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76–554 PDF







DECEMBER 4, 2001

Serial No. 50

Printed for the use of the Committee on the Judiciary

Available via the World Wide Web: http://www.house.gov/judiciary

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HENRY J. HYDE, Illinois
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
ED BRYANT, Tennessee
BOB BARR, Georgia
LINDSEY O. GRAHAM, South Carolina
MARK GREEN, Wisconsin
DARRELL E. ISSA, California
MELISSA A. HART, Pennsylvania

BARNEY FRANK, Massachusetts
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HOWARD L. BERMAN, California
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ADAM B. SCHIFF, California

PHILIP G. KIKO, Chief of Staff-General Counsel
PERRY H. APELBAUM, Minority Chief Counsel


DECEMBER 4, 2001

    The Honorable F. James Sensenbrenner, Jr., a Representative in Congress From the State of Wisconsin, and Chairman, Committee on the Judiciary
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    The Honorable John Conyers, Jr., a Representative in Congress From the State of Michigan, and Ranking Member, Committee on the Judiciary


Mr. Charles W. Ergen, chairman and CEO, EchoStar Communications Corporation
Oral Testimony
Prepared Statement

Mr. Robert Pitofsky, Georgetown University Law School
Oral Testimony
Prepared Statement

Mr. Bob Phillips, president and CEO, National Rural Telecommunications Cooperative
Oral Testimony
Prepared Statement

Mr. Gene Kimmelman, Consumers Union
Oral Testimony
Prepared Statement


    Statement of the Honorable F. James Sensenbrenner, Jr., a Representative in Congress From the State of Wisconsin, and Chairman, Committee on the Judiciary
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    Letter from Ms. Marcia S. Smith, specialist in Aerospace and Telecommunications Policy Resources, Science, and Industry Division

    Statement of the Honorable Lamar Smith, a Representative in Congress From the State of Texas, and Chairman, Subcommittee on Crime, Committee on the Judiciary

    Statement of the Honorable Sheila Jackson Lee, a Representative in Congress From the State of Texas

    Statement of Mr. Robert Sachs, president and CEO, National Cable & Telecommunications Association (NCTA)

    Excerpts from complaint filed in EchoStar v. DirecTV

    Statement of the Honorable Bob Goodlatte, a Representative in Congress From the State of Virginia

    Letter from Mr. Charles W. Ergen, chairman and CEO, EchoStar Communications Corporation


Statements Submitted For The Record

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    The National Association of Broadcasters (NAB)

Material Submitted For The Record

    Letter from Mr. Charles W. Ergen, chairman and CEO, EchoStar Communications Corporation

    Letter from Mr. Matthew M. Polka, president, American Cable Association

    Letter from Irwin, Campbell & Tannenwald, P.C., Attorneys at Law

    Letter from Mr. Bob Phillips, president and CEO, National Rural Telecommunications Cooperative

    Letter from Ms. Sophia Collier, president, BroadwaveUSA

    Letter from Mr. Patrick Gottsch, president, RFD Communications, Inc.

Attachments to Testimony of Mr. Bob Phillips, president and CEO, National Rural Telecommunications Cooperative
Map of Housing Units with Access to Cable
List of States with Housing Units with Access to Cable TV as Percentage of Population
  Graphic charts:
   Access and Subscribers: Satellite vs. Cable
   Small Satellite Dish (Ku-band)
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   High-Speed Internet (Ku-band)
   Broadband Internet (Ka-band)
   Size of Video Distributors Post DirecTV/EchoStar Merge
Article From New York Times, October 30, 2000—Business Section, ''Look Up In The Sky! Big Bets On A Big Deal''
Letter From Missouri Attorney General Jay Nixon to U.S. Attorney General John Ashcroft
  Reference Material:
''Advanced Telecommunications In Rural America, The Challenge of Bringing Broadband Service to All Americans.'' U.S. Departments of Commerce and Agriculture. April, 2000, at http://www.ntia.doc.gov/reports/ruralbb42600.pdf, at page 19
Declaration of Mr. Roger J. Rusch, U.S. Department of Justice expert, in Satellite Broadcasting and Communications Association of America v. Federal Communications Association, May 23, 2001
EchoStar v. DirecTV Enterprises, Inc., Amended Complaint, United States District Court for the District of Colorado, April 5, 2001



House of Representatives,
Committee on the Judiciary,
Washington, DC.

    The Committee met, pursuant to call, at 10 a.m., in Room 2141, Rayburn House Office Building, Hon. F. James Sensenbrenner, Jr. (Chairman of the Committee) presiding.
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    Chairman SENSENBRENNER. The Committee will be in order, a quorum being present.

    The Committee on the Judiciary has the exclusive jurisdiction over laws pertaining to antitrust and effective competition in the national marketplace. As Chairman of this Committee, I have made it a priority to rigorously examine the proper implementation and enforcement of our antitrust laws in the context of our free market economy.

    Aggressive business practices have always been a linchpin of America's economic success, and consolidating mergers can benefit consumers and the community. However, business practices that cross the line and violate our antitrust laws may stifle innovation, reduce consumer choice, diminish economic efficiency and lead to higher consumer prices.

    Earlier this Congress I held a hearing on competition in the broadband high speed Internet service market. This week I have scheduled a hearing which will focus on the antitrust immunity enjoyed by major league baseball. More hearings are forthcoming, and each reflects this Committee's obligation to examine the role of our Nation's antitrust laws and their application in various facets of our economy.

    Presently, nearly 90 million Americans receive multichannel video services, that is, services that provide them with many TV channels. The multichannel video industry, which is comprised of both cable and satellite video service distributors, has expanded entertainment options for millions of Americans and provided access to timely and important news information.
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    Last year, cable revenues alone exceeded $42 billion. The last several years have seen the meteoric growth of Direct Broadcast Satellite systems. DBS technology provides consumers throughout the United States with expanded digital viewing options by transmitting satellite signals directly to their homes.

    Since 1994, the number of DBS subscribers has skyrocketed from zero to nearly 17 million. However, DBS satellite services provided millions of rural Americans with access to multichannel video programming once reserved to cable subscribers in urban areas. In my State of Wisconsin, for example, more than 30 percent of the homes have no access to cable.

    Many of my colleagues on this Committee have heard complaints from constituents concerning poor cable service and higher cable bills; and DBS serves as a restraint on continuous cable rate hikes and customer service that leaves much to be desired. DBS will also provide thousands of rural communities with broadband Internet service, which is central to creating the telecommunications infrastructure necessary to recruit and retain high technology business.

    Two companies, DirecTV and EchoStar, have been in the vanguard of the DBS revolution. In a few short years both companies have transformed the U.S. market for distribution services and dramatically enhanced competition and choice.

    While these two companies are currently the only facilities-based DBS providers serving the United States, no one can argue that they have not been fierce competitors.

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    In late October, General Motors announced plans to sell DirecTV to EchoStar. The combined company will create a DBS operator with about 90 percent of the DBS market. The market dominance and potential anticompetitive consequences of such a merged company raise important questions that this Committee must address.

    Because millions of rural homes do not have cable access, a combined company would create a single multichannel video provider in these areas. For millions more in urban areas, a merger will create a single provider in the DBS service market.

    The purpose of today's hearing is not to prejudice the outcome of the Administration's pending antitrust review of the proposed DirecTV-EchoStar merger. We are legislators and not regulators. As legislators, we are committed to ensuring that our constituents are provided access to the highest quality products that our free market economy can provide; and today's hearing is consistent with that commitment.

    I look forward to hearing from today's witnesses. And will now slowly recognize Ranking Member Conyers, while he is sitting down, for his opening remarks.

    Mr. CONYERS. Thank you, Mr. Chairman. And good morning to the witnesses. We are always happy to see the former head of the FTC with us.

    Is Rupert Murdoch testifying here today?

    Chairman SENSENBRENNER. No, he is not. At least I don't see him in the audience.
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    Mr. CONYERS. Okay.

    Chairman SENSENBRENNER. But he has a commanding presence, as you know, sir.

    Mr. CONYERS. Well, how many people representing him are in the audience?

    There are a number of questions that we wanted to explore today. Where is the benefit to the rural consumer in this discussion that we are gathered here to examine with these distinguished witnesses? And I wonder what process new EchoStar would have to go through to launch high-speed Internet service. Maybe we will find out.

    I wonder if it is true that EchoStar was the only viable domestic candidate for this merger who submitted a competitive bid for DirecTV?

    If DirecTV was purchased by News Corp., wouldn't they have an incentive to use their power to emphasize FOX programming on DBS satellite TV to the detriment of other programming?

    How will other satellite TV companies be able to compete in terms of price and services? Might it not be nearly impossible for them to finance the technology required for effective competition, even locally?

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    Will anyone else be able to compete nationally? How can EchoStar effectively compete with local cable when its costs to the consumer are significantly higher even in urban markets where the larger markets usually lower prices?

    For example, price start-up costs, equipment costs, monthly service, compared to channel services. Does either company own an essential facility that is shared by other satellite TV companies or cable companies?

    Are there any customers currently served by either company that will not be served by the new company?

    How much does each company currently charge? Will the uniform price be less than both the current prices?

    Now, Ed has said that after the merger they will have bandwidth to serve local programming to 100 communities nationwide, reaching 85 percent of households. But would those not be primarily larger markets? Will they be providing local programming to rural customers?

    We will stay tuned and we will see how many of those things get answered this morning.

    I thank you, Mr. Chairman.

    Chairman SENSENBRENNER. Without objection, all Members' opening statements will be placed in the record at this point.
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    [The prepared statement of Mr. Sensenbrenner follows:]


    A quorum being present, the Committee will come to order. The Committee on the Judiciary has exclusive jurisdiction over laws pertaining to antitrust and effective competition in the national marketplace. As Chairman of this Committee, I have made it a priority to rigorously examine the proper implementation and enforcement of our antitrust laws in the context of our free market economy. Aggressive business practices have always been a linchpin of American economic success and consolidating mergers can benefit consumers and the economy. However, business practices that cross the line and violate our antitrust laws may stifle innovation, reduce consumer choice, diminish economic efficiency, and lead to higher consumer prices.

    Earlier this Congress, I held a hearing on competition in the broadband high-speed Internet service market. This week, I have scheduled a hearing which will focus on the antitrust immunity enjoyed by Major League Baseball. More hearings are forthcoming, and each reflects this Committee's obligation to examine the role of our nation's antitrust laws and their application in various facets of our economy.

    Presently nearly 90 million Americans receive multichannel video services; i.e. services that provide them many TV channels. The multichannel video industry, which is comprised of both cable and satellite video service distributors, has expanded entertainment options for millions of Americans and provided access to timely and important news information. Last year, cable revenues alone exceeded $42 billion.
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    The last several years have seen the meteoric growth of Direct Broadcast Satellite systems. DBS technology provides customers throughout the United States with expanded digital viewing options by transmitting satellite signals directly to their homes. Since 1994, the number of DBS subscribers has skyrocketed from zero to nearly 17 million. Moreover, DBS satellite service has provided millions of rural Americans with access to multichannel video programming once reserved to cable subscribers in urban areas. In my state of Wisconsin, for example, more than 30 percent of homes have no access to cable. Many of my colleagues on this Committee have heard complaints from constituents concerning poor cable service and higher cable bills, and DBS serves as a restraint on continuous cable rate hikes and customer service that leaves much to be desired.

    DBS also will provide thousands of rural communities with broadband Internet service, which is central to creating the telecommunications infrastructure necessary to recruit and retain high-technology businesses.

    Two companies, DirecTV and EchoStar, have been at the vanguard of the DBS revolution. In a few short years, both companies have transformed the U.S. market for distribution services and dramatically enhanced competition and choice. While these two companies are currently the only ''facilities-based'' DBS providers serving the United States, no one can argue that they have not been fierce competitors.

    In late October, General Motors announced plans to sell DirecTV to EchoStar. The combined company will create a DBS operator with around 90 percent of the DBS market. The market dominance and potential anti-competitive consequences of such a merged company raise important questions that this Committee must address. Because millions of rural homes do not have cable access, a combined company would create a single multichannel video provider in these areas. For millions more in urban areas, a merger will create a single provider in the DBS service market.
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    The purpose of today's hearing is not to prejudice the outcome of the Administration's pending antitrust review of the proposed DirectTV/EchoStar merger. We are legislators, not regulators. As legislators, we are committed to ensuring that our constituents are provided access to the highest quality products that our free market economy can provide, and today's hearing is consistent with this commitment. I look forward to hearing from today's witnesses and now recognize Ranking Member Conyers for his opening remarks.

    [The prepared statement of Mr. Smith follows:]


    Mr. Chairman, I have concerns about EchoStar's proposed merger with DirectTV.

    By combining DirecTV with EchoStar, a Direct Broadcast Satellite (DBS) monopoly provider is created that owns 100% of the spectrum capable of serving the United States. Due to lack of competition, EchoStar would have less incentive to develop innovative technology, program offerings and services.

    American consumers would go from three competitive options to two. And, in markets where cable is not available, as in some parts of Texas, millions of Americans would face a monopoly provider.

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    For those in rural areas, DBS is the only source of digital television service. The number of consumers in markets served by a monopoly provider is likely to increase in rural markets, as the small cable systems that serve those markets lack the resources to remain competitive and therefore may go out of business.

    EchoStar claims that it needs access to 100% of the DBS spectrum serving all 50 states to provide local broadcast signals to additional markets. EchoStar and DirecTV both could provide more local-into-local service but have chosen not to do so. Even with the merger, over half of the nation's 210 local television markets still will be left without local service.

    One piece of the pie is left out of the merger debate. A company called Northpoint Technology has developed and patented a wireless technology that reuses the satellite spectrum. It is waiting for its licenses in order to bring new service to rural America.

    Northpoint systems will carry all local TV channels in all 210 local television markets. DBS providers serve only the top 42 markets, and with the merger would only carry the top 100. Also, Northpoint's digital networks will offer broadband access to the Internet, reaching areas not served by cable or DSL.

    If EchoStar and DirecTV want to eliminate competition in the satellite industry, I would hope that they'd be willing to support introducing a new facilities-based competitor in the multichannel marketplace.

    [The prepared statement of Ms. Jackson Lee follows:]

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    Thank you Chairman Sensenbrenner and Ranking Member Conyers for holding this very important hearing on H.R. 3295, the ''Help America Vote Act of 2001.''

    Today, we consider one of the most important and pervasive issues in America: electoral reform. I look forward to the commentary and recommendations from our distinguished panel of witnesses: Cleta Mitchell of Foley & Lardner, James Dickson of the American Association of People With Disabilities, John R. Lott Jr. of the American Enterprise Institute, Philip D. Zelikow of the National Communications Federation, and Lloyd J. Leonard of the League of Women Voters of the United States.

    Few issues are as central to our democratic principles and freedom. Four decades ago, thousands of Americans risked their lives and ways of life challenging the prevailing institutional systems of discrimination in this Nation that prevented millions of Americans from exercising their sacred and fundamental right to vote.

    Many who rose up on legal, constitutional, and moral grounds lost their lives in the civil rights and voting rights movements. Their sacrifice is a reminder to us all that the freedoms and liberties that we all enjoy in this great country did not and will not come without a price. The widespread voter disenfranchisement of the 2000 presidential election continues to remind us of this.

    According to a report issued by Caltech and MIT, as many as 6 million Americans were denied their fundamental right to vote and to have their votes counted. More recently, in last month's Houston Mayoral runoff in Harris County, Texas, which I represent, a computer problem cut off access to the county's voter registration database. As a result, many voters were either turned away from the polls or were told by election officials that they could only vote if they had voter registration cards. Many could not vote at all.
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    This is truly horrifying in any democracy, but is particularly shameful in America. In order to rectify these egregious irregularities in process, it is patently clear that the nation's voting procedures, riddled with inequities and systemic barriers, must be corrected at all costs.

    The 2000 presidential election revealed a plethora of barriers to voting. In NAACP hearings on voting irregularities we heard testimony from law enforcement, poll workers, educators, civil rights organizations, state and federal legislators, and disenfranchised voters recounting the following:

1. That citizens who were properly registered were denied the right to vote because election officials could not find their names on the precinct rolls;

2. That registered voters were denied the right to vote because of minor discrepancies and clerical errors;

3. That first-time voters who sent in voter registration forms prior to the state's deadline for registration were denied the right to vote because their registration forms were not processed;

4. That African-Americans voters were singled out for criminal background checks at some precincts and that one voter who had never been arrested was denied the right to vote after being told that he had a prior felony conviction;

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5. That African-American voters were required to show photo identification while white voters at the same precincts were not subjected to the same requirement;

6. That voters who requested absentee ballots did not receive them but were denied the right to vote when they went to the precinct in person on Election Day;

7. That hundreds of absentee ballots of registered voters in various counties throughout the nation were improperly rejected by the Supervisor of Elections and not counted;

8. That African-American voters who requested assistance at the polls were denied assistance;

9. That African-American voters who requested the assistance of a volunteer to translate the ballot for limited proficient voters were denied such assistance.

    Beyond these egregious voting irregularities, millions of Americans were denied their fundamental right to vote simply because they were unable to vote due to prior work commitments. In fact, the great untold story in the last election, and in most elections in America is the voting disparity that exists between those who can afford to take time off work to vote and those who cannot. Moreover, this perpetual disparity has caused a voting gap that threatens the very fabric of our representational democracy and has challenged Congress to legislate a solution that addresses this great disparity.

    In August, 2001 the non-partisan National Commission on Federal Election Reform, also known as the ''Ford-Carter Commission'' attempted to remedy this problem when it issued its policy recommendations with respect to electoral reform. Its premature recommendation for an Election Day holiday was as follows: ''in evenly numbered years the Veterans Day national holiday be held on the Tuesday next after the first Monday in November also serve as our Election Day.'' I believe there is a better and different approach and I have affered legislation to change to that approach.
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    I take exception with this recommendation. It is because of the sacrifices made by our Veterans for freedom, the flag, and the American people that we are today able to vote. Their sacrifice, particularly in light of the September 11 attacks and the ongoing war on terror, reminds us that we cannot take our freedoms and democracy for granted. As such, this important day should be preserved and honored at all costs.

    That's why, on March 7, 2001 I introduced H.R. 934 which ensures that the fundamental right to vote is guaranteed to every citizen of the United States without interference with Veterans Day. H.R. 934 establishes Presidential Election Day on the Tuesday next after the first Monday in November in 2004 and each fourth year thereafter, as a legal public holiday so that all Americans can vote irrespective of their economic status. Importantly, it also recognizes the sacrifices of Veterans and the sanctity of Veterans Day by ensuring that Election Day never falls on Veterans Day.

    The legislation before us today, H.R. 3295, is one of numerous efforts to reform a system which clearly needs fixing. As the Chair of the Congressional Election Reform Caucus, I applaud such efforts. However, I am afraid that this particular legislation, H.R. 3295, contains numerous problematic provisions and falls short of the kind of comprehensive legislation that would ensure that every American's vote is cast and counted.

    In fact, in many respects, this bill in its current state may actually reverse voting protections as provided under current law. For example, it fails to ensure that Americans are allowed to cast provisional ballots where their eligibility is questioned at the polls. It fails to ensure, regardless of race or ethnicity, that the voters have access to voting machines that perform accurately. It deviates from current federal law allowing for voter names to be ''purged'' from the voting rolls, and fails to provide such protections ensured by computerized statewide voter registration lists. Finally, it fails to ensure that voters with disabilities are adequately assured of their voting rights, and fails to ensure that all voters have access to machines that are easily and universally operable.
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    In the alternernative, I am glad to lend my support to the recent bi-partisan efforts of Senators Dodd and Daschle, and Representatives Conyers and Morella in their recent introduction of S. 565/H.R. 1170, the ''Equal Protection of Voting Rights Act''. This bill would provide greatly needed grants to states and localities for federal election administration systems that are part of state plans developed by the Governors and approved by the U.S. Attorney General.

    States would have to adhere to mandatory uniform national standards for: accessibility, nondiscriminatory standards addressing election technology, provisional voting and sample ballots, and provide funds for voter education and worker training programs. A bipartisan commission would examine issues, develop ''best practices'' and issue a report within one year.

    The report would include consideration of the best ways for the federal government to permanently assists state and local governments. This legislation is deserving of all of our support.

    While I thank the sponsors of H.R. 3295 for their efforts to reform our badly corrupted election system, I'm afraid that their bill fails where others succeed.

    For the forgoing reasons, I cannot support H.R. 3259 and urge my colleagues to also oppose it.

    Thank you.

