[Senate Hearing 107-873]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-873

DOMINANCE IN THE SKY: CABLE COMPETITION AND THE ECHOSTAR-DIRECTV MERGER

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                    BUSINESS RIGHTS, AND COMPETITION

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 6, 2002

                               __________

                          Serial No. J-107-65

                               __________

         Printed for the use of the Committee on the Judiciary


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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts     ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware       STROM THURMOND, South Carolina
HERBERT KOHL, Wisconsin              CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California         ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin       JON KYL, Arizona
CHARLES E. SCHUMER, New York         MIKE DeWINE, Ohio
RICHARD J. DURBIN, Illinois          JEFF SESSIONS, Alabama
MARIA CANTWELL, Washington           SAM BROWNBACK, Kansas
JOHN EDWARDS, North Carolina         MITCH McCONNELL, Kentucky
       Bruce A. Cohen, Majority Chief Counsel and Staff Director
                  Sharon Prost, Minority Chief Counsel
                Makan Delrahim, Minority Staff Director
                                 ------                                

      Subcommittee on Antitrust, Business Rights, and Competition

                   HERBERT KOHL, Wisconsin, Chairman
PATRICK J. LEAHY, Vermont            MIKE DeWINE, Ohio
RUSSELL D. FEINGOLD, Wisconsin       ORRIN G. HATCH, Utah
CHARLES E. SCHUMER, New York         ARLEN SPECTER, Pennsylvania
MARIA CANTWELL, Washington           STROM THURMOND, South Carolina
JOHN EDWARDS, North Carolina         SAM BROWNBACK, Kansas
               Victoria Bassetti, Majority Chief Counsel
                 Peter Levitas, Minority Chief Counsel


                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

Brownback, Hon. Sam, a U.S. Senator from the State of Kansas.....     8
DeWine, Hon. Mike, a U.S. Senator From the State of Ohio.........     3
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...     1
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......    37
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     4

                               WITNESSES

Allard, Hon. Wayne, a U.S. Senator from the State of Colorado....    10
Ergen, Charles W., Chairman and Chief Executive Officer, EchoStar 
  Communications, Littleton, Colorado............................    26
Fritts, Edward O., President and Chief Executive Officer, 
  National Association of Broadcasters, Washington, D.C..........    51
Hartenstein, Eddy W., Chairman and Chief Executive Officer, 
  DirecTV, Inc., EL Segundo, California..........................    16
Kimmelman, Gene, Co-Director, Washington, D.C. Office, Consumers 
  Union, Washington, D.C.........................................    45
Nixon, Jeremiah W., Attorney General, State of Missouri, 
  Jefferson City, Missouri.......................................    10
Pitofsky, Robert, Former Chairman, Federal Trade Commission, 
  Washington, D.C................................................    40

                         QUESTIONS AND ANSWERS

Responses of Charles W. Ergen to questions submitted by Senator 
  Sam Brownback..................................................    83
Responses of Charles W. Ergen to questions submitted by Senator 
  Maria Cantwell.................................................    85
Responses of Charles W. Ergen, Edward O. Fritts, Eddy W. 
  Hartenstein, Jeremiah W. Nixon, and Robert Pitofsky to 
  questions submitted by Senator Orrin G. Hatch..................    89
Responses of Charles W. Ergen to a question submitted by Senator 
  Ted Kennedy....................................................   102
Responses of Charles W. Ergen to questions submitted by Senator 
  Herbert Kohl...................................................   102
Responses of Charles W. Ergen to questions submitted by Senator 
  Strom Thurmond.................................................   114
Responses of Edward O. Fritts to questions submitted by Senator 
  Herbert Kohl...................................................   118
Responses of Edward O. Fritts to questions submitted by Senator 
  Orrin G. Hatch.................................................   119
Responses of Edward O. Fritts to questions submitted by Senator 
  Edward M. Kennedy..............................................   119
Responses of Robert Pitofsky to questions submitted by Senator 
  Edward Kennedy.................................................   149
Responses of Robert Pitofsky to questions submitted by Senator 
  Strom Thurmond.................................................   149
Responses of Robert Pitofsky to questions submitted by Senator 
  Herbert Kohl...................................................   150
Responses of Robert Pitofsky to questions submitted by Senator 
  Orrin G. Hatch.................................................   151

                       SUBMISSIONS FOR THE RECORD

Kirkpatrick, Kirk, President and Chief Executive Officer, MDS 
  America, Incorporated, Stuart, Florida, statement..............   152
Slocum, Charles B., Strategic Planning Director, Writers Guild of 
  America, West, Inc., letter....................................   155

 
 DOMINANCE IN THE SKY: CABLE COMPETITION  AND  THE  ECHOSTAR-DIRECTV  
                                 MERGER

                              ----------                              


                        WEDNESDAY, MARCH 6, 2002

                                       U.S. Senate,
                    Subcommittee on Antitrust, Competition,
                          and Business and Consumer Rights,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:35 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl, 
Chairman of the Subcommittee, presiding.
    Present: Senators Kohl, Leahy, DeWine, Hatch, Specter, 
Brownback, and Allard [ex officio.].

OPENING STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE 
                       STATE OF WISCONSIN

    Chairman Kohl. Good morning. We are here today to examine 
the proposed merger between EchoStar Communications and 
DIRECTV, the two largest satellite television companies in the 
country. If they merge, they will be the Nation's largest pay 
TV service, though it may only be a matter of time before they 
are overtaken by AT&T/Comcast, if indeed that deal goes 
through.
    In the last few years, one of the few bright spots in cable 
television has been the emergence of satellite TV. For decades, 
American consumers had to do business with a cable monopoly 
that offered poor service at ever-increasing prices. To the 
extent there has been any improvement, it is because of 
companies like EchoStar and DIRECTV.
    Now, all that is about to change. These two fierce 
competitors want to merge. They say they will stop fighting one 
another in order to better fight the cable guy, and that only 
by joining forces will satellite be able to keep cable honest. 
In other words, they say they have to become an 800-pound 
gorilla in order to compete with the 800-pound cable gorilla.
    Most consumers today have a choice of three companies for 
subscription television--these two satellite companies and 
their local cable company. Even with three competitors, prices 
continue to increase, and in many rural areas not reached by 
cable these two satellite companies are the only choice.
    Faced with these facts, critics of the deal charge that it 
will create a duopoly in most of the country and a monopoly in 
suburban and rural areas. It doesn't take a rocket scientist to 
be highly skeptical of a merger that reduces competition in an 
industry and creates a monopoly in rural America.
    The parties proposing this merger bear a high burden of 
proof to overcome this skepticism. We are not saying that they 
cannot meet that burden, but these are not companies that need 
to merge in order to survive. EchoStar and DIRECTV are growing 
businesses that compete against one another in cable. That 
said, their decision to merge requires them to prove that they 
can solve the rural and suburban monopoly problem.
    EchoStar and DIRECTV need to be honest about how extensive 
this rural monopoly problem is. They need to demonstrate that 
duopolies and monopolies do not decrease competition.
    To pitch their deal, EchoStar and DIRECTV have been making 
some pretty alluring promises: a single, uniform national 
price; local-into-local for all markets, no matter how small 
the market might be; broadband to everyone in America, and 
high-definition and interactive television to be rolled out via 
satellite. We are used to companies making promises, saying 
whatever they need to get the deal done. Unfortunately, 
experience teaches us how quickly these promises are often 
forgotten upon approval, and consumers are left holding the 
bag.
    It is obvious that this merger is being pursued because it 
is good for the companies, good for shareholders, and good for 
the bottom line. We are afraid that if it happens to be good 
for the consumer, it may just be accidental. No one says that 
businessmen are required to behave any differently. In fact, it 
would be irresponsible for them not to put their shareholders 
first and the best interests of their companies first.
    Call it a case of once bitten, twice shy, but if the 
antitrust authorities find it appropriate to permit this 
merger, then they need to tightly wrap all these promises into 
a consent decree. Promises made in a press release, of course, 
are not enough. They need to be legally binding, and maybe even 
overseen and enforced by a special master.
    At a minimum, we need to be certain that, Number one, the 
companies will deliver local programming into all 210 
television markets within a specified time. Number two, the 
companies will comply with a full, must-carry requirement as 
required by law.
    Number three, the companies must price service in rural 
areas at the same levels and on the same terms as in 
competitive markets. Number four, the companies must unroll a 
competitive broadband service. Number five, the companies must 
offer high-definition TV and interactive television. Number 
six, the companies must not charge consumers for any costs 
associated with having to change equipment as a result of this 
merger or to receive local channels.
    We also need to carefully assess the companies' claim that 
carrying local television stations makes satellite TV a much 
stronger competitor to cable. For this reason, Senator DeWine 
and I are today directing the General Accounting Office to 
study whether cable rates are restrained in those markets in 
which satellite companies offer local stations.
    Far too often, consumers across the country have been told 
that these mergers are in their best interests, only to 
discover afterwards where the real interests lie once the 
deals, in fact, get done. To date, consumers of pay TV have 
continued to suffer ever-increasing prices and ever greater 
consolidation. We need to examine this merger carefully to 
ensure that, for a change, the promised benefits are truly 
realized.
    I thank our distinguished panel of witnesses for their 
attendance here today, and now I turn it over to my friend and 
colleague, Senator Mike DeWine.

STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE STATE OF 
                              OHIO

    Senator DeWine. Mr. Chairman, thank you very much for 
calling this hearing and for your very excellent statement.
    Mr. Chairman, this Subcommittee has been very interested in 
competition in the cable and satellite industry and it has had 
a number of hearings on these issues over the years. Today's 
hearing, which examines the proposed merger between EchoStar 
and DIRECTV, is one of the most important of those hearings.
    The parties argue that they need to merge in order to more 
successfully battle against the cable industry. In fact, 
EchoStar and DIRECTV are asking us to believe that the best way 
to increase competition is to decrease competition. Maybe this 
is true, maybe it is not.
    I have a lot of concern about this proposed merger, 
especially about its impact on rural consumers. However, I am 
keeping an open mind about this deal because frankly it does 
offer some tangible benefits. So today we need to look at this 
carefully and work with all of our witnesses to try to figure 
out what is the best outcome for consumers and for competition.
    To start, as a matter of law, this proposed merger faces 
some very serious hurdles, and I think we all need to 
understand that. Section 7 of the Clayton Act establishes the 
parameters for impermissible mergers. That law states that a 
merger is impermissible when the merger would ``create a 
monopoly or substantially lessen competition.'' The courts have 
generally interpreted this to mean that even if a merger were 
to promote competition in a certain market or geographic area, 
it does not justify the lessening of competition in another 
market or geographic area.
    While the deal would make EchoStar a larger competitor 
against cable, it also lessens competition by reducing the 
number of competitors from three to two in most markets and by 
creating a monopoly in a number of rural markets. Because of 
this, I am interested to hear from Mr. Ergen and Mr. 
Hartenstein today on how they plan to meet the legal challenges 
posed by the Clayton Act.
    If the parties can satisfy the legal requirements of the 
Clayton Act, this deal clearly does offer some potential 
consumer benefits. Most important of those benefits is that the 
newly merged company plans to provide local channels to all 210 
broadcast media markets in the Nation. This certainly is a 
major improvement over the current situation in which only the 
top 42 markets receive local satellite service.
    The parties also claim that a combined satellite company 
would be able to offer a less expensive, more price-competitive 
high-speed Internet product. As the country continues to move 
toward greater use of broadband services, consumers certainly 
would be well served by an improved satellite option.
    Since this merger will likely enhance local service and 
could improve high-speed satellite data offerings, it would 
help EchoStar compete with cable. Any enhanced competition 
could help improve customer service and lower prices for 
cable--two results that this Subcommittee always is interested 
in pursuing.
    The big question, however, is whether this deal actually 
would increase competition in the long run. If these parties 
merge, most consumers would face a duopoly--the local cable 
company and a much larger and stronger EchoStar. But even more 
importantly, millions of rural customers would find themselves 
with only one option--EchoStar satellite service. EchoStar 
would dominate satellite service for video and broadband, which 
might also allow it to aggressively fight cable for market 
share. Or as so often happens in duopoly markets, maybe the two 
remaining competitors might find it easier to compete less 
vigorously.
    I hope that with this hearing today we can get to the 
bottom of who really benefits from the proposed merger. We need 
to find out if consumers would gain the promised benefits. We 
need to find out how rural consumers would be protected, and we 
need to find out what we would be giving up in terms of 
competition if this deal goes forward.
    Mr. Chairman, I am looking forward to the testimony, and I 
again appreciate your calling this hearing.
    Chairman Kohl. Thank you, Senator DeWine.
    We turn now to the Chairman of the Judiciary Committee, 
Senator Pat Leahy.

  STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE 
                        STATE OF VERMONT

    Chairman Leahy. Thank you very much, Mr. Chairman. I want 
to thank you and Senator DeWine again for these kinds of 
hearings. You have over the years moved back and forth as 
Chairman and ranking member of this Subcommittee.
    Senator DeWine. We hope to move again, Mr. Chairman.
    Senator Brownback. Hear, hear.
    [Laughter.]
    Chairman Leahy. Maybe someday.
    Senator DeWine. Someday.
    Chairman Leahy. I have been here many times in the majority 
and many times in the minority over 27 years. I do like the 
majority better, and I hope many of your wishes come true, but 
not all.
    The one thing that has happened is, whichever role you 
played, you have both done enormous credit to the Senate and to 
this Committee. You have held some of the most difficult and 
important hearings and you have done it in a completely non-
partisan way, and it has been a credit to the Judiciary 
Committee, to the Senate, to yourselves, but more importantly 
it has been beneficial to the Nation and I applaud you both for 
that.
    If we can bring full satellite service to rural America and 
help to bridge the digital divide, that would fill a very high 
priority of mine for many years. Those goals of bringing that 
kind of service are foremost to me as I look at this issue 
before us.
    I have also advocated the benefits for rural communities 
that local network broadcasting, offering local weather 
reports, local emergency news, and local public interest 
programming can provide throughout America. Senator Hatch and I 
addressed those goals in March 1998 when we introduced and 
later won the Committee's approval of a bill to allow local-
into-local television via satellite.
    I worked with Senator Burns and with the Republican Leader, 
Senator Lott, and many others to enact a program to provide a 
Federal loan guarantee of up to $1.25 billion in loans to 
finance the delivery of local-into-local television and high-
speed Internet access to rural America. That was in 1999 and 
2000.
    I worked to help companies which offered promising 
approaches to providing local-into-local TV services, companies 
that included Capitol Broadcasting of North Carolina, and 
NorthPoint, which hopes to offer such service using terrestrial 
antennas. I worked on a provision, which is now law, directing 
the FCC to give NorthPoint an opportunity to demonstrate the 
viability of their technology.
    As a conferee on the farm bill, I am now working to include 
mandatory funding to cover any Federal risk in implementing 
that Federal loan guarantee program. I strongly believe in both 
rural access to full satellite service and robust competition 
to improve rates and services in the cable and satellite areas.
    Those of us who might be in an area where we receive cable 
service and feel it is not adequate, the picture quality is not 
good, wherever that might be, or it is too expensive, should 
have the ability to have competition.
    In 1999, I congratulated Charlie Ergen for his role in the 
industry and I told the Senate--Mr. Ergen may recall this--``I 
want to point that the leaders of the satellite industry, such 
as Charlie Ergen of EchoStar who is known for his creative and 
innovative ideas, want to provide this local [TV] service.''
    Now, EchoStar and DIRECTV have a plan on the table and 
satellites in orbit to cover all 210 markets with local TV and 
broadband access. This crucial question is this: If not this 
proposal to bring full satellite service to rural areas and to 
help to bridge the digital divide, then what? I don't believe 
that rural America can accept ``no service'' or ``maybe some 
possible service in 10 years'' as an answer. At that time, with 
the changes in society and economics in this country, 10 years 
of being on the wrong side of the digital divide basically 
cripples rural America.
    If you look at the market for rural local-into-local 
television or rural high-speed Internet access, in much of 
rural America there is no service, there is no access, cable, 
satellite, or anything else. In much of Vermont and in many 
other States, rural residents have no opportunity to receive 
local TV stations or high-speed broadband access. Mr. Ergen 
calls this a ``no-opoly,'' and he is right. Just as with rural 
electric service or rural telephone service, somebody has to be 
first. Competition requires competitors.
    I remember my grandparents telling me about their 
excitement when rural electrification came to their part of 
Vermont. I remember my grandfather saying how he would go 
around--and my mother reminded me of this story, too, as a 
young woman, and they would go and turn the light switch on and 
off just to see the lights go on. It is something we take for 
granted, but think of what it was like at that time.
    A solution to local electric and telephone monopolies back 
then was to foster more competition. That is why I hope all 
Senators will join in supporting full funding for the loan 
guarantee program for local-into-local television service which 
could be offered by competitors of EchoStar and DIRECTV and 
anybody else. It is a provision in the farm bill and it is 
going to be back before the Senate soon.
    Mr. Kimmelman will point out that we should support 
efforts, as I have done over the last 3 years, to permit other 
companies such as NorthPoint to compete with EchoStar and 
DIRECTV. If you look at urban markets, the merged company could 
effectively compete, as he points out, with local cable 
monopolies.
    Now, I know that some argue that EchoStar has the capacity 
to offer local-into-local TV to all the market areas today 
without a merger. I have done everything possible to promote 
local-into-local television, including working on two major 
bills with Senator Hatch and one with Senator Burns, which are 
now law.
    We shouldn't try to mandate what risks and investments 
companies should make. I look out here and I see people who 
have been extraordinarily innovative, but have also bet the 
farm on their innovation. They should be allowed to do that, 
but I want to make sure that we have something.
    We can reward the willingness to take risks and be creative 
and be the first. If a company invents a new computer 
innovation, for example, and patents that, then they get the 
advantage of being first. When local-into-local TV service and 
Internet access come to all rural markets, they will be a boon 
to rural America, but they will also encourage competition 
because others will try to get into that market.
    So I say this not with a magic wand, Mr. Chairman and 
Senator DeWine, but rather that every Senator has a rural area 
and has to be concerned about what happens. I applaud the 
innovative entrepreneurial spirit of the people who are here. I 
just want to make sure that my part of the world, rural 
America, whether it is rural America in Texas, Vermont, 
California, or anywhere else, gets the benefit of it because we 
cannot survive, our children cannot look forward to jobs, and 
our people cannot look forward to being full participants in 
this wonderful country if they suffer the digital divide.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Leahy follows:]

 Statement of Hon. Patrick J. Leahy, a U.S. Senator from the State of 
                                Vermont

    Chairman Kohl and Senator DeWine, once again you have been a great 
credit to this committee and the Senate and offered a superb service to 
the public in the way you have worked together to help organize this 
hearing.
    Bringing full satellite service to Rural America and helping to 
bridge the digital divide have been high priorities of mine for many 
years, and those goals are foremost to me as I evaluate the benefits 
and shortcomings of this proposed merger. I have also advocated the 
benefits for rural communities that local network broadcasting, 
offering local weather reports, local emergency news and local public 
interest programming, can provide throughout America.
    Senator Hatch and I addressed those goals in March 1998 when we 
introduced and later won the committee's approval of a bill to allow 
local-into-local television via satellite.
    I worked with Senator Burns and with Republican Leader Lott and 
many others to enact a program to provide a federal loan guarantees on 
up to $1.25 billion in loans to finance the delivery of local-into-
local television, and high-speed Internet access, to Rural America. 
That was in 1999 and 2000.
    I have also worked with others to help companies which offered 
promising approaches to providing local-into-local TV service--
companies that include EchoStar, Capitol Broadcasting of North 
Carolina, and Northpoint, which hopes to offer such service using 
terrestrial antennas. I worked on a provision, which is now law, 
directing the FCC to give Northpoint an opportunity to demonstrate the 
viability of that technology.
    As a conferee on the Farm Bill I am now working to include 
mandatory funding to cover any federal risks in implementing that 
federal loan guarantee program. I strongly believe in and have worked 
for both rural access to full satellite service and for robust 
competition to improve rates and service in the cable and satellite 
industries.
    I have congratulated Charlie Ergen for his role in the industry, 
telling the Senate: ``I want to point out that the leaders of the 
satellite industry--such as Charlie Ergen of EchoStar who is known for 
his creative and innovative ideas--want to provide this local [TV] 
service.''
    Now EchoStar and DirecTV have a plan on the table, and satellites 
in orbit, to cover all 210 markets with local TV and broadband access.
    The crucial question is this: If not this proposal to bring full 
satellite service to rural areas and to help bridge the digital divide, 
then what? Rural America cannot accept ``no service,'' or ``maybe some 
possible service in 10 years,'' as the answer. If you look at the 
market for rural local-into-local television, or rural high-speed 
Internet access, in much of rural America there is no service--neither 
cable, nor satellite, offers it.
    In much of Vermont and in many other states, rural residents have 
no opportunity to receive local TV stations or high-speed broadband 
access. Charlie Ergen calls this a ``no-opoly''--and he is right. Just 
as with rural electric service, or rural telephone service, someone has 
to be first. Competition requires competitors.
    It is easy for me to make this point about being first, because I 
remember when Vermont families first received electric service, and 
first received telephone service. People would walk through their homes 
and turn the light switches on and off, just for the fun of it.
    A solution to local electric and telephone monopolies back then was 
to foster more competition. That is why I hope all senators will join 
in supporting full funding for the loan guarantee program for local-
into-local television service which could be offered by competitors of 
EchoStar and DirecTV--which is a provision in the Farm Bill that soon 
will be back before the Senate.
    In addition, as Gene Kimmelman will point out, we should support 
efforts, as I have done over the last three years, to permit other 
companies such as NorthPoint to compete with EchoStar and DirecTV.
    From another standpoint, if you look an urban markets, the merged 
company could effectively compete, as he points out, with local cable 
monopolies.
    I know that some argue that EchoStar has the capacity to offer 
local-into-local TV to all the market areas today, without the merger 
with DirecTV. Indeed, I have done everything possible to promote local-
into-local television since 1997--including work on two major bills 
with Senator Hatch and one with Senator Burns, which are now law.
    But Congress normally does not try to mandate what risks and 
investments that companies should make. I admit that Congress has 
created an entire system that rewards a willingness to take risks and 
to be creative, and to be first. If a company invents a new computer 
innovation, and patents that invention, our society rewards the 
developer for being first.
    When local-into-local service TV service and Internet access come 
to all rural markets, they will be a boon to Rural America and they 
likely will encourage competition. That is a crucial goal and a key 
test in evaluating this merger.

    Chairman Kohl. Thank you, Senator Leahy.
    We turn now to Senator Brownback, from Kansas.

STATEMENT OF HON. SAM BROWNBACK, A U.S. SENATOR FROM THE STATE 
                           OF KANSAS

    Senator Brownback. Thank you very much, Mr. Chairman. I 
have got a full statement I would like to put into the record 
and just put forward a couple of thoughts.
    First, thank you to you and the ranking member for holding 
this hearing. I think it is an important subject for us to take 
a good look at, one of which I have a number of questions 
about. Particularly for me, being from Kansas, the benefits of 
this merger in my mind are murky. In many rural communities 
where there are no local cable systems, this merger will 
eliminate any choice in the multi-channel video market.
    Mr. Ergen, whom I have met with, has committed EchoStar to 
a national pricing policy designed to reassure us that rural 
consumers will receive the same rates for service that exist 
for urban consumers who benefit from satellite and cable 
competition. I am appreciative of that, but without any 
specifics about what that national rate will be, I am concerned 
that this merger may lead to rate increases for rural 
consumers. So I look forward to having that fleshed out for us 
a little bit further in this hearing.
    I am also concerned with the consolidation of spectrum 
under this one company. While I understand the logic to the 
argument in favor of the merger to create efficiencies by 
eliminating duplication, I must pose the question, do we really 
need all of that spectrum.
    Currently, DIRECTV and EchoStar control 50 percent of all 
the orbital slot bands. These slots are expected to be used for 
both multi-channel video and broadband services, and I would 
like to hear today that the merged company has every intention 
of deploying satellites in these slots, or else enabling 
another entity to take advantage of them. That is something 
else that I look forward having discussed by this panel.
    Finally, I am very well aware that this merger also makes 
possible the first truly national broadband service. This is 
especially important to Kansas, where fast connections to the 
Internet that can increase educational, business, 
entertainment, and health care resources in rural areas and 
could form the foundation of rural revitalization and help put 
an end to some rural flight are very important aspects of this 
bill. I look forward to that discussion as well.
    On the whole, Mr. Chairman, this is something that I want 
to hear answers to these particular questions before really 
determining myself the impact of this on my State. I am 
appreciative to have a hearing like this so that we can get at 
some of these questions a little better.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Brownback follows:]

   Statement of Hon. Sam Brownback, a U.S. Senator from the State of 
                                 Kansas

    I thank the Chairman for holding this important hearing today. The 
proposed merger between Echostar and DirecTV holds out the prospect of 
many strong consumer benefits, especially in our nation's urban 
markets. However, the merger also raises the specter of anti-consumer 
consequences, especially in some of our rural markets.
    In urban communities, both Echostar and DirecTV are competing with 
each other and cable television companies in the multichannel video 
market. Their merger will reduce the number of competitors available in 
urban markets by one, but it will also create strong efficiencies by 
eliminating duplication and substantially increasing the spectrum 
resources available for satellite television. Consumers will have 
access to increased programming, reduced costs for satellite equipment, 
and a powerful service. However, for consumers to realize these 
benefits satellite TV must remain price-competitive with local cable TV 
companies.
    In our nation's rural communities--of special interest to a Senator 
from Kansas--the benefits of this merger are murky. In many rural 
communities where there are no local cable systems this merger will 
eliminate choice in the multichannel video market. Mr. Ergen has 
committed Echostar to a national pricing policy designed to reassure us 
that rural consumers will benefit from competition in urban markets as 
if they had a choice in service providers themselves. Without any 
specifics about what that national rate will be, I am concerned that 
this merger may lead to rate increases for rural consumers.
    I am also concerned with the consolidation of spectrum under this 
one company. While I understand the logic of the argument in favor of 
the merger--to create efficiency by eliminating duplication--I must 
pose the question: does the merged company really need all of that 
spectrum?
    Opponents of this merger suggest that either of these companies can 
offer the slate of services that Echostar and DirecTV say are only 
possible through a merger. In addition, DirecTV and Echostar control 
50% of all Ka-band orbital slots, yet I am concerned that they have no 
immediate plans to actually use them. I would like to hear today that a 
merged company has plans to deploy satellites and offer services using 
these slots, or else will enable other entities to take advantage of 
them.
    Finally, I am very aware of this merger's promise of a national 
broadband service. This is especially important to Kansas where fast 
connections to the Internet in rural areas can increase entertainment, 
education, health care, and business resources which could form the 
foundation of a rural revitalization. I look forward to hearing more 
about this aspect of the merger proposal.

    Chairman Kohl. Thank you, Senator Brownback.
    I would now like to introduce briefly the members of our 
panel and then call on Senator Wayne Allard to make some 
remarks before you all begin your testimony.
    Our first witness today will be Jeremiah ``Jay'' Nixon, who 
is the Attorney General of the State of Missouri. Mr. Nixon is 
a native of Jefferson County, Missouri, and has been involved 
in State politics for more than 15 years.
    From DIRECTV, we are joined by Mr. Eddy Hartenstein, 
Chairman and CEO of DIRECTV. Mr. Hartenstein is a technology 
guru, holding degrees in aerospace engineering, math, and 
applied physics.
    Next to him is Mr. Charles Ergen, who is co-founder, 
Chairman and CEO of EchoStar Communications. Among other 
things, in his career over the past 5 years Mr. Ergen has 
admirably worked his way up Forbes' 400 List, currently ranking 
number 22 on the list.
    Also joining us today is Mr. Robert Pitofsky, former 
Commissioner and Chairman of the Federal Trade Commission, and 
current professor at Georgetown University Law School. Mr. 
Pitofsky is a noted scholar and writer on both trade regulation 
and antitrust law.
    Representing Consumers Union is Co-Director of the 
Washington, D.C. Office, Mr. Gene Kimmelman. Mr. Kimmelman is a 
valued regular at this Subcommittee's hearings, most recently 
as a witness and in the past as chief counsel to former 
Chairman Metzenbaum.
    Our final witness today will be Mr. Edward Fritts, who is 
president and CEO of the National Association of Broadcasters. 
Mr. Fritts' broadcasting and production career began during his 
student days at Ole Miss. He was recently inducted into the 
Broadcasting and Cable Hall of Fame.
    We welcome you all, and before we take your opening 
statements we would like to call on Senator Wayne Allard, from 
the great State of Colorado.

 STATEMENT OF HON. WAYNE ALLARD, A U.S. SENATOR FROM THE STATE 
                          OF COLORADO

    Senator Allard. Mr. Chairman, thank you, and Ranking Member 
DeWine. I would like to extend my appreciation for allowing me 
to introduce one of your primary witnesses here this morning, 
who is a Coloradan, and he is going to be talking about a 
Colorado company, EchoStar, which is located in Littleton, 
Colorado.
    It started in 1980, selling satellite dishes in rural 
Colorado, and then launched the DISH Network in 1996. It is the 
Nation's fastest growing direct-to-home satellite TV company 
with over 7 million customers, and currently they have 6 
satellites orbiting the Earth to provide the services to 
America.
    Charles Ergen has a number of professional honors. The most 
significant includes he was the Rocky Mountain News Business 
Person of the Year in 1996 and 2000, Satellite CEO of the Year 
in the year 2001, and in 1991 was Master Entrepreneur for the 
Rocky Mountain Region according to Incorporated magazine.
    Again, it is with a great deal of pleasure that I introduce 
to the Committee Charles Ergen, Chairman and CEO of EchoStar 
Communications Corporation.
    Thank you, Mr. Chairman.
    Chairman Kohl. Thank you, Senator Allard.
    Now, we will take opening statements.
    Mr. Nixon?

  STATEMENT OF JEREMIAH W. NIXON, ATTORNEY GENERAL, STATE OF 
               MISSOURI, JEFFERSON CITY, MISSOURI

    Mr. Nixon. Good morning, Chairman Kohl, Senator DeWine, 
Chairman Leahy, and other members of the Subcommittee. I 
appreciate the opportunity to appear before you today to 
discuss this matter of great importance to consumers in 
Missouri and throughout this Nation.
    I am Jay Nixon, serving my third term as Attorney General 
of the State of Missouri. As an official charged with 
protecting consumer rights in my State, and with authority to 
enforce antitrust laws in both State and Federal court, I have 
come today to voice my concerns about the proposed merger 
between Hughes and EchoStar.
    In my view, the proposed merger between DISH and DIRECTV 
will create an illegal monopoly in rural areas of America and 
my State. Up to one-third of the residents of Missouri 
currently have no access to cable. Those residents have two 
options for multi-channel video programming--DISH Network or 
DIRECTV.
    Let me show you a map, centered on Missouri, but also 
showing contiguous States. On this map--and you will see many 
other maps, but on this map census blocks that are not served 
by cable are in white. If this merger is not stopped, consumers 
represented by the white on this map will be faced with a 
perfect monopoly for multi-channel programming. In those areas, 
this is a two-to-one merger.
    The proposed monopoly will therefore do away with a vibrant 
and competitive market for rural consumers which can provide 
competitive prices, innovation, and quality service. That 
competitive market has also substantially reduced the cost of 
consumer equipment and installation. Meaningful choice will 
disappear if the proposed merger is not stopped.
    EchoStar has attempted to address our concerns by offering 
a national pricing policy and by offering to re-broadcast local 
stations into every local market. Their proposals are a tacit 
admission that the merger is detrimental to consumers, absent a 
monumental amount of governmental intervention.
    Now, I want to make it clear that EchoStar's concessions 
attempt to address consumer harm and public policy concerns, 
but they are not legal arguments. The Clayton Act specifically 
prohibits mergers to monopoly, and regardless of the short-term 
benefit a merger to monopoly is illegal under Federal law.
    Now, I acknowledge that EchoStar's attempts to try to 
combat the harm from this proposed monopoly are significant. 
The promise of local-into-local service is a very important 
step, but local-into-local service is simply a way to address 
only one of the aspects of a monopoly. It is a concern for 
today, but what are we to do about innovations and programming 
changes that consumers demand tomorrow? They will have no 
option but to accept EchoStar's offerings. In short, the 
admitted benefits of local-into-local do not justify a perfect 
monopoly.
    The parties' offer of national pricing addresses the price 
increases that would inevitably occur if this transaction were 
to move forward. This, too, is an acknowledgement of the 
effects associated with monopoly. National pricing is extremely 
complicated and problematic.
    How would the new EchoStar compete with cable in various 
areas across the country if it has no flexibility to change its 
prices to meet local special offers? Are we to believe that the 
new EchoStar will not compete with local cable companies that 
offer special promotions, or that local retailers will be 
prohibited from raising prices or lowering prices on equipment 
or installation? National pricing is fraught with difficulties 
because it is an artificial attempt to regulate price, when 
history proves that a vibrant, competitive marketplace is, in 
fact, the best way.
    The bulk of my remarks have addressed the areas where there 
will be an illegal monopoly created by this merger. Even 
accepting the argument that there are areas where DBS competes 
with cable, the merger is still not acceptable. A merger to 
duopoly has never been allowed by any court where it is 
difficult for new competitors to enter the market. The parties 
have conceded that particular point.
    In closing, let me say that this is a very important 
consumer protection issue. Competition is a great thing for 
consumers. It allows them to vote with their feet when prices 
get too high or service gets too bad. They need that option for 
DBS.
    Consumers understand the value of competition. They know 
that only having one provider of a service is contrary to sound 
economic principles and contrary to consumer interests. We owe 
it to those consumers to point out the problems with this 
proposal.
    Thank you very much.
    [The prepared statement of Mr. Nixon follows:]

   Statement of Hon. Jeremiah W. Nixon, Attorney General , State of 
                   Missouri, Jefferson City, Missouri

    The only two competitors for consumers of multichannel video 
programming in certain markets not effectively served by cable seek to 
merge into a single entity, leaving those consumers at the complete 
mercy of a perfect monopolist. Even in the other parts of the country 
where consumers may avail themselves of a cable alternative, the result 
of the proposed merger would be a duopoly. Barriers to entry are 
extremely high. For a new DBS competitor to enter this market to 
discipline prices and encourage better service would require an 
extraordinary investment of many hundreds of millions to build, launch 
and insure a satellite and more to provide the ground systems, 
advertising and other expenses necessary to begin a DBS business from 
scratch. In addition, any new entrant would be required to obtain all 
appropriate licenses from the Commission. No court has ever approved a 
merger to duopoly under similar circumstances.\1\
---------------------------------------------------------------------------
    \1\ FTC v. H.J. Heinz 246 F.3d 708 (D.C.Cir. 2001).
---------------------------------------------------------------------------
    In 1998, the U.S. Department of Justice sued to enjoin the transfer 
of the Full CONUS Orbital Slot located at 100+ W.L. from 
ASkyB to PrimeStar, claiming that the transaction would reduce the 
number of competitors in rural MVPD markets from four to three, i.e., 
from EchoStar, Hughes-DIRECTV, PrimeStar and ASkyB to just EchoStar, 
Hughes-DIRECTV and PrimeStar. The Justice Department also claimed that 
the merger was illegal in urban MVPD markets, where Cable Television 
and satellite services were available, typically reducing the number of 
MVPD competitors from five to four. If a four to three and a five to 
four merger was wrong then, it stands to reason that in the same market 
just a few years later, a two to one and three to two merger is wrong.
The Proposed Merger Creates a Perfect Monopoly in Areas of the Country 
          Not Effectively Served by Cable--Mostly Rural Areas.
    Hughes, through its DIRECTV unit, owns 61.7% of the market for 
direct broadcast satellite (DBS) service, while EchoStar has 38.3% of 
that market.\2\ Together, they would create a monopoly in DBS. That 
monopoly extends to MVPD for a significant number of consumers. 
According to EchoStar ``millions'' do not have access to cable and 
broadcast.\3\ For all of these mostly rural households, the options 
will be reduced from two competitors to one. The merger will leave 
rural Americans with only one choice for multichannel video programming 
distribution (MVPD). Rural businesses that depend upon the services 
provided by satellite will also be subjected to a monopolist should the 
merger go through and the license transfers be approved. The perfect 
monopoly that will be created in many areas of the country and the 
unavoidable and foreseeable consequences of that monopoly cause me to 
oppose the merger.
---------------------------------------------------------------------------
    \2\ Sources: Carmel Group, Morgan Stanley
    \3\ EchoStar v. DIRECTV, Civil Action NO. 00-K-212, Amended 
Complaint at para. 28.
---------------------------------------------------------------------------
    Charles W. Ergen, Chairman and Chief Executive Officer of EchoStar, 
himself admitted that there is a problem with this deal especially in 
rural communities. He said, as reported in a recent article, ``If the 
market is satellite only, then I wouldn't approve this deal. It's going 
to be a nonstarter.'' \4\ In various rural MVPD markets where cable 
does not pass or effectively serve homes, the relevant MVPD market is 
satellite only and therefore it creates significant antitrust issues, 
even in the eyes of EchoStar's CEO.
---------------------------------------------------------------------------
    \4\ Wall Street Journal, October 31, 2001.
---------------------------------------------------------------------------
    Another problem associated with this acquisition is the reduction 
in competition in emerging technologies such as broadband Internet. 
There is a terrific disparity between urban and rural areas for this 
technology.\5\ Allowing this acquisition would leave rural households 
even further behind urban areas for this increasingly important and 
popular service. The absence of competition for satellite delivered 
high-speed Internet service will stymie the development and 
availability of content for this emerging service. Increasingly, this 
technology is used to provide coverage of important local, state and 
federal governmental meetings and information. It also provides access 
to entertainment avenues such as sporting events, music, movies and 
movie trailers. Videoconferencing is an increasingly important way for 
business to be transacted; high-speed Internet access is important for 
this business tool to be available.
---------------------------------------------------------------------------
    \5\ Falling Through the Net: Toward Digital Inclusion; A Report on 
American's Access to Technology Tools, October 2000, pg. xviii (rural 
areas are lagging behind cities and urban areas in broadband 
penetration, 7.3% penetration for rural areas, 12.2% for central cities 
and 11.85 for urban areas).
---------------------------------------------------------------------------
    Other technologies cannot be counted on to gain acceptance or 
penetration in order to discipline prices and services through 
competition. In recent years, there has been talk of new technologies 
that would allow some of these services to be provided through 
telephone lines and other avenues. These options have yet to 
materialize with any significant degree of penetration.
    The Proposed Merger Creates a Duopoly in the Rest of the Country
    Even in areas where cable is an option for MVPD, the acquisition 
would result in only two options where there had once been three. Such 
a reduction in competition is unacceptable. Three-to-two mergers are 
nearly always anticompetitive and the efficiencies and advantages 
claimed thus far by the merging parties do little to assuage the 
concerns recognized by federal court precedent and reflected in the 
NAAG Horizontal Merger Guidelines and the FTC and DOJ Horizontal Merger 
Guidelines.
    Moving beyond what may be the effect in rural communities, this 
merger presents difficult issues with regard to the rest of the 
country. Assuming that DBS competes with cable, the proposed merger 
would create a duopoly for MVPD in areas of the country served by 
cable. In most communities where cable is an option, there is a single 
cable operator and two DBS providers. Post-merger there would be only 
two options for consumers--a duopoly. Mergers to duopoly are rarely, if 
ever, approved. A problem with a duopoly is the presumption that 
increases in concentration will increase the likelihood of tacit 
collusion.\6\ In a duopoly there is a real danger of supracompetitive 
pricing at monopolistic levels.\7\ Where there is a duopoly and high 
barriers to entry, there is the opportunity and every incentive to 
collude to increase prices.\8\ Therefore, not only is the proposed 
merger a problem in the markets where cable is available but the 
promise by EchoStar to price nationally based upon its price in the 
areas where it enjoys a duopoly only assures that the potential for 
supracompetitive pricing will extend to the rural areas where it holds 
a monopoly. Merger policy has at its core the goal to ``obstruct the 
creation or reinforcement by merger of such oligopolistic market 
structure in which tacit coordination can occur.'' \9\
---------------------------------------------------------------------------
    \6\ See, FTC v. H.J. Heinz Co., at 725.
    \7\ Id at n23, citing Edward Hastings Chamberlin, The Theory of 
Monopolistic Competition: A Re-orientation of the Theory of Value 46-55 
(8th ed. 1962).
    \8\ Id. at 725 (``The combination of a concentrated) market and 
barriers to entry is a receipe for price coordination''). The court 
further observed that ``Significant market concentration makes it 
easier for firms in the market to collude, expressly or tacitly, and 
thereby force price above or farther above the competitive level'' and 
``Where rivals are few, firms will be able to coordinate their 
behavior, either by overt collusion or implicit understanding, in order 
to restrict output and achieve profits above competitive levels.'' 
Citations and internal quotations omitted.
    \9\ Id.
---------------------------------------------------------------------------
EchoStar's Efficiency Arguments are Irrelevant and Factually Inaccurate
    EchoStar argues that only through this proposed merger can it 
increase the capacity to the level necessary to provide the services 
consumers desire, high speed internet access, local-into-local in all 
markets, and additional programming. The technology exists for such 
increased capacity today.\10\ Even so, vigorous competition is the most 
assured way to achieve creative and swift innovation. With only a 
single actor in the market, any technological advances are left to the 
self interest of the monopolist. There is no incentive for the 
monopolist and only slightly more for the oligopolist to invest in the 
research and development necessary to develop and deploy innovative 
technological advances. In any event, competition, not consolidation, 
is the best way to achieve the innovation necessary to expand capacity. 
With more than one or two competitors working diligently toward 
technological advances, they are more likely to occur and to occur more 
rapidly than if only a few are engaged in such activity. Consumers then 
get what they desire, the programming and access to technology through 
several different providers competing for consumers. Without such 
competition, the consumer will have no option when faced with a 
monopolist or only two duopolists who don't have the same incentives as 
they would have in a competitive market to provide the lowest price, 
best service and ever increasing technology.
---------------------------------------------------------------------------
    \10\ Affidavit of Roger J. Rusch filed by the U.S. Department of 
Justice in Satellite Broadcasting & Communications Association of 
America v. Federal Communications Commission, Civ. Act. No. 00-1571-A.
---------------------------------------------------------------------------
    The parties argue that only through the proposed merger will they 
be able to provide the high-speed internet access consumers desire. 
They claim the technology does not exist to provide the spectrum needed 
for broadband services. Yet both companies currently provide such 
service through EchoStar's StarBand and DIRECTV's DIRECWay product. 
Both services are provided on the Ku-Band. In addition, both companies 
include deployment of Ka-Band services in their separate business 
plans. A very significant number of consumers in different sections of 
the country have only satellite providers as their source for broadband 
services. For these consumers, DSL and cable are not an available 
alternative. If the merger is consummated, one company will control the 
price, quality and technology for this important service.
    EchoStar has advanced several reasons why it believes this proposed 
merger will garner certain efficiencies claimed to be beneficial to 
consumers that trump any competitive concerns. But there is no proof 
that these efficiencies are merger specific. Under the antitrust laws, 
when merging parties argue that a merger may result in certain 
efficiencies, the efficiencies must be merger specific.\11\ In other 
words, it is not enough to show that there are efficiencies, the 
efficiencies must be available only because of the merger. For 
instance, when EchoStar announced the merger and filed the necessary 
FCC applications, it argued that only with a perfect monopoly in DBS 
will it be able to expand such service into as many as 100 markets. A 
similar claim was made in the unsuccessful challenge to the Carry One, 
Carry All requirement in the Satellite Home Viewer Improvement Act of 
1999 (``SHVIA'').\12\ In that case, the United States relied upon 
technical analysis that showed that EchoStar and DIRECTV each 
individually could serve all local broadcast channels to subscribers in 
all DMAs using a small portion of their respective current transponder 
capacity.\13\ It is interesting that with the motivation to get this 
deal approved, the executives and their engineers were able to find a 
way to provide local into local into 210 markets.
---------------------------------------------------------------------------
    \11\ See FTC and DOJ Horizontal Merger Guidelines Sec. 4.
    \12\ SBCA v. FCC, 275 F.3d 337 (4th Cir. 2001).
    \13\ Rusch Affidavit, supra.
---------------------------------------------------------------------------
    It should be noted that all of these claims regarding the ability 
of the two satellite companies to efficiently use their capacity to 
comply with the Carry One, Carry All requirement were fully presented 
before Congress within the context of hearings on the proposed 
legislation. Congress recognized that satellite technology is improving 
and heard from satellite company executives regarding plans to develop 
spot beam satellites so that spectrum frequencies can be reused in 
order to increase capacity to provide local-into-local in more and more 
markets.\14\ With this evidence in hand, Congress elected to adopt its 
regulation knowing the present day limitations and the continuing 
advancements being made in technology. In fact, one reason Congress 
delayed implementation of Sec. 338 was to allow for some additional 
time for satellite carriers to develop the new technology about which 
they had testified.\15\ With full knowledge of the state of competition 
at the time and after giving full hearing to all market participants, 
Congress determined that despite any capacity constraints it would be 
in the public interest to preserve local stations by enacting SHVIA. 
Congress knew at the time that not all markets would be fully served at 
the outset and that local-into-local would expand gradually from larger 
markets to smaller over time. Congress enacted SHVIA to stimulate 
competition along with all its consumer benefits.\16\ It cannot be the 
subject of rational debate then that Congress intended for its Carry 
One, Carry All to be used as an excuse to reduce the very competition 
it had hoped to advance.
---------------------------------------------------------------------------
    \14\ H.R. Rep. No. 106-79, pt. 1, at 14 (1999); Satellite/Cable 
Competition: An Examination of the EchoStar/MCI Deal. Hearing Before 
the Subcommittee on Antitrust, Business Rights, and Competition of the 
Senate Committee on the Judiciary, 106th Cong. 40-41 (1999) (1999 
Senate Hearing) (Statement of Charles Ergen, CEO of EchoStar), as cited 
in SBCA, 275 F.3d 337 at n5.
    \15\ Id.
    \16\ Id.
---------------------------------------------------------------------------
   EchoStar's Proposed Fixes Will Not Work and Call for Undesireable 
                               Regulation
    EchoStar's promises, assurances and alleged commitments are poor 
substitutes for direct and vibrant competition. According to EchoStar's 
economist, ``EchoStar is committed to providing more diverse 
programming, and more advanced services.'' and ``New EchoStar has 
committed to maintaining its policy of uniform national pricing for its 
programming.'' \17\ EchoStar by presenting these arguments invites the 
government to regulate it indefinitely. In order that consumers can be 
assured that New EchoStar's commitments will be honored for all time, 
it will be necessary to establish which government agency will 
regulate, the appropriate measure of the competitive price and how 
terms such as quality, programming, service and equipment are 
monitored. It is no real assurance that, in the words of EchoStar's own 
economist, ``rural customers would likely be no worse off following the 
merger'' or that they ``may benefit from more intense competition 
between New EchoStar and cable companies.'' \18\ It is disheartening 
that EchoStar's argument is not that rural consumers interests will 
indeed be advanced but that they may benefit and will be no worse off 
than before.
---------------------------------------------------------------------------
    \17\ Willig para.para. 33, 28
    \18\ Willig para. 36 fn 35.
---------------------------------------------------------------------------
    EchoStar realizes that there is an especially significant antitrust 
problem with this proposed merger in rural areas not passed by cable or 
where cable is otherwise not a viable option. Attempting to address 
this concern, EchoStar offers to continue a policy of national pricing. 
Under their proposal, they would consent to offering DBS services at 
the same price to all consumers whether or not cable is a viable 
option. EchoStar argues that this should resolve all concerns about 
subjecting a significant portion of the population to a monopolist. Not 
only is this proposal an admission that the merger would create a 
monopoly in certain parts of the country, it fails to address all of 
the anticompetitive concerns and raises additional problems.
    First, the underlying difficulty is not avoided by the national 
pricing proposal. Approving the merger and the license transfers would 
hand a significant portion of the country's consumers over to a 
monopolist. Second, the proposal assumes that a duopoly price is a 
competitive price and that there will be no collusion between the 
duopolists. Third, EchoStar's promise does not account for the fact 
that prices in areas where DBS competes with cable may be artificially 
increased on the backs of the captive rural consumers. Fourth, it 
further entrenches the way of business that focuses technology and 
programming efforts on urban areas over rural. Since the company's 
profit margin principally will be determined by the urban price and 
services provided there, including programming, there will be little 
incentive to provide the type of programming and services desired by 
consumers residing in the country-side. For example, if rural consumers 
who only have access to DBS for MVPD, desire program X and program X is 
not popular in the city, there is no incentive for the sole DBS carrier 
to carry program X at all. However, if there are more than one DBS 
provider trying to attract that rural population, one or both will feel 
compelled to provide program X. Fifth, EchoStar's proposal calls for 
government regulation--for all time. For these reasons, national 
pricing does not resolve the concern that the interests of citizens and 
businesses in rural communities not adequately served by cable will be 
undercut by this merger to monopoly.
    Not only is a promise of uniform pricing insufficient to assuage 
legitimate concerns, it will not adequately be constrained by any 
means. EchoStar's argument that cable rates will constrain New 
EchoStar's national pricing \19\ is directly contradicted by assertions 
it made in EchoStar Communications Corporation v. DIRECTV Enterprises, 
Inc., Civ. No. 96-4963. In that case, EchoStar averred that EchoStar is 
DIRECTV's closest competitor, that consumers do not view cable as an 
effective substitute for high-power DBS services, that EchoStar and 
DIRECTV react primarily to each other when setting equipment and 
service prices, and that millions of potential DBS and/or High Power 
DBS customers live in areas that do not have access to cable such that, 
if there is no competition between DIRECTV and EchoStar, there is no 
competition at all.\20\ EchoStar's court-filed statements show that the 
two DBS companies establish prices based upon the competition between 
them and not so much with cable and that consumers in rural areas of 
the country not passed by cable or otherwise not sufficiently served by 
cable will be subjected to an unrestrained monopoly if one of the two 
are eliminated from the market. Accepting as true EchoStar's own 
arguments, there can be no faith that the assurances offered today will 
in any way protect those consumers. That faith is further shaken by Mr. 
Ergen's own statements about the nature of the national pricing 
promise. He indicated in response to questions on the subject that his 
promise would make allowances for New EchoStar to respond to local 
promotions or rebates by cable.\21\
---------------------------------------------------------------------------
    \19\ Willig para.para. 9, 10, 29 and para. 10 fn 9 (information 
regarding pricing policies based on interviews with EchoStar and 
DIRECTV executives).
    \20\ EchoStar's Amended Complaint and EchoStar's Request for Rule 
56(f) Continuance To Respond to DIRECTV Defendant's Motion for Summary 
Judgement and Memorandum of Law in support thereof at 12, filed in 
EchoStar Communications Corporation v. DIRECTV Enterprises, Inc., Civ 
No. 96-4963.
    \21\ Egen Makes His Case, Satellite Business News, December 21, 
2001 at 1.
    Question: So you're saying you wouldn't offer a special deal in one 
part of the country and not offer it in another part of the country?
    Ergen: I guess if you're saying if the cable company came in and 
offered a rebate in one city, would you respond to that?
    Question: And you would be looking for that kind of flexibility in 
a consent decree on national pricing?
    Ergen: Again, this is very premature We certainly haven't had 
discussions with any regulators about how to do it. But we know that 
there are past examples of formulas and ways that can make this work.
---------------------------------------------------------------------------
    It is anathema to the standards of our federal system and the 
principles of antitrust laws to benefit some fortunate enough to have a 
cable alternative on the backs of those who have been denied access to 
cable and are therefore captive to a potential perfect monopolist for 
DBS services. Where there are anticompetitive effects in one area of 
the country, the parties cannot justify the merger by claiming 
procompetitive effects in another.\22\
---------------------------------------------------------------------------
    \22\ U.S. v. Philidelphia National Bank, 374 U.S. 321 (1963).
---------------------------------------------------------------------------
                               Conclusion

    I oppose this merger because it would create a monopoly for MVPD 
for a significant number of Americans. There are now two firms 
competing for that business and after a merger there would be just one. 
In Missouri, all consumers in one-third of our households would have 
only one option for MVPD and high-speed internet access. My 
responsibility is to enforce the antitrust laws in order to protect all 
citizens in my state from mergers that would reduce competition.
    The Clayton Act does not allow a merger when the effect ``may be 
substantially to lessen competition, or tend to create a monopoly.'' We 
know from years of experience that a lessening of competition equals a 
lessening of innovation. Prices will be higher and there will be lower 
quality and service. If the merger is allowed, technology advances 
necessary to drive the same phenomenal increases in capacity we have 
seen in recent years will not be developed. EchoStar wants to get the 
capacity the quick and easy way, from eliminating a competitor, rather 
than to innovate for it. For short term gains in capacity, we would be 
sacrificing increases in technology that will take us beyond new 
frontiers if we ensure vibrant competition. In addition, we would be 
allowing these short term gains that benefit shareholders on the backs 
of consumers who would be subjected to a monopolist.
    Mr. Ergen's promises to price nationally and to rebroadcast local-
into-local channels across the nation are concessions, but they do not 
address the core concerns. They do not resolve the basic problem with a 
merger to monopoly or to duopoly which is that a significant reduction 
in competition will inevitably lead to higher prices, lower quality, 
reduced programming options and, perhaps most importantly in this 
industry, slow or no technological innovation. Furthermore, both of the 
proposals call for undesirable government regulation of a new type that 
would not be necessary if competition is preserved.

