the 50 most subscribed-to cable programming networks, and 8 of the top 15 cable programming networks, were vertically integrated with cable systems in 1992(4). In addition, the report shows that the cable industry is becoming more concentrated than ever, with the top four companies now serving over 62% of subscribers, as opposed to 47% in 1993.(5) I believe the best way to prevent the cable companies from increasing rates and asserting improper influence, is to create robust competition in the market.
To truly break the cable stranglehold over the video subscription market, we need help from Congress. There are two choices. Significant additional cable regulation, or more limited regulation combined with a more level playing field for cable competition, with real choice for consumers.
Consumer surveys show that when customers interested in satellite television go into a store, eight out of ten walk out without making a purchase. Why? Most often because they have learned they cannot get network programming by satellite.(6)
EchoStar plans to provide consumers a true alternative to cable.
Three weeks ago, EchoStar took the first small steps toward offering viewers the stations they spend three fifths of their time watching when they have their TV's turned on--their local network affiliates. EchoStar now offers certain consumers in Washington, D.C., New York, Atlanta, Dallas, Boston and Chicago, who qualify as "unserved households" under current law, the opportunity to receive their local network channels by satellite, instead of by cable. We are still severely limited by a number of laws which provide huge advantages to cable. However, for the first time, at least some consumers in these six metropolitan areas now have the option to pull the plug on cable altogether. By this summer, EchoStar intends to expand its effort to include 20 of the largest U.S. metropolitan areas, serving over 40% of the U.S. population.
But without Congressional action, we will only be able to offer true choice to a fraction of the total number of consumers in these areas. Most will continue to have no alternative to cable until the law is changed.
For example, not even the cable industry can plausibly defend the law today, which prohibits EchoStar from selling local programming to any consumer who receives local programming by cable, until that consumer disconnects from cable for 90 days. This law has the effect of placing EchoStar at a competitive disadvantage in its attempts to rescue the 70 million consumers being fleeced by the cable cartel today. Tens of thousands of consumers have tried to pull the plug on cable and subscribe to DBS programming, but continue to be hampered by this law, which makes it practically impossible for most to switch to satellite without great sacrifice and difficulty. The law should make it easy to switch, not difficult. Consumers, not cable lobbyists, should make the choice of how consumers receive programming.
As another example, while some parties read the law so as to prohibit EchoStar, due to current Section 119 copyright restrictions, from providing local programming to most U.S. households, cable is specifically permitted under Section 111 to provide local programming to 100% of the households passed by cable. Similarly, Section 111 specifically permits cable to provide local programming to commercial establishments. EchoStar is prohibited under Section 119 from doing so.
The cost of this programming is another glaring example of the challenges faced by EchoStar in its effort to provide competition to cable. Cable companies are the beneficiaries of a law permitting them to pay on average 9.7 cents and 2.5 cents respectively, per month, for copyright licenses for superstations and network channels. At the same time, EchoStar is required by law to pay $.27 per month for that same superstation or network channel. A serious disparity exists for superstation retransmissions, where the role applicable to satellite carriers is again 27 cents.
In enacting the unserved household legislation, Congress intended to protect the network-local affiliate relationship. While EchoStar has asked the Copyright Office to confirm that consistent with this intent EchoStar can serve a larger number of households than the cable interests would like, even with a favorable ruling by the Copyright office EchoStar and the DBS industry need Congress to make several changes to the Satellite Home Viewer Act to promote competition:
1. As you know, the current statutory license for satellite providers, first enacted in 1988, is not permanent but has been renegotiated every five years since then. We need Congress to institute a permanent, statutory, compulsory license that unambiguously declares that satellite providers have the right to retransmit local signals.
2. The license should cover both local network affiliates and independent stations.
Cable benefits from a compulsory license for both network affiliates and independent stations. Satellite cannot compete without similar rights. The additional fees collected can only benefit copyright owners.
3. The recent recommendation of the Copyright Arbitration Royalty Panel or "CARP" to raise the fees that satellite providers pay for superstation and distant network signals-and the Librarian of Congress' subsequent decision to uphold those rates, has created an inequality between what cable pays and what satellite must pay for the same product. As I have mentioned, effective the first of this year, satellite broadcasters must pay 27 cents per subscriber per month for every superstation and network signal carried. That is ten times what cable pays for network signal and three times what they pay for a superstation. In its recently released competition report, the FCC recommends that as Congress implements copyright changes: "existing differences between the copyright treatment of cable transmissions and of satellite retransmissions or broadcast signals should be removed where possible so that the compulsory licenses do not affect the competitive balance between the satellite carrier and cable industries."(7) The license should provide a satellite rate equal to the rate paid by cable. Satellite can not create effective competition to cable with such a cost differential.
4. The license should include commercial and other establishments, and not be limited to private homes as is the case today. How can it be justified that cable can sell to these customers but satellite can not.