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    Chairman SENSENBRENNER. Also, without objection, the letter from Sophia Collier, president of Broadwave, USA; a letter from Patrick Gottsch, president of RFD Communications; and information from the National Association of Broadcasters will be included in the record following the testimony and questions and answers of the witnesses today and any material that they wish to submit.

    Without objection, this hearing's record shall remain open to receive additional information or answers to questions requested of the witnesses.

    Today's witnesses are Charles Ergen, the CEO of EchoStar Communications Corporation; Robert Pitofsky, professor at the Georgetown University Law School and former Chairman of the Federal Trade Commission; Bob Phillips of the National Rural Telecommunications Cooperative; and Gene Kimmelman of the Consumers Union.

    Could you all please stand, raise your right hand and I will swear you in.

    [Witnesses sworn.]

    Chairman SENSENBRENNER. Let the record show that each of the witnesses answered in the affirmative.

    Chairman SENSENBRENNER. I would like to ask each of the witnesses to summarize their statements in 5 minutes or so. Without objection, all written material, including testimony in total, will be included in the record following your prepared statement.
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    Mr. Ergen, you are first.


    Mr. ERGEN. Thank you, Mr. Chairman, Mr. Conyers, distinguished Members of the Committee. Thank you very much for inviting EchoStar to testify today about video competition and the proposed merger of EchoStar Communications and Hughes Electronics Corporation. I believe that this will promote competition among the multichannel video providers and offer much-needed benefits to consumers.

    I would like to first take a minute and give you a little background on EchoStar. We started back in 1980 selling big dishes primarily to farmers and ranchers in rural America. We had one problem. They cost $20,000 and they were about 10 feet in diameter.

    By 1996, we realized that we had to get—to compete against cable. A big dish for $20,000 in your back yard in a city wasn't going to be effective. And we have brought the cost down to below $1,000, but we had to bring the size down. So we launched a small dish service called DISH Network, a little pizza-sized dish and brought the cost down to about the price of a VCR. Then and only then could we reach our dream of competing on a level playing field with cable.

    We had some advantages back in those days. We were the—only us and DirecTV and others were the only digital satellite providers, and our market took off. Over the last 6 years we have acquired about just over 6 million subscribers, or about 6 percent of the consumers in America.
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    We have been rated number one in customer service 2 of the last 3 years in J.D. Power; and this year, in the University of the Michigan Business Survey, among consumers. We have spent billions of dollars and launched six high-powered satellites with two more high-powered satellites scheduled to launch sometime next year.

    The first step in really analyzing this merger is, what market are we in? Many people suggest that we are only in the satellite television business market. In other words, we only compete against satellite television providers. Nothing can be further from the truth. We compete in the MVPD market, in other words the pay television market, and that includes, among others, cable operators, SMATV operators, phone companies and overbuilders.

    In that particular market, we only have, between DirecTV and DISH Network, 17 percent of the market or about 15 million homes between the two companies. That compares against the entrenched incumbent, the cable companies, who have 80 percent of that market. It hardly makes us a monopoly in that business. The Department of Justice has shared that view in their analysis of the Primestar merger back in 1998. And the FCC has also written in the past that as their—that being the relevant market.

    In this market, cable rates have gone up about 2 1/2 to 3 times the rate of inflation each and every year for the last 10 years, notwithstanding the fact that the DBS business has now been in business for 7 or 8 years. So we haven't been able to stop those inflationary, or those more than inflationary, increases, which means we haven't been as effective a competitor as we would like to be. We don't want government regulation, but we need to be able to compete effectively, and there are several barriers to entry, to our effectively competing against cable.
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    First and foremost, we duplicate each other's spectrum. We have this valuable resource in outer space that is very limited with only three full CONUS slots, yet we duplicate each other's spectrum. That means that of the 600 channels that we both broadcast, each of us are broadcasting over 500 of the very same channels. So the customer, in effect, may have a choice between providers, but doesn't have a choice in services.

    Our operational inefficiencies are massive. We both have several billion dollars of satellites launched that do exactly the same thing. We have multiple uplink centers; we have multiple fiber connections to connect our points of presence; and we have different technologies and inoperative boxes between each platform. To compete, we must remove some of these barriers to entry, and the benefits will be obvious.

    First and foremost, we will be able to increase our local markets where we compete against cable from about 40 markets to well over 100. And, in fact, we will be able to do at least one market in every single State.

    Now, why that is important? The single biggest reason that people do not buy satellite systems today is lack of local broadcasting. People spend two-thirds of their time watching the popular networks' programs, and only one-third watching the 3 or 400 cable channels that are out there.

    So if we don't have those network channels, we are not an effective competitor to cable. That is one reason the cable rates have gone up greater than the rate of inflation.
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    We also have the benefit of high definition television. For 6 or 7 years, broadcasters have talked about putting high definition television out across America, yet we see very little of that today. Yet satellite has the unique ability to broadcast high definition television to every square inch of the United States, including Alaska and Hawaii, if only we are permitted to do so and only if we have the spectrum to do that.

    As you know, high definition television takes up about six regular channels worth of bandwidth. It doesn't make a lot of sense for DirecTV to broadcast HBO in high definition television and DISH Network to broadcast the very same channel, thus using very valuable capacity in the marketplace.

    Our equipment is not interoperable. We both use different standards, so we have kind of a Beta/VHS situation going on within the business. It makes a lot more sense to become standardized so that set-top boxes, TV sets, recording devices in the future all can have the same standard in the box.

    The cable industry is already doing that. We need to do that to be effective to effectively compete against them.

    We also have some inefficiencies of scale. Our programming costs are our number one costs. About 40 percent of our costs are programming costs, yet we, as providers, pay somewhere between 5 and 15 percent more, on average, than the largest cable operators for our programming costs.

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    We need to be able to take advantage of the same volume discounts that an AT&T or a Time Warner can take advantage of. If we can get lower programming costs, then we can pass those savings on to consumers.

    Chairman SENSENBRENNER. Mr. Ergen, do you think you could wrap up in about 15 seconds or so, because the light is on?

    Mr. ERGEN. I show a minute here but I apologize. Mine shows a minute. So I don't know if——

    Chairman SENSENBRENNER. That is over the 5.

    Mr. ERGEN. Thank you. A minute over.

    Additionally, uniform—we are willing to commit to uniform nationwide pricing. We already do that as a company. So that means that the people in rural America get all of the benefits of high-definition television, high-speed broadband access—something I didn't get a chance to talk about—and local television competitive competition with cable, at the same time paying the same price as in most competitive markets where there are cable overbuilders and true cable competition.

    So, in conclusion, this merger is necessary for consumers. This merger is necessary for our industry to compete on an effective, level playing field.

    Thank you very much. I will be happy to answer your questions.
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    Chairman SENSENBRENNER. Thank you.

    [The prepared statement of Mr. Ergen follows:]


    Mr. Chairman, Mr. Conyers and distinguished members of this Committee, on behalf of EchoStar Communications Corporation, I want to thank you for inviting our company to testify today. We appreciate the opportunity to discuss video competition issues and how the merger of EchoStar Communications Corporation (EchoStar) and Hughes Electronics Corporation (Hughes) will promote competition among multichannel video providers and offer much needed benefits for consumers. We would 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. 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:
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   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 fees, all in an attempt to compete better with cable companies.

   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.

   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.

   A study by the University of Michigan Business School also rated EchoStar's DISH Network number one in overall customer satisfaction in 2001.(see footnote 1)

   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.
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   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's why we believe that this merger will win the support of DOJ and FCC.
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    DISH Network and DirecTV provide pay television services, including traditional cable networks like ESPN and CNN, premium movie channels like HBO, and local broadcast stations. Satellite TV providers compete with cable television providers, which offer similar channels and services and offer local broadcast stations in virtually every market they serve. Satellite TV providers also compete with other competitors that offer a similar mix of programming, including SMATV, which offers ''private cable'' to apartment buildings and single-family residential developments; Multipoint Multichannel Distribution Service (MMDS) or wireless cable; C-Band satellite TV service, which recently began to offer digital service nationwide; and cable overbuilders such as RCN, WideOpenWest and Knology that are beginning to deliver a multitude of bundled services by fiber. National Rural Telecommunications Cooperative (NRTC) and their affiliates, such as Pegasus Communications which has rights to independently market certain DirecTV programming in defined geographic areas, also compete in the pay television market, also known as the Multichannel Video Programming Distribution (MVPD) market.

    Some have attempted to suggest that the relevant product market for examining this proposed merger should be narrowly defined to encompass only satellite TV services, while excluding cable television. But as you will see in my testimony, such a definition not only flies in the face of reality, it has also already been rejected by the DOJ. The DOJ clearly rejected that approach first in its 1998 case by blocking the acquisition by Primestar, Inc. of the 110 degree orbital slot, and more recently in comments urging the FCC to approve the transfer of that orbital slot to EchoStar. The DOJ has described that the relevant antitrust market as Multi-Channel Video Programming Distribution (MVPD) services.(see footnote 2)
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    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.(see footnote 3) 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.(see footnote 4)

    Cable firms continue to dominate the MVPD market and have raised rates an average of over 6% in each of the last 10 years.(see footnote 5) These almost annual increases are two-and-a-half-times greater than the rate of inflation during the same period. In contrast, satellite TV equipment prices have steadily dropped and its programming prices risen only slightly, well below the rate of inflation. DirecTV did not raise its basic programming price from the launch of its service in 1994 until 2000, and DISH Network, since its launch in 1996, did not raise rates on its basic programming package until 2001.

1) Barriers to Competition

    Satellite TV providers have made some headway in providing some competition against the dominant and entrenched cable companies, and American consumers are better off for it. However, EchoStar and Hughes face competitive barriers which prevent them from providing consumers with the programming and services they desire, and which limit satellite TV's effectiveness in provoking a competitive response from cable (as demonstrated by cable's ability to raise prices in the face of low satellite TV prices and 100 percent digital TV offerings). These barriers include:
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   The duplication of very limited and scarce satellite spectrum or bandwidth,

   An inability to offer a more competitive, satellite Internet broadband option compared to cable's bundled video/Internet services,

   Other operating inefficiencies such as duplicated administration, uplink, backhaul and satellite operations. This translates to $1.9 billion to $2.3 billion in unrealized savings and over $5 billion unrealized savings over a 3-year period,

   Unrealized savings totaling billions of dollars from not combining satellite assets and spectrum sharing opportunities,

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

   Our constrained ability to offer local TV channels due to limited, scarce satellite spectrum allocated by the government,
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   Our smaller market share of customers compared to the large cable operators. This hinders our ability to purchase necessary programming from cable operators at reasonable rates.

    The merger will help break down these competitive barriers and will allow the new EchoStar to fulfill satellite TV's potential as a vigorous competitor to cable and offer greater benefits to American consumers.


    The only way to remove the barriers to competition and realize a more competitive marketplace is by taking advantage of the extraordinary efficiencies and synergies created by combining EchoStar and Hughes.

1) Vastly Increased Output of Programming and Services

    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 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 channel duplication, the merger will generate sufficient bandwidth for the new EchoStar to offer the following benefits:
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   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.

   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.

   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.

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

   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.

   The merger will also allow the new company to expedite the introduction of affordable, satellite-based, two-way, always on, high-speed Internet access, as we will describe in more detail.

    Overall, the merger will enable the new EchoStar to provide all of the above services at more competitive rates to cable without sacrificing quality or service.

2) Standardizing Satellite TV Equipment

    Other efficiencies are gained by standardizing the two currently incompatible, satellite TV set-top box platforms currently offered by EchoStar and Hughes. Standardization will decrease manufacturing costs through volume purchasing and allow easier integration of satellite TV receiving equipment into TVs and other hardware. Standardization will also allow faster and more seamless production of new technologies like video on demand.

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    To the extent that consumers will need new equipment to accomplish this standardization, there will be no costs incurred by current EchoStar or Hughes subscribers who wish to maintain their current level of subscription television programming.

3) Cost Savings

    In addition to the extraordinary bandwidth and satellite-based Internet access efficiencies, the merger will create significant cost-saving efficiencies for the new company. These savings will enable it to offer a greater value to MVPD consumers, including the following:

   Programming Costs: The new company's major expense after the merger will be programming costs. Currently, our company pays higher rates for programming than our larger cable competitors. The merger will allow for a level playing field with cable companies where the new EchoStar will be able to take advantage of volume discounts and negotiate for a more competitive price, which will help keep satellite TV prices low for consumers.

   Advertising Revenue: The merger will also create a critical mass of viewers that will be more attractive to national advertisers, thereby increasing competition for national television advertising dollars. More advertising revenue will allow our company to earn enhanced, alternative revenue streams that will assist in keeping satellite TV rates competitive against cable.

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   Operational Savings: In addition to services that will challenge the service offerings of cable, the new company will eliminate substantial redundancies in uplink and backhaul expenditures while increasing output. For instance, coordinated satellite launches can save approximately $250 million a year. The merger will also increase innovation through sharing of past research and increased investment opportunities.

    The total cost savings from combining lower programming costs, increasing advertising revenue and reducing operational costs will total more than $2 billion after the first year and over $5 billion within a 3 year time span.

4) Greater Access to Broadband

    Another important efficiency created by the merger is the consolidation of the two companies' satellite broadband Internet services. Only through consolidation of satellites and spectrum will the new EchoStar be able to achieve the economies of scale and spectrum necessary to enable it to compete more effectively against the bundled cable/telephony/Internet services of cable. While broadband access is widely available in much of urban and suburban America, service to rural areas has lagged far behind. The efficiencies created by this merger will help bridge the ''digital divide'' between our urban and rural citizens. The new EchoStar will serve millions of rural Americans without access to cable modem service or DSL with two-way, always-on, satellite-based, high-speed Internet access. At the same time, we will be better positioned to compete on a more level playing field with cable modems and DSL in urban areas, offering the same quality everywhere, all at competitively set, nationwide prices.

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    Developing an efficient-scale satellite Internet service will require each company to put at risk an investment of at least $2 billion, without the fair prospect—given each company's respective subscriber base—of acquiring the number of users needed to make that investment economical.

    Both EchoStar and Hughes currently have relationships with start-up companies to develop satellite-based Internet systems that can be integrated with satellite video services. Each has a relationship with different firms currently offering services in the Ku band, and with firms developing services in the Ka band.(see footnote 6) Due to high equipment and installation costs of approximately $1,000, and monthly service fees ranging from $60 to $100, the service is simply not competitive on a price/quality basis with cable modem service or DSL. Currently, only one percent of total satellite subscribers, fewer than 200,000 subscribers, use the data services. Under current circumstances, this product serves only a high-priced, niche portion of the market. In order to justify the investment in research and development, satellite launches, and related infrastructure, as well as to bring costs down to competitive levels, a satellite-based Internet service would need vastly greater economies of scale to succeed against cable modem or DSL service. Neither satellite TV company alone has a large enough subscriber base from which to achieve the scale for Internet service that would result in effective competition to cable and DSL offerings. Thus, it is necessary for the two satellite TV companies to combine their efforts in order to have a realistic chance of success.


    We believe after the merger of EchoStar and Hughes, consumers nationwide will have the kind of competition to cable that members of Congress hoped for when they passed the 1996 Telecommunications Act. Indeed, the proposed merger between EchoStar and Hughes is a vital step toward bringing price and service competition to the MVPD marketplace.
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1) A Healthy MVPD Market Creates Competition

    The new EchoStar will become the first truly effective competitor to cable. However, some opponents of our merger would rather see two competitively weakened satellite TV providers rather than a single, combined, effective provider competing against the dominant and entrenched cable companies.

    Satellite TV providers have an economic mandate to price low and provide high quality service. This model has developed because of the tremendous upside potential of winning customers from cable's huge installed customer base, the risk of losing current satellite customers if our pricing is not competitive, and satellite TV's high fixed costs and low marginal costs. Moreover, the capital market's investment in satellite TV has been significantly premised on the expectation of continued growth, making any slow-growth strategy unpalatable to a critical constituency.

    Satellite TV providers compete with dozens of cable firms nationwide, each of which offers different price and quality combinations. Because satellite TV providers offer national distribution, they must compete rigorously with the most competitive of these cable companies, most of which offer a full array of digital services including Internet/telephony/video bundles.

    Digital cable's improved capabilities, in particular, threaten to take away satellite TV's most profitable, high-end customers who are the most willing to pay for the highest quality service. As the gap closes on our past advantages, the merger is the only way that satellite TV will be able to compete aggressively with cable's rapidly improving services.
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    In addition, satellite TV faces competition from cable overbuilders, Regional Bell Operating Companies (RBOCs), and utility companies, which have offered video services to a substantial and growing portion of the U.S. population, especially where the most profitable customers are concentrated. These competitors' products, often including phone and data service, create even more uniformity than the varied cable offerings. In addition, C-Band is also strong in non-cable areas, and has been recently reinvigorated with the ability to offer digital, rather than analog, signals.

2) Broadcasters as New Entrant into MVPD Market

    In the past, the National Association of Broadcasters has consistently demanded from satellite TV providers that they must carry all local channels in as many cities as possible. As a result of the merger, the new EchoStar can better achieve the broadcasters' objectives. However, the broadcasters have recently reversed their course on this objective by opposing our merger. This opposition is on dubious grounds since they have recently received free digital spectrum. It may be that their true motivation for opposing the merger is to stifle competition, particularly now that they have free channel capacity they can use to offer subscription television services and compete with cable, satellite and others in the MVPD market. Only with the merger will there be effective competition in the MVPD marketplace and only then will satellite TV be able to offer hundreds more local TV channels in over 100 markets and at least one city in all 50 states for approximately 85% coverage.

3) Uniform, Nationwide Pricing

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    The benefits of competition between cable and satellite TV will not be limited to consumers in areas with cable TV service. Satellite TV service, as a matter of physics, is distributed nationally, and we will by necessity continue to offer nationwide prices for our services. Therefore, all of the benefits of the merger will be available to consumers across the country regardless of their community's terrestrial telecommunications infrastructure. This will be especially beneficial for rural consumers who have long been ignored by cable. With nationwide pricing, rural Americans will be able receive the full benefits of the increased competition between satellite and cable companies in urban and suburban areas. This is because the new EchoStar pricing and programming decisions will be driven by competition against the most competitive cable firms, including those that face significant competition from cable overbuilders or local MMDS systems, and consumers nationwide will reap the rewards.

    According to the FCC, only 3.4 percent of rural American homes are not passed by cable,(see footnote 7) constituting a small amount of homes. While the majority of these homes will have a choice between video services provided by the NRTC and their affiliates, the new EchoStar, or even other MVPD providers such as C-Band providers, we are sensitive to the concerns that competition in certain areas of rural America could potentially be reduced. That is why we have committed to nationwide pricing where all consumers, including rural Americans, will get the 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 that will provide more entertainment channels, high definition television, greater access to local TV channels, and specialty and educational channels.

    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.
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    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 spectrums, such as cellular services or digital services offered by network broadcasters, we are opposed to permitting electrical 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 our customers' satellite TV signals has 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.(see footnote 8) 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 after by Northpoint. With our filing yesterday concerning this proposed solution, we hope that Congress will see that we are not opposed to competition. We are simply opposed to interference within the same spectrum.
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    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 multichannel video marketplace continues to expand but will only reach fruition if satellite TV is allowed to become a truly effective competitor to the dominant and entrenched cable companies. The proposed combination of EchoStar and Hughes creates massive synergies and cost savings that enable the new EchoStar to offer more local TV channels into many more markets than ever before, faster introduction of Internet access, and the rapid advancement of high definition TV and interactive television services like video on demand. In effect, these new and expanded services will place satellite TV on a more level playing field with digital cable. As a result, American consumers will benefit by receiving competitive prices nationwide, both for current services and for new services that would not otherwise be available. Combining EchoStar and Hughes is the only way to provide truly effective competition to cable companies, which will benefit all consumers.

    We are confident that after a thorough evaluation, the DOJ and the FCC will find that the proposed merger will not violate antitrust laws, is in the public interest, and most importantly, will result in substantial, pro-competitive, consumer benefits in both rural and urban America. We look forward to working closely with these agencies and individuals in their reviews.

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    I appreciate the opportunity to testify, and I am willing to answer any questions.










    Chairman SENSENBRENNER. Professor Pitofsky.

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    Mr. PITOFSKY. Thank you, Mr. Chairman, Mr. Conyers. It is always a pleasure for me to appear before the Members of this Committee.

    I would like to talk a lit bit about the antitrust problems, and then address some of the purported justifications for this deal. I will try to be brief about the problems, because I think Members of the Committee get it.

    Let's divide the country up by those portions served by cable and those that are not. The Chairman mentioned that 30 percent of the people in Wisconsin don't have access to cable. That is not unusual; 30 to 50 percent of people in 20 different States don't have access to cable.