    Chairman Kohl. Thank you, Attorney General Nixon.
    We now turn to the Chairman and CEO of DIRECTV, Mr. Eddy 
Hartenstein.

STATEMENT OF EDDY W. HARTENSTEIN, CHAIRMAN AND CHIEF EXECUTIVE 
         OFFICER, DIRECTV, INC., EL SEGUNDO, CALIFORNIA

    Mr. Hartenstein. Thank you, Chairman Kohl, Senator DeWine, 
members of the Subcommittee. I appreciate the opportunity to 
tell you why we believe that consumers will reap tremendous 
benefits from the merger of EchoStar and Hughes, the parent 
companies of DISH Network and DIRECTV.
    I will talk about how, as a direct result of the completion 
of this merger, consumers across the United States will have 
access to satellite-delivered local broadcast channels with 
digital-quality television picture and CD-quality sound in 
every one of the 210 television markets covering the country.
    Charlie is going to talk about how the merged company also 
will establish itself as a source of meaningful satellite-based 
broadband competition to cable modem and DSL offerings and will 
bring affordable high-speed Internet access to all of America, 
including the most rural areas of the country.
    Together, Mr. Chairman, I believe we can address your six 
points of concern about this merger and how to enforce them, 
and, Senator DeWine, your concerns for rural America and 
meeting the legal aspects of the Clayton Act with the 
Department of Justice.
    Despite the rapid growth of DBS since 1994, cable clearly 
is the dominant provider of multi-channel pay TV services in 
the United States. As you can see on this map, of the 107 
million television households, 104 million are located in a 
cable franchise area.
    Competitive alternatives to the dominant cable operators 
didn't seriously take form until the launch of DIRECTV in 1994, 
joined by EchoStar's DISH Network in 1996. DBS offered more 
channels, superior picture and sound quality compared to cable, 
with one notable exception. Consumers were not able to receive 
their local broadcast channels via satellite.
    In 1999, Congress changed the law, allowing satellite 
carriers to offer local channels. Only at this point did DBS 
become a viable competitive alternative to cable, at least in 
those markets in which DIRECTV and DISH Network began 
delivering local channels.
    Today, as you can see on this map, only those who live in 
the 42 television markets in which DIRECTV and DISH Network 
offer local channels receive local channels. That is about 65 
million households. They have a fully competitive multi-channel 
alternative to cable.
    As you can see on the next map, that leaves 42 million 
households without a true competitive alternative to cable. 
Customers who live in markets in which DBS does not provide 
local channels are forced either to pay additional subscription 
fees for basic cable service to receive their local channels or 
install an off-air rooftop antenna and hope for good reception. 
Neither DIRECTV nor DISH Network alone has sufficient spectrum 
to provide all local channels, as well as the national pay 
cable networks to viewers in every one of the country's 210 
local-channel markets.
    When we first announced this merger in late October, we 
said the merged company could deliver local channels in about 
100 television markets. A week ago, however, we announced that 
the merged company will deliver local channels in all 210 
television markets, including full compliance with the Federal 
must-carry requirements.
    So what happened between last October and last week? 
Starting in late December, the EchoStar and DIRECTV engineering 
teams began meeting as part of the pre-merger transition 
process. We challenged them to develop a technologically 
feasible and economically viable plan that will allow the 
merger company to deliver full local-into-local service in all 
210 television markets.
    As you can see on this chart, the Local Channels, All 
Americans Plan maximizes the use of combined spectrum in the 
existing and planned satellite fleet of the two companies. It 
does require the launch of a new $300 million satellite, and we 
applied last week at the FCC for authority to launch that 
satellite. This new satellite will be the fifth spot beam 
satellite in what will be a combined fleet of 16 satellites.
    Implementation of the Local Channels, All Americans Plan 
could begin immediately following approval of the merger and 
the rollout can be completed as soon as 24 months thereafter. 
This plan can be achieved only because, in addition to 
combining the companies spectrum and satellites, the merger 
will eliminate the need for each company to transmit more than 
500 channels of duplicative programming. We both carry C-SPAN 
and C-SPAN 2, for example.
    In addition, the combination of the companies' subscriber 
bases makes the delivery of local broadcast channels to smaller 
markets commercially feasible. Without the merger, the most 
markets that each company would serve with local channels as a 
stand-alone provider would be about 50 to 70. Needless to say, 
the local broadcasters I have talked to in the last week are 
thrilled that they can gain satellite carriage as a result of 
the merger.
    As you can see on this chart, the merged company will 
continue both companies' current practice of uniform nationwide 
pricing. Consumers across the country will pay the same price 
for their DBS subscription fees, regardless of where they 
reside. For example, a resident of Milwaukee will pay the same 
fee for his or her local channel package as a customer in 
Cedarville, Ohio. A resident of Burlington, Vermont, will pay 
the same price for HBO as a customer in Salt Lake City, and a 
resident of Mountlake Terrace, Washington, will pay the same 
price for the basic 125-channel programming as a customer in 
New York City.
    We are confident that the merged company can make the Local 
Channels, All Americans Plan a reality. Without the merger, 
residents of communities such as Rhinelander, Wisconsin--that 
is DMA number 137--Zanesville, Ohio, DMA 202; Watertown, New 
York, DMA number 176; and Kirksville, Missouri, DMA 198, are 
unlikely to see satellite-delivered local channels in our 
lifetime.
    I appreciate the opportunity to share my views.
    [The prepared statement of Mr. Hartenstein follows:]

Statement of Eddy W. Hartenstein, Chairman and Chief Executive Officer, 
                 DirectTV, Inc., El Segundo, California

    Chairman Kohl, Senator DeWine, and Members of the Subcommittee, 
thank you for inviting me to appear before the Subcommittee. I 
appreciate the opportunity to tell you why we believe that consumers 
will reap tremendous benefits from the merger of EchoStar and Hughes, 
the parent companies of DISH Network and DIRECTV'. I am 
going to talk about how, as a direct result of the completion of this 
merger, consumers across the United States will have access to 
satellite-delivered local broadcast channels with digital-quality 
television picture and CD-quality sound in every one of the 210 
television markets covering the country. Charlie is going to talk about 
how the merged company also will establish itself as a source of 
meaningful satellite-based broadband competition to cable modem and DSL 
offerings, and will bring affordable high-speed Internet access to all 
of America, including the most rural areas of the country.
    When I last appeared before this Subcommittee 11 months ago, I told 
you that despite the rapid growth of direct broadcast satellite (DBS) 
since 1994, cable clearly is the dominant provider of multi-channel pay 
TV services in the United States. That remains so today. Of the 107 
million U.S. TV households, 104 million are located in a cable 
franchise area.\1\ (See Attachment A)
---------------------------------------------------------------------------
    \1\ Annual Assessment of the Status of Competition in the Market 
for the Delivery of Video Programming, Eight Annual Report, CS Docket 
No. 01-129, FCC 01-389 at para. 17 and App. B, Tbl. B-1 (released Jan. 
14, 2002).
---------------------------------------------------------------------------
    Competitive alternatives to the dominant cable operators did not 
seriously take form until the launch of DIRECTV in 1994, later joined 
by EchoStar's DISH Network in 1996. DBS offered more channels and 
superior picture and sound quality compared to cable, with one notable 
exception: consumers were not able to receive their local broadcast 
channels via satellite.
    In 1999, Congress changed the law, allowing satellite carriers to 
offer local channels.\2\ Only at this point did DBS become a viable 
competitive alternative to cable, at least in those markets in which 
DIRECTV and DISH Network began delivering local channels.
---------------------------------------------------------------------------
    \2\ Satellite Home Viewer Improvement Act of 1999, Pub. L. No. 106-
113, 113 Stat. 1501, 1501A-526 to 1501A-545 (Nov. 29, 1999).
---------------------------------------------------------------------------
    Today, only those who live in the 42 television markets in which 
DIRECTV and DISH Network offer local channels--about 65 million 
households--have a fully competitive multi-channel alternative to 
cable.\3\ (See Attachment B)
---------------------------------------------------------------------------
    \3\ Nielsen Media Research (Sept. 2001).
---------------------------------------------------------------------------
    That leaves 42 million households without a true competitive 
alternative to cable. (See Attachment C) Customers who live in markets 
in which DBS does not provide local channels are forced either to pay 
additional subscription fees for a basic cable service to receive their 
local channels, or install an off-air rooftop antenna--and hope for 
good reception. Neither DIRECTV nor DISH Network, alone, has sufficient 
spectrum to provide all local channels as well as the national pay 
cable networks to viewers in every one of the country's 210 local 
channel markets.
    When we first announced the merger in late October, we said the 
merged company could deliver local channels in about 100 television 
markets. A week ago, however, we announced that the merged company will 
deliver local channels in all 210 television markets, including full 
compliance with federal must carry requirements. (See Attachment D)
    So what happened between late October and last week? Starting in 
late December, the EchoStar and DIRECTV engineering teams began meeting 
as part of the pre-merger transition process. We challenged them to 
develop a technologically feasible and economically viable plan that 
would allow the merged company to deliver full local-into-local service 
in all 210 television markets.
    The ``Local Channels, All Americans'' plan maximizes the use of the 
combined spectrum and existing and planned satellite fleet of the two 
companies. It requires the launch of a new spot-beam satellite, and we 
applied last week to the Federal Communications Commission (FCC) for 
authority to launch that satellite.\4\ This new spot-beam satellite 
will be the fifth spot-beam satellite in what will be a combined fleet 
of 16 satellites. The plan would require an additional investment by 
the merged company of over $300 million to launch the additional spot-
beam satellite. Implementation of the ``Local Channels, All Americans'' 
plan could begin immediately following merger approval and the rollout 
can be completed as soon as 24 months later.
---------------------------------------------------------------------------
    \4\ Application for Authority to Lunch and Operate New ECHOSTAR 1 
(USABBS-16) (filed Feb. 25, 2002
---------------------------------------------------------------------------
    This plan can be achieved only because, in addition to combining 
the companies' spectrum and satellites, the merger will eliminate the 
need for each company to transmit more than 500 channels of duplicative 
programming--we both carry C-SPAN and C-SPAN 2, for example. In 
addition, the combination of the companies' subscriber bases makes the 
delivery of local broadcast channels to smaller markets commercially 
feasible.
    Without the merger, the most markets that each company would serve 
with local channels as a standalone provider, both for technical and 
economic reasons, would be about 50 to 70. Needless to say, the local 
broadcasters I've talked to in the last week are thrilled that they 
will gain satellite carriage as a result of the merger.
    The merged company will continue both companies' current practice 
of uniform nationwide pricing. Consumers across the country will pay 
the same price for their DBS subscription services, regardless of where 
they reside. We are one nation, and we will offer one rate card. (See 
Attachment E) For example: a resident of Milwaukee will pay the same 
fee for his or her local channel package as a customer in Cedarville, 
Ohio; a resident of Burlington, Vermont, will pay the same price for 
HBO as a customer in Salt Lake City; and a resident of Mountlake 
Terrace, Washington, will pay the same price for a basic 125-channel 
programming package as a customer in New York City.
    We are confident that the merged company can make the ``Local 
Channels, All Americans'' plan a reality. Without the merger, residents 
of communities such as Rhinelander, Wisconsin (DMA # 137), Zanesville, 
Ohio (DMA # 202), Watertown, New York (DMA # 176), and Kirksville, 
Missouri (DMA # 198) are unlikely to see satellite-delivered local 
channels in our lifetime.
    I appreciate the opportunity to share my views.
    In connection with the proposed transactions, General Motors 
Corporation (``GM''), Hughes Electronics Corporation (``Hughes'') and 
EchoStar Communications Corporation (``EchoStar'') intend to file 
relevant materials with the Securities and Exchange Commission, 
including one or more Registration Statement(s) on Form S-4 that 
contain a prospectus and proxy/consent solicitation statement. Because 
those documents will contain important information, holders of GM $1-
\2/3\ and GM Class H common stock are urged to read them, if and when 
they become available. When filed with the SEC, they will be available 
for free at the SEC's website, www.sec.gov, and GM stockholders will 
receive information at an appropriate time on how to obtain 
transaction-related documents for free from GM. Such documents are not 
currently available.
    GM and its directors and executive officers, Hughes and certain of 
its officers, and EchoStar and certain of its executive officers may be 
deemed to be participants in GM's solicitation of proxies or consents 
from the holders of GM $1-\2/3\ common stock and GM Class H common 
stock in connection with the proposed transactions. Information 
regarding the participants and their interests in the solicitation was 
filed pursuant to Rule 425 with the SEC by EchoStar on November 1, 2001 
and by each of GM and Hughes on November 16, 2001. Investors may obtain 
additional information regarding the interests of the participants by 
reading the prospectus and proxy/consent solicitation statement if and 
when it becomes available.
    This communication shall not constitute an offer to sell or the 
solicitation of an offer to buy, nor shall there be any sale of 
securities in any jurisdiction in which such offer, solicitation or 
sale would be unlawful prior to registration or qualification under the 
securities laws of any such jurisdiction. No offering of securities 
shall be made except by means of a prospectus meeting the requirements 
of Section 10 of the Securities Act of 1933, as amended.
    Materials included in this document contain ``forward-looking 
statements'' within the meaning of the Private Securities Litigation 
Reform Act of 1995. Such forward-looking statements involve known and 
unknown risks, uncertainties and other factors that could cause our 
actual results to be materially different from historical results or 
from any future results expressed or implied by such forward-looking 
statements. The factors that could cause actual results of GM, 
EchoStar, Hughes, or a combined EchoStar and Hughes to differ 
materially, many of which are beyond the control of EchoStar, Hughes or 
GM include, but are not limited to, the following: (1) the businesses 
of EchoStar and Hughes may not be integrated successfully or such 
integration may be more difficult, time-consuming or costly than 
expected; (2) expected benefits and synergies from the combination may 
not be realized within the expected time frame or at all; (3) revenues 
following the transaction may be lower than expected; (4) operating 
costs, customer loss and business disruption including, without 
limitation, difficulties in maintaining relationships with employees, 
customers, clients or suppliers, may be greater than expected following 
the transaction; (5) generating the incremental growth in the 
subscriber base of the combined company may be more costly or difficult 
than expected; (6) the regulatory approvals required for the 
transaction may not be obtained on the terms expected or on the 
anticipated schedule; (7) the effects of legislative and regulatory 
changes; (8) an inability to obtain certain retransmission consents; 
(9) an inability to retain necessary authorizations from the FCC; (10) 
an increase in competition from cable as a result of digital cable or 
otherwise, direct broadcast satellite, other satellite system 
operators, and other providers of subscription television services; 
(11) the introduction of new technologies and competitors into the 
subscription television business; (12) changes in labor, programming, 
equipment and capital costs; (13) future acquisitions, strategic 
partnership and divestitures; (14) general business and economic 
conditions; and (15) other risks described from time to time in 
periodic reports filed by EchoStar, Hughes or GM with the Securities 
and Exchange Commission. You are urged to consider statements that 
include the words ``may,'' ``will,'' ``would,'' ``could,'' ``should,'' 
``believes,'' ``estimates,'' ``projects,'' ``potential,'' ``expects,'' 
``plans,'' ``anticipates,'' ``intends,'' ``continues,'' ``forecast,'' 
``designed,'' ``goal,'' or the negative of those words or other 
comparable words to be uncertain and forward-looking. This cautionary 
statement applies to all forward-looking statements included in this 
document.

[GRAPHIC] [TIFF OMITTED] T5659.001

[GRAPHIC] [TIFF OMITTED] T5659.002

[GRAPHIC] [TIFF OMITTED] T5659.003

[GRAPHIC] [TIFF OMITTED] T5659.004

[GRAPHIC] [TIFF OMITTED] T5659.005


    Chairman Kohl. Thank you, Mr. Hartenstein.
    Now, we turn to Mr. Charles Ergen.

  STATEMENT OF CHARLES W. ERGEN, CHAIRMAN AND CHIEF EXECUTIVE 
     OFFICER, ECHOSTAR COMMUNICATIONS, LITTLETON, COLORADO

    Mr. Ergen. Thank you, Chairman Kohl, Senator DeWine, and 
members of the Subcommittee. I am excited to be here today.
    If I had to sum this merger up, I would say there are three 
major benefits to consumers. First, satellite-delivered 
broadband channels will be available for every home in the 
United States to compete against cable.
    Second, truly competitive high-speed data via satellite 
will be offered everywhere, every square inch of the United 
States, including Alaska and Hawaii.
    Third, we will offer one rate card for both video and 
broadband services so that no matter where you live, all 
Americans will reap the benefits of the competition between 
satellite and cable TV. That means the residents of Wisconsin's 
smallest town, Cedar Rapids, population 36, will have the same 
choices at the same price as the residents of the State's 
largest metropolitan area, Milwaukee, of 1.5 million people.
    A very important benefit of the EchoStar-Hughes merger is 
that it will eliminate the so-called digital divide that exists 
in the wire world today by making satellite-delivered high-
speed Internet access a viable alternative for all Americans.
    Today, about 67 million households have access to high-
speed access through DSL or cable. These are the digital 
``haves'' who are located, of course, primarily in the 
metropolitan areas. But in rural American today, there is a 
``no-opoly.'' Nobody, not the cable companies, not the phone 
companies, is ever going to provide that broadband service.
    The map that is over here clearly shows the number of 
digital ``have nots,'' approximately 40 million households. It 
is simply too expensive to roll out wired technologies to those 
homes. I am convinced that in my lifetime we will never see 
telephone or cable companies offer broadband service to rural 
America. I am equally convinced that the digital ``have nots'' 
living in rural America would welcome the opportunity to choose 
affordable priced satellite-delivered high-speed access.
    This merger will bridge the digital divide by providing 
customers in every community in America with a competitively 
priced broadband solution. Unlike wired technologies, a 
satellite broadband platform can serve every household in the 
country, no matter how rural.
    Initially, the combined company will have a subscriber base 
and financial means to make current broadband offerings more 
affordable, but we are committed to building the next 
generation of satellites to make service a reality for all 
Americans utilizing a new generation of Ka band satellites. We 
will offer a high-speed Internet service that is not only 
price-competitive with existing providers in urban areas, but 
also a tremendous benefit for rural customers with no other 
options.
    In sum, the merger will provide the technical and economic 
infrastructure to convert every household in the country to a 
digital ``have.'' For both video and broadband services, we 
will offer uniform nationwide pricing. So a two of 5 or a town 
of 5 million receives the same price for the same service.
    Mr. Chairman and members of the Subcommittee, bringing 
local channels and broadband services to all consumer 
households is not a simple endeavor. The EchoStar and DIRECTV 
engineering teams have developed a plan that enables consumers 
to receive their local channels, other entertainment services, 
and high-speed Internet on one consumer-friendly dish. New 
equipment will process signals from existing spacecraft as well 
as advanced satellite the companies will build and launch to 
deliver the remaining the local broadcast channels. This 
equipment will be provided at no charge to existing DIRECTV and 
EchoStar customers.
    When we announced our merger on October 29, we said we 
needed to merge in order to compete now and in the future with 
cable. Cable companies continue to dominate the pay TV market, 
with over 78 percent of the pay television market. Only a 
business with dominant market power could continue to raise 
prices 37 percent since 1996. Cable already dominates the high-
speed Internet market, with a majority of all high-speed lines, 
and that market share continues to increase every year.
    With the ability to offer local channels in 210 television 
markets and to offer price-competitive high-speed Internet 
access, the merged company will be able to achieve a new level 
of vigorous competition to incumbent cable operators.
    Of course, the merger will allow us to compete with cable 
in other ways. By eliminating 500 duplicative channels and 
combining out satellites and spectrum, the merged company will 
be able to offer 12 channels or more of high-definition 
television, more advanced services, pay-per-view, video on 
demand, and interactive services. Better DBS service means 
stronger competition to cable, and that can only mean good news 
for American consumers.
    We will offer local channels to all Americans. We are one 
Nation; we will have one rate card. Consumers nationwide will 
need only a single satellite dish to get their video and 
broadband services and we will eliminate the digital divide.
    We believe that once the Department of Justice and the 
Federal Communications Commission have looked at the facts, 
they will conclude that the merger of EchoStar and Hughes will 
provide competition, provide a greater choice of services, and 
provide much needed benefits for all American consumers.
    Thank you for allowing me to discuss this today.
    [The prepared statement of Mr. Ergen follows:]

 Statement of Charles W. Ergen, Chairman and Chief Executive Officer, 
        EchoStar Communications Corporation, Littleton, Colorado

    Chairman Kohl, Senator DeWine, and Members of the Subcommittee, I 
appreciate the opportunity to tell you about how the merger of EchoStar 
and Hughes will benefit consumers in every corner of the United States. 
If I had to sum up what this merger means to the average American, I'd 
say three things. First, satellite-delivered local broadcast channels 
will be available for the first time in every one of the Nation's 210 
television markets. Eddy already gave you the details on that one. 
Second, truly competitive high-speed data via satellite will be offered 
everywhere in the U.S. Third, we will offer one rate card for both 
video and broadband services, so that no matter where they live, all 
Americans will reap the benefits of competition between satellite and 
cable TV. That means the residents of Wisconsin's smallest town, Cedar 
Rapids, with a population of 36, will have the same choices at the same 
price as the residents of the state's largest metropolitan area, 
Milwaukee, with a population of over 1.5 million.
    A very important benefit of the EchoStar and Hughes merger is that 
it will eliminate the so-called ``digital divide'' that exists in the 
``wired'' world today by making satellite-delivered high-speed Internet 
access a viable alternative for all Americans. Today, about 67 million 
households have access to DSL or cable modem service.\1\ (See 
Attachment A) These are the digital ``haves'' who are located primarily 
in the major metropolitan areas. But in rural America today, there's 
what I like to call a ``no-opoly.'' Nobody--not the cable companies, 
not the phone companies--is providing broadband service.
---------------------------------------------------------------------------
    \1\ Annual Assessment of the Status of Commpetition in the Market 
for the Delivery of Video Programming, Eighth Annual Report CS Docket 
No. 01-129, FCC 01-389 at para. 44 (released Jan. 14, 2002).
---------------------------------------------------------------------------
    This map clearly shows the number of digital ``have nots'' in the 
U.S.--the 40 million households with no access to DSL or cable modem 
service. (See Attachment B) It is simply too expensive to roll out 
``wired'' technologies to homes beyond the boundaries of urban and 
suburban markets. I am convinced that in our lifetimes, we will never 
see the telephone or cable companies offer broadband service to rural 
America. I am equally convinced that the digital ``have nots'' living 
in rural America would welcome the opportunity to choose affordably 
priced, satellite-delivered high-speed data services.
    The merger will bridge the digital divide by providing consumers in 
every community in America with a competitively priced high-speed 
``broadband solution.'' (See Attachment C) Unlike wired technologies, 
such as DSL and cable modems, a satellite broadband platform can serve 
every household in the country, no matter how rural.
    Initially, the combined company will have the subscriber base and 
financial means to make our current satellite broadband offerings more 
affordable. Then, we will make next-generation satellite broadband 
service a reality for consumers everywhere in the United States by 
deploying a new generation of satellites utilizing Ka-band spectrum. We 
will offer a high-speed Internet service that is not only price-
competitive with existing providers in urban and suburban settings, but 
also a tremendous benefit for rural consumers who have no broadband 
options. In sum, the merger will provide the technical and economic 
infrastructure to convert every household in the country to a digital 
``have.''
    For both video and broadband services, we will offer uniform, 
nationwide pricing. So if you live in that 36-person town of Cedar 
Rapids, Wisconsin, you will be able to get the same benefits of our 
head-to-head competition with cable and DSL as a person living in New 
York City. Your child will be able to do research for her term paper on 
the Internet as easily as a child living in the city. And both families 
will pay the same price for their video programming and Internet access 
service.
    Mr. Chairman and Members of the Subcommittee, bringing local 
channels and broadband services to all consumers' homes is not a simple 
endeavor. The EchoStar and DIRECTV engineering teams have developed a 
plan that enables customers to receive their local channels, other 
entertainment services and high-speed Internet, all using one consumer-
friendly mini-dish. (See Attachment D) The 18 x 22-inch dish you see in 
this photo will enable customers to receive signals from the merged 
company's three orbital slots. New equipment will process signals from 
existing spacecraft, as well as advanced satellites the merged company 
will build and launch, to deliver the remaining local broadcast 
channels and high-speed Internet services to consumers in all states. 
This equipment will be provided at no charge to existing DIRECTV and 
EchoStar customers who need it to receive their new local channels.
    When we announced the merger on October 29, we said that we needed 
to merge in order to compete now and in the future with cable. Cable 
continues to dominate the pay TV market, despite the introduction of 
DBS eight years ago. Seventy-eight percent of multi-channel video 
subscribers still receive their programming from a franchised cable 
operator.\2\ And only a business with dominant market power could 
continue to raise its rates so dramatically--37% on average since 
1996.\3\ Cable also already dominates the high-speed Internet market 
with a majority of all high-speed lines, and that market share 
increases every year.\4\
---------------------------------------------------------------------------
    \2\ SkyResearch, VOl. 9, No. 2, at 1, 5-7 (Feb. 2002)
    \3\ Report on Cable Industry Prices, MM Docket No. 92-266, FCC 01-
49 at para. 25 (released Feb 14, 2001).
    \4\ Annual Assessment of Advanced Services Deployment, Thired 
Annual Report, CC Docket No. 98-146, FCC 02-33 at para. 44 and App. C, 
Table 1 (released Feb. 6, 2002) (as of June, 2001, cable represented 
54% of all high-speed lines, compared to 51% the previous year).
---------------------------------------------------------------------------
    With the ability to offer local channels in all 210 television 
markets, and to offer a price-competitive, high-speed Internet access 
service, the merged company will be able to achieve a new level of 
vigorous competition to incumbent cable operators.
    Of course, the merger will allow us to compete with cable in other 
ways, too. By eliminating 500 duplicative channels and combining our 
satellites and spectrum (see Attachment E), the merged company will be 
able to offer 12 or more national channels of high-definition 
television programming; more of the very popular pay-per-view services; 
exciting, new interactive and video-on-demand services; expanded 
national program offerings; and additional educational, specialty and 
foreign-language programming. Better DBS service means stronger 
competition to cable, and that can only mean good news for American 
consumers. (See Attachment F)
    We will offer local channels to all Americans. We are one nation, 
and we will have one rate card. Consumers nationwide will need only a 
single satellite dish to get their video programming and broadband 
services. And we will eliminate the ``digital divide'' that exists 
today, particularly in rural America.
    We believe that once the Department of Justice and the Federal 
Communications Commission have looked at the facts, they will conclude, 
as Eddy and I did, that the merger of EchoStar and Hughes will promote 
competition, provide a greater choice of services and provide much 
needed benefits for all American consumers.
    Thank you for allowing me to discuss our proposed merger.
    In connection with the proposed transactions, General Motors 
Corporation (``GM''), Hughes Electronics Corporation (``Hughes'') and 
EchoStar Communications Corporation (``EchoStar'') intend to file 
relevant materials with the Securities and Exchange Commission, 
including one or more Registration Statement(s) on Form S-4 that 
contain a prospectus and proxy/consent solicitation statement. Because 
those documents will contain important information, holders of GM $1-
\2/3\ and GM Class H common stock are urged to read them, if and when 
they become available. When filed with the SEC, they will be available 
for free at the SEC's website, www.sec.gov, and GM stockholders will 
receive information at an appropriate time on how to obtain 
transaction-related documents for free from GM. Such documents are not 
currently available.
    GM and its directors and executive officers, Hughes and certain of 
its officers, and EchoStar and certain of its executive officers may be 
deemed to be participants in GM's solicitation of proxies or consents 
from the holders of GM $1-\2/3\ common stock and GM Class H common 
stock in connection with the proposed transactions. Information 
regarding the participants and their interests in the solicitation was 
filed pursuant to Rule 425 with the SEC by EchoStar on November 1, 2001 
and by each of GM and Hughes on November 16, 2001. Investors may obtain 
additional information regarding the interests of the participants by 
reading the prospectus and proxy/consent solicitation statement if and 
when it becomes available.
    This communication shall not constitute an offer to sell or the 
solicitation of an offer to buy, nor shall there be any sale of 
securities in any jurisdiction in which such offer, solicitation or 
sale would be unlawful prior to registration or qualification under the 
securities laws of any such jurisdiction. No offering of securities 
shall be made except by means of a prospectus meeting the requirements 
of Section 10 of the Securities Act of 1933, as amended.
    Materials included in this document contain ``forward-looking 
statements'' within the meaning of the Private Securities Litigation 
Reform Act of 1995. Such forward-looking statements involve known and 
unknown risks, uncertainties and other factors that could cause our 
actual results to be materially different from historical results or 
from any future results expressed or implied by such forward-looking 
statements. The factors that could cause actual results of GM, 
EchoStar, Hughes, or a combined EchoStar and Hughes to differ 
materially, many of which are beyond the control of EchoStar, Hughes or 
GM include, but are not limited to, the following: (1) the businesses 
of EchoStar and Hughes may not be integrated successfully or such 
integration may be more difficult, time-consuming or costly than 
expected; (2) expected benefits and synergies from the combination may 
not be realized within the expected time frame or at all; (3) revenues 
following the transaction may be lower than expected; (4) operating 
costs, customer loss and business disruption including, without 
limitation, difficulties in maintaining relationships with employees, 
customers, clients or suppliers, may be greater than expected following 
the transaction; (5) generating the incremental growth in the 
subscriber base of the combined company may be more costly or difficult 
than expected; (6) the regulatory approvals required for the 
transaction may not be obtained on the terms expected or on the 
anticipated schedule; (7) the effects of legislative and regulatory 
changes; (8) an inability to obtain certain retransmission consents; 
(9) an inability to retain necessary authorizations from the FCC; (10) 
an increase in competition from cable as a result of digital cable or 
otherwise, direct broadcast satellite, other satellite system 
operators, and other providers of subscription television services; 
(11) the introduction of new technologies and competitors into the 
subscription television business; (12) changes in labor, programming, 
equipment and capital costs; (13) future acquisitions, strategic 
partnership and divestitures; (14) general business and economic 
conditions; and (15) other risks described from time to time in 
periodic reports filed by EchoStar, Hughes or GM with the Securities 
and Exchange Commission. You are urged to consider statements that 
include the words ``may,'' ``will,'' ``would,'' ``could,'' ``should,'' 
``believes,'' ``estimates,'' ``projects,'' ``potential,'' ``expects,'' 
``plans,'' ``anticipates,'' ``intends,'' ``continues,'' ``forecast,'' 
``designed,'' ``goal,'' or the negative of those words or other 
comparable words to be uncertain and forward-looking. This cautionary 
statement applies to all forward-looking statements included in this 
document.

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    Chairman Kohl. Thank you, Mr. Ergen.
    Before we turn to Mr. Pitofsky, I would like to call upon 
the ranking member of the Senate Judiciary Committee, Senator 
Orrin Hatch, from Utah.

STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE 
                            OF UTAH

    Senator Hatch. Well, thank you, Mr. Chairman. I welcome all 
of you here. Chairman Pitofsky, we are glad to have you back.
    Mr. Pitofsky. Thank you.
    Senator Hatch. We appreciate having all of your testimony.
    I thank you, Mr. Chairman, for holding this important 
hearing. We have long shared an interest in the competitive 
future of the satellite television industry. We have worked 
together cooperatively and in a non-partisan manner with other 
colleagues on the Satellite Home Viewer Improvement Act, which 
was enacted at the end of 1999. That legislation granted a 
statutory copyright license to allow the direct broadcast 
satellite or DBS industry to carry local stations under certain 
conditions for the first time, allowing them to compete head to 
head with cable television.
    Since then, the DBS industry has continued to grow at a 
phenomenal rate, finally giving pay television subscribers a 
real choice, and often in places like my own home State of Utah 
two competitive choices to their local cable company. Satellite 
competition has led to price cuts and service and technology 
upgrades, and according to many has had an effect on cable 
service and technology upgrades as well.
    Some credit DBS competition with pushing cable to upgrade 
to digital services and to deploy broadband Internet service 
more quickly. DBS is now offering, as has been explained here, 
its own broadband services. So far, DBS has been an initial 
success story, where congressional policy has actually resulted 
in a positive, market-driven and competitive industry.
    That brings us to this merger, which will combine the 
assets of the only two DBS providers in the United States into 
one entity. It will hold essentially all the satellite slots 
that can serve the entire continental United States with 
traditional DBS service. This sort of merger combining both 
remaining competitors in a market and leaving no avenue of 
entry into the market does raise a host of vexing competition 
policy questions.
    In addition to the traditional antitrust inquiry, I have 
some concerns about the operation of gatekeeper power over 
broadband Internet services that might limit the options 
consumers have in accessing the information they want from the 
Internet. This Committee has looked into those policy issues 
over the past four or 5 years, and this hearing is important 
because it provides an opportunity for the proponents of the 
merger to make their case and to give us the facts necessary 
for the members of this Committee and Subcommittee to make up 
their minds about the merits of this merger.
    So I look forward to the testimony today. I apologize for 
being a little bit late, but I will listen today with an open 
mind, holding real concern for the long-term competitive health 
of this industry and its competitors.
    From what I have read and heard, the proponents of this 
merger say that such a combination is necessary to be a full 
competitor to cable, offering us a choice between trusting in 
uncertain competition to roll out services to markets in our 
respective States or to trust their promises of universal 
services if the merger is allowed.
    This choice is not what we envisioned when we hoped to 
unleash DBS as a local television competitor just over a year 
ago with the Satellite Home Viewer Improvement Act. But this 
choice is not exactly what the merging parties envisioned when 
they first announced the merger either.
    Initially, the parties said that the merger was necessary 
to compete head to head with cable television and broadband in 
80 to 100 of the 210 television markets in the United States. 
Last week, the merging companies announced that if the merger 
is improved, the merged company will be able to serve all 210 
local markets with television and broadband. I am pleased to 
learn of this apparent increase in capacity.
    I have to admit, however, that their announcement of 
finding twice the capacity in this merger so suddenly would 
suggest that perhaps they could meet their originally proposed 
goals separately as competitors. I further wonder why, with 
competition, there would not be a market for continued growth 
in technology capacity.
    In brief, Mr. Chairman, I am concerned for the success of 
the DBS business as a competitive force for the benefit of 
television viewers, broadband Internet subscribers, and 
creative content developers who need distribution choices to 
deliver their goods and services to consumers.
    I should note the opposition to this merger of the Writers 
Guild of America, which represents the men and women who write 
virtually all of our national entertainment programming in this 
country and much of the national news that we see, among 
others. I received a letter from the Writers Guild late last 
night expressing their view that this merger ``would extend 
media consolidation to an unacceptable degree.'' This letter 
outlines their concerns about the effect the merger could have 
on the diversity of programming available to American viewers.
    I would ask that a copy of that letter be placed in the 
record at this point.
    Chairman Kohl. Without objection.
    Senator Hatch. Now, Mr. Chairman, I look forward to hearing 
more about this to help my constituents, as well as the 
constituents across the country, get the benefits of increased 
choice in television and broadband services. I look forward to 
this hearing and to hearing the rest of the witnesses as well 
to provide better illumination by which to see with increased 
clarity what is best for those we serve, those who are watching 
or surfing at home, and those who will live with the effects of 
this merger as they seek out information and entertainment for 
themselves and for their families.
    So I am grateful to have all of you here. I am grateful to 
have the knowledge that you are bringing to us on the Committee 
here today and I hope that we can be constructive in resolving 
some of these conflicts and problems in ways that will be 
beneficial for all concerned.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Hatch follows.]

Statement of Hon. Orrin G. Hatch, a U.S. Senator from the State of Utah

    Mr. Chairman, thank you for holding this important hearing. We have 
long shared an interest in the competitive future of the satellite 
television industry. We have worked together cooperatively and in a 
non-partisan manner with other colleagues on the Satellite Home Viewer 
Improvement Act, which was enacted at the end of 1999. That legislation 
granted a statutory copyright license to allow the direct broadcast 
satellite or ``DBS'' industry to carry local stations under certain 
conditions for the first time, allowing them to compete head to head 
with cable television.
    Since then, the DBS industry has continued to grow at a phenomenal 
rate, finally giving pay television subscribers a real choice, and 
often--in places like my own home state of Utah--two competitive 
choices, to their local cable company. Satellite competition has led to 
price cuts and service and technology upgrades, and according to many, 
has had an effect on cable service and technology upgrades as well. 
Some credit DBS competition with pushing cable to upgrade to digital 
services and to deploy broadband internet service more quickly. DBS is 
also now offering its own broadband services. So far DBS has been an 
initial success story, where congressional policy has actually resulted 
in a positive, market-driven and competitive industry.
    That brings us to this merger, which will combine the assets of the 
only two DBS providers in the United States into one entity. It will 
hold essentially all the satellite slots that can serve the entire 
continental United States with traditional DBS service. This sort of 
merger, combining both remaining competitors in a market and leaving no 
avenue of entry into that market, raises a host of vexing competition 
policy questions. In addition to the traditional antitrust inquiry, I 
have some concerns about the operation of gatekeeper power over 
broadband internet services that might limit the options consumers have 
in accessing the information they want from the internet. This 
Committee has looked into those policy issues over the past four or 
five years.
    This hearing is important because it provides an opportunity for 
the proponents of the merger to make their case and give us the facts 
necessary for the members of this committee and subcommittee to make up 
their minds about the merits of this merger. I look forward to the 
testimony today, and I listen today with an open mind, holding real 
concern for the long-term competitive health of this industry and its 
competitors.
    From what I have read and heard, the proponents of this merger say 
that such a combination is necessary to be a full competitor to cable, 
offering us a choice between trusting in uncertain competition to roll 
out services to markets in our respective states or to trust their 
promises of universal service if the merger is allowed.
    This choice is not what we envisioned when we hoped to unleash DBS 
as a local television competitor just over a year ago with the 
Satellite Home Viewer Improvement Act. But this choice is not exactly 
what the merging parties envisioned when they first announced the 
merger, either. Initially, the parties said that the merger was 
necessary to compete head to head with cable television and broadband 
in 80 to 100 of the 210 television markets in the United States. Last 
week the merging companies announced that if the merger is approved, 
the merged company will be able to serve all 210 local markets with 
television and broadband. I am pleased to learn of this apparent 
increase in capacity. I must admit, however, that their announcement of 
finding twice the capacity in this merger so suddenly would suggest 
that perhaps they could meet their originally proposed goals separately 
as competitors. I further wonder why, with competition, there would not 
be a market for continued growth in technological capacity.
    In brief, Mr. Chairman, I am concerned for the success of the DBS 
business as a competitive force for the benefit of television viewers, 
broadband internet subscribers, and creative content developers who 
need distribution choices to deliver their goods and services to 
consumers. I should note the opposition to this merger of the Writers 
Guild of America, which represents the men and women who write 
virtually all the national entertainment programming and much of the 
national news we see, among others. I received a letter from the 
Writers Guild late last night, expressing their view that this merger 
``would extend media consolidation to an unacceptable degree'' and 
outlines their concern that the effect the merger could have on the 
diversity of programming available to American viewers. I would ask 
that a copy of the letter be placed in the hearing record.
    Mr. Chairman, I very much want to learn more about this transaction 
and its competitive context to help my constituents get the benefits of 
increased choice in television and broadband services. I look forward 
to this hearing to provide better illumination by which to see with 
increased clarity what is best for those we serve, those who are 
watching or surfing at home, those who will live with the effects of 
this merger as they seek out information and entertainment for 
themselves and for their families.

    Chairman Kohl. Thank you, Senator Hatch.
    Now, we turn to Mr. Pitofsky.

 STATEMENT OF ROBERT PITOFSKY, FORMER CHAIRMAN, FEDERAL TRADE 
                  COMMISSION, WASHINGTON, D.C.