5. The license should allow satellite delivery of local channels to all homes in the Designated Market Area (DMA) served by that station. The broadcasters have all agreed that DMAs reflect the economic realities of their interrelationships. There can be no plausible argument that this should not also be the basis on which EchoStar is permitted to transmit local stations.
6. The license should permit distant signals to be brought into a local area for a reasonable surcharge, unless and until the local broadcaster begins using the digital HDTV spectrum Congress gave to the broadcasters without charge for that purpose. Broadcasters should not complain when the means to protect their exclusivity privilege lies squarely within their control merely by fulfilling their promise to Congress. The Copyright Office of the Library of Congress was the first to formally recommend the surcharge solution and we wholeheartedly endorse it over the current system, together with a path for the local station to fulfill its promise to Congress.
7. Work with your colleagues on the Commerce Committee to enact a law that includes a retransmission consent mechanism that balances the right of the local bradcaster to its signals with the need to mandate that all network signals are made available to satellite providers on reasonable terms, including parity with cable retransmission consent regimes.
8. Working with your colleagues on the Commerce Committee the law must also address the disingenuous arguments being circulated by cable and other special interests that a must carry requirement be applied to satellite providers. It is understood by all that the cable must carry requirement was imposed because cable is a monopoly in its local markets, and that some small local stations could not survive without cable carriage. The must carry rule was not applied to MMDS, which was broadcasting local channels at the time must carry was enacted, because MMDS does not have monopoly power to crush small local broadcasters denied carriage. Similarly, EchoStar's penetration in any given local market today is typically less than one percent. EchoStar would be pleased to submit to a technology appropriate must carry if its penetration percentages ever approach those of cable.
Working with your colleagues on the House Commerce Committee, and the excellent staff of the Federal Communications Commission, we are confident you can devise appropriate guidelines expeditiously. Without these changes, cable influence and rates will only be controlled through continuing and greatly increased regulation. With these changes, and moderated cable regulation, true, full competition to cable can be created. Only then can cable rates and service be controlled by market forces rather than Congressional action.
Copyright holders will further benefit because the superior digital picture and sound of satellite will reach more viewers than was previously possible. Topographical and technical interference have always severely restricted the already limited quality of analog broadcasts. In his recent decision modifying the CARP recommendation, the Librarian of Congress recognized this benefit to copyright holders in determining a zero rate for local into local.(8)
Access to local programming is only one of two crucial elements necessary to allow DBS to be fully competitive in the market. The other is access to the popular channels controlled, produced or otherwise heavily influenced by members of the cable cartel.
Access to all programming on fair and consistent terms is essential to the creation of real competition in the market for distribution of video and audio to the home.
The Cable Act of 1992 and the Primestar federal and the now expired state antitrust consent decrees entered into by the largest cable companies all include attempts to address this problem. Recently, your colleagues on the Commerce Committee have been making significant inquiries into the effectiveness of the Program Access laws and we applaud that inquiry. But the restrictions imposed by these laws and decrees are eroding. Further, cable companies have devised , and continue to devise, ways to circumvent the language and the intent of Congress and other regulatory agencies.
EchoStar is opposed to all exclusive programming arrangements in the US video marketplace. Such arrangements thwart competition provided by entrepreneurial companies like EchoStar. We believe all programming should be made available to all video distributors on a fair and equal basis. Only then can and will lower prices, better customer service and other signs of rigorous competition develop.
The major problems which must be addressed in the Program Access area in order to allow for the opportunity for full competition include:
1. The terrestrial delivery and other creative cable loopholes. Until recently, it was widely believed that program access laws and antitrust consent decrees were at least adequate to assure satellite companies minimal access to programming owned by cable operators. Satellite companies have suffered repeated schemes by the cable companies to avoid or outright ignore those laws and decrees. Perhaps the recent brazen action of one of the largest U.S. cable companies will result in meaningful action. I refer to Comcast, which recently purchased Philadelphia area professional sports teams and promptly canceled the traditional satellite "back haul" of those events in an apparent attempt to evade the obligation to make that programming available to satellite companies. Comcast is, of course, the owner of the Philadelphia cable franchise, and logically concludes that it can avoid subscriber loses to DBS, and can perpetuate its monopoly, if the Philadelphia consumer has no satellite access to local professional sports. A program access complaint has been filed with the FCC against Comcast, but more is needed. We call for legislation to shut the door on this loophole. We also call for regulatory sanctions against Comcast for its attempts to evade the law, including re-examination of Comcast's regulatory filings in connection with acquisition of the Philadelphia sports teams to determine whether full disclosure of its plans was made, as is required by law.