    For those people, a merger of these two satellite companies is a virtual merger to monopoly, with high entry barriers, so no one else is going to come in to alleviate that condition.

    Let's look at the rest of the country. It is true that the satellite companies will compete with cable companies. But do they also compete more directly and more fully with each other so as to justify their being in a separate market, so there, too, it is a merger to monopoly? And it seems to me that that could easily be the case.

    The analogy, I would suggest, is between railroads and airlines. Railroads and airlines compete, for example, New York to Washington, Washington to New York, but that doesn't mean you let all of the airlines merge to monopoly. Because of their special prices, qualities, appeal to consumers, they are a separate market.
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    And, incidentally, that is not an argument that only I ascribe to. Mr. Ergen said many think that they are in a separate market. Well, that includes EchoStar, which just a year ago in a private case against DirecTV argued that EchoStar and DirecTV constrain each other's prices and cable is not an effective constraint of prices in that market.

    Finally, even if I am wrong about all of this, it is still a three-to-two merger, and the Court of Appeals of the District of Columbia just a year ago when Beechnut and Heinz tried to merge in circumstances very similar to this, a larger number one, two and three said, we need the merger to compete, there were high entry barriers; and the court said, we have looked back and we can't find a single case in history—I think they meant 110 years—in which a merger of this type was allowed.

    Those are the problems.

    What are the justifications? First, is the trade-off argument. Yes, the people in rural America will sacrifice some competition, but it is worth it because it will improve competition in the rest of the country. My answer to that argument is simple. We don't do it that way.

    The antitrust laws say, mergers that lessen competition in any market are illegal. And we don't trade off procompetitive effects in one market against anticompetitive effects in another. The Supreme Court could not have been clearer about this in Philadelphia National Bank and since.

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    Second, Mr. Ergen states, and I'm prepared to accept his claim, that there are real efficiencies to this deal. Well, first of all, there is a bipartisan consensus that efficiencies are easy to allege and hard to prove; and therefore you would want to look very carefully at the efficiency claims.

    But let's assume that the efficiencies are there, and certainly some of them are there. But then the question is whether efficiencies justify a merger to monopoly or near monopoly. I have been one who has been more welcoming of efficiency defenses than almost anyone in our community; but I have always said, it doesn't justify mergers to monopoly. The DOJ-FTC guidelines say it doesn't justify mergers to monopoly.

    What is the point of achieving all of those efficiencies if you are a monopoly? Where is the incentive then to pass the efficiencies on to consumers without a competitive market?

    Finally and most interestingly, EchoStar suggests that the rural subscribers don't have to worry because there is competition in the urban areas, and EchoStar will give others who are in areas not served by cable the same deal that they give to people served by cable, so they will get the benefits of something like competition.

    It is interesting, it is novel, but I just don't think it hangs together for four reasons. First, it puts the government in the position of doing something that the government hates to do, and that is review, monitor and check whether there is price discrimination from community to community to community throughout the United States.

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    Whenever I hear from the satellite companies, it is about special offers, free goods, 30 days free, et cetera. How do you reconcile all of that in every single city, many of which are quite different in terms of their income?

    Second, that takes care of the price problem. I have less than a minute, Mr. Chairman.

    But what about all of the other forms of competition—service, quality, reliability, technology? In an area like this, you want companies vigorously competing on the technological front.

    Third, it is still a three to two merged at best in the urban areas. I would regard it as cold comfort if I were somebody who couldn't get cable and was told, I will get the benefit of competition in other parts of the country when competition has been reduced from three firms to two.

    Finally, lastly, this proposed merger raises a very fundamental question about what antitrust is all about. We have bet this country for over 100 years on a system of free market protected by antitrust in which independent rivals compete fiercely, as the satellite companies have done to advance consumer welfare, to improve their product, to lower their prices.

    This is a proposal that we should trust well-intentioned people; they promise that they won't overdo it, they won't abuse the market power that this merger allows. We haven't accepted that kind of argument in this country.

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    Now, maybe there is another deal that can be worked out here. Maybe DirecTV is leaving the market no matter what happens. But I have to say that this deal, as proposed, has very serious problems.

    Thank you, Mr. Chairman.

    [The prepared statement of Mr. Pitofsky follows:]


    Mr. Chairman, members of the Committee, I am pleased to appear before you today to present testimony concerning application of the antitrust laws to the proposed merger between EchoStar Corporation and G. M. Hughes Electronics, the parent company of DirecTV. I believe this merger raises profound issues for antitrust policy in both the telecommunications and media industries.

    Let me disclose at the outset that I am now Counsel to the Washington law firm of Arnold & Porter, and the firm represents Pegasus, a distributor of DBS services and therefore a company with a deep interest in the economic consequences of this merger.

    EchoStar and DirecTV are today the only facilities based providers of direct broadcast satellite (DBS) services in the United States. Between them they control all three of the orbital slots licensed by the Federal Communications Commission for DBS service capable of serving the entire U.S. It seems to be a common understanding that no additional satellites are likely to be available for DBS service in the foreseeable future. Put another way, the barriers to entry into DBS service are virtually insurmountable. That was the reason that the Department of Justice, when it issued a complaint in 1998 seeking to block the acquisition by Primestar of an orbital slot then held by MCI and NewsCorp, alleged there was no feasible means of entry into the multi-channel video business in the near future.(see footnote 9) That statement is no less true today than it was in 1998.
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    The testimony before the Committee today has revealed that there are many issues of fact relating to this transaction. For example, there are claims that the proposed merger offers an opportunity for substantial efficiencies, and those efficiencies are likely to be passed on to consumers in the form of improved services. I am prepared to assume for the sake of this session that the people advocating the legality of this merger are well intentioned and credible and that their efficiency claims—while they will have to be carefully analyzed and confirmed—can be assumed for now to be true. Even on that basis, I offer my own conclusion that this transaction as presented faces serious—perhaps the more accurate description is insurmountable—antitrust problems.

    It is helpful in thinking about the competitive and consumer effects of this proposed merger to consider its impact in different parts of the country. Today in many sections of the country—mostly rural but accounting for millions of subscribers—there is no cable television available.(see footnote 10) In other sections where cable is present, there are antiquated facilities that are unlikely to be upgraded in the foreseeable future so that cable is a limited competitor. In those areas, however, consumers do have the benefit of two DBS providers—DirecTV and EchoStar—which compete aggressively for consumer subscriptions through discounts, free equipment, improved service, and similar inducements. For subscribers located in those non-cable or limited-cable areas, this proposed deal is clearly a merger to monopoly, with the predictable higher prices and indifferent quality that experience demonstrates will follow in the wake of that level of market power. In rural areas, this merger does not ''lessen competition,'' it completely eliminates it.

    On October 30, a Wall Street Journal editorial took an unusual view of the plight of viewers in non-cable areas. It observed that ''those who choose to live in a cornfield have no claim on the rest of the economy just to subsidize their entertainment options'' and therefore presumably can be left to the mercy of a monopolist.(see footnote 11) Fortunately, the antitrust laws prevent mergers that lessen competition ''in any section of the country,''(see footnote 12) even sections some in the press think are too unsophisticated to matter.
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No person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no person subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another person engaged also in commerce or in any activity affecting commerce, where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly. 15 U.S.C. §18 (emphasis added).

    Those who would like to see the merger go through unchallenged are likely to argue that it is worthwhile giving up some competition in some parts of the country because the combined DBS outlets will be in a better position to compete with cable in other sections of the country. They argue that only DBS is in a position to challenge the high rates and less-than-perfect service offered by the huge cable companies. One problem with that argument is that in almost all sections of the country, there is only one cable supplier and unhappy subscribers now have two alternative and competing DBS sources to consider. After the merger there will be only one DBS source. As a result, even if one concedes that DBS and cable are direct competitors—a point that EchoStar challenged a little more than a year ago in a private antitrust lawsuit(see footnote 13)—the merger would still result in a reduction of competitors from three to two with no prospect of new entry to alleviate that condition in the foreseeable future.

    Let's assume, contrary to the forcefully stated views held by EchoStar just last year, that DBS and cable are in the same markets. There is a long history of the second and third firms in a three-firm market, with high barriers to entry, arguing that the combination will be better equipped to challenge the powerful number one. That argument was advanced by Heinz and Beechnut a year ago when their merger, allegedly to put them in a position to compete more effectively with the dominant Gerber, was challenged by the FTC. A unanimous District of Columbia Court of Appeals enjoined the merger in language that applies almost perfectly to the proposed EchoStar-DirecTV deal:
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''[There have been] no significant entries in the baby food market in decades and . . . [new entry is] difficult and improbable . . . As far as we can determine, no court has ever approved a merger to duopoly under similar circumstances.''(see footnote 14)

    In advocating a fundamental change in merger policy, defenders of the merger have advanced several arguments. I noted earlier the argument that even conceding a lessening of competition to consumers in rural America, that reduction is worthwhile in order to improve competition in the remaining parts of the country. That kind of tradeoff often is suggested by those sponsoring a merger. In one of the first cases reviewed by the Supreme Court after Section 7 of the Clayton Act was amended and updated in 1950, two Philadelphia banks tried to justify a merger that would produce a high level of concentration in the local market on grounds that consumers in Philadelphia might be harmed, but the merger would allow the larger bank resulting from the merger to compete for very large loans with still larger out-of-state banks, particularly those located in New York. In language that the Court has adhered to consistently ever since, it rejected what it called a concept of ''counterveiling power.''

''If anticompetitive effects in one market could be justified by procompetitive consequences in another, the logical upshot would be that every firm in an industry could, without violating §7, embark on a series of mergers that would make it in the end as large as the industry leader.''(see footnote 15)

    Supporters of the merger also appear to argue that it will allow the combined firms to offer efficiencies to consumers, and with those efficiencies improved service. It will require fairly extensive investigation to determine the magnitude of any claimed efficiencies and also to address the question of whether those efficiencies could be achieved through means other than a merger between two direct competitors.
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    As noted earlier, I am willing to assume for purposes of this discussion that significant efficiencies may result. Nevertheless, under the Department of Justice-FTC revised Merger Guidelines, issued in 1997, and indicating for the first time a willingness on the part of federal enforcement officials to take efficiencies into account, any such efficiencies would not be adequate to justify what is an otherwise illegal merger that leads to monopoly or near monopoly. After explaining that mergers that produce high concentration can only be justified by exceptionally substantial efficiencies, and that there must be the likelihood that those efficiencies would benefit consumers and have little potential adverse competitive effects, the Guidelines note:

''In the Agency's experience, efficiencies are most likely to make a difference in merger analysis when the likely adverse competitive effects, absent the efficiencies, are not great. Efficiencies almost never justify a merger to monopoly or near-monopoly.'' (Italics added.)(see footnote 16)

    Let me elaborate briefly on the point. The reason the DOJ/FTC Merger Guidelines were amended to permit efficiency claims is that efficiencies generated by merger may enhance the merged firms ability and incentive to compete, and may result in lower prices, improved quality, enhanced services or new products. But the whole idea is that those efficiencies would then be likely to be passed on to consumers. If the merger leads to monopoly or a near monopoly. there is no reason for the firms not to decide to pocket the gains that result from no longer competing with each other. Thus, even under a liberal interpretation of the role of efficiencies in merger enforcement, they would not be sufficient to save the kind of illegal transaction proposed by EchoStar and DirecTV.
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    Finally, advocates of the proposed merger have advanced a most unusual argument. They suggest that for most of the country the combined DBS company will have to compete with cable, and competition with cable will keep the DBS rates competitive. They also have promised not to discriminate between rates and terms offered in cable and non-cable areas, so that subscribers in rural areas, faced with a monopoly, would not have to pay monopoly rates.

    There are several problems with that argument. First, it leaves the government in the position of monitoring rates and complicated terms in every community to guard against discrimination—a role that the government tries not to play in a free market economy—certainly not when the transaction is a horizontal merger to monopoly or near monopoly. Second, even if the price terms are worked out, that says nothing about the loss of competition in non-price dimensions—including customer service, programming packages, advanced services and, in particular, technological competition. In a high-tech, dynamic, rapidly developing field like video programming delivery, competition in terms of quality and technology is particularly important. Third, if the merger reduces competition in urban markets, and reducing competitors from three to two certainly suggests such a threat, there is little comfort in pegging prices in rural areas to what may be less-than-competitive prices in urban areas. Most important, the suggestion that mergers to monopoly and duopoly should escape challenge if the merged companies promise not to abuse their market power is fundamentally inconsistent with U.S. antitrust enforcement. We depend on vigorous competition among rivals to produce reasonably priced and high quality products. The idea of substituting for competition the promises of the most sincere captains of industry is simply not the philosophy that we have pursued consistently in this country.

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    The proposed merger also raises troubling issues in the emerging broadband market—that is the provision of upgraded high-speed access to the Internet. In a series of proceedings—including those occasioned by the AOL/Time Warner merger(see footnote 17) and the AT&T/Media One merger(see footnote 18), the Antitrust Division, the FTC and the FCC have all sought to preserve competition in this extremely important new market. Congress has also been concerned that megamergers not lead to a situation in which high-speed access to the Internet will come under the control of one or a small handful of companies. This merger would threaten a potential monopoly in satellite broadband service.

    Wired broadband technologies, such as cable and telephone connections (''DSL'') have been slow to emerge in rural areas for many of the same reasons that these areas have limited cable penetration. There is not sufficient demand to insure more rapid development. Satellite broadband service provides the most viable technology that can bridge the digital divide in rural America. As noted, the merger of EchoStar and DirecTV would be a merger to monopoly for millions of rural consumers who, both today and tomorrow, have no alternative to DBS for broadband Internet as well as multi-channel video service.

    Here, too, the merging parties argue that the merger, by increasing capacity and eliminating ''duplication,'' will enable them to devote more capacity to rolling out broadband services. But the ''duplication'' they seek to eliminate is competition itself. Moreover, they would have to bear the burden of showing why the increase in capacity this merger would produce is necessary to bring out the services that both DirecTV and EchoStar have promised consumers for some time that each separately would provide.(see footnote 19)
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    The aim of antitrust merger enforcement is to protect consumers from the abuses that follow from extreme concentration of market power. As proposed, the EchoStar-DirecTV merger certainly raises that threat, and consumers are left with CEO promises (and perhaps hard to enforce conduct remedies) to protect against abuses.

    It may be that DirecTV is determined to exit the market—as it has every right to do. But without a facilities-based structural remedy that insures that consumers have roughly the same options they have now, this merger should not be permitted.

    Chairman SENSENBRENNER. Robert Phillips, president and CEO of the National Rural Telecommunications Cooperative.


    Mr. PHILLIPS. Thank you, Mr. Chairman. And good morning, Ranking Representative Conyers and other Members of the Committee. It is a privilege to appear before you today to represent the views of the National Rural Telecommunications Cooperative, or NRTC, regarding the proposed merger of EchoStar and DirecTV, and its impacts on the multichannel video distribution market.

    NRTC believes that this merger, as proposed, is bad for competition in rural America because it creates a rural monopoly, it eliminates choice, and it eliminates competition.
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    From our founding in 1986 it has been NRTC's focus to bring advanced rural telecommunications services to all of those who live and work in rural America. NRTC has also been involved in the satellite television business, starting with large dish satellite service, or C-band, including our own investment of our members and utilities in excess of $100 million to help launch the DirecTV service.

    Today, NRTC, through its participating members, who are rural electric cooperatives and rural telephone cooperatives and companies as well as affiliates like Pegasus satellite, serve more than 1.8 million rural subscribers with DirecTV.

    As I said, this merger does eliminate competition for rural consumers. Literally millions of rural homes have no access to cable television or digital cable television services. That makes satellite their only option for video programming.

    And I did bring a map today which is a blow-up of the chart which I included in my testimony, showing on a state-by-state basis how tens of millions of people have no choice for video programming other than satellite.

    Today, these consumers can choose between EchoStar's dish service or DirecTV. If this merger is approved, their choices go from those two providers to one. The proponents of this two to one merger argue that promises will suffice for competition and that the overall benefits of the merger will outweigh the lack of choice in providers from this combination. Instead of the vibrant and competitive satellite TV marketplace which protects competition and choice, EchoStar promises to protect rural Americans by charging them the same price as those who live in urban America.
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    As the professor indicated, there aren't any price guarantees that solve this monopoly problem. It is hard, if not next to impossible, to enforce any such promise. And price is not the only issue when you eliminate choice. What about service, quality, or the choice in programming content?

    The proponents of the merger would also have you believe that another benefit is increased delivery of local TV signals via satellite delivery. They suggest that with the approval of this merger, they will increase their capacity that is going to be dedicated to bringing local-to-local service, but nowhere near all 210 local TV markets. A DOJ witness has testified that each of these merger applicants, DirecTV and EchoStar, independently has sufficient FCC licenses and capacity to separately deliver all 210 TV markets.

    By approving this merger, it will remove all competitive pressure to expand coverage and it will leave one company with the sole power to decide whether or not to deliver all 210 TV markets.

    This merger also has some very far-reaching implications for rural America beyond video programming. The future of satellite-delivered broadband Internet access to rural America is threatened by this proposed merger. Currently, there are already two providers bringing satellite broadband, DiRECWAY, which is owned by DirecTV, and StarBand, which is controlled by EchoStar.

    Again, the merger applicants suggest to you that forming one broadband provider, creating another monopoly is in the best interest of rural Americans. I fail to see how that will benefit consumers. Just a few years ago there were four competitors in the satellite industry. First, Hughes bought Primestar, then Hughes bought USSB; and now, if EchoStar is permitted to buy Hughes, there will be only one. And Congressmen, one supplier is a very lonely number for rural Americans.
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    As currently proposed, this merger of two highly successful DBS companies with a huge market value is so anticompetitive with respect to rural America that it should not be permitted in its current form. If this merger is permitted in its current form, it would appear that there is little to nothing left to antitrust policy and enforcement in the first years of this 21st century.

    I am very grateful for your attention, and I do look forward to answering your questions.

    [The prepared statement of Mr. Phillips follows:]



    Good morning. Mr. Chairman, Ranking Representative Conyers and other Members of the Committee, it is a privilege to appear before you to discuss direct broadcast satellite service and competition in the multichannel video distribution market. I will focus upon the impact on rural Americans of the proposed merger between EchoStar and Hughes Electronics/DirecTV.

    My name is Bob Phillips, and I am the President and CEO of the National Rural Telecommunications Cooperative (NRTC). From our founding in 1986, NRTC's primary mission has been to bring the same state-of-the-art telecommunications services often found in urban areas to those who live and work in rural America.
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    As a national cooperative, NRTC provides our members and affiliates with comprehensive technology solutions that include product research and development, technical support, marketing assistance, industry representation, and product and service distribution.

    NRTC was founded in 1986 to bring valuable telecommunications services to rural communities, just as our rural electric and telephone members helped bring electricity and telephone service to rural America in the 1930s, 40s and 50s.

    NRTC first entered the satellite business by offering C-band (large dish) television service to rural communities. In the early 1990s, we forged an important partnership with DirecTV, Inc., a unit of Hughes Electronics Corporation. NRTC and its members invested more than $100 million toward launching DirecTV—the nation's first and most successful high-power direct broadcast satellite (DBS) system. This money and NRTC's participation was absolutely critical to the launch of DirecTV's business. In return for this necessary seed capital, NRTC's participating members and affiliates became the local distribution channel for this valuable service in certain portions of rural America. Today, NRTC, through its participating members and affiliates, including Pegasus, serves more than 1.8 million rural consumers with DirecTV service, representing nearly 20 percent of DirecTV's entire subscriber base.


    NRTC operates on a not-for-profit basis. We serve our members and affiliates who in turn provide the retail DirecTV service to the rural marketplace.
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    NRTC supports more than 1,000 rural utilities and affiliates located in 46 states. Many of these entities deliver telecommunications and information technology solutions to their communities. These NRTC members and affiliates serve more than 35 million customers in areas of the country that have been historically unserved or under-served by traditional utilities and other businesses.

    Building on a foundation of community service, we work, as a cooperative, to ensure that all rural Americans share equally in the benefits of the digital age. We see ourselves, at NRTC, as builders, and we want to continue this tradition.

    I also want to say that I have a great deal of respect for people who are builders, and accordingly, I want to acknowledge Mr. Ergen. He has built a very strong and important business in EchoStar. We are out there directly competing with his company each day. He aggressively prices and provides service to consumers. He keeps us on our toes. We respect him as a competitor. If this merger is successful, however, he will also be NRTC's exclusive wholesale supplier—and that raises serious concerns for our rural customers by reducing the current choice of satellite services from two to one, and by eliminating all effective and meaningful competition in rural America.