    Mr. Pitofsky. Thank you, Mr. Chairman and members of the 
Committee. As always, it is an unusual pleasure for me to 
appear before this particular Committee.
    I would like to treat this discussion a little differently. 
I am going to be very brief on the question of whether this 
merger on the surface violates the antitrust laws because on 
the surface it is about as illegal as a merger gets to be and I 
would really like to spend my time talking about the fixes that 
have been proposed.
    Just briefly, in something like 19 or 20 percent of the 
country it is a merger to monopoly, and the statute clearly 
says that that should be prevented. Nineteen States, something 
over 30 percent of subscribers, have no access to cable, so it 
is a two-to-one merger.
    In areas served by cable, it is still a three-to-two 
merger, and we just had that case in the court of appeals last 
year when Beechnut and Heinz tried to merge, claiming they 
would be better competitors. Not only did the court turn down 
that merger, but they said in the long history of antitrust we 
can't find a single case in which that kind of merger was 
allowed where there are high barriers to entry.
    So what is the fix? Well, first, the argument which I don't 
hear as much today but I have heard: we will lose competition 
in rural America, but that is a price you have to pay; it will 
prove competition in the rest of the country. Well, that flies 
in the face of the plain language of the statute, which says do 
not allow a lessening of competition in any section of the 
country. I think 20 States, 20 percent of the people here in 
the country, is a section of the country. And the Supreme Court 
has addressed that question and they just won't do tradeoffs 
like that; they don't think it is justifiable.
    Second, here is the real claim: If we can merge, there will 
be efficiencies and those efficiencies will allow us--monopoly 
is more efficient than competition and will allow us to do 
things that competition won't allow us to do. But, you know, 
the main point is why can't these two companies do it on their 
own?
    Senator Hatch just pointed out they suddenly came up with a 
way to serve 210 cities instead of 40 or 100. This merger will 
be permanent if it goes through. Technology is not permanent. 
These companies have gone from 1 million subscribers to 17 
million subscribers in just 5 or 6 or 7 years. They have 
improved the technology of their product enormously. They 
deserve tremendous credit.
    Why can't they do that separately? Why do they need the 
merger to monopoly or duopoly to achieve those things? Several 
witnesses before the FCC said, under present technology, they 
could serve all these local markets today. And even if they 
can't today, what will we see shortly after that, in a year, 2 
years, something like that?
    Finally, there is this very unusual argument that rural 
America will not be disadvantaged because there will be a 
national list price and people will pay the same price in 
Montana or Vermont as they will in New York and Los Angeles. 
Well, first of all, there is more to competition than list 
prices. What about service, subsidies, packages, improvements 
in technology? We are merging to monopoly. Usually, one expects 
that that kind of competition will disappear or be diminished. 
Also, if I lived in rural America and was told I will have the 
benefit of getting the kind of prices that people are paying 
for cable in urban America, I wouldn't be enthusiastic about 
that.
    We want competition to decide prices and terms and service. 
We don't want monopolists to do so. I can't help suggesting the 
following analogy. After this deal goes through, suppose the 
airline companies come in here and they say all that 
duplication that comes from competition; let United Airlines, 
American and Delta all merge together and we will serve more 
cities if the three of us are together than we can today. I 
mean, it is almost ludicrous, but that is very similar to the 
argument that is being presented.
    Finally, and briefly, I think there is more to this matter 
than the welfare of consumers in urban or rural America. We 
have seen incredible deregulation by Congress, by the courts, 
and by the FCC. Much of that is a good thing. Many of those old 
rules were obsolete and outdated. But every time we get rid of 
one of those rules, the argument is, yes, but antitrust is 
there to take care of preserving a diversity of markets, access 
to those markets, diversity of ideas, and so forth.
    If antitrust is asleep at the switch on a merger to 
monopoly, what signal does that send to the other media 
companies about what is acceptable and what can be done as long 
as the parties say we won't abuse our market power and they 
claim that monopoly is more efficient than competition? That is 
not the philosophy this country has followed.
    Thank you.
    [The prepared statement of Mr. Pitofsky follows:]

  Statement of Robert Pitofsky, former Chairman of the Federal Trade 
                      Commission, Washington, D.C.

    Mr. Chairman, Members of the Committee, as in the past I am pleased 
and privileged to have an opportunity to testify before this Committee. 
Today I will address the question of the application of the antitrust 
laws to the proposed merger of EchoStar Corporation and Hughes 
Electronics, the parent company of DIRECTV. Hearings on this subject 
before this Committee are most timely since I believe the proposed 
merger raises very important questions about the direction of antitrust 
enforcement in this country.
    I want to disclose at the outset that I am both a Professor of Law 
at Georgetown University Law Center and Counsel to the Washington law 
firm of Arnold & Porter. That law firm represents Pegasus, a 
distributor of direct broadcast satellite (``DBS'') services, and a 
company that has publicly indicated its deep interest in the 
competitive and economic consequences of the merger. Nevertheless, I 
appear today in my individual capacity and not as a representative of 
any corporate interest.
    EchoStar and DIRECTV are today the only facilities-based providers 
of DBS services in the United States. Between them they control all 
three of the Ku band orbital slots licensed by the Federal 
Communications Commission that provide DBS service to the full 
continental United States. It seems to be commonly accepted that no 
additional Ku band orbital slots are likely to be available for DBS 
service in the foreseeable future.
    DIRECTV and EchoStar are thriving companies that have expanded 
their base substantially in recent years. Between them they have a 
total of 16.7 million subscribers--up from less than a million 
subscribers in 1994.\1\ The growth rate of each company has been 
phenomenal--for example, in just the last year, EchoStar's annual 
subscriber rate increased by 40% and DIRECTV's rate increased by 
15%.\2\ Much of that growth rate has been accomplished as a result of 
fierce competition between the two companies and, in parts of the 
country that have access to cable, also between each company and cable. 
Competition between the two DBS companies has occurred through 
discounts and dealer promotion programs, subsidized equipment, improved 
service and similar inducements. It is interesting that the key 
innovations in video programming delivery--such as on demand access to 
movies and comprehensive sports packages--have been driven by DBS 
competition between EchoStar and DIRECTV.
---------------------------------------------------------------------------
    \1\ See In re Annual Assessment of the Status of Competition in the 
Market for the Delivery of Video Programming, Eighth Annual Report, 
para. 57 (Jan. 14, 2002).
    \2\ Id.
---------------------------------------------------------------------------
    I find it 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 cable 
television is not available. Although the merger parties claim that 
only a small percentage of homes are without access to cable, other 
sources indicate that the percentage of homes without cable access 
might be as high as 19%.\3\ In Montana, South Dakota, Utah, 
Mississippi, Arkansas and Vermont, it has been reported that 40% to 50% 
of homes are without cable access; in Idaho, Wyoming, New Mexico, 
Oklahoma, Louisiana, Missouri, Idaho, Alabama, Tennessee, Kentucky, 
Virginia, North Carolina, Maine and Wisconsin, an estimated 30% to 40% 
of homes are reportedly without cable access.\4\ Even in areas where 
cable is available, it is often unsophisticated analog rather than 
digital cable and some subscribers have demonstrated a preference for 
DBS service over sometimes antiquated cable facilities.
---------------------------------------------------------------------------
    \3\ See National Telecommunications and Information Administration 
(NTIA) & Rural Utilities Service (United States Department of 
Agriculture), Advanced Telecommunications in Rural America: The 
Challenge of Bringing Broadband Service to All Americans, at 19 & n.62 
(April 2000).
    \4\ See Look, Up in the Sky! Big Bets on a Big Deal, New York 
Times, Oct. 30, 2001, at C1.
---------------------------------------------------------------------------
    For subscribers located in these non-cable or limited-cable areas, 
this proposed deal is a merger to monopoly, with the predictable higher 
prices and indifferent quality that experience shows will follow in the 
wake of that level of market power. In many rural areas, this merger 
does not ``lessen competition,'' it completely eliminates 
competition.\5\
---------------------------------------------------------------------------
    \5\ Moreover, that competition has been extremely valuable to 
consumers. For example, when EchoStar entered the market in 1996, 
offering serious competition to DIRECTV for the first time, DBS systems 
fell in price from the $600 to $800 range to $200. See Mark Robichaus, 
Who's News: EchoStar Chief Must Build Link to Murdoch Wall St. J., Feb. 
26, 1997. DBS service prices, largely as a result of direct competition 
between 1996 and 2000.  See In re Implementation of Section 3 of the 
Cable Television Consumer Protection and Competition Act of 1992, 
Report on Cable Industry Prices, 16 FCC Rcd. 4,346 (2001).
---------------------------------------------------------------------------
    I am aware of arguments that it is worthwhile to see a reduction in 
competition for consumers in rural America because it will improve 
competition in the remaining parts of the country. Specifically, it has 
been argued that the combined EchoStar-DIRECTV will be in a better 
position to compete with the large cable companies. That is an argument 
that contradicts the plain language of Section 7 of the Clayton Act 
which outlaws a lessening of competition ``in any section of the 
country.'' \6\ In one of the earliest cases reviewed by the Supreme 
Court after Section 7 was amended in 1950, two large banks in 
Philadelphia tried to justify a merger by arguing that consumers in the 
local market might be disadvantaged, but that would be more than 
outweighed by the fact that the larger bank, with higher lending limits 
because of size, could compete with the big New York banks in loans and 
other activities throughout the United States. The Court rejected what 
it called a concept of ``counterveiling power,'' explaining as follows:
---------------------------------------------------------------------------
    \6\ Section 7 reads as follows:
    ``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 . . . where in any line of commerce 
or in any activity affecting commerce in any section of the country, 
the effect of such acquisition may be substantially to lessen 
competition, or to tend to create a monopoly.'' 15 U.S.C. Sec. 18 
(emphasis added).

         ``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 
        Section 7, embark on a series of mergers that would make it in 
        the end as large as the industry leader.'' Let me turn now to a 
        second major argument offered by the sponsors of the merger--
        that DBS competes in a broader market that includes cable 
        television and the merger would strengthen DBS as a competitor 
        of cable.\7\
---------------------------------------------------------------------------
    \7\ United States v. Philadelphia National Bank, 374 U.S. 321 3790 
(1963).

    That whole approach is an interesting change of strategy for 
EchoStar since it filed a complaint in 2000 against DIRECTV in federal 
court in Colorado alleging that DBS is a relevant market, distinct from 
cable, and that no firm other than EchoStar or DIRECTV was likely to 
enter the market because of high entry barriers.\8\ Among the many 
points cited by EchoStar in arguing that DBS is a separate product 
market from cable was that a significant number of DBS subscribers view 
DIRECTV and EchoStar as closer substitutes than alternative sources of 
programming, including cable; if not constrained by EchoStar, DIRECTV 
could raise its prices above the competitive level without experiencing 
a significant constraint by cable; and DBS and/or high powered DBS is 
superior to most cable services in several respects.\9\
---------------------------------------------------------------------------
    \8\ Complaint, EchoStar Communications Corp. v. DIRECTV Enters. 
Inc., Civ. Action No. 00-K-212 (D. Colo., filed February 1, 2000).
    \9\ 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).
---------------------------------------------------------------------------
    Contrary to EchoStar's views of just over a year and a half ago, 
EchoStar now asserts that DBS and cable do compete in the same market. 
If the merger goes through, however, that still means that the number 
of significant competitors will be reduced from three to two. 
Subscribers today who are dissatisfied with their cable service have 
two vigorous DBS competitors to turn to but would have only one as a 
result of the proposed merger.
    The argument that two competitors is better than three if a 
strengthened number two can compete more effectively with the market 
leader was advanced just a year ago by Heinz and Beechnut when their 
merger, allegedly to put them in a position to compete more effectively 
with the dominant Gerber, was challenged by the Federal Trade 
Commission. A unanimous District of Columbia Court of Appeals enjoined 
the merger, noting in passing that it would be unprecedented to permit 
that level of concentration:

         ``[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.'' 
        \10\
---------------------------------------------------------------------------
    \10\ Federal Trade Commission v. H.J. Heinz Co., 246 F.3d 708, 717 
(DC Cir. 2001).

    I suggest that the argument that it is acceptable to allow a merger 
to monopoly in some parts of the country, or even that it is acceptable 
to allow a merger from three firms to two where there are high barriers 
to entry, in order for the combined firm to compete more effectively 
with the market leader, would be a major departure from established law 
in this country. Moreover, there is no reason to believe that given 
their past success and present trajectory, each company, along with 
challenging each other, can not continue to take subscribers away from 
cable.
    To summarize this point, if the proposed merger is permitted, it 
will be a merger to monopoly in areas of the country not presently 
served by cable--mostly rural America. As a result, existing 
competition on price and service, programming packages and, perhaps 
most important, in improving technology would disappear. In areas of 
the country served by cable, sources of programming would be reduced 
from three to two, price competition between EchoStar and DIRECTV which 
has kept prices low would disappear, and because of high entry barriers 
no new players are likely to appear. Under well established antitrust 
principles--recently emphasized by a unanimous DC Court of Appeals 
decision blocking the Beechnut/Heinz merger just last year--three to 
two mergers with high barriers to entry, and when neither company is 
failing, have never been allowed under the antitrust laws.
    The parties recognize the difficulty of justifying this proposed 
merger and therefore have asserted several additional defenses--one 
common and the other most unusual--in an effort to justify the 
transaction. The common claim by sponsors of the merger is that it will 
allow the combined firm to offer efficiencies to consumers and with 
those efficiencies improve service. Most of the efficiencies that have 
been described, however, really come down to elimination of duplication 
and overlap. But that is just a roundabout way of justifying the 
elimination of competition. Another efficiency that I have heard 
mentioned is that a broader spectrum would allow satellite carriers to 
offer more local TV stations in more local markets. But a consultant to 
the Department of Justice (and now a Pegasus consultant), Roger J. 
Rusch, concluded that EchoStar and DIRECTV, using currently available 
technology, could each, on its own, achieve the same service.\11\ Other 
parties submitting petitions to the FCC have reached the same 
conclusion.\12\ Moreover, just last week the merger parties announced 
that they had developed a new proposal that would allow them to deliver 
local channels to all 210 markets.\13\ The burden of persuasion that 
the two merging parties could not individually achieve the same 
services should be very great. Finally, even if there are cognizable 
efficiencies, the Department of Justice/FTC Revised Merger Guidelines, 
issued in 1997, explained that mergers that produce high concentration 
can only be justified by exceptional, substantial efficiencies, and 
that even such efficiencies ``almost never justify a merger to monopoly 
or near-monopoly.'' \14\
---------------------------------------------------------------------------
    \11\ Mr. Rusch filed an affidavit in support of Pegasus' opposition 
to the merger. See Affidavit and Report of Roger J. Rusch to Pegasus 
Communications Corporation's Petition to Deny, In re Consolidated 
Application of Echostar Cummunications Corp., General Motores Corp., 
Hughes Electronics Corp., Transferors, and Echo Star Communications 
Corp., Transferee, For Authority to Transfer Control (FCC, filed Feb. 
4, 2002).
    \12\ See, e.g., Petition to Deny of National Association of 
Broadcasters, at 74-81, In re Consolidated Application of Echostar 
Cummunications Corp., General Motors Corp., Hughes Electronics Corp., 
Transferors, and EchoStar Communications Corp., Transferee, For 
AUthority to Transfer Control (FCC, Filed Feb. 4, 2002); Petition to 
Deny By the National Rural Telecommunications Cooperative, at 56-60, In 
re Consolidated Application of Echostar Communications Corp., General 
Motors Corp., Hughes Electronics Corp., Transferors, and EchoStar 
Communications Corp., Transferee, For Consent For a Proposed Transfer 
of Control (FCC, Filed Feb. 4, 2002).
    \13\ EchoStar/Hughes Joint Press Release, Merged EchoStar and 
Hughes will Deliver Local Broadcast Channels to All 210 U.S. Television 
Markets (Feb. 26, 2002).
    \14\ United States Dep't of Justice and Federal Trade Commission, 
Revised 1992 Horizontal Merger Guidelines, Sec. 4 (rev. 1997), 
reprinted in 4 Trade Reg. Rep. (CCH) para. 13, 104.
---------------------------------------------------------------------------
    There are persuasive reasons why mergers to monopoly should not be 
justified by claimed efficiencies. The law has eased on allowing 
efficiency justifications for mergers because it is now understood that 
such efficiencies could be passed on to consumers--not just pocketed by 
the officers and shareholders of the merging company. But if a merger 
leads to monopoly or near-monopoly, there is no reason for the firms to 
pass along these efficiencies since they no longer compete with each 
other.\15\
---------------------------------------------------------------------------
    \15\ See Id.
---------------------------------------------------------------------------
    Finally, advocates of the proposed merger have advanced an 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 are willing to commit 
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. I suggest that national pricing 
is no substitute for present vigorous competition. 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. How would the 
government monitor different offers in each city in the United States 
that subsidize the purchase of equipment, offer free or discounted 
installation, and provide promotional pricing and introductory offers? 
Second, even if price terms are worked out, that says nothing about the 
loss of competition in non-price dimensions--competition for 
programming, offers of programming packages, better service 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 turn out to be 
less-than-competitive prices in urban areas. As noted previously, cable 
prices have increased in this country 7% a year since 1996,\16\ and 
have not declined despite the presence of two aggressive DBS providers. 
Why would they come down in the future when there is only one competing 
provider? Should there be much satisfaction in rural markets to know 
that in the future they can have the benefit of price levels imposed on 
cable subscribers in urban markets in recent years? 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--not promises by merging parties or enforcement 
by government agencies.
---------------------------------------------------------------------------
    \16\ See, infra, n.5.
---------------------------------------------------------------------------
    The proposed merger also raises issues in the merging broadband 
market--that is the provision of upgraded high-speed access to the 
Internet. 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 ensure more rapid wire development. 
At least for the foreseeable future, satellite broadband service is the 
most likely technology to provide broadband in rural America. The 
merger of EchoStar and DIRECTV would be a merger to monopoly for 
millions of rural consumers who have no alternative to DBS for 
broadband Internet access as well as multi-channel video service.
    I assume the parties will argue again that they need the merger to 
eliminate ``duplication'' and thereby will be able to roll out 
broadband service more quickly. The companies should certainly be 
pressed to explain why the merger is necessary to bring out services 
that both DIRECTV and EchoStar have promised consumers for some time 
that each would separately provide.
                               CONCLUSION
    We see evidence on all sides of the amazing transformation of media 
in this country--partly a result of advances in technology but also a 
consequence of deregulation by Congress, the courts and the Federal 
Communications Commission. I agree that many regulatory rules are 
outdated and deserve to be vacated. With respect to the loosening of 
ownership restrictions, however, it is often said that antitrust is 
adequate to protect the market against undue concentration. Antitrust, 
it is argued, would prevent adverse effects on consumer welfare and 
preserve a marketplace open to a diversity of ideas.
    If antitrust were to falter, media would indeed be a deregulated 
sector of the economy. This proposed merger of two satellite companies, 
resulting in monopoly in a substantial part of the United States and, 
at best, duopoly in the remainder, violates all of the established 
principles of merger review under the antitrust laws. If this merger as 
presently structured is allowed, antitrust will have faltered. An 
essential condition for continued deregulation will be absent. It would 
send a clear signal to other media companies that the net is down and 
almost anything goes--so long as the sponsors of the merger claim that 
their monopoly is more efficient than competition, and promise not to 
abuse their market power.

    Chairman Kohl. We thank you, Mr. Pitofsky.
    We turn now to Mr. Gene Kimmelman.

  STATEMENT OF GENE KIMMELMAN, CO-DIRECTOR, WASHINGTON, D.C. 
           OFFICE, CONSUMERS UNION, WASHINGTON, D.C.

    Mr. Kimmelman. Thank you, Mr. Chairman, Senator DeWine, 
Senator Hatch. On behalf of Consumers Union, the online and 
print publisher of Consumer Reports, I appreciate the 
opportunity to testify once again.
    As you know better than anyone, I believe no one has come 
before this Committee more often in the last 4 years to 
complain about consolidation and concentration of control in 
the media and telecommunications markets. And I could do this 
one exactly the same way, and both Mr. Nixon and Mr. Pitofsky 
make important antitrust points, and but I believe it would be 
more fruitful today to view this merger from a much broader 
perspective than just antitrust, but I will include antitrust.
    For about 90 percent of consumers, the problem with 
television is cable monopoly. I appreciate that you have asked 
the GAO to study the impact of local broadcast channels added 
to satellite competing versus cable. We have looked at that and 
we will talk to the GAO, and the answer is quite clear and we 
have outlined it in great detail in our testimony. These are 
predominantly separate markets.
    Even with local broadcasts, you have cable rates up 36 
percent since 1996, when the Telecom Act was passed, and just 
since January of this year, from Seattle, to Los Angeles, to 
Reno, to Austin, to St. Louis, to Memphis, to Atlanta, to 
Syracuse, to Boston, double-digit cable rate increases. Most of 
those communities have satellite and have local broadcast 
channels. They do not compete. Mr. Pitofsky and Mr. Nixon, with 
all due respect, are wrong. These are separate markets in many 
respects for antitrust analysis.
    Consumers need competition; they need new entry. As 
Chairman Leahy said, there is an application pending at the FCC 
we have been begging them to move on to allow new players in 
this market so we are not boxed in with three-to-two or two-to-
one limitations through mergers and we have more players. That 
is the most important thing we need to see happen as this 
merger is reviewed.
    Now, the companies argue that they will have efficiencies 
and they will better be able to provide service to local rural 
areas. I believe they mentioned launching a new satellite to 
expand their capacity to serve 210 markets as the basis for how 
they would do that.
    What is clear here is that there is a greater potential 
that more consumers could receive local broadcast channels and 
new high-speed Internet service options if they merge. Is it 
absolutely clear that they wouldn't get it without it? No, but 
there are enormous incentives and opportunities through cost 
reductions and through the ability to purchase programming at a 
lower price with a broader customer base if this merger goes 
through. There are potential benefits for consumers.
    The other 10 percent of consumers have a real problem. I 
don't diminish that. Those are rural consumers throughout the 
country who are not wired for cable. They lose one of the two 
players in the market. That is intolerable and that should not 
be accepted.
    I believe the conditions that Chairman Kohl described in 
his opening statement are the types of conditions that can be 
imposed, I would suggest not by the antitrust officials but by 
the Federal Communications Commission, the agency with 
regulatory authority to look in detail and make sure that it is 
not just prices, it is installation, it is equipment available, 
it is discounts, and it is the same prices, terms and 
conditions available for rural consumers as in adjacent more 
competitive markets. Those are the kinds of conditions that are 
critical.
    But new entry is the most critical thing for rural America, 
as well, and wireless terrestrial transmission using the 
satellite spectrum space is totally viable in rural America as 
well as urban America and we want the FCC to move on that.
    Now, the agencies reviewing this obviously have unique 
roles and they are somewhat narrow--antitrust at the Department 
of Justice versus the FCC's public interest authority. We don't 
want them to step over each other's territory, and certainly we 
don't want you to interfere with their review.
    However, I believe Congress can play a unique role in this 
situation, take a broader look, urge the agencies to work 
together and combine their oversight efforts. If the FCC moves 
first in reviewing this merger under its public interest 
standard, it can require provision of local broadcast signals 
in every community as a condition of merger subject to penalty 
and license revocation.
    It can require opening markets from rural to urban areas to 
new entrants to ensure that we do not diminish the number of 
players in the market. It can require fair prices, terms and 
conditions, and then the Department of Justice can look at this 
and determine whether there is a further need for structural 
separation, a split of some satellite capacity, divesting some 
transponders or orbital satellites to ensure that rural America 
is protected.
    In conclusion, Mr. Chairman, this is a unique opportunity 
not just to look at an antitrust issue but to provide both 
rural and urban consumers competition to cable and more choices 
for both Internet and video services.
    Thank you.
    [The prepared statement of Mr. Kimmelman follows:]

     Statement of Gene Kimmelman, Co-Director , Consumer's Union, 
                            Washington, D.C.

    Consumers Union \1\ 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. Attached to our testimony is an Appendix entitled 
``Cable-Satellite Competition (And Other Myths That Are Distorting Mass 
Media Policy),'' prepared by Dr. Mark Cooper, Research Director for the 
Consumer Federation of America, which describes in great detail the 
market structure and concentration levels for multi-channel video 
services.
---------------------------------------------------------------------------
    \1\ 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 
noncommerical 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.
---------------------------------------------------------------------------
    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.
                               SATELLITE
    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.\2\
---------------------------------------------------------------------------
    \2\ Haffmeister, Sallie. ``GM Deal to Create New Pay TV Giant,'' 
Los Angeles Times, Oct. 29, 2001.
---------------------------------------------------------------------------
    Today, EchoStar and DirecTV serve nearly every home that has a 
satellite dish.\3\ And now EchoStar is attempting to buy DirecTV.
---------------------------------------------------------------------------
    \3\ FCC Seventh Annul Assessment of the Status of Competition in 
the Market for the Delivery of Video Programming (CD Docket No. 00-
132), January 8, 2001.
---------------------------------------------------------------------------
    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 holdings. See Appendix at 35 
(describing AT&T's full and partial cable ownership interests, covering 
as many as 30-40 million households).
    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.\4\ These 
consumers can only choose between DirecTV and EchoStar. Thus, the 
merger would leave them with EchoStar as their only option.\5\
---------------------------------------------------------------------------
    \4\ Advanced Telecommunications in America, report by Rural 
Utilities Service and National Telecommunications and Information 
Administration.
    \5\ Beauprez, Jennifer ``Tech Town,'' Denver Post, November 4, 
2001.
---------------------------------------------------------------------------
    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.
                                 CABLE
    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.\6\ 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. As one 
industry analyst writes:

    \6\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.
---------------------------------------------------------------------------
        We believe that more than 95% of all cable churn is caused by 
        factors other than DBS competition. Competition generated churn 
        rates of just 1.3% per year during the past five years, 
        suggesting that former cable customers make up less than one-
        third of DBS's current customer base. The implication of this 
        finding is significant because it suggests that the vast 
        preponderance of DBS's growth depended on first-time multi-
        channel video (MVC) subscribers. We believe that growth in the 
        MVC market will drop off in the next several years as the 
        potential population of first-time MVC subscribers dwindles.\7\
---------------------------------------------------------------------------
    \7\ Jason B. Bazinet, The Cable Industry (J.P. Morgan Securities, 
Inc., November 2, 2001), p. 4.
---------------------------------------------------------------------------
    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 36 percent. That's nearly three times the 
rate of inflation.\8\ Cablevision recently announced a 7 percent rate 
hike, two weeks after AT&T announced a 7.4 percent hike. In cities all 
around the country, cable companies are raising rates \9\ with an 
alarming pace. The following are just a sampling of rate increases: 
Wichita, KS--14%,\10\ St. Louis, MO--14-26%,\11\ Reno, NV and Memphis, 
TN--15%,\12\ Boston, MA--12%,\13\ Vancouver, WA--9%,\14\ Atlanta, GA 
and Austin, TX--10%.\15\
---------------------------------------------------------------------------
    \8\ Bureau of Labor Statistics, consumer price indexes, Dec. 2001.
    \9\ Berkowitz, Harry. ``Cablevision Rates Rising Again,'' Newsday, 
November 21, 2001.
    \10\ Lillian Martell, ``Cox to Increase Rates for Cable, Internet 
Service.'' The Wichita Eagle, (Feb. 22, 2002).
    \11\ Jerri Stroud, ``Charter Plans to Raise Cable Rates by End of 
Year.'' St. Louis Post-Dispatch, (Sept. 26, 2001).
    \12\ Tom Walter, ``Time Warner Raising Cable Rates for 6th Year in 
a Row.'' The Commercial Appeal, (Nov. 21, 2001).
    \13\ Monica Collins, ``Boston Subscribers at the Mercy of Cable 
Rate Hikes.'' The Boston Herald, (Nov. 28, 2001).
    \14\ Mike Rogoway, ``Cable TV Rate to Increase 9 Percent.'' The 
Columbia, (Nov. 3, 2001).
    \15\ Amy Schatz, ``Time Warner is Upping Cable Rates.'' Austin 
American Statesman, (Nov. 28, 2001).
---------------------------------------------------------------------------
    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,\16\ 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.\17\
---------------------------------------------------------------------------
    \16\ 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.
    \17\ See 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). See also Margaret Talev, ``Consumers 
Have Little Recourse on Cable Rates.'' Los Angeles Times (Feb. 4, 
2001).
---------------------------------------------------------------------------
    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 and are partially co-
owned through Time Warner Entertainment. 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.'' \18\
---------------------------------------------------------------------------
    \18\ Patrizio, Andy. ``Ted Turner Laments Cable Mergers,'' Wired 
News, November 28, 2001.
---------------------------------------------------------------------------
    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.\19\
---------------------------------------------------------------------------
    \19\ 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.
---------------------------------------------------------------------------
    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.\20\ Average operating revenues (total 
revenues minus operating costs) have actually increased by 32 
percent.\21\ 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.\22\ 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.
---------------------------------------------------------------------------
    \20\ FCC Seventh Video Competition Report at 1002, Table B-6.
    \21\ Id.
    \22\ Id.
---------------------------------------------------------------------------
                              COMPETITION
    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. The attached Appendix illustrates how satellite serves a 
rural, unwired-niche market (about 40% of satellite subscribers, or 
approximately 6 million households) and a mega-service market that 
cable has just entered with digital services, but satellite fails to 
compete with cable's 42 million basic and enhanced basic ``lunch 
bucket'' customers. See Appendix at 13.
    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.
    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. An alternative approach to achieve the same result 
would require a structural separation (divestiture) of enough satellite 
capacity to serve rural customers through a new satellite competitor 
that could challenge the combined Echostar/DirecTV.
    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.\23\
---------------------------------------------------------------------------
    \23\ ``FCC and FTC,'' Warren's Cable Regulation Monitor, April 9, 
2001.
---------------------------------------------------------------------------
    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.\24\
---------------------------------------------------------------------------
    \24\ See Comments of Consumers Union, et. al., In the Matter of 
EchoStar Communications Corp., General Motors Corp., and Hughes 
Electronics Corp. for Authority to Transfer Control. FCC Docket No. 01-
348 (Feb. 4, 2002).
---------------------------------------------------------------------------
    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 Kohl. We thank you, Mr. Kimmelman.
    Finally, we turn to Mr. Edward Fritts.

 STATEMENT OF EDWARD O. FRITTS, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, NATIONAL ASSOCIATION OF BROADCASTERS, WASHINGTON, D.C.

    Mr. Fritts. Thank you, Mr. Chairman, Ranking Member Dewine, 
Senator Hatch. We are delighted to be able to present our views 
as to why the National Association of Broadcasters opposes this 
merger.
    As free, over-the-air local television stations, our 
members currently serve their communities with a unique blend 
of local and network programming. The areas served by local 
television stations are divided into 210 designated marketing 
areas, or DMAs, across the country, so we have members ranging 
from No. 1 in New York City all the way down to number 210 in 
Glendive, Montana, and all the markets in between.
    The Satellite Home Viewer Improvement Act, which has been 
mentioned here today, says that if a satellite provider carries 
one local TV station in a market, it must carry all local TV 
stations in that market. This is known as the ``carry one, 
carry all'' statute.
    In many ways, you and we serve the same constituency. Your 
voters are our viewers, and I am sure you know many of your 
local broadcasters back in your home States. These are the 
broadcasters whose stations will be impacted by this proposed 
merger.
    EchoStar, in its attempt garner for the support for the 
merger, is making a number of promises, including one that 
addresses the fundamental objective of local television 
stations, and that is a promise to expand local-into-local 
service into all 210 markets across the Nation. Admittedly, 
this sounds great, but just a few months ago, as was pointed 
out, the company was singing a different song.
    In December, it told the FCC that a combined company would 
be able to serve only 100 markets. Now, with the merger plan 
appearing endangered, it has suddenly discovered the capacity 
to carry stations in all 210 markets. We have always asserted 
that that was possible independently without a merger.
    Regrettably, our local stations across the country have had 
less than a pleasant experience in dealing with EchoStar. In 
fact, EchoStar has done everything in their power to avoid 
complying with the ``carry one, carry all'' law. Naturally, we 
are concerned that a company that has systematically broken the 
law would be also willing to break promises.
    Here are some examples of our concerns: First, the FCC 
rebuked EchoStar for using invalid reasons in rejecting scores 
of carriage requests by local stations. Second, EchoStar's 
solution to complying with Federal law on full carriage is to 
create a second-class tier of disfavored stations, primarily 
Hispanic, minority-owned, religious, and public stations that 
can be received only with the installation of a second 
receiving dish. The FCC has twice rejected such dish schemes.
    Third, in a series of retransmission consent negotiations, 
EchoStar so abused the FCC process that they were cited by the 
FCC for lack of candor. And, fourth, even today as EchoStar 
promises to carry all 210 markets, they continue a court 
challenge today against the ``carry one, carry all'' law.
    So, Mr. Chairman, with this track record, I think it is 
ironic that EchoStar is saying give us a monopoly forever and 
we promise to give you local-into-local someday, maybe. Please 
appreciate that local stations have many concerns with this so-
called promise. EchoStar says they may cover all markets within 
2 years, but there are no specific, definite deadlines. We are 
also concerned about the continuation of the ``two dish'' 
scheme. EchoStar's filing continues to reserve the right to 
discriminate against disfavored stations.
    Another concern is the lack of assurance that all stations 
in all markets that are entitled to carriage will actually be 
carried. This may be an oversight, but we are understandably 
suspicious.
    The most perplexing is EchoStar's promise versus 
performance with regard to court challenges. At the same time 
that EchoStar has promised to provide all 210 markets, it is 
challenging the underlying law on which that promise is 
tendered. So which is it going to be? Is it going to be that 
they will fulfill the promise of carriage in all 210 markets 
and dismiss the court cases, or will they continue to challenge 
the law in court and admit that the promise is hollow?
    Now, we come to the most important part: How are we to 
ensure that EchoStar fulfills its commitments? What is the 
compliance mechanism? Do we rely on the FCC, where EchoStar has 
consistently ignored and abused the rules? I don't think so. Is 
the Department of Justice prepared and capable of regulating 
EchoStar's future behavior? Frankly, I don't have the answer, 
but I can assure you that broadcasters would need an iron-clad 
enforcement mechanism.
    Broadcasters have built our businesses and served our 
communities in a competitive environment. Competition brings 
out the best in all companies, so our overriding objective is 
indeed the same as yours to bring our viewers and your 
constituents their local television stations should they 
subscribe to direct broadcast satellite.
    Thank you for this opportunity to present our views and I 
look forward to answering questions.
    [The prepared statement of Mr. Fritts follows:]

Statement of Edward O. Fritts, President and CEO , National Association 
                   of Broadcasters, Washington, D.C.

                            I. INTRODUCTION

    As President and CEO of the National Association of Broadcasters, I 
am pleased to appear before the Senate Judiciary Subcommittee on 
Antitrust, Competition and Business and Consumer Rights to discuss 
NAB's opposition to the pending EchoStar/DIRECTV merger.
    EchoStar Chairman, Charlie Ergen, has made several promises to gain 
favor for his anticompetitive merger proposal. As the Committee will 
recall, three months ago Mr. Ergen told the FCC that the merged firm 
would be able to serve only 100 markets with local-to-local. Now, to 
try to create a distraction from the fact that his merger will end all 
competition between U.S. DBS firms, EchoStar has announced that it has 
suddenly found the capacity to provide local-to-local in all 210 U.S. 
television TV markets after the merger. This promise--which is nothing 
more than that--in no way alleviates broadcaster concerns, nor does it 
diminish the regulatory hurdles yet to be cleared by the applicants.
    My written testimony first provides a general overview of the 
issues concerning broadcasters, then goes into greater detail regarding 
the impact of this merger on broadcasters and consumers.

                           A. THE TRANSACTION

    EchoStar Communications Corporation (``EchoStar'') and Hughes 
Electronics Corporation, a subsidiary of General Motors, Inc., have 
announced an agreement by which General Motors will spin off Hughes, 
including its Direct Broadcast Satellite (``DBS'') business, DIRECTV, 
which will then merge with EchoStar. The parties to this transaction 
have filed a Consolidated Application For Authority to Transfer Control 
with the FCC seeking authority to transfer control of satellite, earth 
station, and other authorizations, including licenses to use orbital 
satellite positions for DBS services, into the new company.\1\ The 
merger also is under review by the Department of Justice.
---------------------------------------------------------------------------
    \1\ See Generally EchoStar Communications Corporation, General 
Motors Corporation, Hughes Electronics Corporation and EchoStar 
Communications Corporation, Consolidated Application for Authority to 
Transfer Control (December 3, 2001) (hereinafter ``Consolidated 
Application'').
---------------------------------------------------------------------------
     B. NAB'S MEMBERS' ROLE AS BROADCASTERS AND INTEREST IN MERGER

    The NAB is a non-profit trade association that promotes and 
protects the interests of radio and television broadcasters in 
Washington and around the world. The NAB is the broadcaster's voice 
before the Commission, Congress, and the courts. The NAB is committed 
to the goal of promoting localism and diversity in television 
programming throughout the United States.
    The broadcasting industry provides free, over the air programming. 
As cable emerged, grew and thrived through the 70s, 80s and 90s as a 
Multichannel Video Programming Distributor (``MVPD''), it evolved as 
the ``gatekeeper'' of programming, particularly local programming, 
throughout the United States. With the 1999 passage of the Satellite 
Home Viewer Improvement Act (``SHVIA''), satellite carriers were also 
granted this gatekeeper role, enabling DBS companies to deliver TV 
stations within their own markets without paying copyright royalties to 
the owners of the programming carried on those stations.
    As suppliers of programming to local markets, the NAB's members 
stand to be substantially harmed by the proposed merger of EchoStar and 
DIRECTV. By combining the only two DBS providers, the merger will 
create a DBS monopoly, reduce the number of MVPDs, eliminate beneficial 
rivalry between two DBS firms to offer local-to-local service in new 
markets, and enable EchoStar and DIRECTV to exercise significant market 
power in both the purchase and distribution of video programming 
throughout the country. This reduction in competition will be to the 
detriment of both program suppliers and viewers.

                              C. OVERVIEW

    EchoStar and DIRECTV, the sole remaining DBS companies with full-
CONUS spectrum in the United States, propose to merge. Their merger 
would create a monopoly in large areas of the United States and for 
many millions of MVPD and broadband Internet customers. In most other 
areas, at best the merger would reduce the number of competitors to 
two, creating a duopoly and ending EchoStar's frequent role as a 
``maverick'' in the DBS and MVPD industries. The net present value of 
the total consumer welfare loss over the next five years is estimated 
to be approximately $3 billion or more.
    The anticompetitive effects of this reduction of competition would 
be felt both by consumers and programming suppliers, including the 
local broadcast stations that are members of NAB. Broadcasters would be 
particularly harmed because they would lose the benefit of the DBS 
rivalry that has led to carriage of local broadcast stations in many 
markets on one or both DBS systems. The merger would also have a 
deleterious effect on broadcasters' ability to obtain fair compensation 
for retransmission consent.
    The merger application is particularly audacious because both 
companies have been enormously successful on their own. Today DBS is a 
$10 billion industry; it has grown from zero subscribers in 1994 to 
over 17 million at the end of 2001. More than two out of every three 
new MVPD subscribers choose DBS over cable. This phenomenal growth has 
accelerated markedly since the passage of SHVIA in late 1999, which 
allowed DBS providers to offer local broadcast signals. Since SHVIA's 
passage, EchoStar's and DIRECTV's subscriber numbers have grown 87.6 
percent and 60.2 percent respectively.
    At the same time as the DBS industry has enjoyed such striking 
success, it has concentrated into a two-firm duopoly, down from five 
licensees with full-CONUS spectrum in 1998. Today, EchoStar and DIRECTV 
control all 96 available frequencies at the three orbital locations 
capable of transmitting to the entire lower 48 states, 101 degrees 
W.L., 110 degrees W.L., and 119 degrees W.L. Because these are the only 
three full-CONUS orbital slots available to the United States in the 
high-power Ku-band, the barriers to entry into the DBS industry are not 
merely high, they are insurmountable. And because DBS has been the only 
successful competitive entrant against cable, this means that barriers 
to entry to an overall MVPD market are also extremely high.
    The astounding growth of the DBS industry has been spurred by the 
direct head-to-head market and innovation rivalry between EchoStar and 
DIRECTV. Because DIRECTV was first to market in 1994, EchoStar, since 
its entry in 1996, frequently has played the role of a maverick with 
lower prices and innovative marketing concepts. Among the areas in 
which the two have competed fiercely are equipment and installation 
pricing, where EchoStar led the market downward; programming, where 
each service has developed niches, such as DIRECTV's subscription 
sports packages and EchoStar's wide array of international programming; 
technology, where the two firms have sought to outdo each other in 
offering personal video recorders, high definition receivers, and other 
innovative technologies; and local-to-local, which EchoStar first 
pioneered but where DIRECTV now offers service in more cities and in a 
more consumer-friendly manner. All of this rivalry-spurring innovation 
would be lost if EchoStar and DIRECTV were allowed to merge.
    In terms of competitive effects, the proposed merger will have ill 
effects whether EchoStar's position is correct that there is a separate 
DBS market, or whether EchoStar and DIRECTV are closest substitutes for 
one another in an overall MVPD market. In either case, this is a merger 
to monopoly for millions of households throughout the United States who 
are not passed by cable systems, and at best a merger to duopoly 
everywhere else. EchoStar claims that there are only three million 
households in the former category, but the data it relies on are 
clearly inaccurate. Perhaps most strikingly, DIRECTV's own internal 
survey data show that there are more than three million households not 
passed by cable just among DIRECTV's own 10.7 million subscribers.\2\ 
As to the national figures, the NRTC has suggested that the percentage 
of homes passed by cable may actually be only around 81 percent, based 
on a joint report by agencies of the Departments of Commerce and 
Agriculture. Whatever the exact number, it is clear that in many areas 
large numbers of consumers have no access to cable. For instance, 
Pegasus reports that in 22 states over 30 percent of housing units have 
no cable access.\3\ For all of these consumers, this merger eliminates 
their only realistic competitive choice.
---------------------------------------------------------------------------
    \2\ In a filing with the Federal Communications Commission (FCC) 
just a few months ago, DIRECTV said that its own internal customer 
surveys showed that 29 percent of its subscribers are unable to 
subscribe to cable. See Comments of DIRECTV, Inc., In the Matter of 
Annual Assessment of the Status of Competition in the Markets for the 
Delivery of Video Programming, CS Docket No. 01-129, at 13 (filed Aug. 
3, 2001) (only ``71% of DIRECTV customers live in areas able to receive 
television service.'').
    \3\ Pegasus Communications ex parte notice, CS Docket No. 01-348 
(Jan. 23, 2002).
---------------------------------------------------------------------------
    The situation is much the same for consumers who live in rural 
areas passed by financially marginal cable systems. A detailed study by 
a leading investment banking firm found that 8,270 cable systems, 
serving roughly 8.2 million predominantly rural subscribers, might 
become extinct within the next five to eight years because they cannot 
justify the investment to upgrade to digital.\4\ Consumers in these 
territories will also face a monopoly DBS supplier if the merger is 
approved.
---------------------------------------------------------------------------
    \4\ Credit Suisse First Boston Equity Research, Natural Selection: 
DBS Should Thrive as the Fittest to Serve Rural America, at (Oct. 12, 
2001).
---------------------------------------------------------------------------
    In nearly all other areas of the country this will be, at best, a 
3-to-2 merger. As such, and particularly because it will eliminate 
EchoStar's closest competitor, it is likely that EchoStar will have the 
incentive and ability to unilaterally raise its prices, without regard 
to what the cable company may do. Also, with an MVPD duopoly 
established, it will be much more likely that EchoStar and the cable 
incumbents will be able to coordinate their pricing behavior.
    Broadcasters, as local program suppliers, will suffer from this 
elimination of competition. The competitive rivalry between these two 
companies has spurred technological innovation that has expanded the 
capacity to provide local-to-local service on a cost-efficient basis. A 
monopoly EchoStar will have much less incentive to innovate and add 
local stations. The EchoStar and DIRECTV unenforceable ``promise'' to 
add all 210 DMAs over some undetermined period of time if the merger is 
approved (while reserving the right to continue a vicious form of 
discrimination against many stations) in no way alters NAB's opposition 
to the merger. Given the track record of the competition between these 
companies, the advancements in satellite technology, and the 
considerable disparity between EchoStar's promises and its performance 
when left to its own devices, the NAB believes that more markets are 
likely to be carried as a result of competition than if they are at the 
mercy of an EchoStar monopoly. The Carmel Group subscription-TV analyst 
Jimmy Schaeffler agrees: ``Consumers today probably have a greater 
chance of getting all 210 [markets], and getting them sooner, if the 
deal does not go through. This is one of the better examples of the 
real value of the existing competition between DIRECTV and EchoStar in 
today's satellite industry.'' \5\ In addition, local broadcasters will 
be harmed by the reduction in the number of gatekeepers--cable and 
DBS--for local station programming.
---------------------------------------------------------------------------
    \5\ Multichannel News, DBS Politics is Local, Ted Hearn (Mar. 4, 
2002).
---------------------------------------------------------------------------
    Because of the strong likelihood that a 2-to-1 or 3-to-2 merger 
creating highly concentrated markets will result in higher consumer 
prices and reduced output, such mergers are universally condemned. Such 
mergers fail to win approval even when (unlike here) they may offer 
large efficiency gains, as the U.S. Court of Appeals recently ruled in 
FTC v. H.J. Heinz Co., 246 F.3d 708 (D.C. Cir. 2001). Here, the parties 
claim efficiencies would result through the elimination of duplicate 
carriage, principally of local broadcast stations. However, the claimed 
efficiencies fall far short of the ``extraordinary efficiencies'' 
required for a merger in a concentrated industry.
    To be cognizable, an efficiency must be merger-specific, i.e., 
achievable only through the merger. In this case, to the contrary, as 
the Declaration of Richard Gould shows, based on DIRECTV's and 
EchoStar's own Engineering Statement each party individually easily 
could offer all local stations in all 210 DMAs.\6\ And in any event, 
the parties could eliminate duplication by entering into a joint 
venture agreement regarding as much programming as they find 
efficient--without the anticompetitive consequences of the merger.
---------------------------------------------------------------------------
    \6\ Declaration of Richard G. Gould para. 3(c) (``Gould Decl.'') 
(Filed as Appendix C to NAB's Petition to Deny in CS Docket No. 01-348, 
February 4, 2002).
---------------------------------------------------------------------------
    Finally, recognizing that the merger would adversely impact 
consumers in non-cabled areas (but ignoring the anticompetitive impact 
elsewhere), EchoStar has proposed to offer a uniform national price, 
presumably to be enforced by the Commission and/or Department of 
Justice. Such a national pricing plan would be a giant step backward 
from the goals of the Telecommunications Act of 1996 to promote 
competition and eliminate regulation. Further, it simply would not work 
because there are many more dimensions to competition than a simple 
national monthly fee: prices for equipment and installation, customer 
service levels, investments in new local-to-local markets, and the 
like. And even as to price, Mr. Ergen himself admits that EchoStar 
would respond to specialized local pricing by cable operators.\7\
---------------------------------------------------------------------------
    \7\ Ergen Makes His Case, Satellite Bus. News, Dec. 31, 2001 at 11 
(``Ergen'').
---------------------------------------------------------------------------
    For these reasons, a national programming price fix will not work. 
But if it did work, it would harm, not benefit, competition. The 
uniform national price would be a duopoly price, not a competitive 
price, and would exacerbate the oligopolistic nature of the market.
    In addition to the merger's adverse effects in video markets, it 
will have a similar anticompetitive effect in the satellite broadband 
market. Many millions of consumers who are not passed by an upgraded 
(or any) cable system, and who live too far from telephone company 
central offices to have Digital Subscriber Line (``DSL'') service 
available, are totally dependent on DBS for high-speed Internet access. 
Both EchoStar and DIRECTV offer such service today. The merger would 
eliminate this competition, and without any serious claim of an 
efficiency benefit: since each customer needs his or her own dedicated 
broadband transmissions, there is no serious ``avoidance of 
duplication'' argument in the first place.
    For all these reasons, NAB strongly opposes the proposed merger 
between EchoStar and DIRECTV.