2. Price discrimination. Cable companies systematically engage in price discrimination, which defeats the purpose of the program access rules. For instance, EchoStar has filed an FCC complaint against Cablevision for refusing to provide its sports channel programming to EchoStar on the same terms it provides that programming to cable operators. We have been forced to file program access complaints against Fox Sports and fX. Cablevision has already lost similar access complaints filed by Ameritech, Bell Atlantic and CellularVision. Equally egregious, fX has flatly refused to provide its programming to EchoStar even though it is 50% owned by the largest cable operator in the country. Absent additional enforcement mechanisms, it is clear that cable companies will continue to flout the law. We call for the recovery of actual damages, and punitive damages against repeat offenders. Consumers should also have a specific right to sue for violations, since they ultimately pay for these violations through higher prices.
3. Pressure on non-vertically integrated programmers. The increasing concentration of the cable industry makes it easier for an already incestuous industry to ensure that even the programming it does not directly own is subject to its control. For instance, in an FCC filing, the Outdoor Life Channel recently asked the FCC to permit it to provide an exclusive to cable, arguing that without offering that exclusivity, cable would not carry its programming and it could not realistically launch its service. One unaffiliated programmer told the FCC in a 1995 filing that if it had to provide all operators the same pricing as offered to TCI, it would be out of business. Virtually all non-vertically integrated channels are subject to the same pressures. Until the effective local monopoly enjoyed by cable ends, the pressure on unaffiliated programmers to provide non-market rates to cable MSOs will continue. After all, the decision by TCI or Time Warner to cease carrying a channel is the kiss of death for any channel today. We call for legislation assuring all MVPD providers the same rates for programming, with total direct and indirect discounts limited to actual, clearly verifiable cost savings. The days of the volume discount rate applicable only to the large cable MSOs should come to an end, especially where the cost to deliver that programming to DBS providers is less.
4. Limit cable programming/cross ownership. It is virtually impossible for a new programming service to launch today without support from TCI, Time Warner and other large cable monopolists. Hence many programmers now grant ownership interests to the largest members of the cable cartel as a condition to the launch of new channels. The days of these pressures must come to an end. That will only happen if programming/cable cross ownership is outlawed or at least moderated. Certainly, the regulatory authorities must act to prevent further concentration, such as that which would result if News Corp. is permitted to combine its programming with that of the five largest U.S. cable operator members of Primestar. When Congress authorized the FCC to allocate U.S. DBS spectrum, its only direction was that the spectrum be used to create effective competition to cable. When the FCC first promulgated rules governing DBS, its first directive was that the spectrum be used to create effective competition to cable. It defies logic to expect that competition will be created, or that the consumer will be better off, if the five largest cable companies in the world, including many of the largest programming content providers, are permitted to combine with one of the few remaining large non-cable affiliated programmers, to control the single most valuable piece of DBS real estate capable of use to create competition to cable. The Primestar/News Corp. unholy alliance to control the 110 degree orbital slot must not be permitted to proceed. If the Primestar/ News Corp. transaction were to be approved by the Justice Department and the FCC, cable influence would expand to include four of the major studios in the United States, the in market rights to virtually all professional football, baseball, hockey and basketball games, plus the out of market rights to professional baseball. Further, the reach would include three of the top five television networks in the United States and a growing number of sports teams. This must not be permitted.
Conclusion
The American people should not have to wait any longer for a serious competitive choice to their local cable monopoly. Congress has the power in its hands to ensure that competition can occur; not to choose winners and losers but simply to allow companies to have a chance to get into the game. I urge you to work with your colleagues on the Commerce Committee to extend the copyright laws in a manner that fosters competition and does not squelch the growth of this promising young industry. Access to local broadcast signals and to popular cable programming is key to the success of such an effort.
Thank you again for allowing me to testify before you today, I look forward to answering your questions.
0 In the Matter of Annual Assessment of the Status of Competition in the Markets for the Delivery of Video Programming , CS Docket No. 97-141, Fourth Annual Report, FCC 97-141 (rel. January 13, 1998) ("Fourth Annual Report"),Par. 160 "In 1997, 26 of the 50 most subscribed to cable programming networks are vertically integrated. Two of the top 50 services (C-SPAN & C-SPAN 2), while not owned by cable operators, were developed with significant involvement by the cable industry. In terms of prime time ratings, eight of the top 15 cable programming networks are vertically integrated, as was the case last year."
0See FCC Fourth Annual Report
0 See FCC Fourth Annual Report at par. 8.
0See FCC Fourth Annual Report at par. 160
0 See FCC Fourth Annual Report at Table E-3- 1997 Cable MSO Horizontal Concentration Nationwide.
0 S.B.C.A. Home Satellite DISH Owner Report of Findings, March 1997, at pgs. 59, 63-65.
0 Fourth Annual Report at par. 11, p.14
0 Library of Congress, Rate Adjustment for the Satellite Carrier Compulsory License, 62 Federal Register 55742, 55753 (Oct. 28, 1997), Copyright Arbitration Royalty Panel Report (Aug. 28, 1997) at 51-52.