    Rural America includes many areas where no cable company exists to provide video television service. In other areas, only analog cable is available. In both instances, consumers must rely solely upon satellite services for delivery of digital programming. For these rural Americans, the merger of the number one and number two competitors in the high powered digital direct broadcast satellite (DBS) market, without any third provider, creates a monopoly. We believe the Committee should carefully weigh the following facts:
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 As many as 19% of U.S. housing units have no access to cable TV service, according to a U.S. Department of Commerce National Telecommunications and Information Administration (''NTIA'') and the Rural Utilities Service (''RUS'') Report issued in April of 2000. On October 30, 2001, The New York Times estimated that 22% of U.S. homes did not have access to a video cable provider. A copy of the report and article are attached to my testimony. Whether it is 19% or 22%, it still means tens of millions of American households will be without competition.

 The same New York Times article estimated that 20 states have less than 70% cable access. For these areas the DirecTV-EchoStar merger, if permitted, creates a monopoly of one, which will choose the service offerings, pricing and the content of all programming packages.

    These facts are beginning to generate concerns on the part of state antitrust officials and others impacted by the potential merger. For example, Missouri's Attorney General, Mr. Jay Nixon, has recently written to U.S. Attorney General Ashcroft, expressing his office's concern that nearly 850,000 homes in his state—fully one-third of Missouri's population—must rely solely upon the proposed merged company for multi-channel video services if the merger is permitted.


    The future of Broadband Internet access to rural America is threatened by this proposed merger. There are three likely sources of broadband services in rural America—satellite, cable or telephone companies. Because of the low population density in many areas of rural America, satellite is the only potential broadband provider in much of rural America. Portions of rural America will remain on the wrong side of the digital divide if Broadband Internet isn't available at reasonable costs. This proposed merger, if approved, will leave one company controlling the availability, breadth and cost of nearly all satellite Broadband Internet (and video) services to rural America. There are currently two providers of this service in the market today, Direcway (owned by Hughes), and Starband (controlled by EchoStar). The merger would create a monopoly in a market that is still forming. The next generation of Ka-band service, which will have greater capacity, faster speeds and lower costs—if offered in a competitive market—will be dominated by the proposed merged entity. Any other competitors are likely to be frozen out of the market. There is already evidence that this is occurring. Meanwhile, EchoStar just completed its purchase of 90% of Visionstar, another potential Ka-band provider. The market reality is that any satellite broadband provider also needs to offer video services. Without video competition, there will be no broadband competition. Said differently, if this merger is approved as proposed, all roads will lead to EchoStar.
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    Prices of digital video services will go up in rural America because of this merger. Whether it be video or broadband service, if there is no effective competition, prices will be set by the monopoly provider. The claim has been made that the new monopoly will chose to sell its video service at the same price in rural America as it does in urban areas where there is competition. These half made promises of price guarantees are no substitute for genuine competition.

    EchoStar and Hughes have made claims they may extend pricing in Manhattan, Chicago and Los Angeles to customers in rural Missouri, Texas, Virginia and Wisconsin. This promise is supposed to mollify the concerns of your rural constituents who will find themselves in a monopolistic world regarding video and broadband services. But setting that concern aside, no legally enforceable promise has been made. If the Members of this Committee, the antitrust authorities of the Justice Department, and the FCC's Commissioners are to take these representations seriously, Hughes and EchoStar should make their half promise more definite.

    Will the proposed merged entity promise to set rural prices at the level of its lowest urban prices? Will the proposed merged entity provide rural consumers new services, such as broadband services, at the lowest urban price? If the proposed merged entity provides urban America with free installation for a thirty day promotion, will rural Americans benefit from the offer?
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    Currently the set top box technologies used by DirecTV and EchoStar are incompatible, and the customers' dishes are pointed towards different satellites. Will the proposed merged entity really provide new set top boxes and repoint consumers' dishes at satellites for no cost to the consumer as they have implied? We have estimated that the cost of this switchout will be in excess of $5–6 billion, although we have seen much smaller cost estimates proposed. We believe having accurate cost estimates here is critical, because promises to pay without a direct or indirect contribution from the consumers will become increasingly unrealistic as the cost goes up. Does anyone really think the consumers will not be charged, directly or indirectly, for these multi-billion dollar merger related costs? We also wonder if anyone has fully assessed the massive consumer disruption which will be caused by the proposed switchout.

    We believe enforcement of the half promise about pricing is a potentially insurmountable problem. No agency of this government is currently enforcing such a promise. For these reasons, we at NRTC believe this promise has been made for its appealing nature, not because it ensures meaningful protection for rural Americans.


    But even if some form of ''universal pricing'' can meet the requirement for enforceability and realism, it is only one issue of many that concerns consumers. We know our customers. They are not solely concerned with price alone. Quality of service is equally important. If a subscriber's system is broken, they want it fixed. If a subscriber has a question about his billing, he wants it fixed. Service under monopolies traditionally declines because of the lack of competition. If you can't go anywhere else, there is no economic imperative to provide good service. No promise solves this problem.
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    Today's pre-merger competitive marketplace protects the consumer. No price solution, no matter how construed or implemented, can substitute for the choice and competition that exists today.


    Currently, DirecTV and EchoStar each provide alternative video programming. If the merger is approved, rural Americans will only be able to see what DirecTV chooses to deliver. Will certain news programs be made unavailable? Will certain program sources be kept out of reach for any reason? Two or more sources of programming protects access, preserves choice, and assures competition for rural Americans.

    Just last week EchoStar announced they would no longer offer ESPN Classic or ABC Family channels. What happens if EchoStar decides other programming—such as CNN, HBO or C-Span—costs them too much? Where can rural residents go for that programming?



    There are only three U.S. orbital locations capable of nationwide service (aka ''CONUS''—for Continental U.S. frequencies), and they are located at 101 west longitude (WL), 110 WL and 119 WL. Each CONUS slot is authorized to utilize up to 32 frequencies, for a total of 96 total DBS frequencies which can reach the whole country. Today, DirecTV has 46 CONUS frequencies, and EchoStar has 50.
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    Earlier this year, an expert chosen by the U.S. Department of Justice, Mr. Roger J. Rusch, publicly stated that DirecTV and EchoStar are the ''two dominant DBS providers in the United States'' who collectively own all three of the most desirable satellite orbital locations for broadcasting video services. This Department of Justice expert testified in a written declaration that the two DBS providers could retransmit all high power television stations in the U.S. to local communities using existing technology. He further stated that the dedicated use of as few as 12 frequencies could be utilized by each company today to distribute all 1475 local television stations to local communities. A copy of this Department of Justice affidavit is attached to my formal testimony. Therefore, one of the major claimed benefits of this merger—the expanded provision of local-to-local coverage—could be done by both companies individually today, according to the U.S. Department of Justice's own expert. Based upon this analysis, the merger is not necessary to expand local-to-local coverage since DirecTV and EchoStar each have enough spectrum to offer all the local channels. They have chosen not to do so.

    Apart from the Department of Justice view, the proposed merged entity has indicated it will increase on a selective basis local-to-local coverage. Which specific markets will be receiving local-to-local services is not set in stone or guaranteed at this time. Any expansion of local-to-local service is laudable, but it leaves those designated market areas (DMAs) that are not served without coverage. No promise has been made to these citizens about when, or even if, they can receive service. On the other hand, competition between an independent EchoStar and an independent DirecTV is more likely to yield coverage for all local-to-local broadcasts as they aggressively compete for new subscribers by offering highly desirable local programming. Provision of such broadcasts has been an important differentiator in their respective service offerings. If the economics are not there today to encourage service to the last 100 marketplaces, the monopoly that results will have no reason to extend service in the future.
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    As recently as two months ago, EchoStar was engaged in a lawsuit which accused DirecTV of being a monopoly that repeatedly abused its monopoly power. Attached to my testimony you will find a copy of EchoStar's complaint against DirecTV. I believe you will be particularly interested in reviewing EchoStar's characterization of the uniqueness of the DBS marketplace and their allegations of DirecTV's abuse of its power which permeate the document. Of course, the proposed merger partners dismissed this suit when they decided to marry their corporations. But if DirecTV constituted a monopoly, please think carefully about the resulting single entity's overwhelming market power.


    Northpoint is a start-up company with no operating history, no revenue, no experience delivering its proposed service, and no FCC license. It is seeking a terrestrial license to operate in the same Ku-band spectrum as EchoStar and DirecTV, which have opposed the request. It would operate somewhat similar to MMDS, using large antenna towers which could be viewed by households with a clear line of site to the antennas. There are several significant impediments to Northpoint ever coming to market.

    One main impediment to Northpoint coming to market is that its technology interferes with DirecTV's and EchoStar's DBS signal. An independent study commissioned by the Congress and the FCC was performed on Northpoint by the MITRE Corp. That study found Northpoint's technology caused interference with a customer's reception from satellite services. It further found that the interference could be reduced if certain mitigation measures were undertaken, some of which are quite costly. It is unclear whether Northpoint has sufficient financing to undertake these remedial measures.
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    Another significant impediment is that Northpoint's FCC application seeks a license for free, instead of under the FCC's usual method of auctioning off valuable spectrum. Northpoint's CEO has intimated that the company cannot afford to roll out its product if it has to pay for the spectrum. It is unlikely that the FCC will, or should, give away valuable spectrum.

    Even if Northpoint obtains a license and makes it to market, which is speculative at best, it is unlikely that Northpoint would be a significant or effective competitor in rural America because of the high costs for building large antenna towers that would serve very few rural households.


    Claims that a merger will generate efficiencies in one market cannot justify or offset anti-competitive effects created by that merger in a separate market. This conclusion follows from the language of Section 7 of the Clayton Act, which prohibits mergers or acquisitions which may substantially lessen competition ''. . . in any line of commerce or . . . in any section of the country . . .'' Thus, Section 7 presents a legislative conclusion that one section of the country will not be sacrificed to anti-competitive effects in order to generate a benefit for a different section of the country. This hearing reaffirms that conclusion in its own way.

    This statutory language was relied upon by the United States Supreme Court in United States v. Philadelphia National Bank, 374 U.S. 321 (1963), where the Court explained that a merger leading to anti-competitive effects in one portion of the country could not be justified by arguable pro-competitive benefits to another section of the country. The Court stated: ''If anti-competitive effects in one market could be justified by procompetitive consequences in another, the logical upshot would be that every firm in an industry could, without violating §7, embark on a series of mergers that would make it in the end as large as the industry leader.'' The Supreme Court enjoined the proposed merger.
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    The area of effective competition is the geographic area where customers can practically turn for alternative sources of the product. Anti-competitive effects in one market, such as rural America, cannot be shrugged off or disregarded, even if there is allegedly a benefit in another market.


    Just a few years ago there were four competitors in the satellite market. Then Hughes bought Primestar. Hughes then bought USSB. If EchoStar is permitted to buy Hughes, there will be only one. One supplier is a lonely number for a rural consumer. As it is currently proposed, the merger of two highly successful DBS companies with huge market value is so anti-competitive with respect to rural America that it should not be permitted in its current form. If this merger is permitted in its current form, it would appear that there is little or nothing left to antitrust policy and enforcement in the first years of the 21st Century.

    I am grateful for your attention and I look forward to responding to your questions.

    Chairman SENSENBRENNER. Mr. Kimmelman.


    Mr. KIMMELMAN. Thank you, Mr. Chairman.
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    On behalf of Consumers Union, the publisher of both print and on-line Consumer Reports, I appreciate the opportunity to testify today.

    I hardly ever disagree on antitrust matters with Mr. Pitofsky, and I certainly don't disagree with his characterizations of the highly concentrated nature of the cable market and the satellite market. We have seen enormous mergers on both fronts.

    But in his testimony, Mr. Pitofsky states, and I quote, ''In a high-tech, dynamic, rapidly developing field like video programming delivery, competition in terms of quality and technology is particularly important.''

    That certainly makes sense. But he left out price. And let's look at the dynamic, rapidly developing field of video programming delivery. This is the marketplace that Congress deregulated in 1984, the cable market. And rates shot up about three times faster than inflation because of rapidly developing competition that did not arise.

    In 1992, you saw the realities and reregulated. In 1996, Congress again stepped in and deregulated because of the hope of dynamic, rapidly developing competition in video delivery. Again, it has not arisen and prices are up 35 percent, on average, for cable since you passed the 1996 act. And the announced prices this year for cable rates going into 2002 are as high as, in St. Louis, 14 to 26 percent increase; Reno, Nevada, and Memphis, Tennessee, 15 percent increase; Boston, 12 percent; Syracuse, 11 percent; Atlanta and Austin, Texas, 10 percent even with two satellite companies in the market. These are clearly separate markets.

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    There clearly is a rural problem, as Mr. Pitofsky and Mr. Phillips have indicated, but in every place that is pale on Mr. Phillips' map, we need more competition to cable.

    The antitrust discrepancy that Mr. Pitofsky described before, of the markets, their high concentration, isn't the entire story. When the Department of Justice last reviewed a satellite merger, the Primestar case, it described the cable industry as one of the most enduring monopolies in America. It said satellite did not compete against cable; however, it said satellite was the most likely potential competitor to cable. This all rings true. Satellite just is not there yet. And the Department of Justice blocked a cable-owned satellite venture in the hopes that satellite would compete.

    So what does satellite need to compete better against cable? We know they need local broadcast channels. That is what most consumers watch more than half the time, and most consumers still do not have it from satellite. It is their upfront costs that are still dramatically more expensive than cable. They are not price competitive yet.

    Now, will the EchoStar/DirecTV merger solve this problem? Not necessarily. Let's look at it more carefully in the light of what Mr. Pitofsky said.

    Going from three to two in markets, or going from two to one, is clearly a problem. We need a new entrant and/or some structural fix. We have a new entrant waiting in the wings at the Federal Communications Commission, Northpoint Broadwave; and potentially other companies claim secondary licenses, secondary use of satellite spectrum that would enable them to enter markets all across this country in 1 to 3 years. The new player would mean we don't go three to two or two to one; we maintain the number of competitors.
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    The FCC has promised to make a decision on that before the end of this year. We hope that they do.

    As a backup, we clearly would need a consent decree if this merger were ever to be approved that ensures that prices, service quality, terms and conditions for getting satellite hookup, satellite installation, dealing with satellite service problems, are handled everywhere on that map in the same way as they are in the most competitive market, so that we at least have price protection.

    If that is too much regulation, I would suggest it is no more regulation than what Mr. Pitofsky did in his Time Warner-Turner or AOL Time Warner consent decrees at the Federal Trade Commission.

    Finally, there is maybe a potential benefit—that is the gem of hope here—to get competition to cable from satellite. By combining satellite capacity, would it be possible to serve more communities with local broadcast channels, the most popular programming consumers want? The answer is obviously yes. Could they do more now? Possibly. But combining the two, requiring them to serve, as you have through your must-carry requirements, would yield a clear consumer benefit.

    Could it possibly cut the costs of speeding up high-speed broadband service by satellite to compete against cable modem service or DSL? It should. That is what we hope, for consumers, the Department of Justice will review and the Federal Communications Commission will act on, so that rather than just taking a narrow antitrust view here, we have strict but creative antitrust enforcement and procompetitive competition policy so that consumers in the end see more competition and not less.
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    Thank you.

    Chairman SENSENBRENNER. Thank you, Mr. Kimmelman.

    [The prepared statement of Mr. Kimmelman follows:]


    Consumers Union(see footnote 20) is extremely concerned about the enormous concentration of control over multichannel video distribution systems—predominantly cable and satellite—which has prevented the growth of vibrant competition.

    Direct broadcast satellite (DBS) stands as the most likely competitor to today's cable monopolies. While further consolidation in the satellite industry could be dangerous to consumers, it also holds the potential to make satellite more competitive with cable monopolies. We believe that antitrust issues related to satellite mergers should be reviewed in the overall context of policies designed to foster more competition in the multichannel video market.

    It is important to understand that, while antitrust is an excellent tool to prevent monopolization or substantial dilution of competition, it may do nothing to create new competition or explode existing monopolies. Consumers need both—strong antitrust enforcement and strong pro-competitive policies.
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    Over the last three years, there has been a great deal of consolidation within the satellite TV industry. The number-one provider, DirecTV, bought two of its competitors, PrimeStar and United States Broadcasting. Meanwhile, the number-two company, EchoStar, acquired the assets of American Sky Broadcasting.(see footnote 21)

    Today, EchoStar and DirecTV serve nearly every home that has a satellite dish.(see footnote 22) And now EchoStar is attempting to buy DirecTV.

    If this merger is approved, it would combine the dominant players in the satellite TV market to become the second-largest pay-TV company in America, behind AT&T's combined cable ownings.

    The potential antitrust problems presented by this merger are serious and substantial. Currently, most consumers have three choices for pay-TV services: EchoStar's Dish Network, DirecTV, or their local cable company. This merger would reduce their choices from three to two. For rural America, the prospects are even grimmer. Approximately 13 million homes in rural areas are not wired for cable TV.(see footnote 23) These consumers can only choose between DirecTV and EchoStar. Thus, the merger would leave them with EchoStar as their only option.(see footnote 24)
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    Therefore, Consumers Union believes that this proposed merger poses significant antitrust problems and must be rejected, unless the problems are adequately addressed before the merger is completed. Under certain circumstances, we also believe the merger could offer consumers some significant benefits, such as more local broadcast channels and better high-speed Internet options available via satellite. We believe that government approval should be contingent on specific market-opening preconditions and protections against anti-competitive practices. These would involve antitrust consent decree requirements to prevent monopolistic pricing and inferior service, plus Federal Communications Commission (FCC) action to encourage competition.


    To understand the full set of trade-offs related to this proposed merger, we believe that the issues surrounding satellite concentration should be viewed in the overall context of persistent cable monopoly dominating the multi-channel video programming market.

    Sixteen percent of American households have satellite dishes, while about 68 percent have cable.(see footnote 25) A substantial portion of satellite subscribers also purchase cable in order to receive local broadcast programming or to satisfy multiple TV viewing needs. Thus far, satellite has failed to provide price competition to cable.

    Every year, cable rates keep going through the roof. In the five years since the Telecommunications Act became law, cable subscribers have seen their rates go up 35 percent. That's nearly three times the rate of inflation.(see footnote 26) Cablevision recently announced a 7 percent rate hike, two weeks after AT&T announced a 7.4 percent hike.(see footnote 27)
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    Unfortunately, the 1996 Telecommunications Act phased out cable rate regulation. It gave consumers the impression that cable competition would expand sooner rather than later, and cable prices would go down, not up.

    The law assumed that the elimination of legal barriers to entering the cable business would unleash a torrent of competition from local telephone companies, electric utilities and others.

    Unfortunately, it just hasn't happened. The local telephone companies have virtually abandoned their efforts to compete with cable,(see footnote 28) and electric utilities have had difficulty breaking into the market. Without the benefit of regulations that prevent cable price gouging, only consumers in the few communities where two wire-line companies engage in head-to-head competition for cable services are receiving the benefits promised in the 1996 Act. FCC data show that head-to-head competition saves consumers 14 percent compared to prices charged by cable monopolies (where satellite service is also available), and independent research indicates that competition can save consumers as much as 32 percent on their cable bills.(see footnote 29)

    Unfortunately, two-wire towns are the exception to the rule in today's marketplace. Large companies that are well-positioned to block competition increasingly dominate the cable industry. Currently two companies (AT&T and AOL Time Warner) together own cable systems serving more than 50% of the nation's cable subscribers. In most places, the local cable company is the only cable company. As cable TV pioneer Ted Turner recently said: ''I think it's sad we're losing so much diversity of thought and opinion. . . We're getting to the point where there's going to be only two cable companies left.''(see footnote 30)
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    Cable companies often argue that programming costs and capital outlays account for the increase in rates. But these arguments simply do not hold up under scrutiny.

    For one, cable industry data show that a substantial portion of the increase in programming costs are offset by corresponding increases in advertising revenue. As programming gets more expensive, cable companies get more revenue from advertisers who run commercials during the programming.(see footnote 31)

    Secondly, the largest cable system operators have financial interests in about one-third of all national and regional programming. So when cable companies complain about having to pay more for programming that they partly own, some are simply taking money of the right pocket and putting it in the left pocket.