 II. ECHOSTAR'S TRACK RECORD WITH LOCAL STATIONS: A CONSISTENT PATTERN 
                        OF ABUSE AND LAWLESSNESS

    In every aspect of their dealings with local TV stations, EchoStar 
has shown a shameful disrespect for obedience to law. Since EchoStar 
has been perfectly willing to openly defy actual statutory mandates in 
their dealings with local TV stations, there is little doubt that they 
will readily walk away from vague assurances it may make today to 
obtain government blessing for a merger to DBS monopoly.

  A. ECHOSTAR'S AND DIRECTV'S ABUSE OF THE DISTANT-SIGNAL COMPULSORY 
                    LICENSE: ``CATCH ME IF YOU CAN''

    In 1988, with an extension in 1994, Congress created a special 
compulsory license in the Copyright Act to allow satellite carriers to 
retransmit distant ABC, CBS, Fox, and NBC stations--but only to the 
tiny fraction of households that are ``unserved'' by local broadcast 
stations. 17 U.S.C. Sec. 19. This statute is called the ``Satellite 
Home Viewer Act,'' or ``SHVA.''
    When DIRECTV went into business in 1994, and when EchoStar did so 
in 1996, they immediately began abusing this narrow compulsory license 
by using it to illegally deliver distant ABC, CBS, Fox, and NBC 
stations to ineligible subscribers. In essence, the DBS companies 
pretended that a narrow license that could legally be used only with 
remote rural viewers was in fact a blanket license to deliver distant 
network stations to viewers in cities and suburbs.\8\
---------------------------------------------------------------------------
    \8\ For the first few years of this exercise in lawbreaking, 
DIRECTV and EchoStar hid behind a small, foreign-owned company called 
PrimeTime 24. See CBS Broadcasting Inc. v. PrimeTime 24, 48 F. Supp. 2d 
1342, 1348 (S.D.Fla. 1998) (``PrimeTime 24 sells its service through 
distributors, such as DIRECTV and EchoStar . . . [M]ost of PrimeTime's 
growth is through customer sales to owners of small dishes who purchase 
programming from packagers such as DIRECTV or EchoStar.''). Starting in 
1998 (for EchoStar) and 1999 (for DIRECTV), the two companies fired 
PrimeTime 24 in an effort to dodge court orders to obey the Copyright 
Act.
---------------------------------------------------------------------------
    As a result of EchoStar's and DirecTV's lawbreaking, viewers in 
markets such as Meridian, Mississippi, Lafayette, Louisiana, Traverse 
City, Michigan, Santa Barbara, California, Springfield, Massachusetts, 
Peoria, Illinois, and Lima, Ohio were watching their favorite network 
shows not from their local stations but from stations in distant cities 
such as New York. Since local viewers are the lifeblood of local 
stations, EchoStar's and DirecTV's copyright infringements were a 
direct assault on free, over-the-air local television.
    When broadcasters complained about this flagrant lawbreaking, the 
satellite industry effectively said: if you want me to obey the law, 
you're going to have to sue me. Broadcasters were finally forced to do 
just that, starting in 1996, when they sued the vendor (PrimeTime 24) 
that both DirecTV and EchoStar used as their supplier of distant 
signals. But even a lawsuit for copyright infringement was not enough 
to get the DBS firms to obey the law: both EchoStar and DirecTV decided 
that they would continue delivering distant stations illegally until 
the moment a court ordered them to stop.
    The courts immediately recognized--and condemned--the satellite 
industry's lawbreaking. See, e.g., CBS Broadcasting Inc. v. PrimeTime 
24, 9 F. Supp. 2d 1333 (S.D. Fla. 1998) (entering preliminary 
injunction against DirecTV's and EchoStar's distributor, PrimeTime 24); 
CBS Broadcasting Inc. v. PrimeTime 24 Joint Venture, 48 F. Supp. 2d 
1342 (S.D. Fla. 1998) (permanent injunction); CBS Broadcasting Inc. v. 
DIRECTV, Inc., No. 99-0565-CIV-NESBITT (S.D. Fla. Sept. 17, 1999) 
(permanent injunction after entry of contested preliminary injunction); 
ABC, Inc. v. PrimeTime 24, 184 F.3d 348 (4th Cir. 1999) (affirming 
issuance of permanent injunction).
    By the time the courts began putting a halt to this lawlessness, 
however, satellite carriers were delivering distant ABC, CBS, Fox, and 
NBC stations to millions and millions of subscribers, the vast majority 
of whom were ineligible city and suburban households. See CBS 
Broadcasting, 9 F. Supp. 2d 1333.
    By getting so many subscribers accustomed to an illegal service, 
DirecTV and EchoStar put both the courts and Congress in a terrible 
box: putting a complete stop to the DBS firms' lawbreaking meant 
irritating millions of consumers. Any member of Congress who was around 
in 1999 will remember the storm of protest that DirecTV and EchoStar 
stirred up from the subscribers they had illegally signed up for 
distant network stations.
    While Congress properly refused to grandfather all of the illegal 
subscribers signed up by DirecTV and EchoStar, the two firms ultimately 
profited from their own wrongdoing when Congress--having heard an 
earful of consumer complaints--enacted legislation in late 1999 
providing for limited grandfathering.
          * * * * * * *
    Not only did EchoStar and DirecTV ignore the plain requirements of 
the Copyright Act for years, but also when courts finally ordered their 
vendor (and them) to stop breaking the law, they took further evasive 
action to enable them to continue their lawbreaking.\9\ In particular, 
when their vendor (PrimeTime 24) was ordered to stop breaking the law, 
and to ensure that its partners (such as DirecTV and EchoStar) stopped 
doing so, both DBS firms fired their supplier in an effort to continue 
their lawbreaking.
---------------------------------------------------------------------------
    \9\ A Federal Court has ruled that EchoStar unlawfully breached its 
contract with PrimeTime 24. See PrimeTime 24 Joint Venture v. EchoStar 
Communications Corp., 2002 WL 44133 (So. Dist. NY, Jan. 11, 2002).
---------------------------------------------------------------------------
    When DirecTV tried this in February 1999, a United States District 
Judge held in open court that DirecTV's claims were ``a little 
disingenuous'' and promptly squelched its scheme. CBS Broadcasting Inc. 
et al v. DirecTV, No. 99-565-CIV-Nesbitt (S.D. Fla. Feb. 25, 1999); see 
id. (S.D. Fla. Sept. 17, 1999) (stipulated permanent injunction).
    EchoStar has played the game of ``catch me if you can'' with 
greater success. Thanks to a series of stalling tactics in court, 
EchoStar is continuing today to serve large numbers of illegal 
subscribers. Realizing that broadcasters were about to sue it in 
Florida, for example, in October 1998 EchoStar filed a declaratory 
judgment action in its home district--Colorado--against ABC, CBS, Fox, 
NBC, and their Affiliate Associations. The District Court in Colorado 
(Judge Nottingham) granted broadcasters' request to transfer EchoStar's 
lawsuit to Florida, finding that EchoStar had engaged in ``flagrant 
forum-shopping.'' Hearing Transcript, EchoStar Communications Corp. v. 
CBS Broadcasting Inc. (D. Colo. Mar. 24, 1999).
    Although EchoStar's stalling techniques have thus far kept it from 
being subject to any long-term court order to stop its infringements, 
there is no doubt that EchoStar is continuing to break the law. When 
EchoStar was (briefly) ordered to start turning off its illegal 
subscribers in late 2000, for example, it candidly told the Court that 
it had so many illegal subscribers that it would take a long, long time 
to turn them all off, even if it turned off 5,000 subscribers per 
day.\10\
---------------------------------------------------------------------------
    \10\ Declaration of Mark Jackson, Senior Vice President, EchoStar 
Technologies, para.para. 17, 19, 20, 21 (executed Oct. 11, 2000) 
(``Jackson Decl.'') (claiming that EchoStar can only terminate 6,000 to 
10, 000'' per day); Declaration of James DeFranco, Executive Vice 
President and Director for EchoStar Communications Corp. (executed Oct. 
11, 2000) (``DeFranco Decl.'') at para.para. 18-21 (describing 
EchoStar's proposed time frame and alleged need for lengthy period for 
shut off process).
---------------------------------------------------------------------------
 B. THE SATELLITE CARRIERS' BREACH OF FAITH WITH CONGRESS ON THE LOCAL-
                      TO-LOCAL COMPULSORY LICENSE

    Starting in 1997, EchoStar began urging Congress to enact a new 
compulsory license that would allow satellite companies to carry local 
TV stations to local viewers without paying any copyright fees. DirecTV 
joined in the call for such a law in 1999.
    In December 1999, Congress granted the DBS companies' wish in the 
Satellite Home Viewer Act of 1999 (``SHVIA''): it gave them carte 
blanche to deliver any TV station within its own market, without paying 
a penny in copyright fees to the owners of the programming carried on 
the station. Congress wanted to make sure, however, that the new 
compulsory license would not harm other stations in the market by 
putting a barrier--the DBS firm--between non-carried stations and many 
of their viewers.
    Congress therefore told EchoStar and DirecTV in the SHVIA that if 
they wished to use this special new license, they would need--starting 
in 2002--to carry all of the stations in each market. This simple and 
equitable principle is called ``carry one, carry all.''
    The DBS firms happily accepted the gift that Congress had given 
them--a local-to-local compulsory license. Thanks to that congressional 
largesse, the DBS firms have grown at a blistering pace since then: 
DirecTV has expanded from 7.86 million subscribers in November 1999 to 
10.3 million today, while EchoStar has grown even more explosively, 
from 3.25 million in November 1999 to 6.43 million today.
    The DBS industry made no secret of the fact that its phenomenal 
post-SHVIA growth has been largely the result of Congress' decision to 
make it easy for them to carry local TV stations. The Satellite 
Broadcasting & Communications Association, for example, said that the 
industry's ``40% subscriber addition growth in 2000 is primarily the 
result of legislation passed in November 1999 allowing the DBS 
operators to offer local broadcast channels in markets of their 
choice.' '' \11\
---------------------------------------------------------------------------
    \1\ SBCA Comments, In Re Annual Assessment of the Status of 
Competition in the Market for the Delivery of Video Programming, CS 
Docket No. 00-132 (filed July 2000) (quoting Industry analyst).
---------------------------------------------------------------------------
    How did EchoStar and DirecTV show their gratitude for this 
extraordinary gift? By brazenly seeking to defeat the will of Congress.
    Only a few months after the SHVIA went into effect, EchoStar, 
DirecTV, and SBCA filed a lawsuit demanding that the Court invalidate 
the ``carry one, carry all'' principle, on the theory that Congress' 
generous (and lucrative) gift to the DBS industry somehow had to be 
even more generous to satisfy the First Amendment.
    In effect, the DBS firms demanded that the court rewrite the SHVIA 
to give them a sweet deal that Congress had emphatically refused them: 
the ability to use the programming of local TV stations with no 
copyright fees whatsoever, combined with a free hand to cherry pick a 
few stations while effectively cutting all other local stations off 
from DBS households. (Just two weeks ago, EchoStar and DirecTV filed an 
emergency motion asking the Court to stay the January 1, 2002 effective 
date of the SHVIA carry-one-carry-all provisions.)
    Luckily, the courts have thus far brushed aside the satellite 
industry's intense effort to thwart Congress' will. But the lesson is 
clear: Congress (and the administration) would be foolish to approve a 
merger to DBS monopoly based on vague promises about future benefits. 
EchoStar and DirecTV's track record shows that they are perfectly 
willing to take a government-granted benefit--here, permission to merge 
to DBS monopoly--and then use every available tactic to unravel the 
terms on which the government granted the benefit.

C. THE SATELLITE CARRIERS' RELENTLESS GUERRILLA WARFARE AGAINST ``CARRY 
                           ONE, CARRY ALL.''

    EchoStar and DirecTV have not only attacked the principle of 
``carry one, carry all'' on a wholesale basis in the courts, but have 
sought to sabotage it in their ``retail'' dealings with local stations 
requesting carriage. When local stations sent requests to EchoStar in 
the summer of 2001 asking for carriage, for example, EchoStar sent back 
crude form letters offering nonsense reasons for rejecting most 
stations, such as absurd claims that the stations didn't list the city 
in which they are licensed or that TV towers a few miles away did not 
provide a strong enough signal.
    On its own initiative, the FCC sharply criticized EchoStar form-
rejection-letter tactic for failing to ``comply with the rule or the 
Report and Order.'' In re Implementation of the Satellite Home Viewer 
Improvement Act of 1999: Broadcast Signal Carriage Issues, CS Docket 
No. 00-96, para. 59, 16 FCC Rcd 1918 (Sept. 5, 2001).
    EchoStar's recalcitrance has continued since then: many station 
owners have been forced to file complaints against EchoStar at the FCC 
to enforce the carriage rights that Congress granted them. See 
EchoStar, DirecTV Turn Down Dozens Of Requests For Carriage, 
Communications Daily (Oct. 19, 2001). Indeed, as press reports reflect, 
the FCC has been ``inundated'' by an ``avalanche'' of complaints that 
broadcasters were forced to file after being turned away by EchoStar, 
DirecTV, or both. Id.

 D. ECHOSTAR'S BRAZEN DECISION TO DEFY CONGRESS AND THE FCC BY PLACING 
              DISFAVORED STATIONS IN ``SATELLITE SIBERIA''

    EchoStar and DirecTV have twice asked the FCC to rule that 
satellite companies can ``satisfy'' the carry-one-carry-all rules by 
relegating disfavored stations to an out-of-the-way satellite that 
viewers could receive only if they purchased an additional dish. In 
response, the Commission has twice emphatically rejected that proposal. 
See In Re Implementation of the Satellite Home Viewer Improvement Act 
of 1999: Broadcast Signal Carriage Issues, para.para. 37-41, CS Dkt. 
No. 00-96 (released Sept. 5, 2001) (discussing initial rejection of DBS 
proposal and reaffirming prior rejection).
    In an extraordinary slap in the face to Congress and to the FCC, 
EchoStar has decided to do exactly what the Commission had twice said 
would be unacceptable: purporting to ``satisfy'' its carry-one-carry-
all obligations by putting disfavored stations on a completely 
different satellite that requires viewers to obtain new equipment. 
Specifically, in late December, EchoStar announced that many stations 
that it was required (starting on January 1, 2002) to offer on a local-
to-local basis would be available only to the tiny fraction of 
subscribers who obtained a second satellite dish capable of receiving 
signals from EchoStar's ``wing slot'' satellites located far over the 
Atlantic or the Pacific. NAB has been forced to file an emergency 
petition with the FCC to halt this outrageous practice, and innumerable 
broadcasters have filed protests with the Commission about it. (Among 
other things, EchoStar has rendered virtually all local Spanish-
language, minority-owned, and religious stations inaccessible to 
viewers by segregating them on its wing-slot satellites.)
    EchoStar has extensive experience with consumer reactions to 
obtaining local stations from a second satellite dish--and it knows 
that consumers view a second dish as posing unacceptable costs, even if 
EchoStar supposedly offers to install the second dish ``for free.''\12\ 
Indeed, EchoStar has previously told the Commission exactly that.
---------------------------------------------------------------------------
    \12\ EchoStar's pretense is that its discriminatory treatment of 
some local stations is justified because it supposedly offers to 
install a second dish ``for free.'' Even if EchoStar in fact made that 
offer in good faith, it would not remotely solve the problem, because 
it would not address the inconvenience, hassles, and aesthetic 
undesirability of the two-dish approach. But in reality, EchoStar has 
shown utter bad faith with regard to this ``free offer.'' Among other 
things, (1) EchoStar's web site contains no mention of the supposed 
free offer, (2) as EchoStar itself has boasted, the letter to consumers 
announcing the ``offer'' buried it in a footnote--which is likely to be 
read by few and understood by fewer, (3) EchoStar has decided to end 
its ``free offer'' on March 31, 2002, long before most subscribers will 
even be aware of it. All of this is set forth in detail in NAB's 
filings with the FCC in Docket No. 00-96.
---------------------------------------------------------------------------
    The pertinent background is as follows: from early 1998 until some 
time in 1999, and before the enactment of the SHVIA, EchoStar offered 
local-to-local transmissions of certain local stations (typically the 
major network stations) to subscribers in several markets.\13\ At that 
time, all of the local stations that EchoStar offered were offered as a 
package, but--because the package was offered from a ``wing slot'' 
satellite--it required use of a second dish. In at least some cities, 
EchoStar offered second dishes for free--just as it purports to be 
doing now--except that it actually announced its free offer, rather 
than trying to keep it a secret.\14\
---------------------------------------------------------------------------
    \13\ EchoStar Press Release, DISH Network is the Only One! 
EchoStar's DBS Service the First and Only to Guarantee Local Channels 
(Jan. 8, 1998).
    \14\ EchoStar Press Release, EchoStar DISH Network Launches DISH 
NETS Local Channels in Pittsburgh--EchoStar Offers Customers Free 
Second Dish For Local Channel Access (Sept. 15, 1998) (emphasis added), 
www.web.archive.org/web/19991008075007 /www.dishetwork.com/profil/
press/press/press139.htm .
---------------------------------------------------------------------------
    EchoStar ultimately abandoned the two-dish method of offering local 
stations. Before it did so, however, EchoStar candidly admitted to the 
Commission that, even under ideal conditions--with a free dish, and 
with the entire local station package (as opposed to just a few 
stations) being offered on a second dish--the two-dish option 
encountered ``substantial consumer resistance,'' was ``unfortunate[],'' 
and ``not an attractive alternative":

        EchoStar has had to offer a two-dish solution to complement its 
        full-CONUS offering with services from its satellites at 
        61.5+ W.L. and 148+ W.L. . . . EchoStar 
        has encountered substantial consumer resistance to the 
        perceived difficulties of installing and maintaining second 
        dishes. . . . [citation omitted] (``As a 'second-best' solution 
        to this problem of orbital scarcity, EchoStar has been offering 
        limited local-into-local service through the use of half-CONUS 
        satellite capacity. This requires the use of multiple dishes, 
        and will thereby be more difficult to market as a convenient 
        alternative to cable.''); [citation omitted] (``EchoStar 
        currently offers local programming through its satellites at 
        61.5+ W.L. and 148+ W.L. This arrangement 
        unfortunately, requires customers to install a second dish in 
        order to receive local programming. While some customers have 
        embraced the two-dish system, others have found it to be 
        cumbersome and difficult, despite EchoStar's offer to install 
        the second dish free of charge. To date, the two dish solution 
        has not proven to be a particularly attractive alternative to 
        cable.'') (citations omitted.)
        [EchoStar] Petition to Deny, In Re Tempo Satellite, Inc., File 
        No. SAT-ASB-19990127-00014 at 3 n.4 (filed March 5, 1999) (copy 
        attached as Appendix A) (emphasis added).
    Despite all this, at the FCC right now, EchoStar is aggressively 
defending its ``right'' to discriminate against local stations that it 
does not like by placing them in second-dish Siberia. And as discussed 
below, EchoStar is reserving the right to fulfill its ``210-market'' 
promise in this same, grossly discriminatory manner--which makes a 
mockery of the carry-one-carry-all principle that Congress embodied in 
the SHVIA. Given this duplicity, it would be irresponsible to treat 
EchoStar's eleventh-hour ``210-market'' promise as though it had any 
real-world meaning.

      E. ECHOSTAR'S ``ABUSE OF THE COMMISSION'S PROCESSES'' ABOUT 
                         RETRANSMISSION CONSENT

    EchoStar has brought the same abusive approach to the arena of 
retransmission consent--the process by which DBS firms obtain 
permission from those local stations that the DBS firms do wish to 
carry. EchoStar's approach has been simple: if it is unable to make a 
retransmission consent deal with a station, it automatically--as 
punishment--files an FCC complaint alleging that the station had failed 
to bargain in good faith.
    One broadcaster victimized by this practice was Young Broadcasting, 
Inc., which owns local TV stations in several markets. On August 2, 
2001, the FCC's Cable Services Bureau rejected EchoStar's 
retransmission consent complaint against Young Broadcasting as 
unfounded. In re EchoStar Satellite Corp. v. Young Broadcasting, Inc., 
File No. CSR-5655-C, para. 32, at 15 (Aug. 6, 2001). Not only did the 
Commission reject EchoStar's complaint, but the FCC Bureau found that 
EchoStar had engaged in misconduct that the Bureau could not 
``excuse.'' The FCC Bureau chastised EchoStar for ``abuse of process'' 
and cautioned EchoStar ``to take greater care with regard to future 
filings'' (id. at 16), finding further that ``EchoStar failed in its 
duty of candor to the Commission'' by publicly disclosing portions of 
the documents for which it sought strict confidentiality in Commission 
proceedings. (Emphasis added.)
    The FCC's Bureau held that ``EchoStar's conduct in filing material 
with the Commission requesting confidentiality, while concurrently 
engaging in a public debate over the issues raised in this proceeding 
and publicly disclosing selected portions of the alleged confidential 
material, constitutes an abuse of the Commission's processes.'' Id. 
(emphasis added).
    Again, the lesson is clear: it would be foolish to expect a 
monopoly DBS firm to obey the law and comply with legal processes when 
the company that would own the monopoly firm (EchoStar) has never done 
so in the past.

           III. BROADCASTER CONCERNS WITH THE PROPOSED MERGER
                         LOCAL-TO-LOCAL SERVICE

1. EchoStar's ``promise'' to provide local-to-local service in all 210 
        markets does not resolve NAB's concerns
    Perhaps the most perceptive comment about EchoStar's 11th-hour 
promise to offer local-to-local in all 210 markets has been made by Bob 
Shearman, the editor of a leading trade publication about the satellite 
industry: EchoStar's announcement is ``a very shrewd political Hail 
Mary with no downside because it's unenforceable.''
    In one sense, EchoStar's new ``Hail Mary'' promise is no surprise--
as the NAB has always maintained, either company individually has the 
capacity to serve all 210 markets, and the combined company would 
obviously have the ability to do so. But what is notable is the 
lightning speed with which EchoStar has reversed field: as of December 
2001, EchoStar told the FCC that the combined firm could serve only 100 
markets, but now--facing the prospect that its merger to DBS monopoly 
will be rejected by the authorities--it has suddenly ``found'' 
sufficient capacity.\15\
---------------------------------------------------------------------------
    \15\ Notably, the two companies have also admitted that before the 
merger announcement, DIRECTV had already planned to launch spot-beam 
satellites that would be able to serve 103 markets--in other words, 
that their December 2001 ``promise'' of 100 markets was actually 
offering nothing beyond what DIRECTV by itself was already planning to 
be able to do.
---------------------------------------------------------------------------
    So what, if anything, has changed with Mr. Ergen's latest move? We 
now have a paper ``commitment'' from Charlie Ergen that after EchoStar 
has gotten what it wants--the opportunity to swallow its competitor and 
become a DBS monopolist--and after it is much too late to undo the 
merger, New EchoStar will supposedly offer local-to-local in all 210 
markets.
    Does it make sense to place any faith in this ``promise''? The 
carefully hedged manner in which EchoStar has made this 
``commitment''--and broadcasters' consistent bitter experience with 
EchoStar's bad faith maneuvering in the past--shows that it does not.
    First, the ``210 markets'' promise is nothing more--only a promise. 
It is not a legally enforceable obligation--and even if it were, 
EchoStar has shown that it will exploit every conceivable mechanism to 
avoid complying with legal obligations that it considers inconvenient 
at the moment. Since EchoStar is perfectly willing to defy federal 
statutes and regulations, there is no reason to expect it to live up to 
a mere unilateral promise, particularly when EchoStar will have 
achieved the benefit (merger approval) that it sought to achieve by 
making that promise.
    Second, EchoStar has carefully avoided making any commitment about 
when it will offer local-to-local service in all markets. All of its 
new FCC filings contain ambiguous phrases like ``as soon as two years 
after approval''--words intended to give it all the wiggle room it 
needs to delay providing local-to-local in smaller markets for as long 
as the monopoly DBS firm likes, which may be a long, long time.
    Third, and perhaps most significant of all, EchoStar is reserving 
the right to segregate some local stations on ''wing-slot'' satellites 
that can only be viewed if the subscriber obtains a second satellite 
dish. As discussed below, this tactic completely guts the carry-one-
carry-all rule that Congress embodied in the SHVIA--and EchoStar is 
aggressively defending its right to use this statute-destroying 
technique as part of its ``210-market'' promise.
    A careful reading of the DBS firms' latest FCC filing reveals 
classic EchoStar game playing. Early in the filing--in the part that 
EchoStar expects to be widely read--EchoStar tries to create the 
impression that it will make all local stations in all markets 
available to customers with ``one consumer-friendly mini-dish.'' \16\ 
Far back in EchoStar's filing, however, the truth comes out: EchoStar 
tells the Commission that it ``should reject attempts . . . to impose a 
special condition on the combined company that it carry all its 'must-
carry' stations so that they are received on the same dish.'' \17\ That 
is, EchoStar insists on being able to carry out its ``210-market'' 
promise in a manner that--as discussed in detail above--makes the 
promise meaningless.
---------------------------------------------------------------------------
    \16\ See EchoStar's Opposition to Petitions to Deny and Reply 
Comments, CS Docket No. 01-348 (filed Feb. 25, 2002), at 4.
    \17\ Id. at 140.
---------------------------------------------------------------------------
    To sum up: EchoStar has now made an unenforceable promise to carry 
the local television stations in all markets at some indefinite time in 
the future, and with the threat to render many local stations 
effectively unviewable by stranding them on satellites that require 
consumers to install a second satellite dish. Given the emptiness of 
this ``promise''--and the many other fatal problems with the merger 
that this promise does not purport to address--NAB remains opposed to 
the merger.

2. Capacity for local-to-local without the merger is not an issue.
    Each firm individually could easily do what the two firms say they 
would do as a DBS monopoly--namely, provide local-to-local service in 
all 210 TV markets. A merger is not necessary to produce such a result 
because currently each provider strives to ``leapfrog'' the other in 
offering new service to different markets. With a merger, this 
incentive disappears. If the merger does not occur, for example, 
EchoStar will be deeply concerned about the increasingly large number 
of markets that DIRECTV does--but EchoStar does not--serve with local-
to-local, and will surely take prompt and aggressive countermeasures as 
it has in the past. It is precisely this competitive ``fear'' that has 
led to the current level of local-to-local service.\18\
---------------------------------------------------------------------------
    \18\ DIRECTV Press Release, DIRECTV to Launch Local Channels in 10 
New Markets This Year--Local Channels will be available in 51 Markets 
Representing more than 67 percent of U.S.TV Households (Jan. 8, 2002).
---------------------------------------------------------------------------
(a) Local-To-Local Service In Remaining Markets Will Require Far Less 
        Capacity
    At the outset, we note that, for a reason not discussed by the 
applicants, future local-to-local deployments will be easier in one 
critical respect than past rollouts. The reason is simple: the markets 
the two firms are already serving are the largest markets in the 
country, which have the greatest number of local TV stations. For 
example, stations in the top 50 markets have an average of 12 stations 
per market (598 eligible stations in 50 markets), while stations in the 
next 50 markets have only an average of eight eligible stations per 
market (393 eligible stations in 50 markets).\19\ With the same amount 
of channel capacity, therefore, the DBS firms will be able to serve 
significantly more small markets than large markets.
---------------------------------------------------------------------------
    \19\ In the carriage lawsuit in the Eastern District of Virginia, 
the FCC's expert witness, Dr. Jeffrey Rohlfs, provided a detailed 
spreadsheet showing the number of eligible stations in each market as 
well as a running total of the cumulative number of eligible stations. 
See Declaratin of Jeffrey H. Rohlfs, Satellite Broadcasting & 
Communications Ass'n of Am. v. FCC, No. 00-1571-A (E.D. Va. 2001).
---------------------------------------------------------------------------
(b) The EchoStar/DIRECTV Joint Engineering Statement Shows That Each 
        Firm Could Separately Provide Local-To-Local In All Markets
    The Joint Engineering Statement of EchoStar Communications 
Corporation and Hughes Electronics Corporation, Attachment B to the 
parties' Consolidated Application for Authority to Transfer Control 
filed with the Federal Communications Commission on December 3, 2001 
(``Joint Engineering Statement'') confirms that DIRECTV and EchoStar 
today have more than enough high-power, Ku-band CONUS capacity to offer 
all local television stations in all markets via satellite.
    As the Joint Engineering Statement explains (at 6), DIRECTV has 
already found a way to design a spot-beam satellite that reuses the 
same frequency an average of 7.33 times when retransmitting local TV 
stations. And both companies acknowledge that they expect to be able to 
compress 12 channels into each frequency while maintaining acceptable 
picture quality. Id. at 13. These two statistics, both of which come 
from the applicants themselves, mean that each company--using its 46 
(for DIRECTV) or 50 (for EchoStar) CONUS Ku-band frequencies--could 
carry all of the eligible local television stations in all 210 U.S. 
markets, and also carry all of its existing national programming, with 
ample room to offer still more.\20\ And by taking advantage of readily 
available technological advances, each company will be able in the 
future to greatly expand its ability to deliver even more television 
programming.\21\
---------------------------------------------------------------------------
    \20\ See Gould Decl. at 9-11.
    \21\ Id. 11-15.
---------------------------------------------------------------------------
(c) Satellite Capacity Is Constantly Increasing Through Technological 
        Innovation
    Although the analysis above shows that the two firms individually 
have ample capacity to deliver local-to-local in all 210 markets, that 
analysis is only the beginning of the story, because ``satellite 
capacity'' is not fixed and finite but elastic and expanding, thanks to 
the relentless ingenuity of engineers and business people.
    NAB's satellite engineering expert, Richard Gould, provides 
valuable perspective on this point. As Mr. Gould explains: ``I have 
worked in the field of satellite engineering since the 1960s. At every 
point during that period, scientists and engineers have been finding 
ways to use satellites more efficiently and intelligently than in the 
past. In this respect, the satellite industry is like the computer 
industry: past performance records are constantly being shattered as 
engineers design better and better hardware and software.'' \22\
---------------------------------------------------------------------------
    \22\ Id. at 17.
---------------------------------------------------------------------------
    Indeed, the Commission should hear a familiar ring to the 
protestations of the satellite industry that present and future 
capacity constraints will forever limit their ability to expand 
carriage of local television stations. In its decade-long fight against 
carriage of local stations, the cable industry made the same factual 
claims. In 1992, Congress soundly and correctly rejected these self-
serving predictions. In doing so, Congress made logical and reasonable 
predictions that cable's expanding capacity would virtually eliminate 
what were already minimal capacity issues with the carriage of local 
stations. In Turner, the Supreme Court found these predictions 
eminently reasonable, and as history as shown, they were correct.\23\ 
The DBS industry's current effort to contend that technological 
progress has come to an end are no more credible. Consider the 
following points, which show that the alleged benefit--increased 
capacity--is not merger-specific, since it will be achieved through 
technical innovation in any event.
---------------------------------------------------------------------------
    \23\ Turner Broadcasting Sys. v. Fcc 512 U.S. 622 (1994).
---------------------------------------------------------------------------
(1) Spot Beams
    EchoStar and DIRECTV have each embarked on launching two satellites 
fitted with spot beams to enhance their ability to offer local-to-local 
service. These satellites will enable DIRECTV and EchoStar to deliver 
far more local stations than could be retransmitted with CONUS 
satellites--and illustrate how engineering ingenuity stimulated by 
competition creates new ``capacity'' where it did not exist before.
    The Joint Engineering Statement filed by EchoStar and DIRECTV also 
shows that engineering techniques evolve over time, and how engineers--
in the spirit of rivalry--do better when they compete with each other. 
As discussed above, one of the critical factors that determines how 
much capacity can be created by using spot beams is how many times a 
single frequency is reused in different parts of the country. On this 
score, the Joint Engineering Statement shows that DIRECTV (or its 
contractors) have, at least in the first round, been much more 
successful than EchoStar (or its contractors): DIRECTV achieved a reuse 
rate of 7.33 with its first spot-beam satellite \24\--which is almost 
50 percent higher than the 5.0 reuse rate that EchoStar originally 
planned to achieve with its two spot-beam satellites.\25\ If the two 
firms continue to compete with each other--as they should--their 
engineers will surely continue to play the game of ``can you top 
this,'' to the benefit both of themselves and the public.
---------------------------------------------------------------------------
    \24\ See Joint Engineering Statement (attached to Consolidated 
Application) at 6. (hereinafter ``Eng. Statement'').
    \25\ Id.
---------------------------------------------------------------------------
(2) Dishes Capable Of Receiving Signals From Two Or Three Orbital 
        Locations
    In addition to use of spot beams, many other techniques are 
available to enable DBS firms to expand their capacity to deliver local 
stations (or other programming). For example, although satellite dishes 
have traditionally been ``pointed'' at only a single orbital location, 
both DIRECTV and EchoStar today offer a single dish that can receive 
signals from two or even three different orbital locations 
(101+ W.L, 110+ W.L, and 119+ W.L). 
Simply through use of a single dish that points to multiple satellites, 
consumers can receive far more programming than with the single-
satellite dishes that were the only option until recently.
    A few years ago, multi-satellite DBS dishes were unknown, and the 
prospect of ``doubling or tripling satellite capacity'' through their 
use was hard to imagine. Today, for one of the two DBS firms, multi-
satellite dishes are ubiquitous: EchoStar states that ``[a]pproximately 
80 percent of [its] subscribers currently have antenna dishes capable 
of viewing programming from both the 110+ W.L. and 
119+ W.L. orbital locations.'' \26\
---------------------------------------------------------------------------
    \26\ Eng. Statement at 5.
---------------------------------------------------------------------------
(3) Compression Techniques With Existing Equipment
    DIRECTV and EchoStar admit that their ability to squeeze more 
programming onto the same number of frequencies has essentially doubled 
over the past few years.\27\ Although the two firms say that they 
expect to achieve a 12:1 compression ratio with existing hardware,\28\ 
their Engineering Statement, inexplicably, assumes a much too low 
compression ratio of only 10:1 when calculating how much capacity each 
firm has separately.\29\ This strange pessimism is unwarranted, for at 
least three reasons. First, DIRECTV told a court more than a year ago 
that its compression ratio even then was about 11:1, not 10:1.\30\ 
Second, both DIRECTV and EchoStar now state that they ``expect'' their 
own compression ratios to be at least 12:1.\31\ It is hard to fathom 
why the two firms do not accept their own compression figure. Third, 
the company that manufactures compression equipment for DIRECTV--a 
company called Harmonic, Inc.\32\--has stated that using the type of 
digital compression equipment it has sold to DIRECTV, the compression 
ratio is actually between 12:1 and 14:1.\33\ There is no reason to 
doubt that EchoStar could purchase the same equipment (if it has not 
already done so). And if the manufacturer of the compression equipment 
is right that a compression ratio of 14:1 is in fact achievable, that 
single change (as compared to the low 10:1 ratio that EchoStar and 
DIRECTV assume in their Engineering Statement) would give DIRECTV four 
extra channels for each of its 46 frequencies, or 184 total extra 
channels, and EchoStar four extra channels for each of its 50 
frequencies, or 200 total extra channels.
---------------------------------------------------------------------------
    \27\ Eng. Statement at 13 (``Four to five years ago, compression 
ratios of 6-08 were achievable and the future outlook using existing 
hardware is only expected to achieve ratios of about 12:1 with 
acceptable quality.'').
    \28\ Id.
    \29\ See id. at 7, 8, 14.
    \30\ Declaration Under Penalty [of] Perjury of Stephanie Campbell, 
SBCA v. FCC, No. 00-1571-A (E.D. Va. Nov. 2, 2000) (DIRECTV carried 
approximately 500 channels using its 46 frequencies, which amounts to 
about 11 channels per frequency).
    \31\ Eng. Statement at 13.
    \32\ Harmonic, Inc. Press Release, DIRECTV Signs Contract for 
Harmonic's Digital Compression Systems--DIRECTV Signs Contract for 
Harmonic's Digital Compression Systems--DIRECTV to Deploy Hundreds of 
Harmonic MV50 Encoders by Year's End May 7, 2001) (`` `Harmonic's 
technology has played an integral role in our ability to provide the 
widest offering of channels possible to more then 9.8 million DIRECTV 
customers across the U.S.,' said Dave Baylor, executive vice president, 
DIRECTV, Inc.'').
    \33\ See Gould Decl. at 6-7.
---------------------------------------------------------------------------
    When the Commission evaluates whether all progress in compression 
has come to an end--as the DBS firms imply in their Engineering 
Statement--it should consider this: even as DIRECTV has in fact doubled 
its compression ratio from around 6:1 just a few years ago to (by its 
own admission) 12:1 today, it has again and again told the Commission, 
incorrectly, that it had essentially hit a brick wall as far as any 
further progress in compression technology:

        July 31, 1998: ``DIRECTV has substantially reached current 
        limits on digital compression with respect to the capacity on 
        its existing satellites. Therefore, the addition of more 
        channels will necessitate expanding to additional satellites. . 
        . .''
        Aug. 6, 1999: ``DIRECTV has substantially reached current 
        limits on digital compression with respect to the capacity on 
        its existing satellites.''
        Sept. 8, 2000: ``DIRECTV has substantially reached current 
        technological limits on digital compression with respect to 
        capacity on its existing satellites. Although there are 
        potentially very small gains still possible through the use of 
        advanced algorithms, such technological developments can 
        neither be predicted nor relied upon as a means of increasing 
        system channel capacity.''
        Aug. 3, 2001: ``DIRECTV has offered digitally compressed 
        signals from its inception, and has substantially reached 
        current technological limits on digital compression with 
        respect to capacity on its existing satellites. Although there 
        are potentially very small gains still possible through the use 
        of advanced algorithms, such technological developments can 
        neither be predicted nor relied upon as a means of increasing 
        system channel capacity.'' \34\
---------------------------------------------------------------------------
    \34\ See, e.g.Comments of DIRECTV, Inc., [1998] Annual Assessment 
of the Status of Competition in the Markets for the Delivery of Video 
Programming, CS Docket No. 98-102, at 5 (filed July 31, 1998; Comments 
of DIRECTV, Inc. [1999] Annual Assessment of the Status of Competition 
in the Markets for the Delivery of Video Programming, CS Docket No. 99-
230, at 9 filed Aug. 6, 1999); Comments of DIRECTV, Inc. [2000] Annual 
Assessent of the Status of Competition in the Markets for the Delivery 
of Video Programming, CS Docket No. 00-132, at 16 (filed Sept. 8,2000); 
Comments of DIRECTV, Inc. [2001] Annual Assessment of the Status of 
Competition in the Markets for the Delivery of Video Programming, CS 
Docket No. 01-129, at 16 (filed AUg. 3, 2001).
---------------------------------------------------------------------------
    In other words, as DIRECTV was--no doubt in good faith--repeatedly 
telling the Commission that further progress was impossible, it (or its 
vendors) were in fact finding ways to double the number of channels 
that could be delivered with the same number of frequencies. The lesson 
here is plain: just as happened with cable, America's satellite 
engineers are constantly devising fresh ways to expand the capacity of 
satellites to deliver television programming, and it would be 
irresponsible to assume that decades of continuous improvements have 
suddenly, and inexplicably, come to an end.
(4) Expanded Channel Capacity Possible Through 8PSK With New Set-Top 
        Boxes
    Everything that DIRECTV and EchoStar say about channel capacity in 
their Engineering Statement is premised on what can be done ``using 
existing hardware'' \35\--but that limitation makes no sense. First, 
there is an enormous amount of natural turnover as consumers replace 
old set-top boxes (or buy new ones with new features, such as personal 
video recorders). Second, if the two companies wish to share 
frequencies, including through a joint venture, they will need to 
supply many if not all of their customers with new set-top boxes.
---------------------------------------------------------------------------
    \35\ Eng. Statement at 13.
---------------------------------------------------------------------------
    If consumers are provided with new set-top boxes, a powerful new 
capacity-expanding technique becomes available: so-called ``higher-
order modulation and coding'' using a technique called ``8PSK'' (or 
potentially 16PSK TCM or 16QAM), which would permit DBS firms to 
transmit substantially more channels than they do today with QPSK 
(Quaternary Phase Shift Keying) modulation. As satellite engineer 
Richard G. Gould explains, simply moving from the current standard of 
QPSK to the next standard up (8PSK), would by itself result in at least 
a 30% increase in satellite capacity. For the 50 Ku-band CONUS 
frequencies controlled by EchoStar, for example, this technical 
improvement alone would result in an increase of at least 180 channels 
(50 frequencies x 12 channels/frequency x .3). Of course, because 8PSK 
requires a new set-top box, a satellite carrier might need to phase it 
in over a period of a few years, just as driver-side air bags have 
gradually become ubiquitous in American automobiles. For example, 
satellite carriers might initially use 8PSK to offer local-to-local 
service in new cities, expecting that (a) new customers will acquire 
the 8PSK boxes in the first instance and (b) existing customers will 
acquire the 8PSK boxes over time. Alternatively, the DBS firms might 
offer customers free new set-top boxes as part of a production joint 
venture in which they achieve the ``anti-duplication'' benefits of the 
merger while continuing to compete as separate firms. In any event, it 
would be absurd to ignore this powerful and readily-available technical 
tool, which DIRECTV and EchoStar do not even mention in their 
Engineering Statement, but that would undoubtedly be used by competent 
engineers seeking to maximize satellite capacity.
(5) MPEG-4
    Finally, there is every reason to expect that the current signal 
compression technology, known as MPEG-2, will be replaced by more 
advanced technologies, such as MPEG-4 (and no doubt future generations 
thereafter). With higher compression ratios in the future, the number 
of TV channels that can be supported on a single frequency will 
increase beyond the assumptions set forth above.\36\
---------------------------------------------------------------------------
    \36\ See Gould Decl. at 14.
---------------------------------------------------------------------------
          * * * * * * *
    Just as anyone who bought a personal computer in 1998 has seen it 
become a virtual antique today, satellite engineers have a long and 
unbroken record of making last year's performance standards seem old 
hat. If the Commission leaves these two highly energetic and creative 
DBS rivals to continue their spirited competition with one another, 
there can be no doubt that satellite ``capacity'' will continue its 
long tradition of explosive growth for many years to come.

3. All Of The Benefits Of The Merger Can Be Obtained Today By A 
        Production Joint Venture
    EchoStar claims that it must merge with DIRECTV to gain the 
efficiencies of combining duplicative spectrum capacity in order to 
offer new services and local channels in more markets.\37\ However, 
this is not the case. All of the claimed efficiencies (i.e., 
elimination of duplicative spectrum) can be obtained through a joint 
venture. Antitrust laws do not prohibit competitors from forming joint 
ventures or other limited arrangements to develop, produce, or market 
new products.\38\ Production joint ventures are looked upon favorably 
by the courts because they can allow for the pro-competitive effect of 
integrating functions while at the same time allowing competition 
between the parties to the joint venture to thrive.\39\
---------------------------------------------------------------------------
    \37\ Of curious note is Mr. Ergen's claim that this is a merger of 
two ``weak'' competitiors. As was noted by an industry observer, 
``[u]ntil he had DIRECTV in his sight, did Charles Ergen ever say his 
company, and DBS as a whole, could not compete with cable?'' Bob 
Scherman, A Satellite TV Monopoly: Death of Competition and Choics, 13 
Satellite Business News, Nov. 7, 2001, 12.
    \38\ See 2000 Antitrust Guidelines for Collaborations among 
Competitors, . See also PPG, 798 
F.2d at 1508 (D.C. Cir. 1986) (``cooperation with other market 
participants could yield similar results without causing the same 
market concentration.'').
    \39\ See generally, ABA Section of Antitrust Law, Antitrust Law 
Developments, ch. IV(B)(2) (4th ed. 1997). See also In re General 
Motors Corp., 103 F.T.C. 374 (1984) (production joint venture between 
two largest automobile manufacturers in the world upheld because it was 
a limited enterprise rather than a merger of two parents).
---------------------------------------------------------------------------
    EchoStar can easily enter into a joint venture with DIRECTV to 
share channel uplinks and downlinks. In fact, EchoStar's merger filings 
demonstrate beyond doubt that such a joint production venture is 
plainly feasible: the two parties are already planning on taking all 
the technical steps necessary to such a venture, such as providing 
their customers with set-top boxes capable of receiving programming 
from either firm's satellites. (Strikingly, EchoStar recently announced 
that it expects to have such a box ready by this spring.) \40\ If 
EchoStar and DIRECTV were correct about the gains to be achieved by 
avoiding duplicative backhauls, uplinks, and downlinks of television 
programming, those gains would plainly be sufficient to finance the 
steps necessary to achieve the same gains through a joint venture--
while preserving the enormous benefits to the public of rivalry between 
two DBS firms rather than allowing creation of a DBS monolith.
---------------------------------------------------------------------------
    \40\ EchoStar Gears Up For Takeover, Communications Daily (Jan. 10, 
2002) (``As EchoStar gears up for proposed acquisition of Hughes 
Electronics and DIRECTV, it expects to have set-top box (STB) by spring 
capable of receiving rival's service. Pro 301 will ship as Echo Star 
receiver but will contain 4 MB of membory for DIRECTV's advanced 
program guide and it will be modified to handle its satellite 
switching, [EchoStar] Senior VP Mark Jackson said at CES here. Final 
detail, should $26 billion deal be approved, would be for DIRECTV to 
transfer source code to box via software download to receiver's flash 
memory, Jackson said. . . .'') (emphasis added).
---------------------------------------------------------------------------
    In a recent interview, EchoStar Chairman Ergen explained why the 
two firms had not yet formed a joint venture: [we] couldn't. . . get 
these efficiencies without merging. . . because we had some obstacles 
to overcome. Whose technology are we going to use? That meant one of 
the companies had to replace all of their boxes, and the other company 
got away without having that cost. . . Second, how would you combine 
the spectrum? You can't flip a switch with two incompatible systems 
today and suddenly overnight light up and change out all of those 
boxes. . . . [Also, who] would get what frequencies and how many 
frequencies [would you] trade off? \41\
---------------------------------------------------------------------------
    \41\ Ergen at 11.
---------------------------------------------------------------------------
    In other words, Mr. Ergen did not--and could not--dispute that a 
joint venture is technically feasible; the only obstacle is to agree on 
allocation of costs.\42\ If the benefits of avoidance of duplication 
were as great as the applicants contend, however, they would have every 
incentive to go back to the bargaining table--after the merger is 
disapproved--to resolve the cost allocations.
---------------------------------------------------------------------------
    \42\ Indeed, as discussed above, EchoStar has already developed 
(since the merger announcement) a new set-up box capable of decoding 
both firms' signals.
---------------------------------------------------------------------------
                       B. RETRANSMISSION CONSENT

    In addition to the concerns regarding local-to-local service, 
broadcasters would also be at a disadvantage with a merged EchoStar/
DIRECTV when it comes to negotiating carriage.
    Broadcasters will be harmed because in monopoly markets they will 
face a monopolist purchaser in retransmission consent negotiations for 
their local signals. Obviously, broadcasters will not fare as well as 
they might if they had two rival DBS companies with which to negotiate. 
There will also be an anticompetitive effect on retransmission rights 
negotiations in cabled duopoly markets because of the loss of 
EchoStar's closest competitor.

      C. THE MERGER WILL HAVE ANTICOMPETITIVE EFFECTS ON CONSUMERS

    Consumers in the many local markets where this will be a merger to 
monopoly will experience increased prices and a reduction in output. 
Post-merger, EchoStar, as a profit-maximizing monopolist MVPD, will 
have the incentive to raise its prices and lower the quality (i.e., the 
costs to EchoStar) of its service in non-cabled areas and areas with 
antiquated cable systems by offering reduced program choice and 
variety. With no competing MVPD, EchoStar will have the power to 
control price and output in many local markets to the detriment of 
consumers across the country. In these predominantly rural monopoly 
markets the price of DBS is estimated to increase from an average of 
$46.76 today to $62.35.\43\ The total consumer welfare loss is 
estimated to be nearly $2.3 billion in rural markets over the next five 
years on a net present value basis.\44\
---------------------------------------------------------------------------
    \43\ Sidak Declaration para.para. 36-37 and Table 3 (filed as part 
of NAB's Petition to Deny is CS Docket No. 01-348, February 4, 2002).
    \44\ ``Consumer welfare loss'' represent (i) `deadweight loss', 
u,e,, the loss of value by consumers who forego DBS service as a result 
of the post-merger price increase plus (ii) the incremental wealth 
transfer from consumers who will pay higher prices post-merger. Sidak 
Decl. para.para. 49-50 Table 3. (Attached as Appendix A).
---------------------------------------------------------------------------
    Even if a uniform national price were instituted and could be 
enforced (which it could not be), consumers in monopolized MVPD markets 
will pay somewhere between a monopoly price and a duopoly price. 
EchoStar will logically sacrifice some subscription revenue in markets 
where it competes with a cable substitute in order to raise prices, and 
reap monopoly profits, in markets with no competition.
    In the rest of the country, where the merger will result in an 
EchoStar-DBS duopoly, there will be both unilateral and coordinated 
anticompetitive effects. The unilateral effects will result from the 
elimination of consumers' ability to choose EchoStar's closest 
substitute for MVPD services. As EchoStar recently stated in its 
litigation, ``EchoStar is DIRECTV's closest competitor.''\45\ This 
position is supported by a recent DBS industry study that found that 
DBS households were more likely to switch to a different DBS provider 
than to any other MVPD provider.\46\ In such circumstances, EchoStar 
will be able profitably to raise its prices to consumers above the 
premerger level and/or reduce the quality and quantity of its product 
offerings and customer service to below the premerger level even in 
markets where there is a viable cable competitor. Combining the effects 
in monopoly and duopoly markets, Dr. Sidak--an Economist retained by 
NAB--has estimated that the acquisition will result in a consumer 
welfare loss of from approximately $3 billion to $7.6 billion (assuming 
perfect collusion with cable providers) over the next five years on a 
net present value basis.\47\
---------------------------------------------------------------------------
    \45\ Rule 56(f) Motion, at 7.
    \46\ See Competitive Market Study at 30.
    \47\ See Appendix A. Sidak Declaration para.para. 49-51 and Table 
3.
---------------------------------------------------------------------------
    In addition, the merger will augment the potential harm to 
consumers that EchoStar has constantly sought to inflict on subscribers 
by limiting their access to some stations in local-to-local markets it 
serves. Virtually since SHVIA was enacted, EchoStar has sought through 
constitutional challenges, bogus claims of inadequate signal strength 
and duplicative programming and, most recently, its two-dish ploy to 
deny consumers access to smaller and niche television station 
programming in their markets.\48\ Such actions are harmful to consumers 
who will be denied access to this local programming.
---------------------------------------------------------------------------
    \48\ See Emergency Petition of National Associationof Broadcasters 
and Association of Local Televisio Stations to Modify or Clarify Rule, 
In the Matter of Implementation of the Satellite Home Viewer 
Improvement Act of 1999 Broadcast Signal Carriage Issues, CS Docket No. 
00-96 (filed Jan. 4, 2002).
---------------------------------------------------------------------------
    D. THE MERGER PROPONENTS FAIL TO ADDRESS ANTICOMPETITIVE EFFECTS

    The merger proponents claim, with no real support, that there will 
be no anticompetitive effects because of the competition with cable. 
Neither the parties nor their economic expert--Professor Robert D. 
Willig--provide any empirical data to support any of their claims of 
market definition, the ability of cable to constrain the merged firm, 
or reduced costs. At best, Professor Willig repeats anecdotes he has 
been told by business people at EchoStar and DIRECTV.\49\
---------------------------------------------------------------------------
    \49\ See Declaration of Robert D. Willig on Behalf of EchoStar 
Communications Corporations, General Motores Corporation, and Hughes 
Electronics Corporation (Nov. 30, 2001) at para. 10. (hereinafter 
``Willig Decl.'') (``Executives at both EchoStar and DIRECTV confirm 
that the objective of each firm is to gain market share by luring 
consumers away from the leading cable providers, and the firms 
accordingly price their DBS programming services at levels based 
primarily on the prices charged by cable providers.''); Id. at para. 11 
(``it appears based on statements by executives of both EchoStar and 
DIRECTV that a majority of new DBS consumers had previously been cable 
subscribers.'').
---------------------------------------------------------------------------
    The only ``evidence'' Professor Willig cites for the proposition 
that EchoStar and DIRECTV do not compete with one another as vigorously 
as they do with cable is an executive's assertion that DIRECTV failed 
to respond to an EchoStar promotion. According to Professor Willig, 
DIRECTV's supposedly failed to respond to EchoStar's ``I Like 9'' 
pricing strategy under which customers who purchased EchoStar DBS 
equipment (rather than accepting an equipment subsidy) could also 
purchase its ``America's Top 100'' programming package for $9.99, on a 
month-to-month basis.\50\ Professor Willig was apparently not advised 
that (1) EchoStar itself was responding to a DIRECTV promotion 
announced the previous day,\51\ and (2) at the time (July/August 2001) 
when the two companies were announcing their dueling promotions, 
DIRECTV's CEO told the press the real reason that DIRECTV would not 
match the specific EchoStar offer: because DIRECTV had a ``huge 
differentiator'' with EchoStar, the exclusive and extremely popular NFL 
Sunday Ticket package of all Sunday NFL games.\52\
---------------------------------------------------------------------------
    \50\ Willig Decl. at para. 10.
    \51\ DIRECTV Press Release, DIRECTV Univeils Fall National 
Promotion and Advertising Campaign (July 30, 2001).
    \52\ Multichannel News, DISH Kicks Off $9 Monthly Plan (Aug. 6, 
2001) (``DIRECTV, Inc. has no immediate plans to respond in kind to 
EchoStar's aggressive programming pricing strategy. ``We have a huge 
differentiator with the NFL in the third quarter,' DIRECTV CEO Eddy 
Hartenstein said.'').
---------------------------------------------------------------------------
    What is significant about the two firm's competing August 2001 
promotions is that cable providers--which did not have the NFL Sunday 
ticket as a ``differentiator''--did not respond to either offer. In 
Comments filed by EchoStar concerning the Eighth MVPD Competition 
Report, EchoStar cited cable's failure to respond to ``I Like 9'' as 
evidence that ``[o]n the whole, cable operators are still not 
aggressively competing [with DBS] on price.''\53\ In fact, EchoStar's 
comments question cable's positions regarding the causes of its high 
prices--investment in infrastructure and capacity, as well as 
programming costs--as hollow and an inadequate justification for the 
rate of its price increases exceeding inflation.\54\ The only 
conclusion then can be that falling DBS prices are the result of 
intense DBS competition.
---------------------------------------------------------------------------
    \53\ See Reply Comments of EchoStar Satellite Corporation In the 
Matter of Annual Assessment of the Status of Competition in Markets for 
the Delivery of Video Programming, CS Docket No. 01-129 (Sept. 5, 2001) 
at 2. (The only cable response was that AT&T Broadband offered to 
reduce the price of basic cable to $19.95 per month through the end of 
the year. Id. at 3.)
    \54\ See id. at 2-3 (``EchoStar's aggressive pricing also exposes 
as dubious the cable industry's continued incantation of programming 
costs as justification for high prices'') and n.5 (``The cable 
industry's lengthy commentary on its investment in programming and 
infrastructure also sounds like an alternative argument offered to 
justify or excuse its price hikes'') (citing Comments of the NCTA 
(dated Aug. 2, 2001) at 2-3).
---------------------------------------------------------------------------
    Ironically, the parties themselves confirm the anticompetitive 
effect on consumers of the merger in their application where they 
highlight that their costs will be lower because the new company will 
suffer less ``customer turnover, or 'churn''' as the EchoStar and 
DIRECTV customer bases would be consolidated.\55\ That is simply 
another way of saying that customer choice will be reduced and that, 
because consumers will have only one differentiated alternative or no 
alternative at all, they will be effectively captive.
---------------------------------------------------------------------------
    \55\ Consolidated Application, at 36; See also Salomon Smith 
Barney, DBS Industry Update: Valuing the Possiblity of a DISH/GMH 
Merger (Jan. 17, 2002) at 16 (predicting a decrease of 20 basis points 
in the amount of churn faced by the merged company by 2005).
---------------------------------------------------------------------------
                               CONCLUSION

    EchoStar's proposal to acquire its only DBS competitor would create 
a monopoly MVPD giant for many millions of Americans, would (at best) 
reduce consumer choices from three to two for all other Americans, and 
would snuff out the head-to-head competition between EchoStar and 
DirecTV that has led to the rapid rollout of local-to-local in many 
markets and would lead to further expansion of local-to-local in the 
future. In place of competition, EchoStar, one of the least trustworthy 
companies with which broadcasters have ever dealt, offers only its own 
unilateral promises--which, when read carefully, promises virtually 
nothing. For all of these reasons, NAB remains opposed to the proposed 
merger of DirecTV and EchoStar.

    Chairman Kohl. Thank you very much, Mr. Fritts.
    We will turn now to some questions. I would first like to 
address Mr. Ergen and Mr. Hartenstein, and I will ask five or 
six different questions and ask you to reply one and then the 
other.
    The first question for you, Mr. Ergen. You have made five 
or six promises. Let's take them one by one and see if you are 
willing to commit to them in a legally binding and enforceable 
way.
    Mr. Ergen, first, you have promised to implement a single, 
uniform national pricing plan so that rural consumers who can't 
get cable and will face a pay TV monopoly with this merger will 
indeed realize the price benefits of urban competition. Are you 
willing to commit here today to be subject to an enforceable 
and legally binding decree that you will implement this pricing 
plan if your merger is approved?
    Mr. Ergen. Yes, we are, Senator, and I might point out that 
we already do that at EchoStar; we have for 6 years that we 
have been in business. I would point out that in Alaska, for 
example, today where we are the sole provider outside of 
Anchorage in the Eskimo villages, the sole provider of TV 
today, they pay exactly the same price as they do anywhere else 
in the United States.
    Chairman Kohl. Well, what would you do, Mr. Ergen, if one 
of those 210 markets, or 2 or 3 or 4 or 5, or 8 or 10 begin 
offering on cable TV enormous price reductions and you feel a 
need to respond or, in effect, go out of business in a market? 
What would you do?
    Mr. Ergen. Well, I think that I am not the attorney here, 
but I think that those kinds of conditions can leave some 
flexibility to meet those kinds of challenges. And I think if 
we work toward solving the problem there, with the tremendous 
benefits that we get we will be able to do that.
    Chairman Kohl. Well, you are getting off of the pledge and 
the promise. Very clearly, you are saying where certain 
situations arise in certain markets, then we need to have the 
flexibility to respond. I understand that is business, but now 
that is no longer the same thing that you have said about 
offering a uniform national pricing policy that would allow all 
of your customers all across the country to get the benefits of 
competition.
    I mean, that is what you are saying. You are willing to 
make that promise and then when I ask you a simple question 
which is obvious--what do you do when 1 or 2 or 3 or 5 or 10 
markets require you to offer lower rates to compete--what do 
you do with all the other markets that you have promised a 
single, uniform pricing policy?
    Mr. Ergen. Let me try to answer that for you. We are 
certainly willing to live with one single, uniform nationwide 
pricing. I believe that it may be in the consumer's best 
interest that there is some flexibility that regulators of the 
Justice Department or the FCC can agree to and I have seen many 
different formulas. We have offered a suggestion of one single 
nationwide price and we are willing to live with that.
    Having said that, there have been other pricing mechanisms 
that I have seen talked about among the people that may offer 
some flexibility that may be better for consumers than our 
plan. We are certainly willing to have those discussions so 
that when all is said and done, customers are protected on 
their pricing where we may be the sole provider.
    Chairman Kohl. I am listening and wanting to understand, 
and what I think I hear you saying is that you need to have 
that thing discussed more fully before you can agree to a 
single, uniform national pricing policy.
    Mr. Ergen. I would put it this way: We are willing to agree 
to a single nationwide pricing policy. That is what we have 
suggested. When we suggested that, many people said what about 
if a cable company does this or that?
    Chairman Kohl. Yes.
    Mr. Ergen. We then said, look, if there is flexibility that 
can be built into that consent decree or that condition and 
that is good for consumers, we are certainly willing to discuss 
that, and we have seen lots of different mechanisms discussed 
among some of the officials. But absent that, absent some 
better plan than we have suggested, we are willing to live with 
a single nationwide price, no matter what.
    Chairman Kohl. But explain as time unfolds how you will 
respond when cable companies across the country attempt to cut 
you up and take advantage of your national pricing policy. In 
New York, if the cable company offers a rate which is 
unbelievably low and you either have to respond, in effect, in 
a few years or get out of the market, what will you do?
    Mr. Ergen. I think that proves our point. New York would be 
such a big market for us we couldn't afford to leave that 
market, so we would have to meet that competition and the 
people in rural America would get the advantage of that 
competition in New York.
    Chairman Kohl. But then it is only in New York where your 
competition would suffer that problem. You would suffer that 
problem all across the country, so they could force you out of 
business.
    Mr. Ergen. Well, we believe that to meet competition we not 
only have to be better than cable, we are going to have to be 
less expensive. And satellite, with this merger, is uniquely 
positioned to be a better economic animal, so we would have 
that decision of forgoing New York, with its some 12 million 
homes or whatever it is, or not being able to compete there.
    Chairman Kohl. But then your competitor in Chicago does the 
same thing and forces you out of Chicago. A competitor in L.A. 
forces you out of L.A. In order to maintain your national 
uniform pricing policy, I would submit to you that there would 
need to be an awful lot of discussion prior to an approval of 
this merger on that particular point.
    Mr. Ergen. And we have suggested a solution. It is a very 
simplistic solution, I will admit. People have brought up the 
same point that you have brought up. When they have brought 
that up, other people have come up with mechanisms that solve 
that problem as well. And, of course, it gets more complicated 
when you do that, but we are certainly willing to discuss those 
things. I do think effort has to be put on that particular 
issue to make sure that this merger does protect those places 
where we might be a sole provider.
    Chairman Kohl. Mr. Hartenstein, your second promise is you 
promise to offer local broadcast television stations to your 
subscribers in all 210 television markets in America, compared 
to the 40-plus markets that receive this service today. Will 
you tell us today that you will commit to this in the form of a 
legally binding, enforceable obligation, and can you tell us 
how soon you will be able to deliver local broadcast stations 
into every market in America?
    Mr. Hartenstein. Mr. Chairman, the simple answer to that 
is, yes, we would be willing to be bound by whatever mechanisms 
that the regulators, the Department of Justice and/or the FCC, 
would impose on us.
    On the second part of your question as to how quickly we 
could implement it, we believe that beginning immediately, on 
the day of approval of the merger, we could begin expanding 
beyond the 42 markets that we together serve today, begin 
expanding that over the first year, growing to about 100-plus 
markets. And then with that final satellite, the 16th satellite 
of the fleet, the 5th spot-beam satellite between our two 
fleets, we would fill in the holes in those roughly 100-plus 
markets, markets 100 to 210, approximately, and that could 
begin about 24 months after the approval of the merger.
    Chairman Kohl. The third question, Mr. Ergen: You have also 
promised to comply with the full ``must carry'' provision that 
went into effect for satellite at the beginning of the year. 
``Must carry'' means, of course, that you have to pick up all 
local signals in a market, not just the two or three that might 
be most desired. We are pleased to hear this, given the fact 
that you have sued to have this requirement declared illegal. 
Does this mean that you are going to drop your lawsuit?
    Mr. Ergen. First of all, we will comply with ``must carry'' 
on a single dish and carry all stations in all markets. Having 
said that, we believe the principle of ``must carry'' may have 
some constitutional questions in terms of freedom of speech, 
and we believe that that principle should at least be pursued 
in the courts. That is why we obviously have courts. I might 
point out that the NAB has on 14 different occasions over the 
years pursued legal remedies where they haven't agreed maybe 
with the Congress or the FCC.
    We have lost that court of appeals case so far, but we do 
have the option to go to the Supreme Court, just as the cable 
industry has done. Notwithstanding that, we are willing to 
commit to carrying all the channels, but we believe it is a 
principle that our customers would like us to pursue because 
they don't necessarily want us to carry 200 home shopping 
channels that are all identical, with no local content, no 
local news, weather or sports.
    Chairman Kohl. Number 4: Mr. Hartenstein, you have promised 
to offer competitive broadband Internet service to compete with 
cable modem service across the country. Are you willing to 
commit to be subject to an enforceable and legally binding 
decree that you will implement this plan if your merger is 
approved?
    Mr. Hartenstein. Yes, sir, Mr. Chairman.
    Chairman Kohl. Number 5: Mr. Ergen, you have both said how 
this merger will permit the rollout of HDTV and interactive 
television via satellite. How soon can we expect to see this 
service and is this something you would agree to as a condition 
of the merger?
    Mr. Ergen. We will see expansion of that service 
immediately upon closure of the merger and we are willing to 
agree to it in a consent form.
    Chairman Kohl. Number 6: We understand this merger will 
require some change-over of consumer hardware, be it an antenna 
or a set-top box. As you promise that there will be no charge 
to consumers for any equipment change necessary to receive 
local channels or simply continue service, and you have also 
promised both a free installation and a free service call for 
this equipment switch-over, I assume you can live with putting 
that promise into a consent decree as well.
    Mr. Hartenstein. Yes, sir, we do. We announced that on the 
day that we announced the merger, and we are in the business of 
customer service and we absolutely would agree to that in 
whatever form the regulatory agencies would ask us to.
    Chairman Kohl. Before I turn to my colleagues, I would like 
to ask you, Mr. Pitofsky, why doesn't the companies' 
willingness to agree to be legally bound, as you have heard 
them say here today, solve many of the problems posed by this 
merger?
    Mr. Pitofsky. Can I ask just one question of my colleagues 
here?
    Chairman Kohl. Go ahead.
    Mr. Pitofsky. Aside from list price, are you prepared to 
commit that there will be a single price throughout the country 
and that there will be no difference in any part of the country 
with respect to equipment subsidies and introductory offers, 
which it seems to me is the way competition is waged in this 
industry?
    Mr. Ergen. I think Mr. Pitofsky is a bit misinformed on how 
the industry works today. We sell at a price to retailers and 
by law they set their own price and their own installation 
price, so that with vigorous competition, whether it be your 
ability to buy a system at Radio Shack or from an independent 
retailer, maybe in Wal-Mart, maybe in a Circuit City or Best 
Buys store, there is tremendous competition today once the 
product leaves for that installation.
    You will notice free installation services across the 
country, for example, promotions, rebates, and so forth. That 
is done after the product leaves us and we don't think that the 
merger in any way negatively impacts that, and customer and 
consumer choice and competition from a retailer's perspective. 
So I think that the market works a little bit differently than 
that, and that competition will always be there, regardless.
    Mr. Pitofsky. And you don't support the dealers in their 
subsidies and discounts and you don't give any subsidies and 
discounts yourself. Is that right?
    Mr. Ergen. We support the dealers. Today, we support 
through subsidies, and that subsidy is consistent across all of 
our retail distribution.
    Mr. Pitofsky. And you would agree that in every single 
city, county and State in the United States, the subsidies that 
you give to the dealers will be exactly the same?
    Mr. Ergen. That is what we do today, but we can't guarantee 
what price to the consumer we will charge because we expect the 
retailers to vigorously compete and we expect that depending on 
which store you might go to, whether you buy it in the 
Internet, whether you buy it in a particular store from a 
retailer, you will probably see some better prices than others, 
some better installation offers than others. But that 
competition is external to our company
    Mr. Pitofsky. Mr. Chairman, to answer your question, this 
is a very, very regulatory order; it is about as regulatory as 
you get. I thought the trend in this country was toward 
deregulation, toward not having the Government sitting in 
judgment as to every discount, every quality change, every 
introductory offer, and so forth. We leave that to the free 
market.
    The idea of a regulatory order like this, where it is a 
horizontal merger, it is a monopoly or, at best, a duopoly, it 
just seems to me would be a major departure from everything 
that we have done in antitrust for 100 years.
    Chairman Kohl. Thank you.
    Senator DeWine?
    Senator DeWine. Thank you, Mr. Chairman.
    Mr. Ergen and Mr. Hartenstein, as I noted in my opening 
comments, this merger faces some serious legal challenges. The 
basis premise of this merger seems to be more competition by 
less competition, but the long history of antitrust law would 
seem to lead to a different conclusion.
    Mr. Pitofsky has been, I think, pretty blunt and 
straightforward about what he thinks about the legality of 
this, but let also quote from United States v. Philadelphia 
Bank a leading Supreme Court case in this area, and I quote, 
``If anti-competitive effects in one market could be justified 
by pro-competitive consequences in another, the logical upshot 
would be that every firm in an industry could, without 
violating Section 7, embark on a series of mergers that would 
make it in the end as large as the industry leader.''
    Then the court goes on to say, and again I quote, ``We are 
clear, however, that a merger, the effect of which may be 
substantially to lessen competition, is not saved because on 
some ultimate reckoning of social or economic debits and 
credits it may be deemed beneficial.''
    This seems like a pretty tough case from your perspective. 
It rejects the idea of decreasing competition in one market to 
increase it in another, and it also refuses to consider the 
benefits of a merger if that merger lessens competition.
    Bluntly, it seems to me you have a legal problem. How are 
you going to deal with it? I know you have got good lawyers, 
but are they that good?
    Mr. Ergen. First of all, I don't necessarily agree with the 
assumption that there is less competition, and I will come back 
to that. But in 1997, even when Chairman Pitofsky was at the 
FTC, the FTC and DOJ said that antitrust agencies in some cases 
will consider efficiencies not strictly in the relevant market; 
i.e., in a different market. This was in 1997, so it is an 
update from the case that you------
    Senator DeWine. Excuse me. You are quoting from what?
    Mr. Ergen. I am quoting from a 1997------
    Senator DeWine. That is not a court case, though?
    Mr. Ergen. It is not a court case, and again I am going to 
get in real trouble trying to be a lawyer here and I am not 
going to try to do that and we will certainly give some more 
information on that. But there are some cases, but let me tell 
you why------
    Senator DeWine. I appreciate it. I was quoting from a U.S. 
Supreme Court case.
    Mr. Ergen. Let me tell you why I don't agree with the 
competition issue. We really have a fundamental issue here, 
which is today our two companies offer these 500 channels, and 
that is what we both do. And you do have two choices from our 
companies of that, but the marketplace where yo don't have 
local means neither one of us are a choice; only your cable 
company is a choice.
    When we bring local channels, you now will have two 
choices. You are going from one to two choices. In those 
markets where we only broadcast video, with the merger we are 
still going to be able to broadcast video, but now we can do 
your local channels. We can do high-definition television and 
interactivity; we can do broadband Internet. This is what cable 
does today.
    So, today, where you only have one choice of cable for 
three-dimensional-type services, you now will have two choices. 
Even in a city, we can't offer these channels, all these 
different services. Now, we will be able to do that, so we have 
actually increased choice for services to consumers, and that 
is all on a single dish. So consumers are asking for that and 
this will enhance competition and enhance our ability to 
compete. This will not lessen competition because we go three-
dimensional.
    Senator DeWine. All right, I appreciate your comments.
    Mr. Kimmelman, thank you for coming back here. You are in a 
little different role today, though, and I want you to help me 
out and explain why you are in this different role and how you 
came to these conclusions. As a non-expert, I have looked 
through some of your charts. I am not sure I understand them, 
but that is not unusual. That is my fault, not yours.
    Walk me through this, though. I am not sure I really 
understand what you are saying. You are telling us that really 
there are two separate markets. Does that mean that DIRECTV is 
really not competing against cable?
    Mr. Kimmelman. Yes.
    Senator DeWine. And are you saying that if these changes 
are made, they will compete? I mean, is that the bottom line?
    Mr. Kimmelman. That is a little too strong. When I 
mentioned before the issue of whether local channels offered on 
satellite had changed the whole picture and made them 
competitive, I suggest that it has not if you just look at rate 
increases.
    The FCC has looked at this carefully. In the few 
communities where there are two wires into the home offering 
cable television and two satellite providers, they found 
through econometric analysis prices on average are 14 percent 
lower. Other studies have shown that they are as much as 30 
percent lower. Everywhere else in the country, if you look at 
where one cable wire is there and two satellite providers, 
those prices are higher. There is no price substitution.
    Senator DeWine. Why do you think that is?
    Mr. Kimmelman. I believe it is because of the up-front 
costs of satellite, the purchase of the dish, multiple hook-
ups, in some cases the inability to get reception.
    Senator DeWine. Even with all the deals that are offered? 
It is almost like they will give you one.
    Mr. Kimmelman. It is a tremendous story, $1,000 down to 
$200, giveaways if you are willing to pay for the whole year's 
programming and what not. The problem is cable is cheaper. 
Cable installation they can give away for free any time, any 
day, and when they charge you the full price it averages $30. 
They can do multiple-set hook-ups. Most American families have 
more than one TV hooked up to a multi-channel service. They 
want to watch different programs on different TVs--much cheaper 
than satellite.
    Satellite has made tremendous inroads and yet it still 
isn't there, and that is what is different from the Beechnut 
example and that is what is different from Philadelphia 
National Bank. I believe in Philadelphia National Bank.
    Senator DeWine. And you don't think time will cure this 
problem the way it is today? In other words, some people might 
look at this market and say, well, when people really get used 
to buying the dish and it reaches a certain saturation point 
and everyone says, yes, you know, that is sort of the way to 
go--you don't think at that point it tips and becomes really 
competitive?
    Mr. Kimmelman. You and I have been talking about this for 4 
years as those cable rates keep shooting up and up and up, now 
almost 40 percent. How much time? In response to Mr. Pitofsky, 
he is absolutely right. This is totally unorthodox and unusual 
for antitrust. I am suggesting the FCC should do it, but the 
problem here is Congress deregulated cable monopolies before 
there was competition. That is our problem.
    Senator DeWine. Mr. Pitofsky, I want to give you 30 seconds 
because my time has run out. I want to give you 30 seconds to 
respond to that because I think this really gets down to the 
nuts and bolts of this argument with what Mr. Kimmelman said.
    Mr. Pitofsky. My response is very brief. Mr. Kimmelman is 
absolutely right. Cable rates have gone up an average of 7 
percent a year every year since 1996, or thereabouts. DBS rates 
have only gone up about 1 percent. What is the difference 
between cable and DBS?
    The difference is the two DBS companies compete with each 
other and keep the prices down. The difference is cable is a 
monopoly in every city in which it operates. Why would we 
change and allow DBS to become a monopoly so they, like cable, 
can raise prices 7 percent a year? It doesn't make any sense to 
me.
    Mr. Kimmelman. I am worried about the 68 million cable 
subscribers at the same time as I am worried about the 15 
million satellite subscribers. That is why I am saying I urge 
you to step back a little bit from antitrust. These gentlemen 
are absolutely right on straightforward, narrow antitrust 
principles. I would agree with them, but we are talking about 
the need for competition both to cable and to satellite. We 
know we are not going to re-regulate cable, from everything I 
have seen.
    Senator DeWine. Mr. Pitofsky, do you have an opinion about 
why, as Mr. Kimmelman says, the effect is that people are not 
switching over, so they are seeing their cable rates go up? 
They continue to go up. Yet, they really have the option in 
many, many markets to go over and buy Mr. Ergen's dish.
    Mr. Pitofsky. Let's give these folks credit. They are 
switching over. They have gone from 1 million subscribers to 17 
million subscribers in, what, 5 or 6 or 7 years? If they 
continue that trajectory--I am not sure they can, but if they 
did, each of them would be as large as the combined company 
which they propose to produce as a result of the merger. They 
are doing very well. They deserve all the credit in the world.
    Senator DeWine. What about that, gentlemen, in about 20 
seconds? If you guys are doing so great, what is the problem?
    Mr. Hartenstein. The problem simply is this: Neither one of 
us is profitable yet. When you ask a consumer, which is what 
this is all about, why don't you have satellite versus cable, 
ask them what they watch at six o'clock and at ten or eleven 
o'clock. It is their local news, their local weather, their 
local sports. We are not able to do that in some 42 million 
homes, and that is what this merger is all about, getting the 
spectrum to do that.
    Senator DeWine. Let me move to that small number of people 
that are very significant in this country, but it is actually 
not that small, who are going to end up in rural areas with no 
choice other than your merged company. Let's talk a minute 
about them.
    In Mr. Kimmelman's testimony he says, ``A second safeguard 
we would suggest is aimed at improving competition. If 
consumers are going to lose one competitor in the multi-channel 
video market, particularly when it means unwired markets will 
go from two 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.''
    Do you want to talk a little bit about that and do you want 
to maybe reconsider your position on NorthPoint/Broadwave?
    Mr. Hartenstein. Let me clarify our position, and Charlie 
can do the same for him, Senator.
    Senator DeWine. All right.
    Mr. Hartenstein. Our issue with NorthPoint has never been 
about competition. Bring it on. I mean, for God's sake, we are 
competing with cable in all those areas today. It has been 
about interference. It is about someone else using the exact 
same frequency spectrum and interfering with the 17 million 
customers we have today. We have suggested alternate 
frequencies. It is all about interference. It has nothing to do 
with competition. That is where we stand and that is what our 
position has consistently been about.
    Senator DeWine. Mr. Ergen?
    Mr. Ergen. I would just only add to that that we went so 
far at EchoStar as to suggest an alternative band, which we 
will support at the FCC, same amount of spectrum which is right 
next to the DBS band that would not interfere with our 
customers and would allow NorthPoint or someone like NorthPoint 
to compete. We are supportive of that competition without 
interference.
    Senator DeWine. Mr. Kimmelman, do you have anything to add 
to that?
    Mr. Kimmelman. My understanding is the FCC engineers have 
looked at this. They believe it can be done without 
interference and they believe that the burden ought to be on 
the new entrant. I say let's go forward and get the new entrant 
in the market before this merger is approved.
    Senator DeWine. Thank you, Mr. Chairman.
    Chairman Kohl. Thank you very much, Senator DeWine.
    Senator Specter?
    Senator Specter. Thank you, Mr. Chairman.
    In taking a look at this proposed merger, it is a little 
hard to understand, notwithstanding the explanations, how 
competition will not be substantially lessened. You have two 
companies and you are going to create one company, and I have 
heard your theories as to how competition would be promoted.
    Mr. Pitofsky, you have been a regulator for a long time. 
How do you evaluate the theories proposed that there would, in 
fact, not be a lessening of competition if these two companies 
merge?
    Mr. Pitofsky. Well, I respect the theories. They are 
innovative, they are different, but I can say very simply they 
have been advanced before in Philadelphia National Bank and 
elsewhere and they have been rejected time and time again by 
the courts. We don't allow mergers to monopoly and then say 
monopoly is so efficient that in the long run consumers will be 
better off. We rely on competition and competitive markets.
    Senator Specter. Mr. Ergen, what is your response?
    Mr. Ergen. Well, first, I think each merger is different 
and has to stand or fall on its own merits, and I think that to 
compare us to a baby food case or a bank case or something may 
be------
    Senator Specter. We will agree with that. What is your 
response to the basic proposition that if you have two 
companies, they are competitors, and you have one and there 
isn't on its face a conclusive lessening of competition?
    Mr. Ergen. Because this merger will not reduce our 
incentive to compete, but will rather enhance our ability to 
compete. By that I mean if all you believe the market was was 
cable channels, like CNN and HBO, then you have got some 
points. But the marketplace is much broader than that. It is 
going to be new services like high-speed broadband, which cable 
does today and is increasing their market share and has over 50 
percent of that market share today.
    It is high-definition television, which the broadcasters 
are now filing for extensions and waivers for and breaking 
their promise to this Congress that they would get it up by 
this year. That is not going to happen unless we can do it. It 
is video on demand where we have to compete with cable that we 
don't have today without the spectrum. And, of course, it is 
those local channels that we don't have in 42 million homes.
    So we are going to increase the choices for Americans. When 
we can increase the choice, we can more effectively compete 
against the incumbent cable operators who have almost 80 
percent of the market today in the pay television market.
    Senator Specter. A constituent of mine, Pegasus 
Communications, has raised a concern that their effort to 
compete with satellites will be severely impacted adversely 
because there won't be enough slots available.
    Mr. Hartenstein, you are a proponent of this merger. Does 
Pegasus have a real concern here, a real point?
    Mr. Hartenstein. I am not certain. You would have to ask 
counsel or any firms representing them. I am not sure where 
they are going. What we have said is with the existing spectrum 
up there, the most efficient use of it--and this is after a lot 
of study--would be to provide local channels to all markets. 
That is almost 1,500 local television stations--and Pegasus 
comes from a broadcasting heritage, I do believe--and that is 
exactly what consumers are looking for.
    Pegasus itself does have applications and indeed has been 
granted Ka band slots to expand that. They are a publicly held 
company capable of, with a viable business plan, fulfilling 
that. So we have made a plan with our merger to fulfill those 
promises and I think address the six concerns, and a 
willingness to be bound to those six points that, Mr. Chairman, 
you have brought up.
    Senator Specter. The principal argument which EchoStar and 
DIRECTV have made here is that their combination would still a 
lot of competition out there with cable. But how about the 
homes which are not serviced by cable? There is a 
representation that the new company would not take advantage of 
this monopoly position, but how can we really rely on that?
    You have changes in corporate management, you have 
acquisitions, you have mergers again, you have all sorts of 
corporate shifts. How can this Committee rely on such a 
representation, Mr. Ergen?
    Mr. Ergen. Well, first, fundamentally, the way we run our 
business is we charge one nation, one price. Both of our 
companies have since our inception, because as the billing 
systems------
    Senator Specter. You would have one price.
    Mr. Ergen. We charge the same price.
    Senator Specter. But there is nothing to prevent you from 
changing that.
    Mr. Ergen. There is nothing to prevent us from changing it. 
It is a structural part of the business that it is just the 
most efficient way for us to do it, to advertise with our 
billing systems. Our cost systems, with 6,000 agents, can't 
remember different pricing schemes.
    Senator Specter. Can't remember different prices?
    Mr. Ergen. It would be very difficult for------
    Senator Specter. You could write them down.
    Mr. Ergen. No. You would have 6,000 agents who, depending 
on where you are calling from, would have to charge you a 
different price depending on what zip code you are in. So that 
is the fundamental. But having said that, we are willing to 
make as a condition of merger that we will continue that 
practice, and the length of time is certainly up to the 
Government to say.
    Senator Specter. How many homes would be involved where 
there is no access to cable, where there would be only 
satellite from just the one company.
    Mr. Ergen. Per the FCC's most recent study which just came 
out in January of this year, it was about 3 million homes. I 
think I noticed, in fairness, that Mr. Kimmelman may have a 
different--I think he had about 13 million homes in his 
testimony, but somewhere in that number.
    Senator Specter. Mr. Kimmelman, what is the real number?
    Mr. Kimmelman. What we have found from the Federal 
Government statistics is there may be as many as 13 percent of 
households that are not wired for cable.
    Senator Specter. Which would be how many?
    Mr. Kimmelman. There are 100-plus-million households, so 13 
percent of the population.
    Now, we have found that of satellite subscribers------
    Senator Specter. How many, again?
    Mr. Kimmelman. Thirteen million.
    Senator Specter. Thirteen million?
    Mr. Kimmelman. Yes, and we have found in response to 
questionnaires of subscribers that 40 percent of current 
satellite subscribers claim that they do not have cable service 
available.
    Senator Specter. Well, what would the enforcement mechanism 
be? Attorney General Nixon, you can answer this question. What 
would the Government do if there were a condition that prices 
wouldn't be raised, which they could be in a market with a 
monopoly situation?
    Mr. Nixon. Senator, I wish we were as good as they thought 
we were. If I could hold this up for just a second------
    Senator Specter. I used to be in your business. I 
understand the limitations.
    Mr. Nixon. Senator, to answer to your question, for the 
central part of the country, the white is the two-to-one area. 
That is the place that is not served by cable, anything that is 
white on that map. That is Missouri in the middle. I found that 
to be the most interesting State to analyze, but clearly the 
same trend would be true in Pennsylvania and others, and I 
could provide that data to you, if necessary.
    I wish we could write the perfect document, but when CEOs 
come in front of Committees like this and say we will be bound 
by whatever restrictions and regulations that you all can draft 
and let the attorneys worry about enforcing them later on, 
Katie bar the door.
    I mean, these are fine men who have done a great job and 
are in an emerging industry. So you are going from 1 million to 
17 million households over the last 9 years. All at once, they 
have figured out that if they both work together they can make 
even a faster move. Consequently, the responsibility we all 
have here is huge. I wish I could write that document, Senator.
    Senator Specter. Are you saying that competition is a 
better guarantee for the consumers than governmental 
enforcement?
    Mr. Nixon. Senator, I have practiced law long enough to 
know a leading question when I hear one.
    [Laughter.]
    Mr. Nixon. Yes, sir.
    Senator Specter. Mr. Ergen and Mr. Hartenstein, we don't 
want to pre-judge this matter and we are prepared to listen to 
you, but you have got a high mountain to climb over when you 
have such a basic proposition of combining two into one and 
some people not having the advantage of cable.
    Let me get parochial again for a minute or two about one of 
my constituents, Digital Broadband Applications Corporation, 
which has an application now in to the FCC. Do you have any 
expectation of opposing that, Mr. Ergen or Mr. Hartenstein, or 
both?
    Mr. Hartenstein. We put in a response to the FCC which was 
one merely for lack of better information to make sure that 
there wasn't going to be any interference. There was not 
sufficient information for us to evaluate that. Per se, from a 
competitive point of view, we have no problem with it. We just 
wanted to make sure there wasn't going to be any interference.
    Senator Specter. It is OK, per se?
    Mr. Hartenstein. From a purely competitive position, yes. 
Again, the issue, as it was with NorthPoint--and Mr. Kimmelman 
indicated the same thing--was interference.
    Senator Specter. So you are saying if there is no 
interference, it is all right with you?
    Mr. Hartenstein. We didn't see any problems with that, no, 
sir.
    Senator Specter. Would you concur with that, Mr. Ergen?
    Mr. Ergen. Yes. We did not file against that application 
and are happy to see them come in. Just for record, I believe 
it is for a Canadian orbital slot, I believe, of which there 
are at least two, and maybe more, to bring high-power DBS 
service to the United States; in other words, a new entrant. We 
did not have a problem with that. We do not believe they will 
interfere based on our analysis.
    Senator Specter. Mr. Fritts, I haven't had a chance to ask 
you a question. If I may, Mr. Chairman, just to wrap it up, 
what is your view as to the adequacy of protection for those 3 
million or 13 million people who rely upon satellite and don't 
have cable competition if this merger were to go through?
    Mr. Fritts. Senator Specter, I happen to be a satellite 
subscriber and I happen to have------
    Senator Specter. Do you have access to cable?
    Mr. Fritts. I do where I live. Indeed, I do, but my wife's 
parents are also subscribers to satellite and they do not have 
cable. As we discussed their acquisition of a satellite dish, 
price was important because they live on Social Security and 
that was an important element for them, as the live in a rural 
area.
    We have taken officially positions on the broadcast 
portions of this, as you know, and that is what we have 
confined our oral testimony to today on this. And I would just 
like to respond to Mr. Ergen saying that we are reneging on our 
promises on digital television. To the contrary, only about 600 
stations have asked for, completely within the guidelines set 
up by the FCC--if you need an extension because of 
environmental problems, because of tower problems, because of 
equipment problems, because of engineering problems or 
financial problems, you could go before the FCC and ask for a 
6-month extension.
    The good news is there will be a huge number of stations 
that will be on the air in digital. The question that I guess I 
can't ask back to my friends on the satellite side is I hope 
they are going to carry us in digital and in high-definition 
television.
    I have heard them talk about carrying high-definition. I 
don't know if they are going to carry local stations in high-
definition. I haven't heard that discussed here today, but I 
hope that sort of answers your question and responds to it.
    Senator Specter. If the merger goes through, Mr. Ergen, 
will there be enough channels liberated so that C-SPAN can put 
on number 4 and carry hearings like this live?
    [Laughter.]
    Mr. Ergen. Yes, there will.
    Senator Specter. That will be very persuasive on my vote.
    Mr. Ergen. Yes, there will, because we eliminate 500 
channels and that frees up an awful lot of spectrum for C-SPAN 
1 through 400, if we need to, to carry hearings ad infinitum.
    Senator Specter. Mr. Chairman, thank you for scheduling 
this hearing. This is a very complicated subject and I think 
there has been substantial additional light shed on it this 
morning and this afternoon.
    Thank you.
    Chairman Kohl. I thank you, Senator Specter.
    We are going to begin to wrap it up. I am going to give 
each of you a chance to say in a minute or two whatever you 
wish on the basis of what you have heard today, but I will 
express myself, too, for a minute or two.
    If this merger went through, as Mr. Pitofsky indicated, the 
only way it could be implemented is with Government oversight. 
Nobody here is disputing the fact that those promises you are 
making are crucial to any consideration of the merger. So, in 
effect, we would have to be inserting the Government in 
perpetuity to be sure that those promises that you are making 
can be, in fact, implemented. It is an argument almost on its 
face to be very, very apprehensive about allowing a merger like 
this.
    I think all of us are fearful that, given 5 or 10 years, 
there will be you and cable and you won't compete on price. You 
will wink at each other and they will stop competing with you 
on price and you will stop competing with them on price. You 
will compete for service and in all the other ways except 
price, and you won't have other competitors to worry about and 
you will make a fortune and the consumer will pay.
    The danger of that happening is so huge that it seems to me 
that there are enormous barriers that you will have to surmount 
in order to get this thing through the Antitrust Division and 
the Attorney General's office. So I am very, very concerned 
about it. I don't want to be mealy mouthed and say on the one 
hand, on the other hand. You know, you all are very strong and 
determined people. You make decisions and you don't take half-
assed positions. You know, you put your money and your future 
on your idea of where things are going, and if it works, it 
works, and if it doesn't, it doesn't. But you don't make your 
success by being on the one hand or on the other hand. You take 
very strong positions, so sometimes you have to hear very 
strong positions.
    I think this would be great for you and great for your 
shareholders, which is what you are all about, but I do not 
believe at this point it would be great for the people of 
America.
    In a minute or two, Mr. Nixon, do you want to recapitulate 
how you feel right now?
    Mr. Nixon. Thank you very much, Senator. I appreciate your 
interest and the Senate's interest in this issue.
    There has not been a great deal of discussion about the 
various State and State attorneys general, although I have 
worked on this matter with dozens of my fellow attorneys 
general and been on the phone and in person as early as very 
early this morning with some of them. I myself have been very 
personally active in antitrust issues in my decade as attorney 
general, although I was not involved in the Microsoft case.
    I thought there was an argument to be made that they were 
improving things in that particular case. And while I stood 
quietly on the sidelines in that regard, I am not in this 
regard. I think that the vast majority of the States and State 
attorneys general are also exceptionally concerned about 
significant portions of their jurisdictions having competition 
for a valuable, valid, important used service wiped out. We 
will be active.
    Thank you, Mr. Chairman.
    Chairman Kohl. Thank you.
    Mr. Hartenstein?
    Mr. Hartenstein. Mr. Chairman, thank you. We are not 
competitive, simply put, with cable in those 42 million homes 
where we cannot today provide a consumer the television that 
they want to watch most, and that is their local channels. 
Neither one of us alone can serve all those markets. The best 
either one of us can do is some 50 to 70 markets, which would 
leave all of those millions of homes unserved with a truly 
competitive alternative.
    I think the underlying economics of both the cable industry 
and the DBS industry are very capital-, very infrastructure-
intensive. I think competition will be going vigorously as we 
go forward. The consumers obviously here from our perspective 
are going to benefit, those consumers in those 42 million 
homes.
    In the good State of Missouri, there are some 13 DMAs that 
cover the State of Missouri. Some of them are from outside, 
other States. We are only batting 3 for 13 today. We want to be 
able to deliver to the local broadcasters in Missouri and many 
of your other States 13 for 13, 9 for 9, or whatever the number 
is. That is what we can do with this. We can only do it 
together.
    Thank you for your time.
    Chairman Kohl. Thank you, Mr. Hartenstein.
    Mr. Ergen?
    Mr. Ergen. I am disappointed that Attorney General Nixon 
has pre-determined this merger because I think the right 
process is that you get all the facts and we are still 
providing documents, economic analysis, technical analysis, to 
the regulatory agencies. So there is a lot of information that 
still has to come out. Certainly, there will be interviews with 
people, and so forth, and I think the proper procedure is the 
State attorneys general should be included, and to work with 
the Justice Department to make sure they see all the 
information before they make a determination.
    I feel bad for the white areas in Missouri that Attorney 
General Nixon has shown because those customers in my lifetime, 
if this merger were not to happen, are not going to get high-
speed Internet access. Those kids are not going to have the 
same educational capabilities as kids in the cities. They are 
not going to get local-into-local, they are not going to get 
competition. Their rates, as Mr. Kimmelman has said, will go up 
higher because they won't have local-into-local.
    My third and final point is that I think there is a 
misunderstanding here that going from three to two would be a 
duopoly and that we could suddenly collude with the cable 
operators. Understand that cable operators are different in 
every city and we would have to collude with dozens of cable 
operators who have 80 percent of the business.
    Now, I can tell you as a businessman--and I know you are a 
businessman--you are not going to put a $5 billion asset in 
outer space and not go and try to get the customers--where you 
have a low marginal cost, go get the customers from the cable 
company who has 80 percent of the business. We are certainly 
not going to collude with AT&T, Time Warner, Cox, Comcast, 
Charter, and the other thousands of cable companies across the 
country.
    This is not a case where you can collude with the guy next 
door, as in some other cases. That is why each individual 
merger has to be looked at on its merits and in its own set of 
circumstances, and ours are materially different. And nobody on 
any side of the argument has denied the fact that there are 
huge efficiencies and huge benefits to consumers from this 
merger. And when you can show that--and it is a high burden of 
proof, I will agree with you, but when you can show that, 
mergers like this can be allowed.
    Chairman Kohl. Thank you, Mr. Ergen.
    Mr. Pitofsky?
    Mr. Pitofsky. Mr. Chairman, three very brief points. One is 
I want to make sure the record is clear. The number of people 
who may be hurt by this merger is not 13 million. They don't 
have any cable at all. There are many other people in this 
country who have inadequate cable, analog cable, obsolete 
cable. They could switch to satellite. Now, they have two 
choices. They will also have only one.
    Second, it is not a matter of colluding with all the cable 
companies. EchoStar itself in a formal court filing a year-and-
a-half ago said that the reason that satellite prices are so 
low is because of competition between the two satellite 
providers, and that cable competition doesn't influence those 
prices. Now, when the competition between the satellite 
providers is eliminated, I expect that prices would drift up. 
Maybe it will be nationally and they will drift up all over the 
country, but that is not good news either.
    Finally, I don't want to say that the Government never 
should exercise oversight of the kind that you have described 
and tried to extract from the CEOs here. We have done it, but 
usually that kind of oversight is in vertical mergers, 
conglomerate mergers. I presided over some of those conduct 
remedies myself, but I will say this: I cannot think of a case 
in 100 years in which a conduct remedy was relied upon to 
permit a merger to monopoly or duopoly.
    Thank you.
    Chairman Kohl. Thank you.
    Mr. Kimmelman?
    Mr. Kimmelman. I think we should start by looking at what 
happens if this merger does not go through. These two companies 
have been out there, done wonderful things, but cable rates 
keep going through the roof and I see no signs that they are in 
a position in the foreseeable future to offer what consumers 
really want--their local broadcast stations in every community 
in the country, packaged with a broad variety of programming, 
installation costs and multi-set hook-ups at a price that is 
competitive or lower than cable.
    Second, for 4 years this property, DIRECTV, has been 
dangling out there, people looking to buy it. The one other 
potential purchaser is a national television network that owns 
stations serving more than 40 percent of all consumers, owns 
global properties with satellite capacity throughout the world, 
and owns more than 20 regional sports stations, studios and 
newspapers around the world.
    Its economic incentives are quite clear. It makes its money 
mostly by programming. It has no incentive to compete head-on 
with cable to drop prices. It has an incentive to push cable to 
raise what it spends on programming so that it, News Corp., can 
make more money. That is a lose-lose for consumers--higher 
prices for programming, no competition from satellite, higher 
prices on cable.
    I suggest that in this environment we take the unusual step 
of looking beyond antitrust, attempting to remedy what the 
Federal Communications Commission can remedy first and do the 
regulatory oversight, and leave finally for the Justice 
Department to look at the remaining antitrust issues.
    I suggest at that point, if we have new entry, if we have a 
pricing promise, that antitrust issue is a question of whether 
you need to divest some satellite capacity to serve rural 
America. I think that would be a better result for consumers 
everywhere.
    Thank you.
    Chairman Kohl. Thank you, Mr. Kimmelman.
    Mr. Fritts?
    Mr. Fritts. Mr. Chairman, with all due respect to my good 
friend, I thought the merger was about DIRECTV and EchoStar 
that was on the table.
    Just a couple of comments from the trade press that follows 
satellite television. The satellite TV investment analyst Jimmy 
Schaeffler, when asked about this merger, said that consumers 
today probably have a greater chance of getting all 210 markets 
and getting them sooner if the deal does not go through.
    Let me underscore that all 210 markets' carriage of local-
into-local is very important for our broadcasters. Bob Sherman, 
who is the editor of Satellite Business News, the industry's 
leading trade publication, said, and I quote, ``EchoStar's 
announcement is a very shrewd political Hail Mary with no 
downside because it is unenforceable.''
    I will let those statements stand on their own and thank 
you, Mr. Chairman, for convening this hearing and for your 
introspective look at this issue.
    Chairman Kohl. Thank you, Mr. Fritts, and thank you all 
very much for coming. It has been a very enlightening hearing.
    The hearing is closed.
    [Whereupon, at 12:27 p.m., the Subcommittee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]

                         QUESTIONS AND ANSWERS

    Responses of Charles W. Ergen to questions submitted by Senator 
                               Brownback

    Question 1: Broadband
    As you know, I have been deeply involved in legislative efforts to 
spur increased access to broadband services for rural consumers. I am 
interested to hear more about the broadband plans for this proposed 
merger.
    You are saying that, should this merger be approved, EchoStar will 
offer broadband services sometime around 2003 or 2004, and that your 
broadband service will effectively be available to virtually anyone who 
buys a dish. But EchoStar and DirecTV are competing with 2-way 
broadband services today, are they not, and aren't these services 
available nationwide? What would be the difference in these services 
pre and post merger?
    Answer: Please see the response to Senator Kohl's fifth question.