    Even at the local level, the cable industry's complaint about rising programming costs does not hold water. Since the passage of the 1996 Act, cable revenues have increased much faster than costs. Since 1996, total revenues have increased by 50 percent, while operating revenues are up 43 percent.(see footnote 32) Average operating revenues (total revenues minus operating costs) have actually increased by 32 percent.(see footnote 33) Most notably, the revenues that are associated with the expansion of systems—advertising, pay-per-view and shopping services, advanced services and equipment—are up 123 percent.(see footnote 34) The dollar value of revenue increases for new and expanded services since 1997 alone swamps the increase in programming costs. Virtually all of the increases in basic and expanded basic service revenues have been carried to cable's bottom line in the form of increases in operating profits.
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    So how does satellite TV stack up against cable? Cable companies may contend that satellite is a serious rival, but evidence shows that, thus far, satellite is not an effective competitor to cable. For most consumers, satellite is still more expensive and less attractive than cable. Installation and multiple TV hookups make satellite significantly more costly than cable. In addition, poor satellite reception is a problem for some consumers in urban areas, and most consumers still cannot get all of their local TV stations from satellite.

    If satellite can provide local channels in more areas and continue to bring down up-front equipment costs, it could be well-positioned to be the most likely competitor to cable in the future.

    One of EchoStar's major arguments for a merger with DirecTV is that combining the dominant players of the satellite industry is the only way for them to compete head-to-head with the cable monopolies. We do not believe this combination alone would guarantee that satellite becomes an effective competitor to cable TV. However, the combined companies would have additional satellite capacity to beam local channels into more markets than they do now. They would also be able to reduce costs per subscriber and possibly speed up the availability of high-speed Internet service in rural areas. Once again, all of these would increase the likelihood that satellite could become a price and service competitor to cable.

    Nonetheless, the only way that antitrust and other competitive concerns about this merger can be addressed is to require the conditioning of the merger with two significant safeguards.
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    First, EchoStar should be required to implement a broad array of protections for rural subscribers. The company should have to agree to offer the same prices, terms, and conditions to consumers in rural areas as it does to consumers in more competitive areas. The same installation options, program packages, promotions, and customer service that EchoStar provides in the closest, most competitive markets would then be available where consumers have cable and only one satellite choice.

    The second safeguard we would suggest is aimed at improving competition. If consumers are going to lose one competitor in the multichannel video market, particularly when it means unwired markets will go from two choices to one, the FCC should move forward to open the door to another competitor.

    For example, Northpoint/Broadwave is a promising potential competitor to both cable and satellite TV. It is trying to secure a license for its service, but it is caught in a regulatory morass at the FCC. Two of the companies that have pressed the FCC to reject the application are the companies that could see the stiffest competition—EchoStar and AT&T.(see footnote 35)

    The addition of Northpoint/Broadwave or a comparable firm to the marketplace could offset the loss of a satellite competitor as a result of this merger. Therefore, we are asking the FCC to approve licensing of Northpoint/Broadwave—if the service can be provided without interfering with satellite service—before the antitrust officials complete their review of this merger.

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    In conclusion, I would like to recall the last telecommunications merger to receive this kind of attention from Congress—the merger of America Online and Time Warner. Some of you probably remember the antitrust concerns that were raised when AOL first unveiled its merger plans.

    I know that former FTC Chairman Pitofsky remembers them well. And thanks to his insight and leadership at the FTC, that merger was transformed from a potential threat to consumers to a model for the protection of consumers.

    That merger was very different in many ways from the merger under discussion here today. But they do have at least two things in common.

    Like the merger of AOL and Time Warner, the merger of EchoStar and DirecTV presents serious problems that could be dangerous to consumers. But as the government's approval of AOL Time Warner demonstrated, problems can be fixed if the companies and federal officials are willing to do so.

    Rather than reject this proposal out of hand, we would urge the federal government to seize an opportunity to improve consumers' standing in the marketplace and bring some sorely-needed competition to the multi-channel video market.

    Chairman SENSENBRENNER. The questions will be under the 5-minute rule which, given the turnout by Members of the Committee, will be strictly enforced.

    The Chair has noted the order in which Members have appeared on each side of the aisle and will recognize Members in the order in which they have appeared, starting with myself and Mr. Conyers.
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    Mr. Ergen, I have reviewed both your testimony and the amended complaint that was filed on April 5th, 2001, in the Federal Court for the District of Colorado in the action entitled EchoStar v. DirecTV, et al., and I think your testimony is inconsistent, at least in the implication with what you allege to the Federal Court in the following respect.

    In your testimony you claim that C-band technology, which is the one that uses the big dish, is one of several competitors to DBS. However, in paragraph 30 of your amended complaint in your antitrust lawsuit against DirecTV, you stated that C-band technology is largely obsolete; and two paragraphs later, in paragraph 32, you note that there are only about 110,000 remaining C-band subscribers.

    Is your testimony accurate when you portray C-band as a credible competitor to high-powered DBS?

    Mr. ERGEN. Yes, it is in rural America. Certainly not a competitor in the urban areas because of the size of the dish. And I believe there are approximately a million, 1 million C-band customers today. I don't know the exact number. But I think it is closer to a million—certainly closer to a million than a hundred thousand.

    So clearly—I might add that while we have a lot of different numbers that are being thrown at the Committee here today, I think the FCC, who really is the branch of the government that defines this, has found that 97—approximately 97 percent of America is passed by cable.
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    A lot of the graphs and charts that we have here don't consider the MDU, the multi-unit dwelling cable passings, and that is why their numbers may be a little bit different. But the FCC, in a 2001 definitive study, found it to be 97 percent.

    Chairman SENSENBRENNER. Well, let me quote directly from the amended complaint which EchoStar filed in the court in Colorado.

    Paragraph 32, quote, ''The first and only significant provider of medium-powered DBS equipment and programming was Primestar, which DirecTV acquired in 1999. At its peak, Primestar offered approximately 140 channels to 1.8 million subscribers. Although Primestar currently continues limited operations, its subscribers now number fewer than 110,000.''

    Then it says, ''DirecTV has been attempting to upgrade Primestar customers through its own high-powered DBS service. At present, Primestar is the only medium-powered DBS service available in the United States and no new medium-powered DBS service is expected to be developed.'' And yet, after telling the court that, what you said in your testimony is that C-band is a competitor.

    Now, how can you say that C-band is an effective competitor when they only have 110,000 subscribers? You know, I don't understand that.

    Mr. ERGEN. Let me please answer.

    With all due respect, I think, Mr. Chairman, that you have gotten two technologies mixed up here. C-band is the large 10-foot dish that I am talking about in my testimony that has approximately a million subscribers. The SBCA and other people have statistics for that. I don't know exactly the number; it may be a little bit less than a million subscribers today.
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    The Primestar technology that you are talking about, per our filing in the court, is in fact a—a DBS-type service, which is a small dish. It is a medium-powered Ku-band service that was acquired by DirecTV, and there are fewer than—I believe there are probably not—clearly fewer than 100,000 subscribers there. But that is a little dish, and it is called Ku-band.

    In my testimony, written testimony——

    Chairman SENSENBRENNER. Excuse me. Mr. Ergen, my yellow light is on. You called C-band obsolete. And you have also called C-band as something that is declining. And that was in your filings with the court.

    And now you are making it out that C-band, you know, is a major competitor to what you are proposing to do.

    Now, you are being inconsistent with the court in Colorado and with this Committee; and I would urge you to figure out which is right and to let the Committee know, you know, whether your filings with the court are accurate or whether your testimony before the Committee was accurate.

    My time is up. The gentleman from Michigan, Mr. Conyers.

    Mr. CONYERS. Thank you, Mr. Chairman.

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    Mr. Pitofsky, you are here today testifying as an antitrust scholar, a hired lobbyist, or a member of Arnold & Porter?

    Mr. PITOFSKY. Numbers one and three.

    Mr. CONYERS. One and three, okay.

    Well, they billed you as a professor at a university; and I should tell you that I am in touch with one of your brilliant scholars, Tom Campbell, who teaches antitrust law at yet another university. So his spirit hovers over us in this discussion.

    Now, you didn't do that much for me when I told you about all of those black doctors that were being excluded from HMOs. Now you come up as the big trust-buster today.

    You didn't do much when the Microsoft case came about. It got away from the FTC, and Antitrust had to take it over. Remember, it went to you first?

    Mr. PITOFSKY. Not to me. I wasn't there.

    Mr. CONYERS. You weren't there?

    Mr. PITOFSKY. I was somewhere else.

    Mr. CONYERS. Well, it went to FTC.

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    Now, what about, Federal monitoring of nationwide pricing is unwieldy? I think you had something to do with things like that when you were at the FTC; that was while you were there.

    So, you know, let me ask you, suppose instead of EchoStar acquiring DirecTV, the purchaser was the company with monopoly control of satellite TV in Asia and Europe and was one of the largest content owners in the United States, controlling a major network, numerous cable TV properties, movies, numerous magazines and newspapers—I can't even count them. Is that your alternative?

    Mr. PITOFSKY. No, it is not. It sounds familiar; the outline of the company you have described sounds like News Corp.

    Mr. CONYERS. No, this is a hypothetical.

    Mr. PITOFSKY. Hypothetical, of course.

    Let me—two points. One is, I don't know enough about News Corp. I don't know the shape of their company or whether they compete here. So I have no opinion on that subject. Let me——

    Mr. CONYERS. Okay.

    Mr. PITOFSKY. But you did raise a question of whether I am being inconsistent in saying that the government shies away from regulatory orders.
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    I don't think so for the following reason: that where it is a very close call as to whether an arrangement will be anticompetitive or not—and we have had plenty of close calls—then I say, take efficiencies and other considerations into account, for example, a merger of six to five and five to four.

    But when it is a merger of two to one, then I say, the efficiencies can't save it; and the unaccustomed government role of being a monitor of the marketplace, rather than relying on the free market to set prices and to ensure quality is the better—the better approach to go.

    Where we went to a regulatory approach, it was because there were very substantial efficiencies, and it was a close call whether we bring the case at all.

    Mr. CONYERS. Well, then, you don't think that News Corp. is—say, didn't EchoStar want you to represent them at one time, or didn't you consider it?

    Mr. PITOFSKY. No, EchoStar never invited me or the firm to represent them.

    Mr. CONYERS. Uh-huh. Well, you don't know much about this hypothetical firm that you attached a name to. And you are an antitrust expert, but this hasn't come to your attention about where this is likely to go if this doesn't happen?

    All I am suggesting is that we may be between the devil and the deep blue sea.
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    Mr. PITOFSKY. You mean, if this deal crumbles maybe the next deal will be as bad or worse? I think there is something to that, Mr. Conyers, and I think that is the right way of thinking about this.

    My answer is that any deal in this marketplace should ensure that consumers, especially consumers in areas that cable doesn't serve, are no worse off after the deal than they are today. And that means there have to be at least two facility-based competitors rifling each other and producing consumer benefits.

    Sitting here now I have no idea how you would do that. My testimony today is with respect to the problems of the deal as proposed.

    Chairman SENSENBRENNER. The gentleman's time has expired.

    The gentleman from Utah, Mr. Cannon.

    Mr. CANNON. Thank you, Mr. Chairman. I would ask unanimous consent to submit for the record testimony by NCTA that will be given later today as an important perspective on defining the competitive market and also——

    Chairman SENSENBRENNER. Without objection, it will be included.

    [The information referred to follows:]

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    Mr. Chairman, members of the Subcommittee, my name is Robert Sachs and I am President and CEO of the National Cable & Telecommunications Association. Thank you for providing us with the opportunity to testify before your subcommittee regarding competition in the multichannel video market.

    Mr. Chairman, competition in the multichannel video marketplace is vigorous and well established. Today, consumers can choose from a variety of multichannel video providers, including direct broadcast satellites (DBS), alternative broadband providers like RCN, phone companies, like Qwest and utilities, like Sigecom. Indeed, most consumers have a choice of at least three multichannel video providers. As a result of this competition, nearly 21 million consumers—almost 23 percent of subscription television customers—today obtain multichannel video programming from a source other than a cable operator.

    To determine whether competition exists, one only need look at what's been happening in the marketplace since the passage of the 1996 Telecommunications Act. With respect to the marketplace for the delivery of video services, the answer to that question is clear. Video competition is fierce, leading to service enhancements and product innovation that inure to the benefit of consumers.

    The cable industry responded to this competition and the regulatory stability created by the passage of the 1996 Act by embarking on a massive effort to upgrade facilities and launch new services. Since the passage of the '96 Act, the cable industry has invested roughly $55 billion to deploy broadband plant in order to offer a wide array of new advanced digital services, including digital video, high speed Internet access, cable telephony and interactive applications. The DBS industry, seeking to maintain its lead position in subscriber growth has responded to cable's investment by launching its own satellite delivered broadband services and obtaining exclusive sports programming.
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    Today, cable competes with a wide range of satellite and terrestrial providers. Last year in its Seventh Annual Report on Competition in the Video Marketplace, the FCC found that ''competitive alternatives and consumer choice continue to develop.'' Customers have increasingly flocked to these alternatives, with non-cable subscribership growing nearly ten-fold from an aggregate of 2,330,000 non-cable MVPD customers at the time of the 1992 Cable Act to more than 20,876,000 in September 2001.

    While cable operators are clearly facing competition from a variety of sources, DBS in particular has proven itself as a competitive substitute for cable. With the passage of the Satellite Home Viewer Improvement Act (SHVIA) in November 1999, DBS companies can now retransmit local broadcast signals into their market of origin (''local-into-local''). As of November 2001, DirecTV and EchoStar made available local TV signals in 42 markets with over 65 million television households. When combined with their ability to offer hundreds of channels of digital video and CD quality sound, DBS companies compete vigorously with cable. The total number of DBS subscribers jumped from 14 million to 16.73 million between September 2000 and September 2001—a 19 percent annual growth rate. DirecTV now has more subscribers (10.4 million) than all but two cable operators—AT&T and AOL Time Warner—making it the third largest multichannel video provider in the U.S. The number two DBS provider, EchoStar, is the fifth largest MVPD and has more customers than all but three cable companies. Furthermore, DirecTV predicts that it will add 1-1.2 million new subscribers in 2002.(see footnote 36) EchoStar forecasts net subscriber additions to total between 1.5 and 1.75 million in 2001, with similar gains predicted in 2002.(see footnote 37)

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    Clearly, EchoStar and DirecTV are formidable competitors to cable and enjoy a number of competitive advantages. For example, DBS has been all digital from the start, giving it greater channel capacity than many cable systems, and has been able to achieve greater efficiencies in advertising and promotion with uniform national pricing. In addition, DBS companies are not subject to local franchise fees and taxes which can add so much as 15% to a cable customer's monthly bill, as they do in the District of Columbia. Also, DBS companies are not saddled with the costs of public access studios, institutional networks and free municipal cable hook-ups which are required by most cable franchise agreements.

    On cable's side of the competitive ledger, upgraded cable systems can match the programming variety and choice that DBS companies offer, and provide consumers with 7 by 24 local customer service, interactive digital video, cable modem and cable telephony products.

    The marketplace will determine which MVPD offers the better package of services with the best price and customer care. And individual consumers will determine which service offering best suits their particular needs. But what is undeniably clear is that consumers have multiple choices and are deciding among them with their pocket books.

    NCTA does not take a position with regard to the proposed EchoStar/DirecTV merger. As indicated earlier, cable operators see the Dish Network and DirecTV as very formidable competitors, and compete vigorously with these satellite companies everyday. Moreover, with the additional channel capacity and operating efficiencies that would result from combining these two companies, we have no reason to believe that a 17 million subscriber satellite company will be any less formidable. Charlie Ergen is a fierce and respected competitor, as his track record amply demonstrates.
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    We believe that antitrust and public policy issues that have been raised about the proposed EchoStar/DirecTV merger are best left to resolution by expert agencies like the U.S. Department of Justice and Federal Communications Commission. NCTA represents cable operators serving over 90% of the nation's cable television customers and more than 200 cable program networks, as well as equipment suppliers and providers of other services to the cable industry. Many of these companies are also suppliers to the satellite industry. Individual member companies may choose to submit comments to the expert agencies, however, the cable industry, as an industry, does not plan to take a position on the merger.

    Total dish subscribership (C-Band and DBS) now exceeds 15 percent in 41 states. According to SkyREPORT, Direct-to-Home (DTH) subscribers (all dish customers, including DBS and C-Band) grew from 15.3 million to 17.9 million between September 2000 and September 2001, an increase of 15.6 percent (versus 1 percent for cable). In 41 states, DTH satellite subscribership now exceeds 15 percent of all television homes. As of July 2001, DTH penetration exceeded 20 percent in 31 states, 25 percent in 16 states, 30 percent in 5 states, and 40 percent in 1 state. As mentioned, today most consumers have the choice of two DBS providers in addition to cable, and some have other multichannel video choices as well.

    While DBS has clearly become the chief competitor to cable, a growing number of new competitors have entered the marketplace. Companies like RCN, Knology, WideOpenWest, and others are providing consumers with competitive video and broadband services. Some utilities and incumbent local exchange carriers are also adding video programming to their product line-ups.

    Mr. Chairman, the goal of multichannel video competition set by Congress in the 1992 Cable Act has been accomplished.
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The Cable Industry's Response to Burgeoning Competition

    Cable companies have responded to competition in the video market by aggressively upgrading their facilities and launching new services. Since passage of the Telecommunications Act of 1996, the cable industry has invested nearly $55 billion to deploy broadband plant in order to offer a wide array of advanced services, including digital video, digital music, high speed access to the Internet, and telephony. These upgrades involve rebuilding more than a million miles of cable plant and by year-end 2001, they will be approximately 80 percent complete. As of September 30, 2001, cable had 13.7 million digital video customers, 6.4 million high-speed data customers, and 1.5 million residential cable telephone customers.

    Among the new options that cable customers have are digital video services. Cable program networks have already launched some 60 new digital channels, offering consumers additional choice and further program diversity. Examples include the Biography Channel and History Channel International (from A&E); Science, Civilization, and Kids (from Discovery); Noggin, Nick Too, and Nickelodeon Games & Sports (from Nickelodeon); and style. (from E!). There are six new Hispanic channels from Liberty Ca  aáles, new music channels from MTV and BET, and separate channels targeting Indian, Italian, Arabic, Filipino, French, South Asian and Chinese viewers from The International Channel. There are also many new premium offerings from HBO (HBO Family, ActionMAX, and ThrillerMAX), Showtime (Showtime Extreme, Showtime Beyond) and Starz Encore (Family, Cinema, Movies for the Soul, and Adventure Zone).

Prices for Cable Programming Services
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    Despite escalating programming costs (especially higher sports rights fees) and billions spent on system upgrades, cable prices have remained relatively stable on a per-channel basis. For example, in its most recent report the Federal Communications Commission found that cable rates stayed unchanged in the year 2000 on a cost-per-channel basis (Report on Cable Industry Prices, FCC 01–49, MM Docket No. 92–266, released February 14, 2001). According to the same report, during the 12-month period ending July 1, 2000, average monthly prices for basic service tiers (BST), cable programming service tiers (CPST), and equipment increased by 5.8 percent. This represents a very slight increase (from 5.2 percent) for the year ending July 1, 1999—during which CPST prices were subject to FCC regulation from July 1, 1998, to March 31, 1999.

    Industry critics will cite the fact that average monthly cable prices increased 5.8 percent compared to the inflation rate of 3.7 percent during the 12-month period ending July 1, 2000. But their criticism fails to take into account the fact that cable subscribers also received an average of three additional channels of BST and/or CPST programming. In fact, it is the competition from direct broadcast satellite services and other competitive broadband providers that has driven cable operators to upgrade their plant and add the new channels of programming consumers want.

    Year-to-year comparisons which fail to consider the increased number of channels that operators provide to customers therefore create a misleading picture. In fact, data from the FCC and General Accounting Office show that the price per channel of cable's video services has declined since 1986 when adjusted for inflation:

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

    Cable customers today are receiving more channels and better value for their dollar than ever before. And consumers are using their cable service more than ever. During primetime, ad-supported cable viewership increased from a 7.5 share during the 1985–1986 television season to a 41.7 share during the 2000/2001 television season, according to a Cabletelevision Advertising Bureau analysis of Nielsen data.

Expiration of Restrictions on Exclusive Contracts

    Finally, I know this subcommittee has a particular interest in a provision of the 1992 Cable Act that imposed a 10-year restriction on the ability of vertically-integrated satellite cable programming networks to enter into exclusive contracts with cable operators. That restriction is scheduled to sunset in October 2002, unless the FCC finds that ''such prohibition continues to be necessary to preserve and protect competition and diversity in the distribution of video programming.''