    Question 2: Spectrum
    Mr. Ergen, when we met last year you told me a merged EchoStar/
DirecTV, even with its combined spectrum resources, could not carry 
local broadcast signals in all 210 TV markets. In addition, you were 
very clear that a merger approval that requires these companies to give 
up more than a trivial amount spectrum would be unworkable. Today, with 
the same amount of spectrum at issue, you are now promising to carry 
local broadcast signals in all 210 markets.
    Opponents of your merger continue to insist that you can, using the 
existing spectrum resources of EchoStar or DirecTV individually, offer 
all local broadcast signals, non-broadcast video programming including 
pay-per-view, and a competitive national broadband service.
    Given your change of views, do you still believe it is necessary 
for the proposed merger to include all of the spectrum resources of 
DirecTV and EchoStar?
    Answer: When EchoStar and Hughes announced the merger, we both 
stated that the merger would enable the new firm to provide local 
channels in over 100 DMAs, including one in every state. At that time, 
the companies lacked the engineering proof necessary to make the 
promise to deliver local channels for all 210 DMAs, and we did not wish 
to promise more than we knew we could deliver.
    Following the merger announcement, engineers from EchoStar and 
Hughes - working together for the first time - studied the feasibility 
of delivering local channels in all 210 local markets. The combined 
efforts of the two companies led to our exciting announcement on 
February 26th that the new firm could and would commit to deliver local 
channels to all Americans.
    Our commitment to carry local channels to all 210 DMAs, however, is 
entirely premised on the spectrum made available by the merger. Without 
all of the spectrum resources of the two firms it would not be possible 
for New EchoStar to offer the full array of programming and services 
consumers want, including local channels for all 210 DMAs, a broader 
selection of HDTV programming, video-on-demand, more specialty, 
educational, foreign language, and general interest programming, and 
more. Our decision to carry all 210 DMAs requires the devotion of more 
spectrum to local programming than previously anticipated, and 
heightens, not reduces, the need for the full compliment of DBS 
spectrum of the combined companies.
    For a more detailed explanation of our analysis of the 210 issue, 
and some of the technical issues involved, please see my responses to 
Senator Hatch's first, eighth, and fifteenth questions.

    Question 3: Your announced business plan for the proposed merger 
seems to be based on existing DBS orbital slots and satellites already 
in use, as well as satellites expected to be placed in orbit in the 
near future. However, DirecTV and EchoStar also control outright, or 
have an interest in, 50% of all Ka-band orbital slots. What assurances 
does the Congress have that you will take full advantage of these slots 
to provide service? I would remind you that these slots must be in use 
in a relatively short period of time, or else the ITU will revoke them. 
Such an outcome would be unacceptable.
    Answer: The best way to ensure that the full capacity and benefits 
of Ka-band are put to use, and put to use quickly, is to create an 
affordable satellite broadband internet service. The merger will give 
the new firm the spectrum capacity, subscriber base and economies of 
scale necessary to ensure that next-generation satellite residential 
broadband service becomes a reality everywhere in the United States, 
rapidly and inexpensively, in a reasonable time frame. A lower-cost 
satellite broadband service will drive demand, which will create the 
capacity demand and economic incentives necessary for full and timely 
deployment of additional satellites.
    In contrast, it is not likely that either company standing alone 
could deploy on a timely basis an advanced residential service of mass 
scale and appeal at an affordable price. Indeed, without the cost 
savings and efficiencies created by the merger, consumer satellite 
broadband will continue to suffer from the high infrastructure and 
subscriber acquisition costs that relegate it to niche status today. 
Again, the merger offers the best chance for full utilization of the 
two firms' Ka-band licenses.
    EchoStar, Hughes, and the companies in which they have investments 
control considerably fewer than 50% of the orbital slots capable of 
providing broadband Internet service to the United States. Moreover, 
the fact that EchoStar has minority investments in two Ka-band license 
holders does not enable it to control what those firms do with their 
orbital slots. In any event, there are at least ten other firms, with 
no affiliation whatsoever with EchoStar or Hughes, that hold licenses 
to operate Ka-band satellites in slots capable of providing broadband 
service in the United States. There is ample Kaband capacity for each 
of those firms to deploy a satellite broadband service and to compete, 
if they are willing to make the commitment to do so.

                                

 Responses of Charles W. Ergen to questions submitted by Senator Maria 
                                Cantwell

    Question 1: You have publicly indicated that the combined DirecTV-
DirecTV would serve the 210 designated market areas with ``local-into-
local'' service. You have also stated that you would accept a 
requirement to meet this commitment as a condition of the merger. Could 
you please describe your plan to accomplish this? In what timeframe do 
you plan to complete this service? What impact on the cost to consumers 
do you expect this to have?
    Answer: EchoStar will be able to offer local programming to all 210 
DMAs only with the merger's end to the wasteful duplication of 
programming. In order to create space for all of these new local 
channels, the combined company will have to end the transmission of 
some redundant programming. However, EchoStar and DirecTV have 
formulated plans, described below, to enable the new local programming 
as soon as possible. Of course, these plans are subject to change and 
revision, as EchoStar and DirecTV are working to find ways to improve 
the process.
    Prior to the merger, EchoStar and DirecTV will jointly develop a 
``dual speak'' receiver capable of receiving programming in both the 
EchoStar and DirecTV formats, and a ``triple head'' dish capable of 
receiving signals from all three CONUS orbital locations (collectively, 
``New Equipment'').
    As soon as possible after the merger, existing DirecTV Para Todos 
subscribers will receive New Equipment, free of charge, in order to 
receive New EchoStar Spanish language programming, thereby allowing new 
uses of capacity on three transponders at the 119+ W.L. 
orbital location.
    Also as soon as possible after the merger, DISH subscribers in the 
top 40 DMAs who subscribe to local channels also will be switched to 
New Equipment, free of charge, and will receive their local channels 
from the 101+ W.L. orbital location, thereby allowing the 
EchoStar VII and VIII satellites to serve different DMAs than they 
currently are scheduled to serve. With this change, EchoStar 
anticipates that EchoStar VII and VIII could serve about 60 additional 
DMAs. It is expected that these first two steps would be completed 
within 8 months after the merger is completed.
    After completing the above steps, subscribers in the 60 markets 
served by EchoStar VII and VIII and who commit to subscribe to local 
channels would receive New Equipment, to the extent required, free of 
charge. After DirecTV 7S becomes operational, a total of about 150 DMAs 
will receive local channels, and subscribers in the additional markets 
who commit to local service would receive New Equipment, to the extent 
required, free of charge. DirecTV 7S currently has an anticipated 
launch date in late 2003, although the merged firm's progress in its 
plans to offer local programming at that date depends on when the 
merger is consummated. The combined firm also plans to launch a new 
spotbeam satellite, tentatively named New EchoStar 1. After this 
satellite is operational, about two years after the merger, the 
remaining DMAs (210 total) would receive local channels. Remaining 
subscribers in the additional local markets who commit to subscribe to 
local channels would receive New Equipment, to the extent required, 
free of charge.
    New EchoStar will offer these local programming channels at the 
same price nationwide, in line with our one nation, one rate card 
commitment. Local programming will make New EchoStar more competitive 
in DMAs where we are unable to provide local channels currently, and 
other efficiencies created by the merger--including HDTV programming, 
interactive services, more national programming, and important cost 
savings--will make New EchoStar more competitive nationwide. 
Accordingly, we anticipate that cable providers and other MVPD 
competitors will respond with better pricing and/or expanded services.

    Question 2: In some markets in which ``local-into-local'' service 
is available, I understand that consumers must use two dishes to 
receive signals from two satellites, one delivering the more popular 
services and a second delivering certain local signals. Please explain 
the current circumstances that underlie this situation and explain how 
the combined companies would manage satellite capacity and resources in 
this regard? Will any consumers continue to be required to have a 
second satellite dish to receive certain local television stations? If 
not, in what timeframe do you expect to have the system reconfigured to 
accommodate single-dish reception of all channels received by a 
subscriber?
    Answer: EchoStar transmits DBS signals from four different orbital 
locations or slots. Two of the slots, 110+ W.L. and 
119+ W.L., because of their placement over the middle of the 
country, serve the entire United States. These are called ``CONUS'' 
slots (CONtinental United States). The other two slots, 
61.5+ W.L. and 148+ W.L., only serve eastern and 
western portions of the United States, respectively, and are called the 
``wing slots.'' A single small satellite dish cannot receive signals 
from both a wing and CONUS slot, because they are too far apart.
    Because of the wasteful duplication of programming between EchoStar 
and DirecTV, EchoStar lacks the satellite and spectrum capacity to 
carry at the CONUS locations all of the local channels required by 
must-carry provisions of the SHVIA, as well as the full complement of 
national programming that consumers demand. Left with the alternative 
of ending local channel service to some DMAs, EchoStar now carries some 
local-intolocal programming from the 61.5+ W.L. and 
148+ W.L. orbital locations, and offers consumers, free of 
charge, the second satellite dish required to receive them. In total, 
almost one million of EchoStar's current subscribers use two dishes to 
receive their programming.
    The FCC ruled today that we need to modify this ``Two-Dish'' plan. 
We are currently reviewing the FCC decision. We will inform the 
Committee of our plans as soon as our review is completed.
    The merger will free up hundreds of channels of satellite and 
spectrum capacity at the CONUS orbital locations, which will allow 
carriage of all local-into-local through a single dish. Under current 
plans, EchoStar customers in the approximately 40 largest DMAs will 
receive one-dish local-into-local programming within 8 months of the 
consummation of the merger. Approximately 60 DMAs will receive new 
local programming service, on one dish after that, and all consumers 
will receive one-dish local-into-local programming approximately two 
years after the merger closes.
    However, there may be a very small number of consumers for whom a 
single dish may not be able to receive programming from multiple 
orbital locations. For example, a consumer might have a tree or 
building partially obstructing the view of the southern sky, making it 
impossible to view all the necessary orbital locations from any single 
point on his or her property. For these customers, a second dish may be 
required to receive all the programming from the three CONUS orbital 
locations.

    Question 3: Currently, direct broadcast satellite delivered 
broadband is not widely available. Could you please describe with all 
possible specificity your plans to expand and improve broadband 
availability, in general and with particularity as to rural 
communities. Please also indicate when you expect to have bi-
directional satellite broadband. Please too describe the data rates you 
expect to achieve, and in what time frame. Please also indicate if and 
when you expect DBS delivered broadband to be competitive with cable 
and DSL pricing and availability. Finally, describe the impact that the 
merger would have on your company's ability to expand and improve 
broadband service.
    Answer: Satellite broadband Internet is available throughout the 
United States, to any subscriber who has a view of the southwestern 
sky. However, satellite broadband is still priced too high for most 
consumers, and too high to compete with terrestrial providers like 
cable modem and DSL, because of high fixed costs and expensive consumer 
premises equipment, among other factors. EchoStar, through StarBand 
Communications, Inc., and Hughes, through Direcway, have relied on 
leased Ku-band transponders to provide satellite broadband service, an 
expensive and inefficient method of providing service, as well as one 
that can serve only a limited number of subscribers.
    Consequently, both EchoStar and Hughes have turned to the Ka-band 
in hopes of developing an affordable, competitive satellite broadband 
service. While use of next generation Ka-band satellites would be 
superior to the current Ku-band offerings, EchoStar and Hughes believe 
that a Ka-band satellite broadband provider would still need at least 5 
million subscribers to achieve the scale economies in consumer premises 
equipment, to spread fixed costs, and to justify the substantial 
investment necessary to develop a competitive consumer broadband 
service. Neither company standing alone could deploy on a timely basis 
an advanced residential service of mass scale and appeal at an 
affordable price.
    Although a Ka-band strategy avoids some of the capacity constraints 
that afflict Ku-band service, it requires the upfront investment of 
hundreds of millions, if not billions, of dollars in complex new 
satellites and technology. The deployment of these Ka-band satellites 
has taken longer, and will require more capital, than many Ka-band 
licensees have been able to sustain. Even Ka-band licensees with 
experienced and well-financed backers have been forced to scale back or 
even abandon their efforts to deploy satellite broadband. Moreover, the 
use of Ka-band satellites does not have any ameliorative effect on the 
high cost of receiving equipment and satellite modems, and indeed will 
increase that cost at least in the short term. Unless these equipment 
and subscriber acquisition costs can be reduced significantly, 
satellite Internet will not likely grow out of a smallscale, high-
priced niche in the consumer market. It is these daunting economic 
barriers--very large initial investment in expensive satellites coupled 
with high up front costs to acquire new subscribers--that have stifled 
continued investment in satellite Internet technology.
    As a result of these substantial obstacles to deployment of a 
consumer-oriented satellite broadband service, along with other 
factors, HNS has developed Spaceway with a focus on the larger 
commercial, or ``enterprise,'' customers while EchoStar's Ka-band 
program has remained modest in scope. Refocusing and integrating these 
Ka-band programs will provide the opportunity to achieve the required 
economic scale for ubiquitous residential true broadband service. 
Combining the broadband services of Hughes and EchoStar will provide 
efficiencies that will enable New EchoStar to deploy a competitive true 
broadband satellite offering for the benefit of all U.S. consumers, 
rural, suburban and urban alike.
    Because of the high price of satellite broadband, and the failure 
of DSL and cable companies to roll out their networks to serve 
customers in rural areas, rural communities today do not have any 
affordable broadband option. The merger will create a bridge over the 
digital divide: competitive, affordable broadband option for rural 
communities. That affordable broadband option promises additional 
benefits uniquely well suited to rural communities, such as 
telemedicine programs, connectivity for rural doctors, and distance 
learning.
    Both StarBand and Direcway currently offer two-way satellite 
broadband service. However, because of the capacity constraints 
associated with the leased Ku-band transponders both companies now use, 
neither service is able to provide uplink speeds in excess of 200 kbps, 
the bi-directional standard that the Federal Communications Commission 
has set for ``advanced telecommunications services.'' With the 
introduction of Spaceway sometime in late 2003, Hughes expects that it 
will be able to provide to consumers a two-way satellite broadband 
service that satisfies the FCC's standard. However, as noted above, the 
high costs of the infrastructure, consumer equipment, and subscriber 
acquisition will prevent this two-way broadband service from being 
affordable to most consumers. With the merger, the combined firm 
expects that it will be able to achieve economies of scale that will 
permit it to provide a truly affordable, true broadband service.
    Simply reducing costs will greatly expand both the number and 
categories of satellite broadband subscribers. A more affordable 
satellite broadband alternative will drive broadband deployment and 
acceptance in rural areas that cable-modem and DSL do not serve. At the 
same time, it will give consumers who are already served by cable-modem 
or DSL yet another broadband option, forcing those incumbent service 
providers to compete in price, quality of service, and new, innovative 
products. At the same time, the satellite broadband firm itself will be 
better able to expand and improve its service. The increased scale and 
rate of growth for New EchoStar not only will allow it to reduce costs, 
but also will reduce the risk profile for what has proven to be a 
highly uncertain industry. A lower risk profile will permit the merged 
company to make greater investments in subscriber acquisition (such as 
increased subsidies of consumer equipment), while making it easier for 
the firm to obtain financing for investments in capacity, technology, 
and new services. In addition, the new firm will have available to it 
sufficient orbital slots, close enough together, to provide a one-dish 
television and broadband service to all subscribers.

    Question 4: You have made the commitment to provide nationwide 
pricing, to avoid the potential for discriminatory pricing in rural 
communities. Although I understand that some competitive features of 
the direct broadcast satellite are outside the control of either 
EchoStar and DirecTV, and within the control of retailers. But as I 
understand it, your company provides incentives and subsidies to 
facilitate retail promotions and special packages. In his testimony, 
Gene Kimmelman of Consumer's Union recommended that as a precondition 
for approval, the government should require the combined EchoStar and 
DirecTV to commit to provide the same pricing, options, program 
packages, promotions and customer service that EchoStar provides in 
urban, competitive markets. Would you agree that there are some 
business practices that can influence the ability of a retailer to 
offer consumers promotions or special packages, and that in executing 
this merger, you would agree to engage in those practices in a manner 
that would not treat rural consumers disparately from consumers living 
in communities with higher population densities. Would you commit to 
assuring practices that do not have disparate impact on rural consumers 
as a condition of the merger?
    Answer: EchoStar is committed to carrying forward its existing 
practice of offering nondiscriminatory pricing so that all consumers, 
whether they have good competitive alternatives or not, receive the 
benefits of the increased competition that this merger will bring. In 
my response to Senator Kohl's first question, I elaborate on the 
factors involved in our historical pricing practices and how a consent 
decree could be crafted to ensure that all consumers receive the 
benefits of the transaction, and rather than repeating myself, I 
respectfully refer you to that answer.
    With regard to retailers specifically, we offer retailers a variety 
of incentives to encourage them to participate in our national 
promotions, and to offer good deals to consumers. Because we need to 
offer consumers a low up-front cost both to compete against the cable 
companies, and to induce new users to try our service, we subsidize our 
retailers' sales of DBS equipment. This need to keep up-front costs low 
will be just as strong after the merger, so this practice will continue 
after the merger, and we intend to continue to do everything to ensure 
that consumers can acquire our products at competitive prices. This 
will include ensuring that our retailers receive fair and equitable 
treatment so that they can continue to compete with each other on price 
and customer service. At EchoStar we believe that our strong network of 
small and independent retailers in rural America has been a significant 
factor in our success in among rural consumers, and coupled with the 
support of national chains, such as RadioShack, that are also strong in 
rural America, should continue to serve those rural consumers well.
    As I said in response to Senator Kohl's first question, we are 
willing to commit to a broad non-discrimination decree that would 
prohibit discrimination in terms of pricing or terms and conditions of 
sale against rural consumers, on the basis of the potential 
subscriber's access or use of competitive alternatives like cable, or 
on the basis of a potential subscriber's address. We believe that this 
can be accomplished in a way that would allow New EchoStar the 
flexibility to deal with particular local competitive situations, while 
maintaining the benefits of a competitive national price for all 
consumers, and we would be pleased to discuss with the Department of 
Justice, the state attorneys general, and the Federal Communications 
Commission how this might be accomplished.

    Question 5: Do either EchoStar or DirecTV currently offer DBS 
broadband Internet access through competitive Internet service 
providers (Internet service providers other than Echo5tar or DirecTV, 
such as Earthlink or America Online)? If so, could you please describe 
the services offered and the consumer pricing associated with each 
service provider? Will the combined companies offer consumers a choice 
in Internet service providers? Could you please describe the services 
you plan to offer and the pricing you will offer consumers? Will the 
combined company offer nationwide pricing, options, promotions and 
customer service for all broadband services?
    Answer: As I noted in my response to Senator Kohl's sixth question, 
EchoStar is committed to allowing its Internet subscribers to access 
the entire Internet, freely and openly. In fact, Spaceway's business 
plan now is to establish interconnections with as many Internet portal 
partners as possible as gateways for its service. Satellite-based 
broadband service currently accounts for a very small fraction of the 
broadband market. To capture market share, New EchoStar will have to 
compete vigorously with cable modem and DSL service providers. To be 
sure, the combined entity will take the appropriate business decisions 
to increase its satellite-based broadband subscriber base, which may 
include offering consumers a choice of ISPs. But, at this point, it 
would be inappropriate, in our opinion, to commit to integrate other 
ISPs into our satellite operations due to questions about the 
technological and the business issues involved in such a commitment.
    Until recently, EchoStar offered satellite broadband service 
through StarBand, which acts as its own ISP. EchoStar believes that it 
would be inappropriate to subject StarBand--or any satellite broadband 
provider -to ``open access'' requirements. First, the FCC in a recent 
declaratory ruling found that cable modem service is an ``information 
service'' and therefore is not regulated as a common carrier under 
federal telecommunications law. See In the Matter of Inquiry Concerning 
High-Speed Access to the Internet Over Cable and Other Facilities (GN 
Docket No. 00-185), Internet Over Cable Declaratory Ruling, Appropriate 
Regulatory Treatment for Broadband Access to the Internet Over Cable 
Facilities (CS Docket No. 02-52) (Mar. 14, 2002). The FCC's rationale 
with respect to cable modem broadband Internet applies with even 
greater force to satellite broadband. It would be counterintuitive at 
best for the federal government to conclude that the cable industry, 
which currently serves almost 70 percent of residential broadband 
subscribers today, see id. at para. 9, should not be subject to ``open 
access'' or any other type of regulation as a common carrier, while the 
nascent satellite broadband industry, which serves less than 1 percent 
of those subscribers, should be subject to such regulation.
    Second, satellite broadband today is not fully competitive with 
cable modem service due in part to satellite's slower download speeds 
and significantly slower upload speeds. An open access requirement 
imposed on satellite broadband would exacerbate this quality 
discrepancy between cable and satellite by potentially diminishing 
upload and download speeds even further.
    Finally, given the precarious financial position of certain 
satellite broadband concerns, imposing regulation on the infant 
industry, particularly regulation that would have an adverse material 
effect on the product's quality, almost surely would hobble and perhaps 
kill the potential of satellite broadband to compete. Such a result 
would clearly be at odds with Congress's directive that the FCC 
``encourage the deployment on a reasonable and timely basis of advanced 
telecommunications capability to all Americans'' by ``regulatory 
forbearance, measures that promote competition. . . . or other 
regulating methods that remove barriers to infrastructure investment.'' 
Pub. L. No. 104-104, Title VII, Sec. 706, Feb. 8, 1996, 110 Stat. 153, 
reproduced in the notes under 47 U.S.C. Sec. 157.
    The New EchoStar anticipates that the merger will allow it to 
provide a two-way satellite broadband Internet service that competes 
with cable and DSL in both price and quality. Given the dynamic nature 
of the Internet, as well as the nascence of satellite broadband, it is 
too early to make predictions about the specific services that the 
merged company will offer. However, EchoStar is fully committed to 
providing nationwide pricing, options, promotions and customer service 
for basic broadband services.

                                

 Responses of Charles W. Ergen, Edward O. Fritts, Eddy W. Hartenstein, 
   Jeremiah W. Nixon, and Robert Pitofsky to questions submitted by 
                          Senator Orrin Hatch

    Question 1: The following questions are directed to specific 
witnesses, but any witness should feel free to respond to any of the 
questions or amplify the record where needed.
    Mr. Ergen and Mr. Hartenstein, when this merger was proposed you 
announced that upon approval of the merger, the New EchoStar would 
serve approximately 100 markets with local channels. Now you have 
announced that you can and will serve all 210 markets. What changed 
with respect to technology and to the marginal economics of offering 
local channels in the smaller markets that has suddenly allowed you to 
go from 100 markets to 210 markets in less than six months?
    Answer: On October 28, 2001, when EchoStar and Hughes announced the 
merger, both stated that the merger would enable the new firm to 
provide local channels in over 100 DMAs, including one in every state, 
as well as affordable nationwide high-speed Internet access. At that 
time, the companies had not had an opportunity analyze the merger 
sufficiently to determine whether we could deliver local channels for 
all 210 DMAs, and we did not wish to promise more than we knew we could 
deliver.
    Following the merger announcement, engineers from EchoStar and 
Hughes--working together for the first time--studied the feasibility of 
delivering local channels in all 210 local markets. The combined 
efforts of the two companies led to our exciting announcement on 
February 25th that the new firm could and would commit to deliver local 
channels to all Americans. The new firm will be able to do what the 
predecessor firms separately cannot do for two important reasons. 
First, because of wasted spectrum, neither firm has sufficient capacity 
to serve anywhere close to all 210 DMAs on its own. Each firm now 
separately beams down approximately 500 channels of identical 
programming. With the merger, the new firm will be able to consolidate 
that wasted spectrum, freeing up those 500 channels for more productive 
uses without reducing output to consumers at all. The additional 
spectrum will be put to use serving all 210 designated market areas 
(DMAs), and offering a great deal of additional programming, such as 
more HDTV, specialty and educational programming and more interactive 
television services. Second, because the satellite and ground costs of 
collecting and backhauling local programming are substantial for each 
DMA regardless of its size, it would be economically challenging to 
launch additional satellites (each costing $250-$300 million) to serve 
smaller DMAs given the smaller subscriber bases of EchoStar and DirecTV 
separately. The merger effectively doubles the size of the subscriber 
audience for local programming and therefore makes possible the 
investment necessary to serve local channels to smaller communities.
    To accomplish the goal of serving all 210 markets, the new firm 
will use spot-beam satellites. Currently, EchoStar and DirecTV each 
have one spot-beam satellite in orbit and each plans on launching 
another in the future. Because the merger will end duplicative 
programming by rationalizing the use of available spectrum, the merger 
will allow these satellites to provide local programming to far more 
communities than otherwise possible. For example, instead of using two 
spot-beams to provide duplicate service to a single large city, the 
merger will allow one spot-beam to serve that city and the other spot-
beam to serve a smaller nearby community.
    In addition, EchoStar and Hughes have also filed with the Federal 
Communications Commission for permission to launch a fifth spot beam 
satellite, which the companies expect to cost about $300 million. 
Utilizing this fifth satellite to take advantage of the spectrum 
efficiencies and economies of scale created by the merger, we will 
achieve our goal of offering local television channels to every 
American, no matter where they live.

    Question 2: Attorney General Nixon, Mr. Fritts, and Mr. Pitofsky, 
would each of you please explain your respective interpretations of the 
recent announcement by DirecTV and EchoStar that they have suddenly 
found sufficient spectrum to carry all stations in all 210 television 
markets?

    Question 3: Mr. Ergen, I have been concerned about gatekeeper 
controls limiting consumers' access to the information or entertainment 
they want to access, especially in the internet context. I expressed 
serious concerns about this problem in the context of the America 
Online merger with Time Warner. Vivendi Universal has made a major 
investment in your company, and some suggest that this gives rise to 
the possibility of the sort of vertical integration issues you 
initially suggested you would avoid. Moreover, you have had some 
history of dropping channels during carriage disputes. Given that you 
could control the sole or dominant television and internet access 
provider in many rural areas if this merger is approved, what binding 
assurances could you give us that consumers will have access to 
programming they have come to expect as well as full and open access to 
the internet over your broadband services?
    Answer: In my response to Senator Cantwell's fifth question, I 
elaborate on EchoStar's position with respect to ``open access'' 
requirements for satellite broadband, and rather than repeat myself, I 
respectfully refer you to that answer.
    EchoStar and DirecTV have played an important role in providing a 
launch platform for independent programmers. As the National Cable & 
Telecommunications Association recently commented to the FCC, ``The 
allure of DBS coverage for new networks, vertically or non-vertically 
integrated, is also strong. Unlike the variety of channel positions and 
system configurations involved in cable system launching, a deal with a 
DBS provider means immediate nation-wide reach to millions of homes in 
the same channel.''\1\ EchoStar programming executives add that 
programmers use DBS carriage to improve their bargaining position with 
cable systems. The programmers assume that DBS carriage will improve 
their chances, and price, for carriage on cable systems, not that DBS 
carriage alone will necessarily make the new programming profitable. 
The agreement with Vivendi illustrates how a DBS firm can facilitate 
the entry of new programming. As part of the agreement, Vivendi 
Universal will develop five new programming channels and EchoStar has 
agreed to carry them. While EchoStar and Vivendi could legally enter 
into an exclusive contract, it is important to note that the new 
programming under the agreement will be distributed on a non-exclusive 
basis: that is, the programming will be available to all other MVPD 
providers. Indeed, far from encouraging exclusivity, EchoStar's 
agreement provides Vivendi with incentives to distribute the new 
programming to other MVPD providers and in fact gives EchoStar the 
express right to cease carrying Vivendi's channels if it does not 
obtain carriage for those channels on other platforms.
---------------------------------------------------------------------------
    \1\ Comments of National Cable & Telecommunications Association, In 
the Matter of Implementation of the Cable Television Consumer 
Protection and Competition Act of 1992, Development of Competition and 
Diversity in Video Programming Distribution: Section 628(c)(5) of the 
Communications Act: Sunset of Exclusive Contract Prohibition, CS Docket 
No. 01-290, (dated December 3, 2001), at 15.
---------------------------------------------------------------------------
    The Vivendi transaction will benefit not only EchoStar, but all 
independent MVPD providers and consumers, by assuring Vivendi a 
foothold in attempting to establish new networks, provide new and 
innovative options for consumers, and increase competition with the 
entrenched incumbents. A few major programmers, such as Disney, General 
Electric/NBC, Viacom, and AOL TimeWamer, now control the vast majority 
of the programming offered by most MVPD providers. These programmers 
have used this power to steadily raise that price that they charge us 
and other MVPD providers for this programming. It is very difficult for 
a new provider to break into the MVPD market with a new network, both 
because of limited capacity and the disincentives of the integrated 
cable MSOs to permit competition with their programming interests. That 
entrenched structure insulates the incumbents from competition and 
preserves their power by limiting the options of independent MVPD 
providers and consumers.
    More specifically, Vivendi will neither have any power nor any 
incentive to exercise any control or influence over the merged 
EchoStar-Hughes entity. The economic interest that Vivendi has in 
EchoStar amounts to about 10%, and the voting stake is even smaller at 
about 2%, before the merger with Hughes is consummated. Post-merger, 
these percentages will decrease to less than 5% equity interest and 
about 1% voting interest in New EchoStar. At the same time, a 
programmer like Vivendi could not survive based on New EchoStar's 17% 
market share; it needs carriage on the major cable MSOs and could not 
discriminate against them.
    Even with the Vivendi deal, EchoStar will need to supply its 
customers with the ``crown jewel'' programming, like HBO, CNN, and ESPN 
that is supplied by the major incumbent programmers and demanded by its 
customers. Those entrenched incumbents possess an enormous amount of 
power. In addition to the ``crown jewel'' programming, EchoStar will 
also need to be able to offer the wide variety of other programming 
that its subscribers expect. The idea that a small investment in some 
of the channels Vivendi develops for EchoStar will either change 
EchoStar's incentives or enable it to discriminate against programming 
providers is not credible. The Vivendi deal increases options and 
competition, consistent with the overall goal of the EchoStarHughes/
DirecTV merger.
    Finally, you have mentioned disputes that we have had with 
programmers. In fact, in our view these disputes further illustrate the 
benefits to consumers of expanding programming options and competition 
through the Vivendi deal. Programming costs are the largest segment of 
our variable costs and they have been continually rising, putting 
pressure on us to raise prices to consumers. These disputes have 
generally arisen when we have resisted price increases that we did not 
believe were warranted. We believe that our actions in resisting price 
increases have benefited consumers.

    Question 4: Attorney General Nixon and Mr. Fritts, in your 
respective opinions, are Mr. Ergen's assurances regarding television 
carriage and internet open access sufficient to safeguard the 
legitimate interests of consumers and competing ISPs?
    Answer: We are willing to embody our commitments in legally binding 
consent decrees or other enforceable agreements. As I noted in my 
response to Senator Kohl's fourth question, I have committed that the 
merged company would still provide all local broadcast channels that 
offer meaningful programming, and I have offered to sign agreements 
with local broadcasters to confirm this commitment.

    Question 5: Attorney General Nixon and Mr. Pitofsky, let me ask you 
both a question that touches on a couple of different antitrust 
principles. There has been some debate about what the relevant market 
is and whether choosing one market over another really makes a 
substantive difference in this case. I would note, for example, that 
EchoStar has taken the position in litigation against DirecTV that DBS 
is the relevant market and that DirecTV is a monopoly in that market, 
but has more recently adopted a different and broader market 
definition. Also, one argument offered in support of the merger is that 
better competition to cable in the more urban areas, as well as more 
local television and pay per view offerings by the merged company, 
justify elimination of satellite television and broadband competition 
nationwide. Moreover, Mr. Kimmelman admitted that your analyses of the 
antitrust issues were correct, but that a broader view of some sort was 
required in this case, while attempting to argue that while DBS and 
cable were separate markets now, they would somehow become one market 
if the merger were approved. Could you comment in detail on these 
issues, including the relevant market definition and the nature of 
competition between cable and DBS, and, finally, give us your views of 
whether the antitrust laws allow benefits in one geographical or 
product market to be traded off against harm in another such market?
    Answer: We would like to address the various issues you raise in 
this question.

    Question 1:  The Relevant MVPD Market
    Answer: The relevant market for this merger, as the Department of 
Justice has determined in similar cases, is the nationwide Multi-
Channel Video Program Distribution (``MVPD'') market.\2\ DirectTV and 
EchoStar provide pay television service in this market, offering 
traditional cable networks like ESPN and CNN, premium movie channels 
like HBO, and in 36 to 41 communities, local broadcast stations. They 
compete with cable television providers, who also offer similar mixes 
of cable networks and premium channels, and who offer local broadcast 
stations in virtually every area they serve.
---------------------------------------------------------------------------
    \2\ See, e.g., Complaint para.para. 59-63, United States v. 
Primestar, Inc., Civil No. 1:98CV01193 (JLG) (D.D.C.) (May 12, 1998).
---------------------------------------------------------------------------
    Other competitors that offer a similar mix of MVPD programming 
include nextgeneration overbuilders like RCN, Satellite Master Antenna 
Television (``SMATV,'' which offers ``private cable'' to apartment 
buildings and single-family residential developments), Multipoint 
Multichannel Distribution Service (``MMDS''), Local Multipoint 
Distribution Service (``LMDS'')), and C-Band satellite service, which 
also offers digital service nationwide. Through affiliates, WSNet 
offers a service including multiple channels, basic and premium 
programming, for a monthly fee, using mediumpower Ku band satellites. 
National Rural Telecommunications Cooperative (``NRTC'') affiliates, 
such as Pegasus Communications, who have rights to independently market 
certain DirecTV programming in defined geographic areas, also compete 
in the MVPD market. A number of nascent providers have also developed 
plans to compete in the pay TV market, such as Northpoint, which hopes 
to use terrestrial broadcasts on DBS frequencies. Cablevision plans to 
launch a competing DBS service. BellSouth, Qwest and other Incumbent 
Local Exchange Carriers are deploying fiber to the curb and VDSL 
technology and have achieved critical mass in several cities. Electric 
and gas utilities are also moving forward with ventures involving video 
distribution.
    Thus, because of the number and variety of competitors in the MVPD 
market, the EchoStar-Hughes merger will not ``eliminat[e] satellite 
television and broadband competition nationwide,'' as your question 
suggests.\3\ For example, in your home state of Utah, C-Band remains a 
viable option for rural consumers with at least 27 retailers or dealers 
selling and installing C-Band equipment and service.
---------------------------------------------------------------------------
    \3\ As discussed in more detail in our response to your question 
regarding broadband offerings, both DirecTV' and EchoStar's current 
broadband offerings are expensive ``niche'' products that have 
attracted a minimal number of subscribers, and neither is a competitive 
product with any significant influence in any market. The merger will 
enable New EchoStar to integrate these products and achieve a more 
competitive price point.
---------------------------------------------------------------------------
    Other competitors notwithstanding, however, cable companies 
continue to dominate the MVPD market, and have raised rates an average 
of over 6 percent in each of the last 10 years. By contrast, DBS 
equipment prices have steadily dropped and service prices have remained 
flat. DirectTV and EchoStar face competitive barriers that prevent them 
from providing consumers with the programming and services they desire, 
and that limit DBS's effectiveness in provoking a competitive response 
from cable (as demonstrated by cable's ability to raise prices in the 
face of low DBS prices). These barriers include limited and wasted 
bandwidth, particularly DBS's inability due to spectrum constraints to 
offer local broadcast stations beyond the largest urban areas, the lack 
of an affordable satellite Internet option, and other cost-raising 
inefficiencies of the current market structure. The merger will help 
break down these competitive barriers, and allow New EchoStar to 
fulfill DBS's potential as a more vigorous competitor to cable, with 
great consumer benefits. Moreover, the merger would be consistent with 
Congress's goals in enacting the Satellite Home Viewer Improvement Act 
(SHVIA), because it will promote head-to-head competition between 
satellite and cable and bring that competition into more local markets.
    We would also like to address your reference to issues in previous 
litigation with DirectTV. Although there have been legitimate arguments 
about the precise contours of the historic market(s) in which DirectTV 
and EchoStar have operated, it is not necessary to resolve these 
disputes to evaluate the competitive benefits of the proposed merger. 
New technological developments, especially in the rollout of digital 
cable, and the profound effect that the merger will have in promoting 
competition with cable make clear that the appropriate relevant market 
is MVPD.
    While competition with cable has always been intense, the advent of 
digital cable has increased this competition dramatically. Digital 
cable reduces the capacity and quality advantages that DBS has 
traditionally enjoyed in distinguishing itself from analog cable. It 
also allows cable to offer products, like high-speed Internet access, 
video-on-demand, and local interactive programming, that DBS cannot 
match under the current market structure. Furthermore, cable companies 
are targeting the DBS firms in ways that they have not done in the 
past, for example, with national advertising targeted at DBS and ``dish 
bounties.'' Under the circumstances, any suggestion that the New 
EchoStar could reduce its competitive efforts without losing 
subscribers and revenues to the cable firms simply ignores economic 
reality.
    It is also true the merger will change the nature of competition in 
the MVPD market by increasing the output that the newly merged company 
will produce. By eliminating duplicate programming, the merger will 
free up scare spectrum and enable delivery of more channels, many of 
local interest, and more advanced services. By removing competitively 
significant barriers that now prevent DBS from competing effectively 
with cable, the merger will force cable to respond in kind with 
improved product offerings.

    Question 2: The Nature of Competition Between Cable and DBS
    EchoStar has always believed that the only way to compete with the 
cable companies was to offer consumers a better product at a lower 
price, and that is what EchoStar has always done. Nothing about this 
merger changes that fundamental dynamic. New EchoStar will use the 
spectrum saving and other benefits of the merger to compete more 
effectively with cable. If we have the spectrum to offer a better 
product, we will be able to beat cable with lower prices. If we do not 
have the spectrum to keep up with cable on a technological basis, our 
ability to exert competitive influence on cable will fade.
    New EchoStar will continue to compete aggressively because it needs 
to grow. The cost structure of DBS's offering and nature of the MVPD 
marketplace make continued expansion an economic imperative for New 
EchoStar.
         DBS's High Fixed Costs and Low Marginal Costs. DBS's 
        satellite and uplink infrastructure requires enormous 
        investment. By contrast, the marginal costs of providing 
        additional customers with service are relatively low. This 
        structure gives New EchoStar strong incentives to grow in order 
        to spread its fixed costs, thus assuring that efficiencies 
        realized by the merger will be passed on to consumers. This 
        incentive will increase with its investment in the new spot 
        beam satellite to bring local channels to all 210 DMAs. To 
        cover the cost of that satellite, it will be imperative for 
        EchoStar to compete to acquire subscribers in the less 
        populous, more rural DMAs to be served by the new satellite.
         Expansion's Upside Potential. The opportunities to 
        grow among customers without cable are very small in relation 
        to the opportunities to grow by capturing some of the nearly 70 
        million cable subscribers. Persuading even a small percentage 
        of current cable subscribers to switch to DBS would have 
        tremendous upside value. Any strategy that attempted to exploit 
        the small number of customers without access to cable at the 
        expense of growth into cable's huge installed base would be 
        grossly counterproductive.
         Cable s Lock-In. As cable improves its products, DBS 
        will be frozen out of potential customers, due to customer 
        inertia and high switching costs from cable to DBS. New 
        EchoStar's incentives will lead it to push expansion before 
        cable entrenches further, especially since consumers who commit 
        to a digital cable/cable-modem bundle will be even harder to 
        win.
         Capital Markets'Expectations. The DBS industry's--and 
        particularly EchoStar's--ability to raise funds in the capital 
        markets, has been premised in large part on the potential for 
        continued growth in MVPD market share. Any slow-growth strategy 
        would undermine New EchoStar's relationship with a key 
        constituency.
    These market realities provide the motive, and the merger 
efficiencies provide the means, for vigorous competition with cable 
that will create better prices, more programming choices, and excellent 
service.

    Question 3: The Merger Will Not Trade Off Harms To Any Market
    Answer: Although your question correctly recognizes the benefits of 
the merger, it erroneously assumes that these benefits will be ``traded 
off' against harms in other markets.
    The merger will not cause antitrust harm in any relevant market. 
While there are consumers in the United States who do not have access 
to cable television, and therefore have fewer alternatives (though by 
no means no alternatives) than those that do, this does not imply that 
there is monopoly power over those customers in the absence of any 
evidence that the hypothetical monopolist could identify those 
customers and charge them supracompetitive prices.\4\ For monopoly 
power to exist, the seller must have the power to control prices or 
exclude competition.\5\ The New EchoStar would be able to do neither.
---------------------------------------------------------------------------
    \4\ See United States v. E.I. du Pont de Nemours and Co., 351 U.S. 
377, 392 (1956).
    \5\ See id. at 391; United States v. Syufy Enters., 903 F.2d 659, 
664 (9th Cir. 1990).
---------------------------------------------------------------------------
    As we have explained, both DirecTV and EchoStar, by the nature of 
their services, operate in a national market, and both companies have 
offered national pricing since their inception. Quite simply, it is 
impossible to for us identify and profitably price discriminate against 
subscribers without good alternatives without risking losing 
subscribers who do have good alternatives. The reasons for national 
pricing include the fact that the administrative costs of separately 
pricing, billing, and marketing to the few rural customers who lack 
access to good alternatives far outweigh any speculative returns that 
might be gained. Further, the reputational injury and destruction of 
consumer goodwill created by a discriminatory pricing policy make such 
a scheme untenable. And, as noted above, there are other competitors 
besides cable currently operating in rural areas, and new entrants into 
the market are on the horizon as well. Under these circumstances, it is 
clear that rural subscribers and other subscribers without access to 
cable will enjoy the benefits of the increased output and increased 
competition resulting from the merger, and that the New EchoStar will 
not have the power to raise prices or to exclude competitors. (For a 
more detailed description of the benefits of national pricing and its 
importance to EchoStar's business, please see my response to Senator 
Kohl's first question.)
    The merger will not change the competitive dynamics that force DBS 
to react to literally hundreds of competitors, and as you know, in 
order to ensure fair treatment of all, both companies have committed to 
continue national pricing after the merger. New EchoStar's continuing 
need to compete with cable in the national market will restrain New 
EchoStar's ability to charge supercompetitive prices in rural areas. 
The same is true of New EchoStar's continuing need to grow, a need that 
will in fact be enhanced for New EchoStar given (for example) the 
commitment to serve all 210 DMAs. The price charged for its offerings 
therefore will be determined by the areas in which New EchoStar 
encounters the fiercest competition, not where competition is lacking. 
Under these circumstances, the traditional concerns that consolidation 
in a marketplace may reduce competition do not apply.
    Furthermore, as noted above, the merger itself will encourage 
increased competition with cable companies. As you know, courts 
consider the effect on price and output when evaluating the market 
power of a firm,\6\ and define market power by the producer's ability 
to raise prices substantially above the competitive level through a 
reduction of output.\7\ Rather than reduce output, however, the merger 
will have precisely the opposite effect, by enabling the delivery of 
more channels and more advanced services. Improved DBS offerings 
inevitably will force cable companies to improve their offerings to the 
market as well.
---------------------------------------------------------------------------
    \6\ See Ball Memorial Hospital, Inc. v. Mutual Hosp. Ins., Inc., 
784 F.2d 1325 (7th Cir. 1986).
    \7\ Id. at 1331; see also Indiana Grocery, Inc. v. Super Valu 
Stores, Inc., 864 F.2d 1409, 1414 (7`'' Cir. 1989) (``Monopoly power 
has long been defined in the courts as the power to exclude competitors 
or to control price, a definition we have alternately stated in this 
circuit as `power over price' or `the ability to cut back the market's 
total output and so raise price.''') (citations omitted).
---------------------------------------------------------------------------
    The ultimate purpose of antitrust law is consumer protection.\8\ 
Our merger--which ' makes all consumers, whatever MVPD product they use 
and wherever they are located, better off than they would be without 
the merger--serves that purpose.
---------------------------------------------------------------------------
    \8\ See American Academic Suppliers, Inc. v. Beckley-Cardy, Inc., 
922 F.2d 1317, 1319 (7th Cir. 1991).

    Question 6: Attorney General Nixon, it is clear you have serious 
concerns about this merger. Could you give us some sense of what steps 
---------------------------------------------------------------------------
you plan to take with regard to the merger?

    Question 7: It was reported in the Wall Street Journal on February 
4th at--right up to the time at which the merger agreement was signed--
EchoStar and DirecTV had been exploring ways to achieve these same 
spectrum efficiencies through a joint venture, but that effort failed 
due to control and economic factors. I would be interested in Mr. Ergen 
and Mr. Hartenstein's elaboration on why such a joint venture is not a 
feasible alternative to this merger, and in Mr. Pitofsky's and General 
Nixon's analysis of that alternative. Could you both please provide a 
detailed explanation of the reasons that a joint venture is not a 
feasible alternative?
    Answer: EchoStar considered, and discussed with DirecTV, the 
possibility of a joint operating agreement (``JOA'') whereby the firms 
would share spectrum to eliminate or reduce redundant programming. 
After careful consideration, during the summer of 2001, the parties 
rejected this option as unworkable and impractical.
    Ultimately, neither EchoStar nor DirecTV could agree to cede 
control of its crown jewel assets, either to the other or to a third 
entity. The potential risk to the pre-existing businesses and the risk 
that the agreement would fall apart, particularly given the magnitude 
of investment required to bring benefits to joint operation, make joint 
operation too much of a gamble.
    There are only three options for control of a spectrum-sharing 
arrangement--control by DirecTV, control by EchoStar, or shared control 
with the potential for deadlock. Without its satellite and spectrum 
assets, neither EchoStar nor DirecTV has a business. Control of core 
assets by a competitor would be ruinous, as a dispute could lead to the 
controlling party severely prejudicing the other's business. The 
controlling party would make critical decisions affecting both 
participants, particularly with respect to which programming was 
carried at which orbital location, and thus to which consumers 
programming would be available. This would leave the non-controlling 
firm vulnerable to a number of risks, including: manipulation of the 
joint programming to favor the controlling party's customers; 
manipulation of the joint programming to favor content for which the 
controlling party has more favorable contract terms, thus effectively 
raising the non-controlling party's costs; and less responsiveness to 
technical problems that affect the controlling party's customers less 
than the non-controlling party's customers. These problems would come 
to the fore every time a transponder malfunctioned or any other event 
occurred that required realigning programming among satellites.
    ``Shared'' control would create the problems posed by committees 
made up of representatives of two entities with adverse interests, 
which would be unable to effectively resolve disputes, vulnerable to 
brinksmanship by either side, and thus inherently unstable and at 
constant risk of stalemate or disintegration. (For these reasons, joint 
ventures with two competitors sharing their crown jewel assets are rare 
in any industry.) Because of the importance of the competitive 
decisions related to the crown jewels, only the stability and certainty 
of the merger provide an adequate foundation for the success of a move 
to eliminate redundancy. Take, for example, the need to adjust the 
jointly carried programming to meet competition from cable and others. 
Both EchoStar and DirecTV might agree that changes were needed, but 
each might have a starkly different agenda concerning the nature of the 
changes to be made, because of different consumer preferences, 
differences in contracts with programmers, or merely differences in 
strategy. If they could not agree, then changes could not be made and 
both would suffer serious competitive harm. Alternatively, 
disagreements or brinksmanship could cause the joint venture to fall 
apart.
    Also, for spectrum sharing involving national channels, the firms 
would lose a valuable promotional opportunity. As part of their 
arrangements with some programmers, EchoStar and DirecTV receive blocks 
of programming time, e.g., a minute on CNN, for use in promoting their 
services. These are a valuable means to communicate with consumers 
about their business, including promotions and brand-building.
    The control and stability issues would be compounded by the need to 
avoid sharing competitively sensitive information between EchoStar and 
DirecTV. The complicated firewalUindependent decision-making system 
necessary to keep separate data on costs, subscribers, and programmer 
relationships, as well as other key information, would further impede 
any possibility that the joint operation could be effectively managed. 
The companies would likely have to coordinate pricing, promotion and 
manufacturing, in ways that may be significantly limited by the 
antitrust laws.
    On the other side of the equation, the investment required to 
accomplish such a volatile spectrum sharing arrangement would be very 
high, and would require extensive, costly and time-consuming consumer 
equipment changes that would be impossible to make absent the certainty 
of the merger. EchoStar's and DirecTV's set-top boxes are largely 
incompatible, and customers of each company generally point their 
satellite dishes to different orbital locations. Thus, the companies 
would have to select the surviving settop box technology, and bear the 
significant consumer switch-out costs associated with the merger. Even 
if the costs were shared, the decision to replace one firm's equipment 
would be harmful to that firm's brand. The firm with legacy equipment 
also would be required to share highly sensitive conditional access 
codes. Moreover, both firms might need to offer consumers new satellite 
dishes, in order to receive signals from the shared orbital location. 
Also, a variety of circumstances could lead one firm to have very 
different incentives and abilities to invest in the switch-out process 
than the other. Given the risks that the arrangement could fall apart, 
the investment necessary to undertake the transition is too much of a 
gamble without the stability provided by the merger and without the 
assurance that the investor would have long-term unitary control of the 
fruits of the investment. The resources needed to move to a new, third 
standard would be much greater still, making that course impracticable 
as well absent the assurance provided by a merger.
    Similarly, the decision on how to use each firm's satellite assets 
could significantly and adversely affect one firm or another in the 
event the agreement was terminated. Issues such as potential satellite 
failures and back-up plans would also be extremely difficult to address 
with separately owned satellite fleets. Finally, the general 
instability of such an arrangement would discourage investment in 
research and development needed to move the platform forward. Only the 
merger can provide the stability and decision-making process necessary 
to overcome these obstacles.

    Question 8: Mr. Ergen and Mr. Hartenstein, in recent FCC filings, 
you stated that the Satellite Home Viewer Improvement Act of 1999 has 
provided you with an important ``opportunity'' to carry local broadcast 
stations. Nevertheless, soon after this Congress passed that Act, you 
filed a lawsuit to overturn it, or portions of it. In that lawsuit, 
incidentally, you argued that you did not have the capacity to comply 
with the Act's must carry requirements for the 40 to 45 markets you now 
serve, let alone to fully serve all 210 local television markets. The 
government countered with expert testimony that showed how, using 
existing technology, either company could comply with must carry 
requirements in all 210 markets. Now you have announced that the merged 
company can carry all stations in all 210 markets. Do you now concede 
that your capacity objections to the Satellite Home Viewer Improvement 
Act are flawed, and do you intend to continue or drop your challenge to 
that statute?
    Answer 8. For an explanation of how we reached the conclusion that 
the merger would enable us to serve 210 markets after the merger, 
please see my response to your first question above. However, as I have 
explained, this is only possible if the merger is consummated. First, 
the capacity to carry so many new local channels will come from the end 
to wasteful duplication of approximately 500 channels of programming 
between EchoStar and DirecTV. The merger will enable the new company to 
consolidate use of that wasted spectrum and free up those 500 channels 
for more productive uses, such as local channels in all 210 DMAs, as 
other new programming and services. Second, the merger, by combining 
the current and potential subscriber base of the two DBS firms, raises 
the returns on the investment in providing local service to smaller 
DMAs by spreading the fixed cost of providing local service over the 
larger expected revenue that would come from a larger subscriber 
base.\9\
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    \9\ Besides the revenue from potential new subscribers, the larger-
than-expected revenues are generated by two factors: first, the ability 
to sell the local service to a larger existing subscriber base, and 
second, the ability to protect a larger subscriber base from switching 
to cable--that is, carrying local channels is an important service to 
maintain extant subscribers.
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    The technical issues regarding the theoretical capacity of 
launching ``super satellites'' that could enable us to serve 210 DMAs 
without a merger are complex. The experts referred to in your question 
have now submitted declarations to the FCC on behalf of private 
parties, to which EchoStar and Hughes have fully responded. The 
numerous technical flaws in the conclusion that service to 210 DMAs is 
possible without the merger need not be repeated here. (For more detail 
on some of the specific technical issues, please see my response to 
your fifteenth question below). More importantly, however, these 
declarations have never attempted to demonstrate that taking the steps 
required to achieve his theoretical plan--scrapping our investments in 
existing satellites, replacing all our consumer premises equipment, and 
launching expensive new satellites using a number of technologies that 
had never been used in a commercial satellite before--made any kind of 
business or economic sense at all. The steps proposed by the 
government's expert would have required the expenditure of several 
billion dollars of shareholders' money, would have been uncertain of 
success in any event, and could not have been justified under any 
business rationale. For example, the ``8PSK'' modulation technology 
suggested by the government's expert would be completely incompatible 
with, and would therefore require the replacement of, satellite 
receivers for each and every existing EchoStar customer. The massive 
transitional effort necessary would be proportionally greater than the 
merger--which requires replacing some but not all consumer equipment--
yet would achieve only a small fraction of the benefits of the merger 
because wasteful duplication of programming would continue. In 
addition, this 8PSK transition would result in none of the other 
efficiencies of the merger, including the economies of scale that 
reduce the per-subscriber cost of offering local programming, as well 
as the other important merger benefits like affordable satellite 
broadband Internet service. While 8PSK technology might be viable for a 
new entrant in the future as the risks of new technology are conquered, 
its system-wide use is not a practical method for EchoStar to increase 
capacity.
    Thus, we do not concede that our objections to the Satellite Home 
Viewer Improvement Act are flawed. We believe that programmers should 
be able to make programming decisions based on consumer demand. We also 
are concerned that, even with the merger, the demand for satellite 
television capacity will be strong enough that it will be important not 
to waste it on programming for which there is no consumer demand, for 
example, the numerous local home shopping channels that we would be 
required to carry, that are identical to nationwide channels we already 
carry. As the cable companies continue to upgrade their systems to 
offer more services, in response to the enhanced competition the merger 
will create, we will also need to keep up. That being said, after the 
merger and launch of New EchoStar One, we fully intend and have 
committed to provide all local broadcast channels that offer meaningful 
local programming, as I explain more fully in my response to Senator 
Kohl's fourth question, above.
    In addition, our recent challenge to limited portions of the SHVIA 
is necessary as matter of principle to protect the fundamental free 
speech right of all Americans to choose the television programming they 
want to watch. Current law provides that consumers can only have access 
to their local network channels, and prohibits Americans from watching 
local news and information originating from other areas of the country. 
EchoStar believes that Americans have the right, under the First 
Amendment, to watch satellite television programming of their own 
choosing in the same way that Americans have the right to choose the 
books or newspapers they read or the movies they watch.
    Today, consumers living outside of New York are permitted to 
subscribe to their local newspaper as well as the N.Y. Times, 
Washington Post or other newspapers across the country, yet those same 
consumers are denied access to New York television news. The technology 
necessary to make those channels available outside of the New York 
television market exists today, but EchoStar is prohibited by law from 
making that news and information available outside of New York. Even 
Congressional members are today prevented by this antiquated law from 
monitoring TV news coverage from their home states while working in 
their offices in Washington, D.C.
    Satellite TV technology can provide local TV channels to consumers 
across the entire United States, rather than the limited reach 
broadcast channels have today. EchoStar has committed, following 
approval of its pending merger with Hughes Electronics Corp., to offer 
local TV channels in all 210 television markets in the United States, 
including Alaska and Hawaii. By combining this plan with the ability to 
offer distant network TV stations, consumers would have greater choice 
in what news and information they receive.

    Question 9: Mr. Ergen and Mr. Hartenstein, is it true that, 
notwithstanding the commitment you made to this Committee at the 
hearing, that even if the merger is approved you do not intend to carry 
all local channels in all 210 DMAs in the event that your challenge to 
the constitutionality of SHVIA is successful in the Supreme Court? 
Would you both please state specifically which DMAs and which channels 
you do not commit to carrying in the event your legal challenge is 
successful?
    Answer: Please see the response to Senator Kohl's fourth question, 
above.

    Question 10: Mr. Ergen and Mr. Hartenstein, please provide your 
estimate of how much it would cost each firm for satellites to provide 
local into local service to all 210 DMAs without the merger, and then 
in a separate analysis, with the merger.
    Answer: In order for DirecTV and EchoStar to provide local-into-
local programming to all 210 DMAs after the merger, we will use two 
DirecTV satellites (4S and 7S) and two EchoStar satellites (VII and 
VIII). EchoStar VII and DirecTV-4S are already in orbit. EchoStar VIII 
has an anticipated launch date in June, and DirecTV-7S is scheduled for 
launch in late 2003. These satellites are designed to devote a total of 
20 frequencies to spot beams for local-into-local programming. Without 
the merger, these satellites largely would serve the same DMAs with 
duplicative service, but with the merger, they will be able to provide 
complementary service to different DMAs.
    EchoStar does not have access to the detailed cost information for 
DirecTV's satellites. In addition, the precise costs of EchoStar's 
satellites is confidential and proprietary, not only to EchoStar but 
also to our vendors. However, industry experience is that advanced DBS 
satellites generally cost approximately $250 million each to design, 
construct, insure, and launch.
    In addition, if the merger is consummated, EchoStar and DirecTV 
plan to construct and launch a fifth satellite, tentatively named New 
EchoStar 1. Based on preliminary analysis, this satellite is expected 
to cost approximately $300 million total, and will use 8 frequencies 
for spot beams.
    Without the merger, it would not be feasible for EchoStar to serve 
all 210 DMAs. It would require the construction of at least three 
satellites, to duplicate the coverage of the DirecTV 4S and 7S 
satellites, as well as the New EchoStar 1 satellite, and to provide 
appropriate back-up capability. Based on EchoStar's experience with 
EchoStar VII and VIII, it estimates that these satellites would cost a 
total of approximately $750-$800 million dollars, and will need to use 
approximately 18 DBS frequencies.
    Without the merger, in order to free up the 18 additional 
frequencies needed to provide local programming service to all 210 
DMAs, EchoStar would have to cut the equivalent of approximately 180-
200 nationwide standard definition programming channels for its 
service, well over half of what it currently offers. Obviously, 
EchoStar does not consider this a realistic option. Not only would such 
significant cuts in EchoStar's national programming immediately cause 
numerous subscribers to leave DISH Network service for cable and other 
MVPD subscribers, but it would prevent EchoStar from attracting new 
subscribers. This would be true nationwide, including in those DMAs 
where EchoStar added local programming. EchoStar would also have to 
consider the significant on-the-ground costs of providing local 
programming, including backhaul, which is much more expensive on a per-
subscriber basis without the combined subscriber base created by the 
merger. While local programming would, all other things being equal, 
make EchoStar more competitive in the MVPD marketplace, losing such 
substantial portions of EchoStar's channel line-up in order to provide 
local programming for more communities would be strong, net loss for 
EchoStar's competitiveness, and thus would leave consumers more at the 
mercy of the large cable MSOs.

    Question 11: Please provide specific bases for the estimates, and 
any assumptions made in those estimates, and supply any supporting 
documentation. Please list every satellite you use in creating each of 
those estimates, and state the cost of each.
    Answer: Please see above.

    Question 12: Mr. Ergen and Mr. Hartenstein, please state, for each 
of you separately, how many DMAs you will and how many you could serve 
using your current and planned satellites not counting the newest 
satellite you now propose, and when each of those satellites will or 
could begin that service. Please be specific, answering for each 
current and planned satellite and explaining if any of them would be 
used in conjunction with other satellites to achieve that result.
    Answer: EchoStar's fleet of satellites currently in use, EchoStar I 
though VI, currently serves 36 DMAs with local-into-local programming. 
None of these satellites has spot-beaming capability. The number of 
DMAs that could be served by these satellites depends on a number of 
factors, including the number of local channels per DMA, and the number 
of other types of channels carried. Based on these factors, EchoStar 
has struggled to carry local programming to the 36 DMAs it currently 
serves, requiring, among other things, increases in compression that 
have reduced audio and video quality below optimal levels.
    EchoStar VII has already been launched, and is expected to go into 
service in mid-April. EchoStar VII is capable of carrying approximately 
250 local channels with its spot beams. EchoStar VIII has an 
anticipated launch date in June 2002, going into service in August. 
EchoStar VIII is also capable of carrying approximately 250 local 
channels with its spot beams. Because of limited spectrum available to 
EchoStar, use of these satellites will require that EchoStar reduce the 
amount of programming that EchoStar's other satellites carry. However, 
with these two new satellites in conjunction with existing satellites, 
EchoStar plans to offer service to the 36 DMAs currently served, plus 
approximately 14 new DMAs, for a total of about 50.
    The precise number of DMAs served, and how these DMAs will be 
allocated between EchoStar's satellites, has not been decided, and will 
depend on a number of factors, including EchoStar's ability to 
negotiate retransmission agreements, the number of channels in the DMAs 
served, consumer demand in different DMAs, EchoStar's ability to offer 
complimentary sports programming, and the outcome of regulatory 
proceedings before the FCC concerning the must-carry rules.

    Question 13: Mr. Ergen and Mr. Hartenstein, if you desired, could 
you change the design and construction of certain of your current 
satellites to carry even more local into local stations than stated in 
the previous response? If so, please explain how, the number of 
additional stations that could be carried, the current cost of each of 
those satellites, and the cost as changed to carry the additional 
stations that could be achieved.
    Answer: It would be impossible to change the design or construction 
of EchoStar's seven DBS satellites orbiting over 20,000 miles above the 
earth.
    EchoStar has one DBS satellite, EchoStar VIII, that we hope to 
launch in June. The construction of the satellite is essentially 
complete, and all that remains is testing, finishing touches, and 
moving the satellite to its launching facility in Kazakhstan. At this 
stage, it would be impossible to change the design or construction of 
EchoStar VIII.

    Question 14: Mr. Ergen, in press conferences held shortly before 
the hearing, I understand you and Mr. Hartenstein indicated that you 
would dedicate 28 of the merged company's frequencies to your Local 
Channels, All Americans plan, but your satellite application for New 
EchoStar 1 states that those frequencies will also be used for 
``development and expansion of new services.'' You also state that 
``New EchoStar may sell and/or lease a portion of its capacity on a 
non-common carrier basis for complementary business purposes.'' How 
many of those 28 frequencies are necessary for local channels, and what 
are these ``complementary business purposes?'' [In the Matter of 
EchoStar Satellite Corporation and Hughes Electronics Corporation for 
Authority to Launch and Operate New EchoStar 1 (USABBS 16), Application 
for Authority to Launch and Operate New EchoStar 1 at 10,13].
    Answer: It is not possible to predict precisely how many stations 
will be carried on the new platform, because there are a variety of 
factors outside of our control. New stations may begin service, and old 
ones may go out of business. We also cannot anticipate precisely how 
many stations will elect for must-carry status, nor the progress of 
negotiations for retransmission agreements. In addition, we cannot 
determine how many stations will provide a sufficiently strong signal 
to our local collection facility.
    However, if the merger is approved, we anticipate the broadest 
possible local programming service to all 210 DMAs. Up to 28 
frequencies will be required to provide local-into-local programming 
service to all 210 DMAs in the United States, including appropriate 
backup capability. We have no specific plans for any other uses of New 
EchoStar 1 other than local programming, but we hope to eventually 
offer other localized programming and services, such as interactive 
applications or advertising. Depending on the number of channels 
ultimately carried and technological progress on compression and other 
technologies, it may be possible to use a fraction of the capacity on 
New EchoStar for these purposes.

    Question 15: Mr. Ergen and Mr. Hartenstein, if you did not merge, 
would you (and answer for each of you separately) employ any 
technological innovations or improvements in your service over the next 
7 years?
    Answer: Since its inception, EchoStar has devoted enormous 
resources to improving the efficiency of its DBS systems in order to 
become more competitive, and to offer consumers more services and more 
value. However, EchoStar is aware of no technology that would increase 
substantially the amount of national and local programming (including 
new services) that EchoStar can offer consumers in a manner that makes 
any business sense.

8PSK Modulation & Turbo-Coding
    EchoStar has examined the possibility of using 8PSK modulation and 
turbo-coding to improve spectrum utilization, and has concluded that it 
would be impractical to incorporate these features on a system-wide 
basis. EchoStar continues to evaluate the use of 8PSK modulation and/or 
turbo-coding on a more limited basis in providing HDTV service.
    System-wide conversion to 8PSK modulation and/or turbo coding is 
not feasible. First, the older satellites in the EchoStar fleet lack 
the power to transmit 8PSK signals effectively. Second, even for 
satellites that are powerful enough to broadcast 8PSK effectively, the 
capacity gain from converting to 8PSK and/or turbo coding would be 
relatively small. In contrast to these small benefits, transmitting 
with 8PSK or turbo-coding would entail enormous transition costs, in 
that the conversion would require that customers' existing set-top 
boxes be replaced with new, more costly models in order to receive the 
signals. In light of the limited benefits of 8PSK modulation and turbo 
coding, the cost of a system-wide swap-out of set-top boxes and a 
launch of new, higher-power satellites simply is not practical from a 
business perspective.
    In contrast, EchoStar continues to consider using 8PSK or turbo 
coding to deliver bandwidth-intensive HDTV and possibly Video-on-Demand 
(``VOD''). This focused application of the technology is more likely to 
prove practical than a system-wide conversion. First, the transition 
costs would be less than those incurred in a system-wide conversion, as 
there is today a relatively small number of HDTV subscribers with 
specialized HDTV receivers, which limits the number of customers who 
would need new set-top equipment (HDTV requires a specialized receiver 
in any event; VOD will also require a specialized receiver). In 
addition, HDTV and VOD could be carried on newer, higher-power 
satellites, and thus the introduction of the new technology solely for 
HDTV and VOD would not require replacement of the existing lower power 
satellites. At the same time, because of the large amount of bandwidth 
consumed by each HDTV channel, a small percentage gain in capacity 
might still be sufficient to justify these more modest transition 
costs. If EchoStar decided to adopt this measure, it would provide new, 
8PSK and turbo-code compatible set-top boxes to current HDTV and future 
VOD subscribers, thereby reducing the amount of spectrum that would be 
used in order to offer HDTV or VOD, and/or it may be possible for 
EchoStar to provide more HDTV or VOD service in the same amount of 
spectrum.

Compression
    EchoStar has improved its compression system over time to allow for 
more television channels in its authorized DBS spectrum while 
maintaining the highest quality audio and video. However, in order to 
meet regulatory must-carry requirements pending launch and operation of 
its new spot-beam satellites, EchoStar was required to carry as many as 
12 television channels on some transponders. This has reduced quality 
levels below optimum. EchoStar is continuously evaluating new 
technologies and working with its vendors, but it anticipates that 
near-term improvements will only help to make up for the lost quality; 
they will not help to increase capacity.
    In addition to EchoStar, a number of independent firms compete to 
deliver better digital video and audio compression technologies for a 
wide range of applications, including DBS service. EchoStar is 
continually exploring new means of squeezing more programming out of 
its limited bandwidth. Unfortunately, it appears that the rate of 
compression improvements is slowing due to the physics of the problem. 
EchoStar continues to pursue developments in this area but believes 
that only small incremental improvements are likely in the foreseeable 
future.

MPEG-4
    EchoStar and DirecTV both use the MPEG-2 video encoding standard. 
Some merger opponents have suggested that a newer standard, MPEG-4, 
could increase the capacity of each company's DBS system. MPEG-4 is not 
practical for EchoStar from a business perspective for several reasons. 
First, while MPEG-4 may offer significant capacity advantages over 
MPEG-2 at lower quality levels suitable for streaming over the 
Internet, it does not offer significant capacity advantages over MPEG-2 
at the higher quality levels necessary for EchoStar and DirecTV to 
compete with cable. Second, use of MPEG-4 would require new set-top 
boxes for each consumer. A system-wide swap-out of set-top boxes is not 
practical from a business perspective given the limited--if any--
consumer benefits. Third, the swap-out would be particularly expensive 
because MPEG-4 compatible hardware is immature.

    Question 16: Specifically address whether you would employ turbo 
coding, 8PSK Modulation, MPEG-4 or other compression techniques, 
personal video recorders, spot beams, or any other techniques to use 
spectrum more efficiently. If your answer for any of these technologies 
is that you do not expect to employ it over the next 7 years, please 
explain in detail the reasons for that decision.
    Answer: Please see the response to the question immediately above.

    Question 17: Attorney General Nixon and Mr. Pitofsky, I have heard 
that sensitive competitive information, such as specific programming 
contract terms, may have been disclosed by DirecTV to EchoStar in a 
manner that is not traditionally part of the normal due diligence 
process of a merger. I have also heard that some DirecTV customers have 
been contacted about needing to switch to EchoStar now, in advance of 
merger approval, to keep uninterrupted television service, reportedly 
by postcard, phone, and advertisement. Mr. Nixon and Mr. Pitofsky, 
would either of these activities, if true, raise concerns in the minds 
of antitrust enforcers as they review this merger?
    Answer: Sensitive terms of programming contracts have not been 
shared between the companies. On the advice of counsel, those 
economists, consultants, and outside lawyers retained in connection 
with the merger have had access to some competitively sensitive 
information, as necessary to prepare filings to the FCC and materials 
for the Department of Justice. For example, it would be impossible to 
analyze cost savings made possible by the merger without access to cost 
information from both companies. Sharing such information with outside 
lawyers, economists and consultants, with appropriate safeguards to 
prevent inappropriate disclosure of such information to the other 
company, is both common and entirely proper.
    We have investigated the allegations of sales techniques described 
in your question, and are unaware of any such conduct. EchoStar and 
DirecTV continue to compete independently as is proper prior to merger 
consummation, and have established safeguards to ensure that we will 
continue to do so.

    Question 18: Mr. Ergen, I am a bit confused about your claim that 
this merger is necessary for you to provide broadband Internet service. 
In EchoStar's FCC application, it is asserted that one of the most 
significant benefits of the merger is that it will ``free up'' the 
spectrum necessary for broadband Internet provision. In fact, Dow Jones 
News Service reported on March 5th--the day before our hearing--that 
you have stated that you ``won't keep pumping funds into developing 
satellite broadband unless the merger closes.'' ["EchoStar Says Has 
Talked To Potential Broadband Partners,'' Dow Jones News Service, March 
5, 2002]. Confusingly, however, the Wall Street Journal reported--also 
on March 5th that you are currently in negotiations with SES Global to 
create a joint venture that would be able to serve the entire 
``anticipated U.S. residential broadband market.'' [Andy Pasztor, 
``EchoStar, SES Discuss Venture For Internet in U.S.,'' The Wall Street 
Journal Europe, March 5, 2002]. Notably, SES already controls the 
orbital slot proposed to be used by the joint venture. Could you please 
harmonize for me these seemingly contradictory actions and statements? 
In particular, if a single satellite in the orbital slot controlled by 
SES will be capable of providing nationwide broadband service, doesn't 
this completely undercut your arguments that this merger is necessary 
to the deployment of satellite provided broadband?
    Answer: Although spectrum--and more particularly, capacity--
constraints do affect the availability of satellite broadband service, 
the primary obstacle to successful deployment of consumer satellite 
broadband today is cost. To use the available spectrum efficiently, a 
satellite broadband provider must make enormous upfront investments in 
complex satellite systems and other technology. After investing the 
hundreds of millions, even billions of dollars necessary to build such 
a system, the high cost of consumer equipment forces a consumer-
oriented satellite broadband provider to incur equally substantial 
subscriber acquisition costs. After making these investments, the 
consumer business can become economical only if it is able to reach a 
scale of at least five million subscribers. As a result, satellite 
broadband Internet is an expensive, high-risk undertaking. Even well 
financed satellite broadband ventures with experienced backers have 
been forced to scale back their plans, or even abandon them altogether. 
For example, Astrolink recently announced that, after having built 90% 
of its first Ka-band spacecraft, and after having spent about $710 
million on its Ka-band system, it was terminating its spacecraft 
contract with Lockheed Martin, as it found itself unable to finance the 
remaining cost of implementing the Astrolink broadband system. Faced 
with these same market uncertainties and financial pressures, EchoStar 
thus far has taken a cautious approach to satellite broadband. Indeed, 
EchoStar does not provide the service itself, but rather has invested 
in StarBand, from which EchoStar purchases the satellite broadband 
service that it then sells to its DBS customers.
    Similarly, EchoStar's plans in the Ka-band are also modest--
EchoStar will deploy a hybrid Ka/Ku band satellite later this year, and 
has not yet determined whether it will use that satellite's limited Ka-
band payload for broadband at all. Even these cautious steps have been 
costly. The StarBand business model has proven to be unprofitable for
    EchoStar and for StarBand, and simply is not economically viable 
today. Without the cost savings and efficiencies created by the merger, 
it is questionable whether the enormous investment in satellite 
infrastructure, research and development, and subscriber acquisition 
necessary for a consumer-oriented satellite broadband service can be 
justified from a business perspective.
    Nonetheless, EchoStar recognizes the importance of a satellite 
broadband alternative. Cable companies already offer an MVPD/broadband 
bundle that is attractive to consumers, and in particular to EchoStar's 
best customers. EchoStar must have a similarly attractive service 
offering to compete. To that end, EchoStar has continued to explore 
various means of providing broadband service to its DBS subscribers. 
Those efforts have included discussions not only with satellite 
companies like SES Americom, but also with various terrestrial 
broadband providers.
    All of those negotiations, including any talks with SES Americom, 
remain very tentative. To the extent that it is possible to comment on 
them at all, it is important to note that a joint venture with SES 
Americom, involving a single orbital slot, would not have enough 
capacity to achieve the economies of scale necessary to provide an 
affordable consumer broadband service. Only the merger would provide 
EchoStar with the necessary slots to reach that scale. However, a 
venture with SES Americom likely would be an improvement over the 
current platform, in which StarBand leases individual Ku-band 
transponders on two satellites owned by third parties. Consistent with 
EchoStar's cautious approach to satellite broadband to date, a joint 
venture with a satellite firm that controls the orbital slot to be used 
would permit EchoStar to continue exploring the viability of satellite 
broadband, without bearing an excessive degree of risk. In the 
meantime, these smaller scale broadband efforts would allow EchoStar to 
get keep its foot in the door in competing against cable, while 
increasing its own experience with, and consumer acceptance of, 
satellite broadband Internet. At the same time, however, satellite 
broadband would remain a high-priced, niche service, beyond the means 
of most consumers, and still not competitive with cable modem or DSL. 
Only with the merger will it be possible to deploy on a timely basis an 
advanced residential service of mass scale and appeal at an affordable 
price.

    Question 19: Mr. Kimmelman, as I understand your position, you 
claim that EchoStar and DirecTV are not in the same antitrust market as 
cable because even where they are all available in a television market 
DBS competition has not constrained cable prices sufficiently. However, 
you also appear to argue that one of the most substantial benefits of 
the merger would be increased competition between cable and DBS, and 
the concomitant restraints that would be placed on cable pricing by the 
DBS service provided by the merged entity. I find this reasoning 
confusing from both a legal and practical perspective. Could you please 
explain in more detail how decreased competition in one market will in 
increase competition in an allegedly separate market? Additionally, 
could you please cite any past instances where the courts, the 
Department of Justice, or the FTC has found that such relationships 
between markets do in fact exist or what relevance they have for 
purposes of antitrust review?

                                

 Responses of Charles W. Ergen to a question submitted by Senator Ted 
                                Kennedy

    Question 1: What impact, if any, would approval of the proposed 
merger on efforts to bridge the digital divide by providing greater 
high speed internet access to underserved urban and rural communities.
    Answer: The approval of the EchoStar-Hughes merger will have a 
truly profound effect on the availability of broadband service in 
underserved and rural communities.
    As I mentioned in my testimony before the Committee, approximately 
40 million households, primarily in rural America, are ``digital have-
nots.'' Because of the enormous expense of rolling out terrestrial 
technology to wire rural homes, neither cable broadband nor DSL is 
likely to serve those consumers in our lifetime. Satellite broadband, 
in contrast, can be delivered anywhere and everywhere in the country, 
the moment the satellite is deployed. It costs no more to deliver 
satellite broadband to the most rural parts of America than it does to 
deliver it to Boston. Satellite broadband is the best hope to bridge 
the digital divide in America.
    For that hope to be realized, however, the cost of satellite 
broadband must be brought down considerably. Today, the enormous fixed 
costs and expensive consumer equipment required for satellite broadband 
service prevent Hughes's and EchoStar's offerings from being anything 
more than high-priced niche services. Neither is competitive, in terms 
of price or service, with current cable broadband products. The only 
way for this market to change, and satellite broadband to become a 
meaningful, affordable option for rural and for urban consumers, is by 
increasing satellite broadband to a scale many times the current number 
of current customers.
    It is not likely that either company standing alone could deploy on 
a timely basis an advanced residential service of mass scale and appeal 
at an affordable price. Thus, Hughes's planned SPACEWAY Ka band system 
has been developed with a focus on larger commercial, or so-called 
``enterprise,'' customers, while EchoStar's Ka band program has 
remained modest in scope.
    By contrast, approval of the merger will have a true ``zero to 
one'' effect in many rural and underserved areas. It will give the 
merged company the spectrum capacity, subscriber base and economies of 
scale needed to ensure that next-generation satellite residential 
broadband service becomes a reality everywhere in the United States, 
rapidly and inexpensively, in a reasonable time frame. Given that there 
are large portions of the country that will not be able to receive 
cable modem or DSL service any time soon, deployment of a 
competitively-priced satellite broadband service will result in 
enormous consumer benefits. In addition to the obvious benefit of 
simply having the same high speed Internet access that urban consumers 
currently enjoy, the merger promises additional benefits uniquely well 
suited to rural communities, including local television channels for 
consumers in remote areas, containing local weather, news, and 
community information, as well as telemedicine programs, connectivity 
for rural doctors, and distance learning.

                                

Responses of Charles W. Ergen to questions submitted by Senator Herbert 
                                  Kohl

    Question 1: At the hearing we discussed your intention to implement 
uniform national pricing so that rural customers are not disadvantaged 
by the rural pay TV monopoly created by this merger, which you promised 
to implement in an enforceable decree with the government. I asked you 
if this would prevent EchoStar from responding to lowered cable pricing 
in a few specific urban markets, and you said you would try to draft a 
decree that would permit EchoStar to do so. But if the decree permits 
you to lower prices (or offer rebates) in a few urban markets because 
of competitive conditions in those markets, then you will no longer 
offer uniform national pricing, and rural consumers will not fully 
realize the benefits of competition in those urban markets. 
Alternatively, if you are strictly bound to a national price, the fact 
that you would have to lower prices nationwide might serve as a 
deterrent to competing by lowering prices in one, small super-
competitive market. In other words, you might choose to lose a small 
number of customers in one market, rather than lower your profits 
across the board. Please clarify what exactly EchoStar can agree to 
with regards to a national pricing plan. Would you agree to a mandate 
to maintain level pricing in all markets? And if you were to lower 
prices in one market to respond to local competition, would you agree 
to be required to lower prices in all markets you serve? You also 
mentioned at the hearing alternative pricing systems that you had seen. 
Could you elaborate on them and explain why and how they might address 
the dilemma I outlined above?
    Answer: In answering this question I need to emphasize three points 
at the outset. First, EchoStar's product and our pricing is (and always 
has been) national in nature. As you know, EchoStar's DBS service is 
sent from the same satellites to consumers all over the United States, 
and EchoStar has always charged the same national prices for the same 
services.\1\
---------------------------------------------------------------------------
    \1\ Our offering in Alaska and Hawaii has historically been 
somewhat different from our other offerings because some signals are 
sent via satellites that subscribers there could not access. Recently, 
however, America's Top 100 at its standard national price has been made 
available to new Hawaiian subscribers. This issue will be resolved with 
the increased capacity resulting from the merger.
---------------------------------------------------------------------------
    Second, EchoStar believes that the national price is an important 
economic feature of the MVPD market, one that EchoStar needs and 
intends to preserve, and one that is valuable and worth preserving. 
EchoStar believes that the benefits of enhanced competition that the 
merger would generate make the national pricing scheme even more 
valuable as a source of benefit to consumers nationwide.
    Third, EchoStar's national price itself generates substantial 
benefits for rural consumers by affording them the benefits of the 
competitive dynamics in other areas of the country. Nevertheless, we 
believe that the concerns of rural consumers are important ones. We 
have thought through those concerns and are sure that there are many 
solutions that are workable to address them. We will be working on such 
solutions with the Department of Justice, the FCC, and the States and 
will be pleased to present them to Congress following that process.
    There are a number of reasons that EchoStar has always used 
national pricing for this national service. First, it provides for 
efficient marketing, advertising, and retailer relationships, and 
allows us to emphasize the price/quality advantages we have 
traditionally maintained over cable systems throughout the country. 
Second, there would be significant costs involved in implementing 
regionally variable pricing, including massive changes to our customer 
service and billing systems. It would be extremely difficult profitably 
to identify and discriminate against those without good alternatives, 
while not driving away potential subscribers (as well as EchoStar's own 
customer base) with good alternatives. Because customers in non-cable 
areas make up such a small portion of our subscribers, and an even 
smaller portion of potential subscribers, it would not make economic 
sense to invest the significant sums needed to implement regional 
service pricing in order to raise rates for those consumers. Third, 
national retailers prefer to be compensated uniformly on a national 
basis, and therefore, efforts to compensate them differently based on 
whether, for example, a customer is passed by cable are resisted by the 
national retailers. Local and regional retailers are also very 
resistant to price discrimination schemes that require them to treat 
certain customers differently, both because it makes their advertising, 
promotion and sales efforts more difficult, and because it endangers 
their goodwill with customers. Fourth, efforts to discriminate against 
rural subscribers would undermine the hard work and dedication we have 
put into earning our reputation for providing value and customer 
responsiveness. This reputation for fair dealing is extremely important 
in our efforts to compete for cable subscribers, who are repeatedly 
subjected to price increases and poor service. Finally, such 
discrimination would also undermine the integrity of the mechanism that 
EchoStar has found is optimal for competing on a nationwide basis: a 
highly competitive national price.
    Because the cable companies control approximately 80% of the pay 
television subscribers in this country, we naturally have focused on 
acquiring cable subscribers as our biggest growth opportunity. In 
running special promotions to attract new subscribers, we have focused 
our efforts on nationwide promotions that are available to all 
consumers in the United States. A good example is our ``I Like 9'' 
promotion that we ran last fall and winter. This program, which we 
offered both directly and through our retail network, allowed new 
subscribers to receive EchoStar's AT 50 program for only $9 a month for 
a year with the purchase of a new system. Equivalent discounts were 
available for purchasers of other packages. This was an effective 
promotion both because it was clearly a better economic deal than any 
major cable system was offering, and because it could be advertised 
efficiently and supported nationally. The vast majority of our 
promotional efforts have been devoted to these national programs. 
EchoStar competes with literally hundreds of different cable systems 
across the country, each with its own widely varying packages and 
pricing. EchoStar's philosophy has always been that we need to offer a 
substantially better price/performance offers than every one of these 
companies in order to overcome their advantages of incumbency and to 
expand our own subscriber base.
    We sometimes target competitors, like particular cable companies, 
as part of our marketing strategy. For example, when a cable company 
raises its prices, we sometimes respond with a targeted marketing 
campaign to attract new subscribers that uses dissatisfaction with the 
price increase to focus consumer attention on our product. Almost all 
of these programs offer the same basic economic terms as our national 
program, but occasionally we have offered more favorable short term 
incentives, for example, lower equipment prices or free programming for 
a limited period of time, that were not offered as part of the national 
package. A narrowly limited local program, of course, does not 
discriminate against rural customers anymore than it discriminates 
against all the urban customers in other areas who cannot take 
advantage of it. The subscribers we gain from these locals promotions 
amount to a very small part of our business. In fact, these promotions 
are often done simply to test a consumer offer on a local basis before 
rolling out nationally.
    We think that these programs are good for consumers and that they 
do not discriminate against rural or any other class of consumers. 
Moreover, while we do not believe that a decree is necessary under the 
competitive circumstances of the MVPD industry, we are more than 
willing to work with the appropriate authorities to create a consent 
decree that would ensure that all Americans receive the competitive 
benefits of our existing nondiscriminatory pricing practices (along 
with the increased output and other benefits of the merger) while 
retaining our existing flexibility to engage in these kinds of narrowly 
limited local activities. To be effective a decree would not need to do 
more than confirm our existing procompetitive practices, including the 
flexibility reflected in them. Such decree would not allow 
discrimination and would not be considered unduly ``regulatory.''
    With regard to the specifics of your questions, the initial issue 
raised is whether allowing EchoStar any flexibility to meet competition 
in local areas would subject rural customers to discrimination in a way 
that would undermine the benefits of the national pricing commitment. 
EchoStar is confident that it would not. If EchoStar engages in 
particular competitive activity in a particular locality, in order to 
meet competition, take advantage of a cable price increase, or simply 
test a marketing concept, this activity clearly would not discriminate 
against rural subscribers without access to cable because those 
subscribers would continue to receive the same competitive benefits as 
all other subscribers outside that particular locality, most of whom 
would not be rural and most of whom would have the option of switching 
to cable.
    As explained above, this is demonstrated by present practice. Over 
the past several years, EchoStar has been free to engage in such 
competition in particular local areas. While EchoStar has used that 
freedom to engage in such competition, it has only done so on rare 
occasions - because its business is based on the offering of a national 
price. Whenever EchoStar has engaged in such competition, every 
EchoStar customer outside the narrowly targeted local areas has been 
treated precisely the same. If, for example, EchoStar offered a better-
than-national promotion focused on the Washington area, rural customers 
might not be able to take advantage of that promotion, but neither 
would customers in New York or Los Angeles or other major DMAs. Because 
EchoStar must remain competitive in all major DMAs, and needs to offer 
competitive national prices and promotions to do so, rural customers 
will be treated the same as customers in the competitive DMAs, just as 
they are today. Under these circumstances, it is clear that rural 
consumers would suffer no prejudice for ``discriminatory'' treatment, 
and would be much better off due to the additional programming and 
services that they will have available.
    Nor, importantly, has EchoStar's present freedom to engage in such 
competition been reflected in other forms of discrimination. Indeed, 
EchoStar's principal present competition in rural areas, Pegasus, as 
well as other NRTC affiliates, has long charged significantly higher 
prices than EchoStar - both on a programming/service and net effective 
price to the consumer basis. That is, Pegasus has charged rural 
consumers, some of whom lack the alternative of switching to cable, 
much higher prices than EchoStar does. For example, Pegasus charges 
$34.99 per month for its ``Total Choice'' package of 105 channels - the 
same package for which DirecTV charges $31.99 - yet EchoStar charges 
one national price of $31.99 for its equivalent 100 channel package, 
regardless of whether it competes against Pegasus or DirecTV. EchoStar 
has never departed from its national pricing principles to exploit that 
large differential and raise its price to consumers in rural areas who 
lack access to cable. There is nothing preventing EchoStar from doing 
so except the fact that, as EchoStar has articulated, it is critically 
important to EchoStar's business to maintain a national pricing regime.
    The danger raised by opponents of the merger, that EchoStar could 
somehow raise the national price above competitive levels, while 
responding to more vigorous competition on a local level, is therefore 
not a realistic concern given the facts about this industry and 
EchoStar's historical actions. Every major cable company and many if 
not most of the smaller ones have upgraded and are continuing to 
upgrade their infrastructure to digital, and are increasing their 
competitive pressure on DBS through improved products and services and 
cable modem bundling. The argument that EchoStar could manipulate its 
national price to exploit the relatively small number of consumers 
without good cable alternatives, while maintaining its competitiveness 
against these competitors with access to the great majority of its 
potential audience (as well as EchoStar's existing customer base) is 
simply wrong. As described above, due to NRTC's high pricing in rural 
areas, EchoStar has the opportunity to engage in that kind of pricing 
today, and has had the opportunity for some time, but has consistently 
declined to use that opportunity because it would damage the core of 
its business.
    Thus, EchoStar believes that the facts demonstrate that no decree 
of any form is needed to protect the current national pricing regime 
from being evaded to discriminate against rural customers. 
Nevertheless, EchoStar is prepared to work with the appropriate 
authorities to fashion an administrable decree if such a decree were 
viewed as helpful reinforcement to continued competitive national 
pricing. EchoStar is agreeable to such a step because it does not seek 
through the merger to depart from its current national pricing 
practices and, indeed, because it believes that those national pricing 
practices are extremely valuable to competition and consumers.
    The next question posed is whether such a decree, by limiting 
EchoStar's flexibility to engage in local promotions, would inhibit 
EchoStar from engaging in socially and economically valuable 
competition. EchoStar does not believe that an appropriate decree would 
need to eliminate all such flexibility; today EchoStar enjoys just such 
flexibility and does not use it to discriminate or otherwise undermine 
the national price even when it is has the clear opportunity to do so, 
as described above. However, the principal point is that EchoStar in 
the vast majority of instances deals with competitive pressures from 
various providers by factoring them into its overall national price. 
Our analyses suggest that the largest markets are the most competitive, 
which are also where the cable companies have improved their offerings 
the fastest. EchoStar cannot ignore these important markets in setting 
its national price. Indeed, these highly competitive markets are the 
ones in which we foresee the greatest opportunity for growth; they are 
also the ones where competition for EchoStar's own customer base is the 
sharpest. Thus, the economic realities that drive EchoStar to 
competitive national pricing are not a detriment to consumers or 
competition. To the precise contrary, this dynamic ensures that 
consumers across the country will receive through the national price 
the benefits of some of the most competitive dynamics in the more 
competitive regions in the country. In effect, the national price 
``exports'' competition, including to customers in rural areas that 
lack access to cable. By so ``exporting'' competition, the competitive 
national price also amplifies competition in all areas of the country, 
for the benefit of cable consumers as well as DBS consumers. To the 
extent that a decree addressed limits on flexibility, it would not 
detract from competition but instead would simply reinforce this 
overall positive impact on competition nationwide. At the same time, it 
would be unnecessary to eliminate all flexibility to compete locally, 
for the reasons stated above.