    The prohibition on the ability of vertically integrated programmers to enter into exclusive contracts was enacted in a very different environment. As my testimony indicates, the competitive landscape in the multichannel video market place has changed dramatically since then. In 1992, DBS had no subscribers. Today, DBS serves more than 17 million customers. In 1992, cable operators served 95% of all MVPD subscribers. Today, cable serves less than 78% of multichannel video customers.
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    And, in a total turnaround of circumstances, the most valuable exclusive rights in subscription television—to the NFL's Sunday afternoon football package—are held by DirecTV, the third largest MVPD. Regulations that were established during a period when there were significantly fewer multichannel video programming alternatives for consumers should be allowed to expire in a competitive environment. In limiting the restriction on exclusive contracts for 10 years, Congress recognized that a competitive marketplace is preferable to regulation. Prolonging the ban disserves competition and diversity by disincenting cable operators and their competitors to develop differentiated programming services.

    The dramatic growth over the last decade in the number of multichannel customers subscribing to alternatives to cable is only part of the picture. The increase in diverse program services in which cable operators have no ownership interest has totally changed the landscape from 1992. In 1992, there were only 45 non-vertically integrated satellite-delivered services. Today, there are more than 200 national satellite delivered services that have no cable ownership. These networks compete with vertically-integrated networks for viewers, offering a variety of programming genres, such as news, children's, music and general interest programming, among others. While nearly half of all program services were vertically integrated in 1992, that percentage has dropped to 26% today. And no single cable company has ownership interests in more than 9% of satellite delivered programming services.

    In contrast, major media conglomerates like Disney, General Electric, Viacom, and News Corp (who respectively own the ABC, NBC, CBS and Fox broadcast networks), are increasing their ownership of cable networks. Each of the major commercial broadcast TV networks today is owned by a media company that has financial interests in 10 to 20 cable networks. Some are nationally distributed channels like CNBC, while others are regional channels like Fox Sports Net. And, as the following chart shows, the stable of broadcast-owned cable networks includes some of the most powerful brands in television, among them ESPN, The Disney Channel, MTV, VH-1, Nickelodeon, Lifetime, the History Channel, and Showtime Networks.
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    Mr. Chairman, consumers are benefiting from a rapid and unabated growth of competition in the video market. The convergence of video, voice, and data services in the digital broadband marketplace will only accelerate this trend. Cable will continue to be a leader in providing consumers with choice—not only in video services, but also in high speed Internet services and telephony. At the same time, consumers will be able to choose from among multiple vendors when making their purchases. In this highly competitive environment, companies that succeed will be those who offer consumers the best quality, value, and service. It is not possible to forecast precisely which will be most successful. But one thing that can be said with certainty is that American consumers are sure to be the ultimate winners.

    Thank you again for this opportunity to present the cable industry's views. I would be happy to answer the Subcommittee's questions.

    Mr. CANNON. I would ask unanimous consent to submit for the record, excerpts from the complaint filed in EchoStar v. DirecTV, which was filed on February 1st.

    Chairman SENSENBRENNER. Without objection, so ordered as well.

    [The information referred to follows:]

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    Mr. CANNON. Thank you.

    Mr. Ergen, EchoStar currently provides local stations in 36 markets covering approximately 57 percent of the United States' TV households. If this deal goes through, you have promised to expand service to the top 100 markets, thereby serving only an additional 13 percent of U.S. TV households.

    But haven't you filed in court an action to avoid rolling out additional local-to-local services required by the ''satellite-must-carry'' law which goes into in effect January 1, 2002?

    Mr. ERGEN. Yes.

    Just to correct the record, we have filed—by going to the top 100 cities, we would go to 85 percent of the market up from the 57 percent. So I believe that is about 38 percent more, not 13 percent more, 28—28 percent more homes.

    Take a look at the graph to get an idea.

    We have filed, through our trade association, the SBCA, a constitutional argument against the ''must-carry'' law that was enacted in 1999 under the SHVIA Act in the fact that we believe it violates our freedom of speech. And we have filed that. That would—if we were successful, then it might strike down the ''must-carry'' arguments.

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    I notice that the cable industry has made that same argument for many years.

    Mr. CANNON. But—thank you.

    Mr. Kimmelman, in an op-ed for Knight-Ridder Newspapers criticizing another telecommunications merger, you stated the following: ''the urge to merge rather than compete has engulfed virtually all facets of telecommunications, leaving consumers paying inflated prices for entrenched monopolies that are inadequately disciplined by either market forces or regulation.'' .

    This would be the first time I have heard that the Consumers Union has been supportive of the creation of a monopoly or duopoly. Just so we are aware of any conflicts, have you or your organization received any financial contributions from Mr. Ergen or his companies?

    Mr. KIMMELMAN. Absolutely not.

    Mr. CANNON. Thanks.

    Mr. Phillips, how will NRTC fit into the future equation as a provider of satellite programming in rural America if this merger is approved? If EchoStar becomes your sole supplier, will you really be competing with EchoStar, as Mr. Ergen contends?

    Mr. PHILLIPS. No, sir, Congressman, I don't believe that we will be competing. We have no facilities. We are not a supplier of satellite product; we are a distributor. We distribute DirecTV.
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    In this new world, where EchoStar owns all of the facilities and provides a very fulsome DirecTV package, we would be distributing some subset of those services up until he converts all of the subscribers. Then it is very unclear as to what we would be offering, because we provide DirecTV, and he has indicated his company will be providing DirecTV. And, his menu will be off of all three full CONUS transponders, and we will have just a subset of those services.

    So we won't be in a position to differentiate our product, to provide anything different. We are simply going to be a distributor with a monopoly supplier, which will be Mr. Ergen.

    Mr. CANNON. Thank you.

    Mr. Pitofsky, I found your testimony compelling. Mr. Ergen, in his written statement, said some have attempted to suggest that the relevant product market for examining this proposed merger should be narrowly defined to encompass only satellite TV services, excluding cable.

    Such a definition flies in the face of reality. But, as you noted in your testimony and as also, I think, the Wall Street Journal reported, Mr. Ergen and EchoStar TV defined the market exactly that way in an antitrust suit against DirecTV just a year ago.

    Does treating DBS as a separate market for competitive purposes really fly in the face of reality, or do you believe that DOJ should define the relevant market for the merger that way?
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    Mr. PITOFSKY. This is a little bit of inside baseball. But let me just take a minute and thank you for your comments.

    I think cable and satellite do compete. I think the Department of Justice is right, they are in one market. The real issue is whether there is a submarket.

    The Supreme Court has recognized, our guidelines have recognized, that the two satellite companies compete so directly with each other in terms of price, quality, consumer preferences and so on that people are entitled to competition in the submarket as well as the overall market. So my answer is, the Department of Justice is right, cable and satellite compete.

    But also others have been right in saying that there is a separate satellite submarket. I would go out on a limb and say, it is about as clear a submarket as I have ever seen.

    Mr. CANNON. Great. Thank you.

    I think my time is about to expire so I yield back what further remains, Mr. Chairman.

    Chairman SENSENBRENNER. The gentleman from Virginia, Mr. Boucher.

    Mr. BOUCHER. Well, thank you very much, Mr. Chairman. I want to join with you in welcoming our witnesses today. And thank each of them for their very informative testimony.
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    Let me say that as the Representative of a rural area, I very much appreciate all of the attention to rural concerns which this issue has brought; and I can only hope it proceeds into other legislative areas as time goes on.

    As a Representative of one of the largest rural districts in the Eastern U.S., I can say that I am firmly convinced that this merger is in the interests of my constituents. They will broadly benefit from the new services this merger will make available, including local-into-local services that today are only provided in about 40 markets across the country, that upon this merger will be provided in 100 markets immediately.

    They will also benefit broadly from the major investments and high-speed Internet access services that the merger will make available, because the—the cost of that service can be spread over many more subscribers and, therefore, be economical for the companies.

    And the merger carries no disadvantages for rural residents. The same price for the programs will be charged everywhere, rural and urban markets alike; the same national programs will be provided everywhere, rural and urban markets alike.

    The same customer service 800 number will be provided with no differentiation in the service provided, rural and urban alike, just as it is today. And on-premises customer installation, which is competitive today with independent retailers competing with each other in order to sell the service at the retail level and perform the installation, will remain competitive after this merger, just as it is today.

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    Mr. BOUCHER. So we in rural America gain broad benefits from this. My constituents, including those who do not have access to cable, are going to be much better off after this merger is completed than they are at the present time; and I want to put that squarely on the record, Mr. Chairman.

    Mr. Ergen, I'd like to give you an opportunity to talk about some of the things you didn't have an opportunity to talk about in your opening statement because of time limitation; and, in particular, you might focus this morning on how the merger would enable you to deploy more rapidly high-speed Internet access services, perhaps because that service would become more economical for the company, given the fact that your costs can be spread out over a broader base of subscribers.

    Mr. ERGEN. Well, I was first pleased to hear Mr. Pitofsky agree with us that the market was the total market and cable, and I think he correctly identifies, you know, potential submarkets there. But he would have us compete only in that submarket.

    We're in a catch-22, a classic catch-22. Without this additional spectrum in this merger, we cannot effectively compete in that submarket at all because we don't have local to local. So it's only going to be cable in some of those markets, the rural markets. By combining the merger together, we're able to benefit those rural customers.

    This is a merger—in my opinion, without this merger, we don't see broadband access in rural America in my lifetime. The cable industry is not going to go spend the money to go do it. The phone company is not going to go spend the money. We're going to have a digital divide, and my kids in rural America aren't going to get the same benefit as somebody in Boston. And that's just not right, and there's not enough government subsidies that are going to allow us to be able to do that. Our company has stepped up and said, we will invest billions of dollars and take the market risk that we can develop this technology to do it.
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    Second, you're never going to see local to local in Richmond and Roanoke without this merger. We don't have the capacity to do it. Many of the projects that people have talked about to be able to do it require advances in technology, speculative risk and tradeout of all equipment that is out there today. There is no question with enough time and money—enough time and money you can do just about anything in technology; but the markets—the last time I read the paper, we were in a recession. The capital markets are not out there for speculative ventures. Many companies, we see them going bankrupt day in and day out.

    Our company has stepped up and said, we're willing to go out and continue to invest our capital to bring benefits to rural America and still protect them, protect them by a pricing mechanism. We may not have the best pricing mechanism. We're open to suggestion, that we can compete in urban markets.

    Mr. BOUCHER. Mr. Ergen, my time is almost up. Let me ask you one specific question about high-speed Internet access deployment. We heard one of the other witnesses, I think Mr. Phillips, mentioned that that service is available to a very limited extent today from Gillette, which is your service, and also from DiRECWAY, which is DirecTV service. Why is that not a fully deployed service, why is it not adequate, and how would this merger accelerate the deployment of high-speed Internet access delivered by satellite?

    Let me just suggest that you talk a little bit, if you could, about——

    Chairman SENSENBRENNER. The gentleman's time is expired.
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    Mr. BOUCHER [continuing]. The numbers that are involved in——

    Chairman SENSENBRENNER. The gentleman's time is expired.

    Mr. BOUCHER. Would you give the witness a chance to answer, Mr. Chairman?

    Chairman SENSENBRENNER. Very briefly.

    Mr. BOUCHER. Thank you.

    Mr. ERGEN. Only about a hundred thousand customers—a little over a hundred thousand customers have it via satellite. The main reason is we don't have satellites that were designed for this purpose, and it would take billions of dollars to do it properly, and then we'd have to spread the cost over a wider base, which, if we can combine forces, will cut the cost in half to consumers.

    Chairman SENSENBRENNER. The gentleman from Texas, Mr. Smith.

    Mr. SMITH. Thank you, Mr. Chairman.

    Mr. Chairman, first of all, if we have not already done so, I'd like for the testimony from Northpoint Technology to be made a part of the record.
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    Chairman SENSENBRENNER. Without objection.

    Mr. SMITH. Mr. Ergen, let me address a couple of questions to you. If you need to finish that glass of water, you're welcome to.

    Mr. ERGEN. That's okay. I'll answer first.

    Mr. SMITH. First of all, in your written testimony you mention that you have concerns that Northpoint Technology will have some harmful interference with DBS service. Wouldn't you agree that we ought to leave that up to the FCC?

    Mr. ERGEN. Yes. I think that it's not—my concern is backed up by the MITRE report that was an independent testing facility that did it for the FCC. They did find significant interference, but I do believe that the FCC has—there may be mitigation techniques. I think they have enough information. And we have recently filed—you may not know this, Mr. Congressman, that we——

    Mr. SMITH. Let me say you did answer my question. You agree that we ought to leave it up to the FCC. We hope that they'll decide by the end of the year, as Mr. Kimmelman suggested.

    Let me go to my next question, and that is that you suggested also in your written testimony that, rather than share spectrum with you, that Northpoint should go to another band, but the FCC has already pointed out the disadvantages of doing that. And are you aware of that?
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    Mr. ERGEN. I believe that that band—there may be some disadvantages, but it is not the disadvantage of interfering with 15 million—or 16 million homes today. Again, I believe they have the information to make that decision, and we encourage them to do so.

    Mr. SMITH. Because for the record, the FCC did say, ''alternative bands are not as attractive. These bands either do not offer the same amount of spectrum, are encumbered by existing operations, impose higher equipment costs, or have significant propagation constraints.''

    My next question, Mr. Ergen, goes directly to district concerns, and I represent a number of rural counties in Texas, and some of my constituents do not have access to cable. In fact, they can only get television reception either by DBS or by rabbit ears, the old fashioned way. While you contend that this merger is imperative for DBS to compete against cable, I am concerned that many of my constituents who—will have no access to cable.

    In fact, in your antitrust suit against DirecTV, you stated, ''millions of potential DBS customers also live in areas that do not have access to cable. For these millions of customers and potential customers, if there is no competition between DirecTV and EchoStar, there is no competition at all.''

    Now what has changed in the last 20 months since you filed this suit, and how do I protect my constituents who are a part of the millions of customers you refer to should this merger be allowed?
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    Mr. ERGEN. Okay. First, all those customers in rural America, I hear from them every day, and they don't have access to high-speed Internet. They don't have access to high-definition television. They don't have access to local channels, and that's what they are asking for. They aren't asking for higher prices, and that's why we've come up with the uniform standard for nationwide pricing.

    There has been a change in the last couple of years, since we did have the lawsuit with DirecTV, and that is the—two things have happened. Digital cable has been rolled out to the vast majority of cable subscribers, something that wasn't true two years ago, and local-to-local legislation has passed that has changed the market where we can be a true competitive and a true substitute for cable in markets, and we don't have the spectrum to do that. So that's the two major changes.

    Mr. SMITH. Okay. Mr. Ergen, to follow up on that, if this merger becomes reality, aren't my constituents and the constituents of many other Members really going from two choices to one, and isn't that by definition a monopoly that would give us concern?

    Mr. ERGEN. I think their choices really are reduced. There certainly is still the C-band dish in those rural areas. There certainly are some wireless people out there, but I think, in general, their choices will be reduced, and that's why I think it's important that we put safeguards in place for those constituencies and those people who have less choice. And we're prepared to do that.

    We've come up with one alternative that we think makes sense. It's been done in the AOL/Time Warner—it's been done in other cases in similar circumstances. We're open to suggestion if somebody has other ways, but I don't think you can——
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    I think if you ask customers today—and again I talk to them every day—if you said, look, we're going to give you nationwide pricing and one choice of a satellite provider, but we're also going to be able to give you HDTV, your local service and broadband Internet access, they would prefer that to having two choices of satellite providers who give them half the channels than they otherwise would at about half the same price.

    Mr. SMITH. Mr. Ergen, you mentioned the safeguards, but I want to refer you to Mr. Phillips' testimony that that is not exactly the preferred means to increase competition.

    Thank you, Mr. Chairman.

    Chairman SENSENBRENNER. The gentleman's time has expired.

    The gentleman from Virginia, Mr. Scott.

    Mr. SCOTT. Thank you, Mr. Chairman.

    Mr. Ergen, this chart up here doesn't appear to have Norfolk, Virginia. Is that an oversight, or was Norfolk not covered?

    Mr. ERGEN. We'll have to show you a different chart here that shows you the DMAs, but we would do the top hundred markets. We would commit to the top hundred markets and at least—and I don't know Norfolk's size, but I believe it's one of the top hundred markets. And we would commit to at least one city, no matter how small, in every State.
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    For example, Cheyenne, Wyoming, is only 25,000 people. We'll do that so that every State will participate.

    Mr. SCOTT. I'm not interested in Cheyenne, Wyoming. I'm interested in Norfolk, Virginia. Should that be on the chart? Was that an oversight, or is it not one of the hundred?

    Mr. ERGEN. Do you know—if it's one of the top hundred markets, we are committing to it.

    Mr. SCOTT. Mr. Ergen, in your pricing of your service, is your pricing more a function of competition between satellite companies or cable?

    Mr. ERGEN. I didn't hear the question.

    They were—by the way, I did confirm that Norfolk and Norfolk—Richmond—and Richmond would be covered and Roanoke.

    Mr. SCOTT. Thank you. Is your price via service more of a function of competition with cable or competition against another satellite company?

    Mr. ERGEN. No. It's definitely a competition against cable. The vast majority of all our new customers come from cable or at one time had cable. A vast, vast majority of our customers come from that, and, again, cable now is digital. It has bounties out on our service, and we don't have some of the advantages that we had before. Cable has the broadband advantage over us and——
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    Mr. SCOTT. But after the competition with cable, you're going to give a nationwide price so everybody in the country would pay the same price for the service?

    Mr. ERGEN. That is correct. Very similar to the way AOL prices their broadband service nationwide at one price.

    Mr. SCOTT. And, technologically, how—you keep talking about serving a market. What do you need to do to serve a market? I mean, doesn't the satellite beam kind of hit all of America, and everybody who can get a satellite can get it? Is there anything technologically that would deny service to a particular area?

    Mr. ERGEN. There's really two changes. Some satellites cover the entire United States. That's our current generation of satellites. Both us and DirecTV have under construction and they have launched a satellite that would be—do a spot beaming, where it would actually put a beam on a particular geographic location. That allows us to do the local markets more efficiently. Those satellites aren't operational today, but both of our companies have invested to do that.

    Mr. SCOTT. Do you do local television now?

    Mr. ERGEN. We do do local television today, but we use a full CONUS beam. So when we broadcast to Washington, D.C., that signal actually goes to the entire United States, but we're prevented from—by the broadcasters from broadcasting that channel to anybody except those people in Washington. It's a very inefficient use of spectrum——
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    Mr. SCOTT. Is there any technological reason why you aren't serving some other rural area in Wyoming? What stops them from getting a dish and getting the service?

    Mr. ERGEN. They can get a dish and a service. They just can't get the local service because they're not in the—they don't have the legal right per SHVIA act to get the Washington signal or one of the other signals.

    Mr. SCOTT. So, actually, you cover the entire United States?

    Mr. ERGEN. We cover the United States, but we're not allowed to broadcast a local signal except to those people in the local DMA. That's a part of the law, and then we have to carry all the signals in a local city with the Must Carry law. So there's—the bottom line is it's very burdensome that we duplicate channels. For example, we have 37—36 markets today or 36 markets. We show on January 1st 36 home shopping channels that are exactly the same. We broadcast one nationally, and we broadcast 36 to local markets with national beams, all using a terribly inefficient spectrum which raises cost to consumers and reduces their choices and makes us less competitive to cable. This merger can help alleviate some of those problems.

    Mr. SCOTT. Let me ask it in another way. Is there anyone in the United States that can't get your service today?

    Mr. ERGEN. No. There's no one in the—every square inch of the United States, including Alaska and Hawaii, we cover today.
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    Mr. SCOTT. If the merger goes through or if it doesn't go through—I want to follow up on a question from my colleague from Virginia. If it goes through or doesn't go through, what difference would that make to DSL and HDTV?

    Mr. ERGEN. It will mean that HDTV will be slow moving. It will mean that we will have to require—that we'll have to rely on the broadcasters to roll it out nationwide. We know their signal will not reach everybody in the United States but——

    Mr. SCOTT. What does the merger have to do with this?

    Mr. ERGEN. The merger frees up spectrum, spectrum. But, right now, we duplicate spectrum. So we unduplicate that spectrum. We free up about 500 channels initially and more over time that allow us to do a dozen high-definition channels overnight. Overnight, with one flip of the switch when this merger happens, we can be broadcasting 12 channels of HDTV.

    Mr. SCOTT. And aren't the 500 channels——

    Chairman SENSENBRENNER. The gentleman's time has expired.

    The gentleman from Ohio, Mr. Chabot.

    Mr. CHABOT. Thank you, Mr. Chairman.

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    Much of the discussion today on the proposed merger has been around how it would affect rural areas, and that's obviously appropriate, since rural consumers would be most directly affected by the proposed merger. I'd ask that any members of the panel that might like to do so would elaborate a little further on how the proposed merger would affect the urban areas within our country. And perhaps if we could start with you, Mr. Ergen.

    Mr. ERGEN. I think it has a great positive effect on the urban areas. And, as you know, in urban areas the cable companies have clustered together now, and they may own—they may have 90 percent of the Pay TV subscribers in the cities. And they've clustered together, and they have continued to raise their rates at, you know, double and triple the rate of inflation. By combining our spectrum and becoming more efficient and getting better programming costs from programmers, we're able then to compete more effectively with those and bring cable prices down instead of—or at least lessen the rate of inflation and compete with new things such as broadband offerings and things like video on demand that cable operators are going to roll out. If we don't do that, we'll never effectively be competitive in the urban areas, and we'll be relegated only to those urban markets who don't have a cable company there.

    Mr. CHABOT. Mr. Pitofsky?

    Mr. PITOFSKY. Yes. Two points. In urban areas the risk is that consumers, who now have the benefit of fierce competition between two satellite companies will be down to one. They'll have no choice if they want to go the satellite route. I think it's instructive that cable prices have gone up—as Mr. Kimmelman has pointed out, have gone up and up and up, but cable is a monopoly in almost every part of the United States.

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    What we're doing now is we're talking about the possibility of satellite becoming a monopoly in many parts of the United States. That is on the risk side.

    On the good side, I mean, I hear the argument that there are—the merger will lead to some benefits, local to local and so forth. The question is, can you not get there without the merger? The Department of Justice's expert witness in another proceeding testified in an affidavit form, I think, that you don't need the merger, that technology is there. Either one of these companies could achieve these. But I concede our benefits to consumers on their own.

    I'm reminded in this conversation of Gary Gesell, a great antitrust judge, saying what we want in this country is for companies to use their brains and energy to expand their own business, not take out their checkbook and buy their competitor.

    Mr. CHABOT. Thank you.

    Mr. Phillips.

    Mr. PHILLIPS. I'd like to add that I certainly agree with what the professor said. It's certainly better to have two robust competitors in urban America. That is not our forte.

    But the point Mr. Ergen made that he's not using the satellites that are most efficient is very important. The DOJ witness pointed out how both DirecTV and EchoStar could expand their service offering today to include all of the local channels. They've chosen not to do that. They've come here suggesting that they don't have enough frequency, but they have hundreds of frequencies that they're not using today, and they're not using them with the most efficient satellite equipment. In rural America, which I'm speaking on behalf of, this has a tremendous impact of going from one provider to two.
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    And the other witnesses have—the questions have been answered about C-band. C-band is currently at 850,000. It loses 25,000 subscribers each month. We're in that marketplace. It's less than 1 percent of the market.

    MMDS was mentioned, wireless, by Mr. Ergen. I was here 10 years ago with MMDS panelists talking about how they would be the great competition for cable. They have failed business plans. They're less than 1 percent of the market today.

    Northpoint is an MMDS-like service. I don't suggest that it is going to be effective in rural America at all.

    So while I don't know about urban America, I don't think the resources these two companies have are being fully utilized efficiently. Two is better than one in urban America, and certainly going to one in rural America is not acceptable.

    Mr. CHABOT. Thank you.

    Mr. Kimmelman.

    Mr. KIMMELMAN. Yes. To put it in perspective, the broad market Mr. Pitofsky talks about includes 85 million households approximately that have cable and satellite available, and that's all urban areas and suburban areas, and this rural market is approximately 10 to 15 million households. It includes a large geographic expanse of 10 to 15 million. We do not support going to monopoly anywhere, but the problem here, as your former Chairman of this Committee, Mr. Hyde, said, was that we deregulated cable inappropriately when there wasn't competition and the rates were skyrocketing. So all the dangers Mr. Phillips talks about, all are related to the risks on consumers from premature deregulation.
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    What's the benefit in urban America from going from three to two? There's not a clear benefit. There's a danger, which is why we recommend licensing a new entrant before you approve this merger under antitrust, and that is before the FCC right now.

    But what is clearly possible here is that with more capacity freed up, more cities, more suburban areas, we'll get the full panoply of local broadcast channels, as Congress has required under the Must Carry Law, and satellite will be able to offer everything that cable can offer and maybe even some comparable service to cable modem service in most communities in the country, possibly serving this 85 percent where there is overlap between cable and satellite. That would be an important improvement for price competition for consumers.

    Chairman SENSENBRENNER. The gentleman's time has expired.

    The gentleman from North Carolina, Mr. Watt.

    Mr. WATT. Thank you, Mr. Chairman. I appreciate the Chairman convening the hearing.

    After hearing the testimony and the statements of—or questions of some of the members of the panel, it appears to me that I may be one of the few people who came in here without any perspective on this, which is not unusual for technology-related matters. And I'm not sure that, after I've heard the testimony, I have much of a perspective on it either. I've got friends on both sides, and as we went down the line it seems to me that I was influenced by each one of those sets of arguments, which is probably a good position to be in. So I hope you all won't line up at my door. We don't have any jurisdiction to change what the FTC and the antitrust division will do. So, hopefully, we won't have to take a vote on this.
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    I was struck by something that Mr. Kimmelman said about other potential satellite providers being licensed, and, Mr. Ergen, apparently you concede that there are only two satellite providers now, and this merger will result in only one satellite provider in the field. Is that right?

    Mr. ERGEN. That is generally correct, although the NRTC and Mr. Phillips will still be a provider in those areas. So nothing changes. They still will have all the rights and obligations that they have from DirecTV to be the provider in those areas.

    Mr. WATT. And the merger, one of the problems you indicated with the merger, or one of the benefits you indicated with the merger, was that you would eliminate the overlap—you would eliminate the duplication of spectrum use and allow consolidation. What would happen then to that other spectrum use? Would that still be owned by the consolidated merged companies, or would it go back and be available for sale or disposition by the FCC?

    Mr. ERGEN. No. That spectrum would still be owned by the new company. It would be necessary to—and then it would be used to free up the spectrum for things like more local cities and high-definition interactive service and video on demand. So all the new services that we can't do——

    Mr. WATT. But this merged company would still own—if it takes five bandwidths and five bandwidths now but two competitor companies, you'd still own all 10. Right?
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    Mr. ERGEN. Yes, just as a cable company that we compete against and has the dominant market share, just as they own all their spectrum, right, then we would own the spectrum to compete against that. So it's a little bit——

    Mr. WATT. I don't know if you want to aspire to be like a cable company. I mean, that's one of the problems that I have. That's not a good argument with me, that you want to be like cable companies.

    Mr. ERGEN. Well, not——

    Mr. WATT. Let me ask Mr. Kimmelman whether there are some other potential good competitors out there that might be licensed. You mentioned a couple. And what would happen if this merger is not approved? Would those players still be in the mix, or is all the spectrum gone, or what would be the situation there?

    Mr. KIMMELMAN. Those players could be licensed separate. They have nothing to do with the merger. The license applications, which are a secondary as the terrestrial use of satellite spectrum, not beaming up to a satellite, beaming up terrestrially, have been languishing at the FCC for years in fights with this very industry. The unique opportunity here, I would suggest in reviewing this merger, shines a light on the major opponent of licensing these new entrants being accused of bringing markets from three to two or two to one.

    I would suggest that that's something the FCC and the antitrust officials could handle directly with EchoStar DirecTV. If they really want to have their merger consummated, they ought to get out of the way of new entrants in the market.
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    There is one who has been seeking a license——

    Mr. WATT. Would part of that be to give up some of this spectrum that I've talked about or other——

    Mr. KIMMELMAN. There are two ways to handle this. The secondary use doesn't require giving up any spectrum. It requires a secondary license with an assurance that there's no interference.

    The second possibility would be a structural remedy Mr. Pitofsky applies in his testimony, which would be to free up some satellite capacity to ensure, particularly in rural areas, if that were necessary, that you are not going to solely one player. That would be appropriate for the antitrust officials to review as an alternative structural approach.

    Mr. WATT. Let me ask you one other question quickly, because my time is about to run out. The extent to which EchoStar and DirecTV now compete with each other, what are the kinds of things you are competing with each other now about?

    Mr. ERGEN. Well, in general, we compete because we have exactly the same programming up there, but, unfortunately, we don't compete against cable as well as we'd like to. We kind of fight against——

    Mr. WATT. I'm talking about between the two of you. I'm not worried about cable at this point.
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    Mr. ERGEN. We generally have the same service, but we don't have all of the things we need to compete.

    Chairman SENSENBRENNER. The gentleman's time has expired.

    The gentleman from North Carolina, Mr. Coble.

    Mr. COBLE. Thank you, gentlemen. Good to have you all with us.

    Mr. Ergen, the pricing program has been discussed, but I am not firmly grasping it. I may not even be loosely grasping it. So let me try again.

    Given that different cable companies offer different programming packages at different prices in different areas, what formula would you use to set a, ''national price,'' that would be beneficial to all customers?

    Mr. ERGEN. Okay. Maybe I didn't make it clear in my testimony, but we do national pricing today and have for the 6 years we've been in existence. And we have, for example, America's top 50 package, which starts at $21.99. That has about 50 of the most popular cable channels. It's the same price no matter where you live, whether it be North Carolina, whether it be Texas. DirecTV does exactly the same thing. They have a $21.99 package, essentially the same channels that they sell nationally. So we would commit that we would continue that.

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    We will have a cable company from time to time, particularly in a big city, that will come after that package and perhaps be very aggressive against it, which will force us to be aggressive. And then that new—that price would be the national price at that point in time. So it's a great thing for consumers, because they get the benefit of the most fiercely competitive area on a nationwide basis.

    Mr. COBLE. Professor, would you like to weigh in on that?

    Mr. PITOFSKY. Well, I'd ask, how are you going to handle introductory offers, special prices, weekend specials, free equipment and so forth? Would that be covered by your single national price?

    Mr. ERGEN. I think I can only answer how we do it—the way we do it today. We have nationwide promotions. For example, we have an ''I Like 9'' promotion today, where you can get nine—pay $9.00 for a certain set of channels for a year, and we do that on a national basis.

    Mr. COBLE. All right. Let me move along, then.

    Mr. Ergen, let me ask you this question. How might this proposed merger affect your ability to adhere to the Must Carry obligations, A; and, B, will some markets lose local access? And, if so, where would these markets be?

    Mr. ERGEN. I think it is imperative for us to comply with Must Carry, that this merger go through. It will greatly enhance our ability to comply with the Must Carry law. I believe that we would not lose access to any of the current 42 markets that our two companies do today if we're allowed to merge.
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    I think without the merger, it is possible, depending on how FCC rules, that some markets, at least from the DISH Network perspective, would have to be taken down.

    Mr. COBLE. Now, Mr. Phillips, it has been alleged by some that you all would become a competitor if the merger comes through. I mean, I believe you said earlier—I think you refuted that, did you not?

    Mr. PHILLIPS. Yes, Representative. NRTC has a distribution agreement. We own no satellite facilities. We have no ability to differentiate our product. We provide DirecTV today off of a subset of the frequencies that were mentioned here. Once EchoStar and DirecTV merge, we would simply be a distributor with a smaller subset of packages. EchoStar would be providing the whole of that in a very robust way, and I don't see any ability for us to compete on a facilities basis or otherwise.

    Mr. COBLE. Now, you all are now a wholesale supplier of DirecTV, are you not?

    Mr. PHILLIPS. Yes, sir. When we invested a hundred million dollars to help General Motors launch the DirecTV business, we were allowed to provide DirecTV service in about 7 million rural home areas. So part of rural America is served by DirecTV through our members and affiliates.

    Mr. COBLE. And you own no satellites?

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    Mr. PHILLIPS. No, sir.

    Mr. COBLE. Now, Mr. Kimmelman, I have omitted you. Do you want to weigh in to any of my questions?

    Mr. KIMMELMAN. I was just going to respond to Mr. Phillips that he's in exactly the same position he was before the proposed merger, just dealing with a bigger adversary. I certainly have sympathy for him in doing that, and I think that would be appropriate for the Justice Department to look at.

    Mr. PHILLIPS. I'm not in the same position today. I represent and present DirecTV's product in competition with Mr. Ergen. We compete with him in the market. We respect him as a competitor. After the merger, he's our sole supplier, and then we'll be provided a subset of what he has and be expected to compete against that.

    Mr. COBLE. Thank you, gentlemen; and I direct the Chairman's attention to the fact that I beat the red light.

    Chairman SENSENBRENNER. And we all appreciate that.

    The gentlewoman from Wisconsin, Ms. Baldwin.

    Ms. BALDWIN. Thank you, Mr. Chairman.

    Let me begin by sharing that I have significant concerns about this merger, and it has been helpful for me to hear the discussion on how it might impact rural suburban and urban America. I represent a district that is roughly one-third urban, one-third suburban and one-third rural, and in a media market that is not one of the top 100 in Wisconsin. And so I have constituents who will have strong interest in this impact.
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    I have additional concerns about increasing concentration in many sectors of the economy. They may not have relevance to today's discussion, but it was only a few months ago that we had the Attorney General here before the Committee, and I expressed my concern about excessive concentration in the agriculture sector and how that is impacting my rural constituencies.

    As we look at this merger, I am appreciative of the promises that EchoStar has made and specifically the commitment to rural services with a pricing system, a national pricing system that is fair. But even in my short time in Congress I have seen some of these promises not be sufficient to protect the public interest.

    I guess, Mr. Pitofsky, based on your experience at the FTC, I'd like to have you elaborate on two things. One is the various types of nonprice competition issues that might arise if this merger were implemented, especially in the areas where there is no real cable alternative competitor.

    And secondly—and you referenced this in response to the question that Mr. Coble raised—what—outside of a national pricing structure, what other types of pricing or fees or other pricing issues might come up for a rural consumer, aside from just the subscriber price? Are there going to be—you know, the equipment, the deals. Are there other ways that rural constituents of mine may feel the pinch?

    Mr. PITOFSKY. Well, let me start with nonprice competition.

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    First of all, there's sort of a backdrop here of a suggestion that satellite can't compete with cable unless it gets bigger. I mean, satellite, with all due respect, has done a terrific job. You've gone from zero to 15, 17 million in a relatively short period of time. You're competing just fine, and it seems to me that you're competing primarily on nonprice, on service, on technology, on programming, on reliability, on new ways of doing things. And what I'm troubled about is, even if it is all true that there will be a national price, national terms of sale, which will be very difficult to monitor, even if that is all true, why do we need the merger? Why can't you people continue, as I think you've predicted you will and promise to do, to expand and expand and expand?

    Let me add one more point. I've sat here quietly while people have spoken on the premise: What a good thing to eliminate duplication. Forgive me, but duplication is competition. I suppose if Kmart and Wal-Mart merged, they could eliminate duplication, but I don't think that is a very good idea. Efficiencies are other than eliminating duplication. And I come back to the proposition that these two companies have competed fiercely and admirably for many years, and they are doing well against cable.

    I agree with Mr. Kimmelman. A large part of this problem emerges out of the fact that cable has such a dominant position in so many places in the United States. We ought to address that, but I don't think it is in the traditions of this country to address it by putting another monopoly in the field.

    Now, as to fees, all I can say is, when you run a company, it is not just the price. It is all sorts of other things about service, reliability and so forth. And I just can't see how the Department of Justice, I guess it would be, is going to keep an eye on every single term of sale with respect to satellite in every community in the United States. It is the sort of thing the government tries not to do.
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    Ms. BALDWIN. Mr. Ergen, also in response to Mr. Coble's question, you mentioned in terms of pricing structure that, look at how you do it today as a basis for how you'd do it in the future past—proposed merger. I would appreciate it, and I think there should be considerable scrutiny prior to this merger, if you can share with the Committee data on your current pricing and extra fees and whatnot that occur so that we can look at that and extrapolate into what you might impose in the future.

    Chairman SENSENBRENNER. The gentlewoman's time has expired. Without objection, the data submitted by Mr. Ergen will appear in the record.

    Chairman SENSENBRENNER. The gentleman from Virginia, Mr. Goodlatte.

    Mr. GOODLATTE. Thank you, Mr. Chairman. Mr. Chairman, I have an opening statement to submit for the record.

    Chairman SENSENBRENNER. That permission has already been granted.

    Mr. GOODLATTE. Thank you, Mr. Chairman.

    [The prepared statement of Mr. Goodlatte follows:]

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    Thank you Mr. Chairman for holding this very important hearing on Direct Broadcast Satellite and competition in the Multichannel Video Distribution Market. Because this issue involves significant antitrust issues, I am pleased that the Judiciary Committee is taking action to review issues within its jurisdiction.

    I continue to believe that government should tread lightly in the free market, and that full, fair, and open competition is the best way for the marketplace to flourish. However, as a member who represents a rural district in a state where almost 40% of homes do not have access to cable, I am interested in hearing how the proposed merger between EchoStar and DirecTV will affect rural areas.

    As Co-Chairman of the Congressional Internet Caucus, I am also concerned about the roll-out of high speed Internet access to rural areas, whether cable or satellite-based. Competition in the marketplace is needed to bridge the digital divide between urban and rural consumers. Therefore, I am interested in determining the effect this proposed merger would have on the deployment of high speed Internet access.

    In addition to these issues, I am anxious to examine how this merger will affect legislation I sponsored and worked to enact into law, along with my colleague Rick Boucher, last year. This legislation which authorizes the U.S. Department of Agriculture to provide loan guarantees to ventures utilizing satellite technology to deliver local television signals to satellite dish owners in the rural and smaller television markets the commercial satellite companies do not plan to serve. As the author of this local-into-local loan guarantee legislation which was signed into law, I am very interested in how this proposed merger will impact bringing local signals to all 210 television markets.
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    Again, I thank the Chairman for holding this important hearing and I look forward to hearing from our witnesses.

    Mr. GOODLATTE. I want to thank you and the members of the panel for what has proven to be an excellent hearing and has, I think, fully talked about the issues related to this merger.

    I have one that I don't think we have covered in as much detail as I would like, and that is the effect that this merger would have on legislation that passed through this Committee that Congressman Boucher and I worked on to provide local-into-local television service to all 210 markets in this country. That legislation has passed, signed into law by President Clinton. President Bush just last week signed the agriculture appropriations bill which provided funding to begin the initial process of that, $20 million, to the rural utility service to help fund that.

    I very much welcome Mr. Ergen's comments that this merger would free up spectrum that would allow him to go from the 35 or 40 markets that he covers today to 100 markets. One of those 100 markets is a market that Congressman Boucher and I share, the Roanoke market. However, I have two other markets, Harrisburg and Charlottesville, that are about 180 and 192 in terms of their market size, and what I'd like to know is what this merger will do to the likelihood that the rural utility service will receive applications from people to put together a package when the market opportunities for that package will be greatly reduced to the smallest 110 markets and taking out some of those other markets that might make it more profitable. Mr. Ergen, would you care to comment on that?
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    Mr. ERGEN. Yes. Thank you very much. It's a good point.

    I think that this merger greatly enhances the ability to get—while we as a company believe that we can only commit to the top hundred in the 50 States and maybe a few more, and not all of them, we think it enhances our ability to do that. And the reason is today both our companies have different technologies and different set-top boxes. So we're Beta/VHS. And if you're going to launch a satellite for the next—the top 200 markets or the next hundred markets, you've got to be on one standard, one—otherwise, you just economically can't do it, and the government is going to loan some money for no reason.

    So we think—when we put our companies together, we also are going to put them on one standard, and we're going to do that at our cost, not a cost to the consumer. We're going to do that at our cost, and it's going to be a couple billion dollars over a period of 3 or 4 years to do that.

    At the same time, you could be building another satellite to do the smaller markets, and people like Capital Broadcasting have proposed plans, both in the—and maybe even in the Ka-band frequency to do so. And then they would be able to go to all our customers with that plan, because we're all on the same standard.

    There is no way that the $1.2 billion loan guarantee that the government has put in place—and I commend them for doing so—is ever going to pay for the cost of changing out the set-top boxes.

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    Mr. GOODLATTE. Let me ask Mr. Phillips if he would comment as well, because I know that his organization has been interested in putting together such a plan. Mr. Phillips.

    Mr. PHILLIPS. Thank you, Congressman. I appreciate your support, the Members of the Committee and all of Congress to help make those funds available.

    I would say to you that, if this merger is allowed to be approved, you're correct that the economics of providing those lower-tiered markets are reduced. And we need to secure a promise, I guess from Mr. Ergen, if that goes forward, because he'll be in a position to control whether or not anyone can bring those markets to the combined platform that he's building. I want to suggest, as a competitor to the industry, that it wasn't until Mr. Ergen launched the local-to-local signals that DirecTV responded in a competitive fashion and launched local into local. That competition, in my mind, is what is going to continue to create an incentive to provide more local-into-local channels, not a merger where there is one platform.

    I would also suggest that the cost of changing out the equipment is a massive undertaking. It is much more, we believe, than $2 billion. And do we really believe that Mr. Ergen is going to finance that and that the consumers are not going to pay that bill?

    Mr. GOODLATTE. So at the very least there should be some protections that this marketplace would be open. But taking out 60 or so of the intermediate-sized markets, what effect does that have on the attractiveness of putting together a package for the remaining 110 markets? And I'll ask both of you to respond quickly.

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    Mr. PHILLIPS. There's two points there. First of all, you need to have access to a video programming resource. I mean, you are not going to be able to do that as an independent provider. Mr. Ergen, with a merged company, is going to have all the programming, all of the CONUS slots, and that is the common platform. So your economics of doing it as another platform are destroyed.

    Secondly, all of the business models we've looked at have relied on a sharing, if you will, of delivering all 210 markets to make the economics work, and I would urge you to take a look at the DOJ's expert testimony——

    Mr. GOODLATTE. But let me interrupt, because——

    Chairman SENSENBRENNER. The gentleman's time——

    Mr. GOODLATTE. Could Mr. Ergen briefly respond to that as well? I want to give them an equal chance to that last question.

    Chairman SENSENBRENNER. Briefly.

    Mr. ERGEN. I don't know that you can respond briefly, but basically the economics just don't work unless you get a single standard platform out there so that anything that Mr. Phillips and his organization might do for local to small markets can be spread across a common platform.

    Mr. GOODLATTE. Thank you, Mr. Chairman.
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    Chairman SENSENBRENNER. The gentleman from Alabama, Mr. Bachus.

    Mr. BACHUS. I thank the Chairman.

    Mr. Ergen, if this merger goes through, you'll control the three orbital slots or positions with continuous coverage over the United States. Is that right?

    Mr. ERGEN. That's correct.

    Mr. BACHUS. Would you be willing to divest yourself of one of those satellite positions?

    Mr. ERGEN. That would defeat the purpose of the merger. Because, by divesting, you then lose all of the efficiencies and the spectrum savings to go in and do the other markets. So it just wouldn't make—it would defeat the purpose of doing it.

    Mr. BACHUS. Do you agree that a merger without doing that would create a—you'd have a monopoly? You'd have all three?

    Mr. ERGEN. Well, again, we believe we compete against cable in the multivideo market but——

    Mr. BACHUS. I understand.

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    Mr. ERGEN [continuing]. So it is kind of hard for me to sit here and be called a monopoly when we only have 17 percent of the market versus somebody who is a monopoly and has 80 percent——

    Mr. BACHUS. Let me ask you, you have 100 percent of the direct-to-home market. Right? Or 90 percent—you'd have 90 percent with this merger?

    Mr. ERGEN. We would have about 90 percent of the direct-to-home market.

    Mr. BACHUS. Let me ask you this, and I'm following up on Mr. Goodlatte, what he said. You're saying that this merger will—is needed to free up frequencies which could be used to provide local broadcasting. Is that right?

    Mr. ERGEN. Among other things. Not just local broadcasting but eventually high-speed Internet, broad bands——

    Mr. BACHUS. Let's talk about local broadcasting. You're saying that this merger would help you with local to local. Right?

    Mr. ERGEN. Right. I see no way of doing more markets.

    Mr. BACHUS. Unless you get the merger.

    Mr. ERGEN. Unless we can combine spectrum and efficiencies to do so.
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    Mr. BACHUS. Let me ask you about a study that was given to us. It was by Roger Rusch, an engineering consultant for the Department of Justice. He filed a written declaration in a satellite Must Carry case, concluding that the DBS system could be built using currently available technology that would enable satellite carriers to offer a rebroadcast of all high-powered television broadcast stations in the continental United States, pursuant to the Satellite Home Viewer Improvement Act, and such a system could be operated using only 12 DBS frequencies.

    Mr. ERGEN. I'm very familiar with what report.

    Mr. BACHUS. Do you agree or disagree?

    Mr. ERGEN. I disagree with his analysis, and here is why. He provides in his report that we completely change out our technologies to something called A-PSK. Today we use a technology called Q-PSK. So he doesn't go into the economics—as a business guy, I have to look at this to my shareholders and whether I can raise capital to do a project like that.

    Now, technically, I do agree with enough time and enough money that you can solve a lot of problems. I just don't believe that what he has come up with is a practical solution. It would be cheaper for us to go put fiber to every home and do it that way than it would be to build his new generation of satellites and replace all of our equipment in the field as he suggests.

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    Mr. BACHUS. Could you provide to this Committee the information you have which rebuts his argument?

    Mr. ERGEN. I'd be pleased to do so.

    Mr. BACHUS. Okay. Thank you.

    [The information referred to follows:]





    Mr. BACHUS. Let me ask you one final question. Since 1997, you've had an—EchoStar has had a license—FCC license to operate Ka-band satellites at two orbital positions, but you hadn't launched a single satellite. Is that correct?

    Mr. ERGEN. I'm not sure exactly—I think you're referring to the Ka-band frequency, the 121——

    Mr. BACHUS. Yeah, Ka-band service.
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    Mr. ERGEN. Yes. We have a satellite under construction, Mr. Congressman, that will launch about September or October of next year, so about 10 months from now. And we've been building—the satellite has been under construction for about three years.

    Mr. BACHUS. Whether you have this merger or not, you'll still deploy this Ka-band service?

    Mr. ERGEN. Yes, we will. The Ka-band frequency is one that we believe long term will have some benefit. Many people have talked about it in relation to local-to-local guarantee. We're going to experiment with that frequency. We know it's going to be technically challenging, but there is some hope there.

    Mr. BACHUS. Well, that is my point. Wouldn't this Ka-band service—if you launched these satellites, couldn't you use that for local to local? Wouldn't that be one solution?

    Mr. ERGEN. We could use it for local to local, and obviously new entrants into the marketplace could do it. Pegasus, who is a member of the NRTC and their largest distributor, has Ka-band licenses. They could launch those satellites today, but they use their capital and risk their capital just like our company has.

    Mr. BACHUS. All right. But you could give this Committee assurances that you will launch those satellites whether or not this merger goes through or not?

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    Mr. ERGEN. Well, we'll launch it. I can't give you assurance that a rocket doesn't blow up, but I can guarantee you we're going to launch that first satellite at 121, because we've paid about 90 percent of the costs of doing so. So we will launch that one.

    Mr. BACHUS. Thank you.

    Chairman SENSENBRENNER. The gentleman's time has expired.

    The gentleman from California, Mr. Issa.

    Mr. ISSA. Thank you, Mr. Chairman.

    Trying to take my eyes off of this merger and look at a little bigger picture, perhaps a view from space, it appears as though this merger is all based on the assumption that a triopoly of the Bell system, the cable companies and the satellite companies will give us better competition, even though we're clearly reducing competition in the arena in which you operate. Is that a fair way of talking about how we're going to define the market in the future at most?

    Mr. ERGEN. Well, I think you bring up a great point. Today we define the market as the pay TV market, and obviously we're only—we're a small fraction of that, but we're also in the broadband mat, the video-on-demand market, the telephone market.

    And let's take broadband, for example. We have no economic ability to compete in that market today, and our competition, cable, is the dominant provider there today of high-speed access. So we're in a situation where people are asking us to fight against the entrenched cable company with one hand tied behind our back, and DirecTV has to fight with one hand tied behind their back. All we're asking is to say, we put these two together. We can get a fair fight. Let the marketplace decide, and I think the consumer will win.
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    Mr. ISSA. Following up on that general line—and others can chirp in if you have decidedly different opinions—if we in the government, not necessarily this Committee, but we in the government were to recognize hypothetically that three is not enough or that there are only two in some areas and only one in—for practical purposes, especially with broadband, you might be the only broadband supplier. If we were to specifically authorize new bandwidth, make new, you know, satellite competitors available as a matter of national priority or other fiber to the home, as you suggested and so on, how does that affect the viability of the model that you're saying is going to pay for putting together some fairly debt-heavy companies?

    Mr. ERGEN. Well, we're putting our money where our mouth is and saying we believe we can be the most efficient. We recognize that competition is going to come. It's coming from the Internet through video today. I can receive my local channels from many different cities on the Internet today, for example.

    We know that fiber to the home is a reality, and it's starting—it's going to be a long-term competitor. We have to become efficient. We have to be able to merge to get stronger. And we have to be good at management. Otherwise, the marketplace will—as they have done to so many companies in high-tech, you're only as good as your last quarter. You're only as good as what you did yesterday. We have to continue to move at light speed to compete, and that's why this merger is necessary.

    Mr. ISSA. But following up on that, if we gave you more spectrum and/or sold you more spectrum and your competitor so that we would have two satellite providers, does that in fact make your model not work, even if we had the spectrum available for you today?
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    Mr. ERGEN. Well, the spectrum is the biggest thing, but realize that we also each launch a new satellite every year for $250 million. We each get higher—we each had to pay higher programming costs by 5 to 15 percent over the large cable companies. We each have much, much—we have a lot of other efficiencies that obviously go along with this merger besides spectrum.

    But spectrum is the main one, and if spectrum were freed up, it certainly would be something to look at.

    Mr. ISSA. Okay. And for everyone else on the panel, I would appreciate—since we know that monopolies are inherently efficient in their buying, if you could comment on maybe the other side of that, I would appreciate it.

    Mr. PHILLIPS. I would like to offer that both of these competitors, EchoStar and DirecTV, both are very successful. They're both financially doing very well in the marketplace. I've included charts in my testimony to show that the amount of spectrum resource they have in the Ka-band is 50 percent of what's already been allocated. So by using more efficient technology—and they're going to do that because they're competing, by the way—I think that they can get these things done, and it will be more effective, both for cable and certainly in rural markets.

    When Mr. Ergen suggested that Pegasus or anyone else could put their money up and launch these other services, when you're a consumer at that home, you don't want to have multiple dishes at your home and multiple set-top boxes. There's a synergy here to pick one or the other, DirecTV or EchoStar. Today they can pick StarBand, or they can pick DiRECWAY as Ku-band Internet access products. If there's a third one that doesn't have any video connected with it, it's going to be nearly impossible to break into that market. So this is really going to forestall anybody.
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    In having been involved in this market the last few months, we've seen companies like AstroLink and Wild Blue just fall apart once this merger was announced.

    Chairman SENSENBRENNER. The gentleman's time has expired.

    Go ahead, Mr. Kimmelman.

    Mr. KIMMELMAN. I'll be very brief. We wish we had more phone companies. They've been consolidated. We wish we had more cable companies. They've been consolidated. Now we see the satellite companies attempting to consolidate. My suggestion is we look aggressively for new spectrum, new entrants. But deregulation has led to a lot of this consolidation, and with no price limits right now for the dominant player in the multichannel market cable, it's consumers who are bearing the risk of day-to-day, month-to-month, year-to-year price increases. So I urge you, besides tough antitrust enforcement we need aggressive, procompetitive policy to get more players in the market.

    Mr. PITOFSKY. Mr. Chairman, could I similarly, very briefly, very briefly?

    Chairman SENSENBRENNER. Very briefly.

    Mr. PITOFSKY. I encourage thinking outside the box, which is what you've suggested here. We know this merger as proposed has its problems. On the other hand, we know the market isn't working all that well. There ought to be other ways to get at this, and I certainly encourage that kind of—addressing the problem.
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    Mr. ISSA. Thank you.

    Chairman SENSENBRENNER. That concludes the number of—the Chair recognizes the Ranking Member briefly.

    Mr. CONYERS. Just an observation. It's a busy day for half our witnesses. They've got to go to another hearing on the same subject, chaired by Chairman Billy Tauzin. And Mr. Phillips will be there. Mr. Ergen will be there. But Professor Pitofsky won't be there. That is—might be—and this is a question, because the president of Pegasus will be there, and he's represented by—guess who—Arnold & Porter, right?

    Mr. PITOFSKY. Oh, absolutely.

    Mr. CONYERS. Yeah. So you couldn't come in here opposing a firm that you're—a client that your firm is representing. Could you or couldn't you?

    Mr. PITOFSKY. Mr. Conyers, yes, I could.

    Mr. CONYERS. You could?

    Mr. PITOFSKY. Yes.

    Mr. CONYERS. Will you be the first—will you give me an example of another—of counsel that has represented somebody that his firm was representing? Do you have some examples?
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    Mr. PITOFSKY. When I was first invited here, I disclosed immediately——

    Mr. CONYERS. I just asked you if you had some examples.

    Mr. PITOFSKY. Oh, I don't have any examples of——

    Mr. CONYERS. Well, when you get some, send them to me.

    Mr. PITOFSKY. Okay.

    Chairman SENSENBRENNER. Well, I think this is a good chance to close this hearing and to allow all of the witnesses to lick their wounds, whether they are coming back around the corner, whether they are not.

    Let me say that Mr. Pitofsky was a witness that was invited by the majority of this Committee; and, given the position that you held in the Clinton Administration, it shows how bipartisan and open-minded at least this side of the room is. We appreciate your coming, and we'd like to invite you back sometime in the future.

    Chairman SENSENBRENNER. With that happy note, the hearing is adjourned.

    [Whereupon, at 11:51 a.m., the Committee was adjourned.]
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Statements Submitted for Hearing Record

Material Submitted for the Hearing Record










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    [NOTE: Additional material submitted for the Hearing Record is not reprinted here but is available on the Internet or on file with the House Judiciary Committee. The material referred to is listed below.]
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    ''Advanced Telecommunications In Rural America, The Challenge of Bringing Broadband Service to All Americans.'' U.S. Departments of Commerce and Agriculture. April, 2000, at http://www.ntia.doc.gov/reports/ruralbb42600.pdf, at page 19.

    Declaration of Mr. Roger J. Rusch, U.S. Department of Justice expert, in Satellite Broadcasting and Communications Association of America v. Federal Communications Association, May 23, 2001.

    EchoStar v. DirecTV Enterprises, Inc., Amended Complaint, United States District Court for the District of Colorado, April 5, 2001.

(Footnote 1 return)
Source: American Customer Satisfaction Index, University of Michigan Business School, August 2001.

(Footnote 2 return)
See, e.g., Complaint 67, 76, 85, United States v. Primestar, Inc., Civil No. 1:98CV01193 (JLG) (D.D.C.) (May 12, 1998).

(Footnote 3 return)
FCC's Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming. January 2001

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

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Source: Kagan World Media.

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The Ka band system will not be ready for launch until 2002 at the earliest. The Ka band system is risky because this band is subject to more rain interference than the Ku band and may have technical problems.

(Footnote 7 return)
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.

(Footnote 8 return)
Source: The MITRE Technical Report: Analysis of Potential MVDDS Interference to DBS in the 12.2–12.7 GHz band. April 2001.

(Footnote 9 return)
Complaint at 84, 103, United States v. Primestar, Inc. et al., (D.D.C. filed May 12, 1998).

(Footnote 10 return)
For example, a recent New York Times article estimated that 40–50% of homes in the following states are without cable access: Montana, South Dakota, Utah, Mississippi, Arkansas and Vermont. In other states, including Idaho, Wyoming, New Mexico, Oklahoma, Louisiana, Missouri, Idaho, Alabama, Tennessee, Kentucky, Virginia, North Carolina, Maine and Wisconsin, an estimated 30–40% of homes are without cable access. See Look, Up in the Sky! Big Bets on a Big Deal, N.Y. TIMES, Oct. 30, 2001, at C1.

(Footnote 11 return)
EchoStar Power, WALL ST. J., Oct. 30, 2001, at A22.

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The key provision of Section 7 of the Clayton Act reads as follows:

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Among the many points cited by EchoStar in arguing that DBS is a separate product market from cable are the following: a) A significant number of DBS subscribers view DirecTV and EchoStar as significantly closer substitutes than alternative sources of programming, including cable television; b) If not constrained by EchoStar, DirecTV could raise its prices above the competitive level without experiencing a significant constraint by cable; c) DBS and/or High Power DBS is superior to most cable services in several respects, including a higher quality picture, substantially more programming options, and pay-per-view in a ''near-on-demand'' environment that consumers find more attractive than the pay-per-view environment offered by cable. See Memorandum of Law in Support of Request for Rule 56 Continuance to Respond to DirecTV Defendants' Motion for Summary Judgment at 11–12, EchoStar Communications Corp. v. DirecTV Enters., Inc., No. 00-K-212 (D. Colo. filed Nov. 6, 2000).

(Footnote 14 return)
Federal Trade Commission v. H.J. Heinz Co., 246 F.3d 708, 717 (D.C. Cir. 2001).

(Footnote 15 return)
United States v. Philadelphia National Bank, 374 U.S. 321, 370 (1963).

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U.S. Department of Justice and Federal Trade Commission, REVISIONS TO HORIZONTAL MERGER GUIDELINES §4 (1997), reprinted in 4 Trade Reg. Rep. (CCH) 13,104 (1997).

(Footnote 17 return)
See American Online, Inc., and Time Warner, Inc.: Analysis to Aid Public Comment, 65 Fed. Reg. 79861 (FTC Dec. 20, 2000); In the Matter of 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, 23 Comm. Reg. 157 (FCC Jan. 22, 2001).

(Footnote 18 return)
Proposed Final Judgment and Competitive Impact Statement: United States v. AT&T Corp. and MediaOne Group, Inc., 65 Fed. Reg. 38584 (DOJ June 21, 2000); In the Matter of Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations from MediaOne Group, Inc., Transferor to AT&T Corp. Transferee, 15 F.C.C.R. 9816 (FCC June 6, 2000).

(Footnote 19 return)
For example, an expert retained by the DOJ in a recent case regarding the constitutionality of must-carry provisions in the Satellite Home Viewer Improvement Act opined that both EchoStar and DirecTV could use currently available technology to significantly increase their ability to provide local programming to additional markets. See Declaration of Roger J. Rusch, Satellite Broadcasting & Communications Ass'n v. FCC et al., No. 00-1571-A (E.D. Va. dated May 23, 2001). If the DOJ's expert is correct, one of the principal efficiencies advanced by EchoStar and DirecTV in support of their merger could be achieved by either company alone. Efficiencies achievable by less anticompetitive means do not justify a merger to monopoly or near monopoly.

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Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the state of New York to provide consumers with information, education and counsel about goods, services, health and personal finance, and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union's income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports with more than 4 million paid circulation, regularly carries articles on health, product safety, marketplace economics and legislative, judicial and regulatory actions that affect consumer welfare. Consumers Union's publications carry no advertising and receive no commercial support.

(Footnote 21 return)
Hoffmeister, Sallie. ''GM Deal to Create New Pay TV Giant,'' Los Angeles Times, Oct. 29, 2001.

(Footnote 22 return)
FCC Seventh Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming (CS Docket No. 00–132), January 8, 2001.

(Footnote 23 return)
Advanced Telecommunications in America, report by Rural Utilities Service and National Telecommunications and Information Administration.

(Footnote 24 return)
Beauprez, Jennifer. ''Tech Town,'' Denver Post, November 4, 2001.

(Footnote 25 return)
FCC Seventh Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming (CS Docket No. 00–132), January 8, 2001.

(Footnote 26 return)
Bureau of Labor Statistic, consumer price indexes, October 2001.

(Footnote 27 return)
Berkowitz, Harry. ''Cablevision Rates Rising Again,'' Newsday, November 21, 2001.

(Footnote 28 return)
FCC Seventh Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming (CS Docket No. 00–132), January 8, 2001.

(Footnote 29 return)
Declaration of Thomas Hazlett, Ph.D. (Resident Scholar, American Enterprise Institute for Public Policy Research). In the Matter of Applications of Northpoint USA, PDC Broadband Corporation, and Satellite Receivers, Ltd. To Provide a Fixed Service in the 12.2–12.7 GHz Band. (ET Docket No. 98–206).

(Footnote 30 return)
Patrizio, Andy. ''Ted Turner Laments Cable Mergers,'' Wired News, November 28, 2001.

(Footnote 31 return)
FCC Fifth Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming (CS Docket No. 98–102), December 17, 1998.

(Footnote 32 return)
FCC Seventh Video Competition Report at 1002, Table B-6.

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(Footnote 35 return)
''FCC and FTC,'' Warren's Cable Regulation Monitor, April 9, 2001.

(Footnote 36 return)
Video Business Online, ''DirecTV parent sees 10% growth next year,'' www.videobusiness.com/news/111401.

(Footnote 37 return)
''EchoStar reports Q3 profit on subscriber growth,'' biz.yahoo.com/rf/011023/n23236477-