    Question 2: Please provide any data which demonstrates that 
satellite television disciplines cable rates in those markets where 
local-into-local service is offered.
    Answer: Local-into-local service makes DBS more competitive with 
cable, and therefore allows DBS to exert more price pressure on cable. 
The Declaration of Dr. Robert D. Willig (``Willig Declaration ''), 
submitted by Hughes and EchoStar to the Federal Communications 
Commission in support of the proposed merger on February 25, 2002 makes 
this clear:

        Lack of local channels had placed DBS at a competitive 
        disadvantage to cable.\2\ For example, according to a January 
        2000 survey by Forrester Research, 47 percent of cable 
        subscribers would not subscribe to satellite television because 
        they do not ``want to lose reception from the major networks 
        (e.g., ABC, NBC, CBS).'' \3\ The fact that consumers value 
        carriage of local channels as part of a DBS offering has been 
        clearly demonstrated in the DMAs in which EchoStar and DirecTV 
        have already offered local channels. For example, after 
        launching local service, EchoStar's DMA-level subscriber growth 
        rate increased by an average of 30 percent in the 36 local 
        markets it introduced local service. Similarly, when DirecTV 
        rolled out its local service in 41 markets, its subscriber 
        growth rate in those markets rose by an average of 17 
        percent.\4\ It is important to note that the increase in DBS 
        subscriber growth is evidence that the introduction of local 
        channels in particular areas has provided direct benefits to 
        consumers and has additionally placed more competitive pressure 
        on cable in those areas. New EchoStar's commitment to expand 
        the provision of local channels to every market will therefore 
        introduce additional competitive pressure throughout the 
        country to the incumbent cable providers.
---------------------------------------------------------------------------
    \2\ The Department of Justice concluded that, ``to the extent that 
DBS cannot offer subscribers local broadcast channels, it has a 
competitive disadvantage relative to cable because many viewers demand 
local news and weather and popular network programming.'' See Comments 
of the U.S. Department of Justice, In the Matter of the Application of 
MCI Telecommunications Corporation and EchoStar Communications 
Corporation, File No. SAT-ASG-19981202-00093, January 14, 1999, 
available at http://www.usdoj.gov/atr/public/ comments/2173.htm.
    \3\ Author's calculation based on Forrester Research, 
Technographics Survey, January 2000.
    \4\ The impact of local service on subscriber growth was estimated 
after controlling for DMA-level economic conditions (proxied for by the 
unemployment rate in those states where the DMA is located), the 
previous month's penetration rate of each DBS provider, national 
business cycle and other factors that affect all DMAs each month, and 
persistent differences in DMA-level subscriber growth rates.
---------------------------------------------------------------------------
        Willig Declaration at para. 17.

    Similarly, the FCC has highlighted the role that local-into-local 
service has played in promoting competition between DBS and cable 
services. In its 2000 Report on Cable Industry Prices, for the first 
time, the FCC concluded that DBS puts statistically significant 
downward pressure on demand for cable services. The report states that 
this ``result is different from our earlier finding reported in the 
1999 Price Survey Report, which showed DBS exerting only a modest 
influence on the demand for cable service. One explanation for the 
increased importance of DBS as a competitor of cable is the passage of 
the Satellite Home Viewer Improvement Act (SHVIA) in November 1999, 
which eliminated the prohibition on DBS delivery of local network 
signals into their local television markets. The two DBS operators have 
begun offering local signals in many major television markets thus more 
closely matching services provided by cable operators.'' See 
Statistical Report on Average Rates for Basic Service, Cable 
Programming Services, and Equipment, Report on Cable Industry Prices, 
FCC (2001), at para. 53.
    Notably, the growth and increased competition described by 
Professor Willig and the FCC occurred at a time when EchoStar still did 
not offer WB, UPN, PBS, and other popular local channels that we now do 
offer. Moreover, by allowing New EchoStar to serve all 210 DMAs with 
local programming, the merger will enable, for the first time, national 
marketing that touts local channels. National marketing can more 
efficiently and effectively reach the smaller DMAs, even those that may 
experience less significant subscriber increases from local 
programming. Moreover, the national coverage of local programming will 
accelerate the process through which DBS technology becomes more 
broadly accepted and ubiquitous. As more and more consumers come to 
understand the benefits of this once unfamiliar product, the costs 
incurred in educating them about the product are reduced.
    In addition, in the absence of the merger, the pressure that DBS 
firms exert on cable providers to constrain prices, to innovate, and to 
invest and increase capacity will diminish. The proposed merger will 
allow New EchoStar to expand its product offerings and will likely 
force cable systems to continue to upgrade their network 
infrastructure. Relative to today's cable infrastructure, an upgraded 
cable system will exert even more competitive pressure on DBS pricing. 
In other words, the proposed merger will help to perpetuate the 
virtuous cycle of competitive innovation.

    Question 3: What is EchoStar's current channel capacity based on 
the satellites currently in deployment? Specifically, how many 
satellites - and what type of satellite (CONUS or spot-beam)--does 
EchoStar currently have deployed and at which orbital slots? Please 
indicate how many satellites EchoStar plans to launch in the future and 
to what degree these additional satellites will increase EchoStar's 
channel capacity. Finally, please explain and detail--based upon 
EchoStar's current licenses and technological capabilities and not upon 
capital needs--the full, potential channel capacity of EchoStar without 
a merger. Please explain how capital needs and economics alter 
EchoStar's technical ability to fully utilize its total channel 
capacity.
    Answer: EchoStar presently uses six satellites in four orbital 
locations to provide DBS service. Presently, with an array of national 
channels and 36 DMAs of local channels, EchoStar's capacity is 
effectively full, and will only be modestly increased with the use of 
two new spot-beam satellites.
    EchoStar's core services are provided from the CONUS orbital 
locations at 110+ W.L. and 119+ W.L. Currently, 
EchoStar uses three satellites to fully utilize its 50 authorized DBS 
frequencies there. EchoStar's current transmissions, occupying its full 
capacity, are as follows:

[GRAPHIC] [TIFF OMITTED] T5659.012


    In addition to the CONUS capacity discussed above, EchoStar also 
currently uses three other satellites to provide service to parts of 
the United States. As the ``wing slots'' at 61.5+ W.L. and 
148+ W.L. are over the Atlantic and Pacific Oceans, each 
wing slot satellite can send signals to only part of the United States. 
EchoStar uses 61.5+ W.L. to serve the eastern states, and 
148+ W.L. to serve the western states. In order to offer 
consumers nationwide the same programming, EchoStar carries much of the 
same programming--about 50 international channels, 3 HDTV channels, 1 
HDTV pay-perview channel--from each location.
    At the 61.5+ W.L. orbital location, EchoStar operates 
one satellite. EchoStar III currently uses more than the 11 DBS 
frequencies EchoStar is licensed at this location, by use of a Special 
Temporary Authority (``STA '') from the FCC and a transponder lease 
arrangement with license-holder Dominion. In addition to Dominion's Sky 
Angel programming, and the duplicated programming discussed above, 
EchoStar III carries about 74 local channels for eastern cities. At the 
148+ W.L. orbital location, EchoStar uses two satellites, 
taking advantage of both a license and an STA. EchoStar I and II carry 
about 65 local channels for western cities, as well as the duplicate 
programming discussed above. In addition, EchoStar also uses its wing 
satellites for business television service, and occasionally necessary 
test signals.
    All together, these uses represent the full capacity of EchoStar's 
satellites and FCC authorizations. Indeed, in some respects, EchoStar 
is beyond its capacity. For example, EchoStar's use of spectrum 
available through STAB is necessarily temporary. In addition, in order 
to meet must-carry requirements, EchoStar was forced to increase 
compression beyond historical levels, causing reductions in video and 
audio quality below optimum levels.
    However, in addition to the satellites currently in use, EchoStar 
plans to use two DBS spot-beam satellites at the CONUS orbital 
locations. Currently, EchoStar's satellites send the channels carried 
in each frequency down to Earth in one large beam. For example, 
consumers in Salt Lake City and Birmingham receive transmissions 
containing local channels both areas, even though subscribers in 
Birmingham cannot view local programming from Salt Lake City, and vice 
versa. EchoStar's new spot-beam satellites will carry local channels on 
smaller beams, targeted to smaller geographic areas. Thus, for example, 
spot-beams will allow one frequency to be used in beams aimed toward 
Salt Lake City and Birmingham (as well as Alaska and Hawaii). However, 
the spot-beams must be narrow enough and far enough apart to avoid 
interference, and spot-beams are only suitable for carrying different 
channels to different parts of the country (i.e., for local-into-local 
programming). Moreover, interference prevents the same frequency from 
being used in both a national beam and a spot beam.
    EchoStar's spot-beam satellites are scheduled to begin service this 
year. EchoStar VII was launched recently into the 119+ W.L. 
location and should begin service in mid-April. EchoStar hopes to 
launch EchoStar VIII into the 110+ W.L. location in June, 
and should start service about two months afterwards. Each of these 
satellites is designed to use five frequencies in spot beams, and to 
reuse each frequency an average of five times. After both new 
satellites are operational, EchoStar will have the capacity to offer, 
and plans to offer, local programming to approximately 10-15 new DMAs.
    EchoStar has no plans for additional spot-beam DBS satellites, 
other than EchoStar VIII, and the New EchoStar I, which, if the merger 
is consummated, will be designed to serve all 210 DMAs. As explained 
more fully in response to your tenth question, unless EchoStar can take 
advantage of the spectrum efficiencies created by the merger, further 
spot-beam satellites would require significant reductions in national 
programming capacity, which would reduce EchoStar's competitiveness 
with cable nationally, including in the DMAs where local channels were 
added.

    Question 4: A day after our hearing, EchoStar filed an appeal with 
the United States Supreme Court to review the must-carry law for 
satellite that was enacted in 1999. This comes as no surprise, for you 
alluded to the fact that EchoStar would indeed pursue its litigation to 
the very end. Let's assume the Supreme Court strikes down the must-
carry law. Would a combined-DirecTV still serve all 210 local 
television markets? And if so, which channels would you serve in those 
markets?
    Answer: If the merger is consummated, the merged company will serve 
all 210 DMAs with local programming regardless of the outcome of 
litigation concerning the must-carry provisions of the SHVIA.
    If the must-carry provisions of the SHVIA are struck down, then DBS 
providers would be free to make programming decisions based on consumer 
demand. However, I have committed, and stand by my commitment, that the 
merged company would still provide all local broadcast channels that 
offer meaningful programming. I have offered to sign agreements with 
local broadcasters to confirm this commitment, and a copy of my recent 
letter to broadcasters, making that offer, is attached. I expect to 
have this agreement in final form early next week. Meaningful 
programming generally means local news, programming, or community 
information. For example, it is possible that we might not carry some 
local home shopping channels, especially those that are redundant to 
channels carried nationally.

    Question 5: Today, there is head-to-head competition in two-way 
broadband satellite service, DirecTV's DIRECWAY and EchoStar' s 
StarBand. However, you have stated that this merger is needed to launch 
a competitive broadband service in the Ka-band; yet, both DirecTV and 
EchoStar have already obtained Ka-band slots from the FCC and devised 
plans to deploy broadband service separately before this merger was 
ever announced. Please explain why this merger is necessary to launch a 
broadband service using Ka-band when both EchoStar and DirecTV already 
offer two-way broadband services and made plans to further expand this 
service separately. Specifically with regards to current and future 
satellite broadband service, please answer the following:
    Answer: Satellite broadband today is unable to compete, in terms of 
price or quality, with cable modem and DSL service, which have nearly 
ten million broadband subscribers between them. EchoStar, through 
StarBand Communications, Inc., and Hughes, through Direcway, rely on 
leased Ku-band transponders to provide an inefficient, high-priced 
satellite broadband service to no more than 100,000 residential 
subscribers combined. The current satellite broadband offerings provide 
lower transmission speeds than cable or DSL, cost more per month, are 
not appropriate for certain popular applications, such as online gaming 
and video-conferencing, and require that the subscriber invest almost 
one thousand dollars in receiving and other equipment that must be 
professionally installed. Moreover, because of capacity limits of the 
Ku-band transponders that StarBand and Direcway lease from third-party 
satellite operators, as well as the practical limits on the number of 
such transponders that are available, it is not possible for StarBand 
or Direcway to achieve sufficient scale to spread fixed costs or 
realize economies of scale in the manufacture of receiving equipment, 
such that current service offerings could be offered at prices that are 
acceptable to consumers, or competitive with cable or DSL. Put simply, 
neither firm has a competitive satellite broadband service, and neither 
is able to exercise power in any market. Thus, to describe the current 
offerings as ``head-to-head'' competitors is a misnomer, and overstates 
each firm's position.
    It is clear that the current services are subject to substantial 
weaknesses that limit their long-term viability. Consequently, both 
EchoStar and Hughes have turned to the Kaband in hopes of developing an 
affordable, competitive satellite broadband service. While use of next 
generation Ka-band satellites would be superior to the current Ku-band 
offerings, EchoStar and Hughes believe that a Ka-band satellite 
broadband provider would still need at least 5 million subscribers to 
achieve the scale economies in consumer premises equipment, to spread 
fixed costs, and to justify the substantial investment necessary to 
develop a competitive consumer broadband service. Neither company 
standing alone could deploy on a timely basis an advanced residential 
service of mass scale and appeal at an affordable price.
    Although a Ka-band strategy avoids some of the capacity constraints 
that afflict Ku-band service, it requires the upfront investment of 
hundreds of millions, if not several billions, of dollars in complex 
new satellites and technology. The deployment of these Ka-band 
satellites has taken longer, and will require more capital, than many 
Ka-band licensees have been able to sustain. Even well-financed Ka-band 
licensees with experienced backers have been forced to scale back or 
even abandon their efforts to deploy satellite broadband. For example, 
Astrolink recently announced that, after having built 90% of its first 
Ka-band spacecraft, and after having spent about $710 million on its 
Ka-band system, it was terminating its spacecraft contract with 
Lockheed Martin, as it found itself unable to finance the remaining 
cost of implementing the Astrolink broadband system. Moreover, the use 
of Ka-band satellites does not have any ameliorative effect on the high 
cost of receiving equipment and satellite modems, and indeed will 
increase that cost at least in the short term. Unless these equipment 
and subscriber acquisition costs can be reduced significantly, 
satellite Internet will not likely grow out of a small-scale, 
highpriced niche in the consumer market. It is these daunting economic 
barriers--very large initial investment in expensive satellites coupled 
with high up front costs to acquire new subscribers--that have stifled 
continued investment in satellite Internet technology.
    As a result of these substantial obstacles to deployment of a 
consumer-oriented satellite broadband service, along with other 
factors, HNS has developed Spaceway with a focus on the larger 
commercial, or ``enterprise,'' customers while EchoStar's Ka-band 
program has remained modest in scope. Refocusing and integrating these 
Ka-band programs will provide the opportunity to achieve the required 
economic scale for ubiquitous residential true broadband service. 
Combining the broadband services of Hughes and EchoStar will provide 
efficiencies that will enable New EchoStar to deploy a competitive true 
broadband satellite offering for the benefit of all U.S. consumers, 
rural, suburban and urban alike.

    Question a: What economies of scale are gained by combining 
EchoStar and DirecTV's satellite and Ka-band resources?
    Answer: The post-merger firm would have a number of advantages that 
would make it more likely that the necessary investment would be made 
and the necessary scale realized to offer competitively priced consumer 
broadband services.
        Mitigation of capacity constraints. As noted above, EchoStar 
        and Hughes estimate that at least 5 million subscribers would 
        be necessary in the next five years to justify the significant 
        up front investment and subscriber acquisition costs associated 
        with actually marketing and deploying a ubiquitous two-way 
        broadband service to residential subscribers. Standing alone, 
        neither EchoStar nor Hughes has licenses to operate Kaband 
        satellites in orbital slots close enough together to serve this 
        number of subscribers. HNS holds only two Ka-band licenses that 
        would allow it to serve residential broadband and DBS 
        subscribers with a single dish. Including the license held by 
        VisionStar, EchoStar also has two such licenses; however, as 
        noted above, the VisionStar license is subject to certain 
        conditions that may not be met, and EchoStar consequently 
        cannot be assured that the license will be available to it.\5\ 
        Even a state-of-the-art Ka-band spot beam satellite like that 
        contemplated by Spaceway would be unable to serve more than 1 
        million to 1.3 million subscribers. Moreover, as increasing 
        numbers of broadband applications become available, and 
        existing applications become more popular, residential 
        subscribers will make ever-increasing demands on available 
        capacity, reducing the number of subscribers who can be served 
        by a single satellite.
---------------------------------------------------------------------------
    \5\ In addition to its holdings through VisionStar, EchoStar holds 
licenses to construct, launch, and operate Ka-band satellites at 
83+ W.L. and 121+ W.L. The slot at 83+ 
W.L, half of which is assigned is assigned to another licensee, Celsat 
America, Inc., is outside the one-dish arc and therefore is not 
suitable for residential broadband service. The slot at 121+ 
W.L., half of which also is assigned to Celsat America, Inc., is 
intended for EchoStar IX, a hybrid Ku/Ka-band satellite, EchoStar IX. 
As noted above, EchoStar IX has a modest Ka-band payload that could be 
used for DBS backhaul or a very limited broadband service. EchoStar IX 
would not permit EchoStar to achieve efficiencies of scale in the cost 
of service or equipment.
---------------------------------------------------------------------------
        Only the merger will provide the new firm with the orbital 
        slots necessary to achieve a scale at which satellite broadband 
        can be priced competitively.
        In addition, an increased number of satellites would allow more 
        efficient allocation of spot beam capacity, and consequently 
        more efficient use of the capacity that exists. As a practical 
        matter, the merger will increase the amount of usable capacity.
        Larger pool of DBS subscribers. The New EchoStar will have the 
        benefit of consolidating the DBS subscriber bases of both 
        firms. Current subscribers of DBS services are more likely to 
        subscribe to satellite broadband services because they know 
        their households have a clear line of sight to the southern 
        skies and because they have a demonstrated willingness to place 
        the necessary equipment and antenna dishes on their homes. This 
        larger subscriber pool can in turn be leveraged into 
        significant efficiencies: it reduces costs in the manufacture 
        of consumer premises equipment (CPE) by encouraging investment 
        in research and development and manufacturing economies; it 
        spreads fixed costs over a larger base; it allows for more 
        efficient use of satellites and spectrum; and it reduces the 
        cost of capital by lowering the risk profile of a residential 
        satellite broadband venture. Scale is also important because 
        each of the factors described above allows the firm to grow 
        more quickly, and thereby achieve an efficiency feedback loop.
        Lower costs. The new firm will have lower overall costs of 
        providing service than two separate firms. It will also make 
        economically justifiable future investment in research and 
        development that would likely be needed to bring down CPE 
        costs. Consumer equipment costs, a substantial factor that 
        differentiates satellite broadband from competing services, 
        remain too high (even with the substantial subsidies already 
        offered by the satellite broadband firms). Substantially 
        increasing the subscriber base will result in manufacturing 
        efficiencies and volume discounts that will reduce these 
        consumer equipment costs. EchoStar and Hughes estimate that it 
        will be necessary to have volumes in excess of a million 
        terminals sold per year to achieve meaningful savings in that 
        area.
        Experience with cable modems illustrates the benefits that real 
        economies of scale could bring to satellite broadband CPE. As 
        recently as 1998, cable modems cost $300 a piece, shipping 
        approximately 500,000 units that year. This year cable modems 
        cost about $75, with anticipated shipments of between 10 and 15 
        million units. Experience with Ku-band LNBFs shows similar 
        economies of scale, with the price of that component falling 
        from approximately $33 in 1993, when only 76,000 units were 
        produced, to approximately $6 in 2001, after cumulative 
        production of between six and seven million units.
        Similarly, Ka-band equipment is not yet available in the mass 
        market, and is actually more expensive than Ku-band equipment 
        because of its shorter production history and lower production 
        volumes. The more quickly Kaband service can be introduced, the 
        lower the costs will be. Such higher volumes could also lead to 
        decreases in installation costs and dealer/retailer commissions 
        per subscriber as installers, dealers and retailers become more 
        amenable to lower per-subscriber fees. The installation of one 
        dish during a single visit for DBS and broadband services 
        further significantly decreases total costs.
    In addition, the merged firm also would need fewer total backup 
satellites for its service; with consolidation, only a single backup 
satellite might be necessary. The merger would also permit 
rationalization of certain facilities such as billing, gateways, call 
centers, and network operations centers, all resulting in lower costs, 
and therefore lower prices to consumers.
        Acceptable risk profile. The impediments faced by each company 
        standing alone are so high that their investors today would not 
        likely accept the risk of deploying a full-scale residential 
        broadband satellite service. Simply stated, today Wall Street 
        will not finance a satellite broadband service catering 
        primarily to consumers on a large scale. Illustrating the high-
        risk profile of such projects today is the fact that none has 
        been funded to completion and deployment. Meanwhile, even 
        wellfinanced ventures with experienced backers have been forced 
        to scale back or even abandon their satellite broadband plans. 
        The perceived risk of a Ka-band project can be brought down to 
        an acceptable level by virtue of the spectrum and satellite 
        capacity efficiencies to be secured by the merger, combined 
        with the cost efficiencies that will flow from the larger pool 
        of DBS subscribers to whom a broadband service can be marketed.
        Higher rate of growth. The increased scale of the single 
        integrated firm will provide an immediate increase in the 
        broadband subscriber base, and an increased rate of growth 
        going forward. Rapid growth is critical to effective 
        competition with cable-modem and DSL, both of which are 
        expanding rapidly and are ``sticky products'' relative to 
        satellite broadband due to the high up-front cost of satellite 
        broadband CPE, as well as the difficulty of changing Internet 
        addresses and reconfiguring one's system. Thus, satellite 
        broadband not only has to achieve the necessary scale, it has 
        to do so in direct competition with cable-modem and DSL 
        providers who have the advantage of incumbency and are building 
        market share far more quickly than satellite providers are able 
        to do. Rapid growth also means a more rapid return on 
        investment, which further reduces costs and mitigates the 
        investment risk associated with the development and deployment 
        of satellites well before they will be called into use.
        Enhanced marketing capabilities. New EchoStar would have an 
        enhanced ability to introduce DBS users to a truly competitive 
        satellite broadband service. Because customers are resistant to 
        having two dishes, a service provider would have to supply a 
        single dish that obtains broadband and DBS service from 
        spacecraft in an arc that is no greater than 22 degrees and 
        includes a slot capable of providing DBS service to the entire 
        United States. A single consolidated firm could make more 
        efficient use of the available orbital slots within this arc. 
        The ability to effectively offer both DBS and broadband service 
        is critical to providing effective competition with cable for 
        several reasons. Most significantly, digital cable offers both 
        MVPD and broadband services, and DBS will need to match this 
        offering and provide cross-product discounts and unified 
        billing. In addition, combining broadband service with MVPD 
        service should result in lower churn, which decreases 
        subscriber acquisition costs and allows the firm to take more 
        business risk in investing in the customer.
        Elimination of duplicative spectrum use. There is and will be a 
        multicasting market on the data side of the business, and 
        consolidation would eliminate the wasteful duplication that 
        would occur if both firms were multicasting simultaneously the 
        same information.

    Question b: When ordered through DIRECWAY or StarBand, how much 
does the service cost per month, for just broadband and then for 
broadband and DBS as a bundle? How much does the equipment cost? Please 
state your suggested retail price, if any, and the actual consumer 
cost.
    Answer: Until this week, when EchoStar ceased selling the StarBand 
service directly to retailers, EchoStar sold the StarBand service 
unbundled for $69.99 per month, plus a $5 access fee with a 12-month 
commitment; installation costs start at $199; the receiving equipment, 
which includes a modem, transceiver, antenna, DBS LNBF kit, and 
mounting hardware, had an MSRP of $549. For a subscriber who also 
signed up for DISH Network Television Programming, installation of the 
television receiving equipment was free; the combined receiving 
equipment, which includes a modem, transceiver, antenna, 2 DBS LNBFs 
and mounting hardware, had an MSRP of $549; and there was no access 
fee. A subscriber who signed up for America's Top 150 television 
programming paid $10 less per month for the combined Dish Network and 
StarBand service. A DISH subscriber also had the option to purchase a 
Dish 301 standalone receiver for $99 (instead of the usual $199).

    Question c: How much would such a service cost if your merger is 
approved?
    Answer: As noted above, EchoStar and Hughes expect that the merger 
will result in significant efficiencies that will allow the new firm to 
reduce substantially costs of service and consumer equipment. With 
these efficiencies, EchoStar and Hughes believe that the merger will 
allow the New EchoStar to offer a satellite broadband service that 
competes with cable modem and DSL in price and in quality. Because the 
new firm will need to grow its broadband subscriber base as rapidly as 
possible in order to achieve economies of scale, and because the 
incumbent cable modem and DSL broadband providers will continue to have 
substantial competitive advantages, New EchoStar will have to price its 
service aggressively, passing these merger-created efficiencies and 
cost reductions on to its subscribers. Moreover, because New EchoStar 
will offer its broadband service at a single national rate, broadband 
subscribers all across America--rural, suburban and urban--will receive 
the benefits of enhanced broadband competition.
    The lower costs of satellite broadband service promise substantial 
benefits to consumers. Aside from the obvious benefit of lower prices, 
an affordable satellite broadband alternative will expand the 
categories of broadband users, much as narrowband Internet use has 
expanded dramatically over the last decade. The increased number and 
variety of broadband subscribers resulting from ubiquitous, affordable 
satellite broadband will in turn drive demand for additional broadband 
content and applications, yielding still greater benefits to consumers.

    Question d: Describe the satellites that each of the services 
currently uses to provide broadband access. For each of these 
satellites please state specifically how many broadband monthly 
subscribers that satellite can serve.
    Answer: In order to provide satellite broadband service, EchoStar, 
through StarBand Communications, Inc., and Hughes, through Direcway, 
lease Ku-band transponders on satellite owned by third parties.
    Satellite broadband capacity is subject to a number of factors, 
including the characteristics of the transponders used, the number of 
transponders available, whether the transponders use spot beams or 
CONUS beams, the size of any spot beams that may be used, the desired 
data transmission rate, subscriber behavior (e.g., amount of time 
online, the size and frequency of data downloads and uploads, demand 
peaks, etc.), the access scheme and efficiency, and the design of the 
satellite modem, among others. Assuming current service conditions and 
reliability, the total subscriber capacity of the Ku-band transponders 
currently leased by both parties combined is well under half a million 
subscribers. Although it is possible to add capacity by leasing 
additional transponders, there is a limited number of Ku-band 
transponders available for lease that are suitable for satellite 
broadband service, and a still smaller number that can be used to 
provide satellite broadband service and DBS service without the 
necessity of a second dish. Moreover, leased capacity on Ku-band 
transponders is both an inefficient and an expensive means of providing 
satellite broadband service, and, moreover, requires that a subscriber 
invest almost one thousand dollars in consumer premises equipment and 
installation, as I explain in greater detail in my response to your 
question five, above.

    Question e: How many Ka-band slots did you ask the FCC for? How 
many satellites do you plan to deploy into these slots?
    Answer: In the first Ka-band processing round, EchoStar sought and 
was granted licenses to construct, launch, and operate Ka-band 
satellites in two orbital slots, at 83+ W.L. and at 
121+ W.L. In each of these slots, EchoStar has the right to 
only half of the available spectrum; the remaining half is licensed to 
a separate company, Celsat America, Inc. EchoStar did not seek any 
additional slots in the second Ka-band processing round. However, the 
Federal Communications Commission recently approved EchoStar's 
application to assume control of VisionStar, Inc., a Ka-band licensee 
in which EchoStar previously held a minority interest. VisionStar holds 
a license to construct, launch, and operate a Ka-band satellite system 
at the 113+ W.L. orbital slot. However, VisionStar's plans 
regarding use of that satellite and that orbital slot have changed 
recently based on a number of factors. In addition, this license is 
conditioned on completion of construction of the satellite by April 
2002, and launching the satellite by May 2002. EchoStar expects that 
VisionStar will not complete construction or launch of the satellite by 
those dates and will soon ask the FCC for an extension of these 
milestone dates. Consequently, EchoStar is not assured of the 
availability of the VisionStar satellite.
    EchoStar expects that it would deploy one satellite in each 
available slot. Later this year, EchoStar will launch EchoStar IX, a 
hybrid Ku/Ka satellite that will be the first satellite using Ka-band 
spectrum in the United States. EchoStar could use the two Ka-band 
transponders on EchoStar IX for a number of purposes, including DBS 
backhaul and/or very limited, broadband Internet service. However, 
EchoStar IX will have only modest Ka-band capacity, and if it were used 
for Internet service, its spot beam configuration would allow for only 
a noncontiguous regional service covering Seattle, San FranciscoSan 
Jose, Denver-Cheyenne, and Phoenix.

    Question 6: If this merger where allowed by the DOJ and the FCC, 
and if completed, would the merged firm allow unaffiliated Internet 
Service Providers (ISP) to be carried on the resulting broadband 
service? Would consumers have a choice of choose AOL, Earthlink, or any 
of the thousands of other ISPs? Would you permit a broadband content 
provider to stream full-motion video, or music (consistent with any 
copyright restrictions) to consumers? Would you charge them for that 
right? Would you agree not to discriminate in favor of your own 
content, the content of Vivendi or any other content provider? Please 
answer all questions in full, and provide all documents in your 
possession substantiating your answer.
    Answer: EchoStar is committed to allowing its Internet subscribers 
to access the entire Internet, freely and openly. In fact, Spaceway's 
business plan now is to establish interconnections with as many 
Internet portal partners as possible as gateways for its service. At 
this point, however, it is impossible to commit to integrate other ISPs 
into our satellite operations due to questions about the technological 
and the business issues involved in such a commitment. Moreover, as I 
explain in greater detail in response to Senator Cantwell's fifth 
question, below, EchoStar does not believe that, under the federal 
telecommunications laws as recently interpreted by the FCC, it or any 
other satellite broadband provider should be required to provide ``open 
access'' to unaffiliated ISPs. Indeed, such a regulatory burden, 
imposed on the fledgling and capacity-constrained satellite broadband 
industry, could hobble its progress, a result that would clearly be 
contrary to Congress's express goal to ``encourage the deployment on a 
reasonable and timely basis of advanced telecommunications capability 
to all Americans.''
    The issue of unlimited streaming is also a difficult one, because 
even with the multibillion dollar investments in satellites that we 
intend to make, capacity will not be unlimited, and will be shared 
among our users. Unfortunately, extremely high bandwidth-intensive 
uses, such as downloading a full-length motion picture, may have 
adverse effects on all users of the service (just as they do with cable 
modem users today). Thus, like most high-speed terrestrial services, we 
will likely need to maintain some limits on high-bandwidth uses in 
order to preserve the quality of service for all users.
    We will not discriminate against any content provider on the 
Internet and will provide our users with access to any provider that 
they wish to access (consistent with any legal restrictions on our 
ability to do so). We are willing to enter into a binding consent 
decree to confirm our commitment. Of course, we anticipate that like 
all Internet service providers, we will enter into arrangements with 
other companies to advertise and promote their products, and will 
advertise and promote our own products.

    Question 7: You have stated that this merger will allow-DirecTV to 
offer more HDTV channels and interactive television services. Please 
detail what HDTV and interactive television services are currently 
being offered. What plans did EchoStar have to launch these services 
separate from the merger? What would be the offering of HDTV and 
interactive television services if the merger is approved and would 
these products be an additional cost to the consumer? Finally, how much 
bandwidth does an HDTV channel consume compared to a regular channel? 
(I realize the answer to this question will probably be a range 
depending on the nature of programming on the HDTV channel.)
    Answer: EchoStar currently offers a total of four High Definition 
channels: one each from HBO and Showtime, as well as East and West 
channels of High Definition versions of CBS network programming. 
EchoStar also offers a High Definition Pay-Per-View channel. High-
Definition television consumes approximately eight times the bandwidth 
of an ordinary digital channel. EchoStar is always looking for new and 
advanced programming options to offer its customers, but is at the 
limits of its capacity now, and so has no firm plans to offer 
additional HDTV channels without the merger. If the merger is approved, 
New EchoStar will increase the number of HDTV channels it offers to at 
least 12.
    Our cable competitors and the DBS firms currently charge consumers 
separately for High Definition television service. We anticipate that 
new EchoStar will continue to charge consumers for this service. 
EchoStar's interactive offerings now are limited to pay-perview movies 
and other events.
    With the merger, EchoStar will have additional capacity to provide 
more and better interactive services. For example, EchoStar could use 
some of the freed capacity to continuously download pay-per-view movies 
to be cached by a specially designed receiver with a large hard drive. 
This would allow EchoStar to offer true video-ondemand (i.e., the user 
can start the movie at the user's convenience, rather than waiting for 
a scheduled start time). Another example is interactive news, 
educational, sports, or weather programming, that would allow a 
subscriber watching, for example, the news, to obtain more information 
about a particular topic in the program by clicking an icon on the 
screen. Again, this kind of service would be made possible by opening 
enough spectrum capacity that EchoStar could continually download 
information to a specially designed receiver with a hard drive, so that 
the user could access the up-to-date interactive information it 
requested. Games, jukeboxes, shopping channels, telemedicine and other 
interactive uses will also be possible with the new capacity.

    Question 8: The Department of Justice issued a second request for 
documents pursuant to the Hart-Scott-Rodino law within the last month. 
When do you anticipate you will fully satisfy that request?
    Answer: EchoStar has devoted significant company resources to 
responding to the Department's wide range of document requests and 
interrogatories, as well as to the Federal Communications Commission's 
separate requests. We have already produced over 270,000 pages of 
documents to date to both the Department and the state attorneys 
general, and we anticipate that we will have substantially complied 
with the Second Request within the month of April. We further 
anticipate that, due to the importance of the issues raised by the 
merger, that we will agree to provide the Department and the states 
with additional time beyond the 30 days provided for by the Hart-Scott-
Rodino Act in order to enable them to complete their review of the 
transaction.

                                

 Responses of Charles W. Ergen to questions submitted by Senator Strom 
                                Thurmond

    Question 1: Mr. Ergen, assuming that a merger between EchoStar and 
Hughes DirecTV would result in enhanced competition between satellite 
and cable services in the short-run, what will be the long-term effects 
on competition in the multi channel video programming market? Are the 
short-term benefits worth the long-term risks? If the merger takes 
place, how can we be assured that a competitive market will exist ten 
years from now?
    Answer: The merger between EchoStar and Hughes will improve 
competition in the MVPD marketplace in both the short and long term.
    The short-term benefits include local-into-local programming into 
all 210 DMAs. The inability to receive local programming is significant 
impediment to consumers choosing DBS over cable, and New EchoStar's 
nationwide offering of local programming will help put more competitive 
pressure on cable, both on price and improved service. New EchoStar 
will also be able to offer more nationwide programming, including 
speciality, educational, general interest, and foreign language 
programming. These will allow consumers broader choice and put more 
pressure on cable.
    The proposed merger will have an additional benefit: it will 
perpetuate the virtuous cycle of competitive innovation. The MVPD 
market is dynamic, with new products and services being introduced 
regularly. The greater geographic coverage of local channels, the 
increased ability to broadcast specialty, ethnic, and foreign language 
programming, the improved interactive television services, and the 
capacity to offer expanded video-ondemand should help New EchoStar to 
compete more vigorously against the cable industry. Such an improvement 
of DBS' product offerings will likely force cable systems to continue 
to upgrade their network infrastructure. Relative to today's cable 
infrastructure, an upgraded cable system will exert even more 
competitive pressure on DBS pricing. This process of competitive 
responses benefits DBS and cable subscribers.
    The danger is that, in the absence of the merger, the competitive 
cycle will be impeded by the constraints facing the DBS firms. If that 
were to occur, competition in the MVPD would be at risk and both DBS 
and cable subscribers could suffer. For example, digital cable is 
undercutting DBS's traditional advantages over cable, such as digital 
video and audio quality and a broader channel selection, compounding 
cable's incumbency advantage. In addition, digital cable is allowing 
cable to develop new advantages, such as video-on-demand, true 
interactive services, and a bundle of cable service with affordable, 
high-speed cable-modem internet access. EchoStar is unable, without the 
merger, to match these offerings, and its ability to competitively 
threaten cable will be diminished. As a Wall Street report predicted, 
``cable will become a far more significant foe, and will likely 
relegate satellite television to a deep second-class status in most 
urban markets. Today, satellite is still doing well in the less 
penetrated urban markets because cable's broadband bundling and true 
video-on-demand services are still in their infancy.
    The benefits of a strengthened DBS video product are the only way 
to ensure that urban America has a choice five years from now.'' \1\
---------------------------------------------------------------------------
    \1\ The Lehman Brothers, Satellite Communications Industry Update, 
2/8/02.
---------------------------------------------------------------------------
    Whether a long or short term view is taken, the merger between 
EchoStar and Hughes will benefit competition and consumers nationwide.

    Question 2: Mr. Ergen, has EchoStar taken the position in the past 
that the Direct Broadcast Satellite Market is different from the cable 
market? If so, please explain your reversal on this issue.T3Answer: 
EchoStar's belief in a single MVPD market is not of recent origin. 
EchoStar has always held the same view: that there is one MVPD market, 
in which cable is the incumbent and dominating player, and that DBS 
competes, although presently with distinct disadvantages, against cable 
and others within the MVPD market. It has also consistently recognized 
that certain factors have historically inhibited DBS from robustly 
competing with cable. EchoStar has expressed that view on dozens of 
occasions, starting as early as 1995. In 1996, for example, EchoStar 
asserted that ``the relevant market includes all multichannel video 
programming distributors, not just DBS service providers.'' \2\ In 1997 
EchoStar wrote in comments to the Commission: ``Ever since it commenced 
DBS service in the spring of 1996, EchoStar has viewed cable 
subscribers as its primary target market. Accordingly, EchoStar has 
priced and structured its offering with the primary purpose of 
attracting cable subscribers.'' \3\
---------------------------------------------------------------------------
    \2\ In re Application of Direct Broadcasting Satellite Corp., 11 
FCC Rcd. 10494 (1996) at para. 18.
    \3\ Comments of Echostar Communications Corp., In re Annual 
Assessment of the Status of Competition in Market for the Delivery of 
Video Programming, CS Docket No. 97-141 (July 23, 1997) at 2.
---------------------------------------------------------------------------
    In December 1998, EchoStar expressed a similar view with respect to 
the potential impact of its transaction with MCI: ``EchoStar emphasizes 
that the MVPD market--not any subset of that market--is the relevant 
market for analyzing the public interest impact.\4\ It also noted that 
``DBS service has emerged as the most likely alternative with the 
potential for introducing full-fledged competition against dominant 
cable operators in the MVPD market, but is still a long way from 
realizing that potential because of various spectrum-related and 
regulatory constraints.'' \5\ Appearing before a congressional 
committee in 1999 regarding EchoStar's efforts to compete with cable 
systems, EchoStar's Chief Executive Officer Mr. Ergen testified: ``The 
relevant market for our service is the MVPD market. DOJ has found 
extensive evidence of customers switching from cable to DBS, contrasted 
with the early days of DBS, when subscribers most often came from 
uncabled areas.'' \6\
---------------------------------------------------------------------------
    \4\ In re Application of MCI Telecommunications Corp. and Echostar 
110 Corp. (Dec. 2, 1998) at 7.
    \5\ Id. at ii.
    \6\ Charles W. Ergen, Testimony Before the Subcommittee on 
Antitrust, Business Rights, and Competition, Committee on the 
Judiciary, U.S. Senate (Jan. 27, 1999) at 3.
---------------------------------------------------------------------------
    While this view of the relevant market was certainly the prevalent 
one in 2000, this does not mean that it was free from any doubt. As 
zealous advocates, EchoStar's lawyers in litigation had the duty to 
explore fully the extent to which any such doubt could be used to 
bolster EchoStar's case. Opponents of the merger have seized on 
statements in EchoStar's request for more discovery to shed additional 
light on the factual issues. In its Request for Rule 56(f) Continuance 
to Respond to Defendants' Motion for Summary Judgment, EchoStar argued 
that the summary judgment requested by DirecTV was inappropriate 
pending ongoing discovery and in light of the need for additional 
discovery on highly complex issues such as market definition. The 
statements cited by opponents described only beliefs about what the 
evidence could establish, and they did not purport to be statements of 
proven fact. Indeed, EchoStar explicitly noted that its assertions were 
based on a preliminary understanding of the case, stating that ``expert 
witnesses will play an important role on several issues, including the 
definition of the relevant market.'' \7\
---------------------------------------------------------------------------
    \7\ Request for Continuance, at 3.
---------------------------------------------------------------------------
    Finally, even if there were any potential counter-argument about 
the relevant market in 2000, it has been dispelled by developments that 
were then in their early stages and that have since matured decisively. 
As explained above; these developments include: on the one hand, the 
fuller extent to which DBS providers have since been able to capitalize 
on the local-into-local opportunity afforded by SHVIA since the end of 
1999; and, on the other hand, the aggressive roll-out of digital cable.
    Also, within the last year, for the first time, we have seen 
national television advertising by digital cable companies against DBS, 
``dish'' bounties (e.g., cable companies offering 200 hours of free 
programming to subscribers who turn in their dishes), and cable selling 
its products through retail stores. Another recent example is digital 
cable's big push on pay-per-view, lowering prices and instituting more 
frequent DBS-like schedules. In short, these examples show that the 
advent of digital cable has reduced or eliminated the capacity/quality 
differential between cable and DBS. The ability of digital cable to 
offer video/Internet bundles is also profoundly threatening to DBS. 
None of this was true a year ago. Thus, to the extent that there ever 
was a submarket for DBS service within the MVPD market, that submarket 
has been eliminated by cable's aggressive digital rollout and focused 
competition with DBS providers.
    Furthermore, the merger itself will change the nature of 
competition by making DBS substantially more competitive with cable. By 
increasing channel capacity and allowing DBS to offer substantially 
more channels and other new and enhanced programming and services, the 
merger will eliminate whatever competitively significant barriers 
remained preventing DBS from competing with cable in an unrestricted 
way. This will force cable to respond in kind. History shows many 
instances where cable accelerated its infrastructure upgrades in 
markets when DBS began offering local stations from those markets.

    Question 3: Mr. Ergen, it has been suggested that the ``one nation, 
one rate card'' will protect rural markets where cable services are not 
available, thereby preventing the new corporation from abusing its 
monopoly in multi-channel video programming in those areas. However, if 
a cable provider in a metropolitan area cuts prices drastically, the 
new corporation would be unable to lower the rates in that metropolitan 
area without lowering rates everywhere in the nation. Therefore, while 
rural areas would be protected, the new company would be at a 
competitive disadvantage in the metropolitan areas where cable cuts its 
rates. If this merger is approved, won't the concept of ``one nation, 
one rate card'' be a hindrance to vibrant competition in some markets.
    Answer: Please see the response to Senator Kohl's first question. 
In addition, if a cable company decides to cut its prices significantly 
in an effort to undersell the merged firm, this would be a great 
example of ``vibrant competition,'' not the end of it.

    Question 4: Mr. Ergen, if the proposed merger were to occur, would 
the ``one nation, one rate card'' apply to high-speed Internet 
services?
    Answer: Yes, the ``one nation, one rate card'' policy will apply to 
New EchoStar's basic highspeed Internet services.

    Question 5: Mr. Ergen, at some time in the future, long after these 
hearings are forgotten, will consumers face the possibility of 
installing more than one dish in order to receive local channels? If 
this were to occur, would the two-dish system relegate some local 
channels to second-class status?
    Currently, because so much of our capacity is consumed by wasteful 
duplication of programming, EchoStar must transmit some local 
programming from the ``wing'' orbital locations at 61.5+ 
W.L. and 148+ W.L. To receive programming from the primary 
CONUS orbital locations (101+ W.L., 110+ W.L. and 
119+ W.L.) as well as a wing slot requires two satellite 
dishes. EchoStar is providing the second dish for free to any local 
programming subscriber who wants to local channels offered from the 
wing slots.
    If the merger is approved, the combined company will rationalize 
spectrum usage and create significant new capacity at CONUS orbital 
locations. We will be able to provide all local programming channels 
from the three CONUS orbital locations, so that consumers can receive 
them on one dish. EchoStar and DirecTV are working on a new satellite 
dish that is capable of receiving programming from all three CONUS 
orbital locations.
    However, as explained in response to Senator Cantwell's second 
question, there may be a very small number of consumers for whom a 
single dish may not be able to receive programming from multiple 
orbital locations because, for example, of physical obstructions on 
their property.

    Question 6: Mr. Ergen, how will the concentration of all the 
satellite spectrum in one company be a benefit to consumers?
    Answer: Currently, DirecTV and EchoStar waste their limited 
spectrum by duplicating the vast majority, approximately 500 channels, 
of the programming carried by the other DBS system. By ending this 
duplication, and thereby freeing up spectrum, the combined entity will 
have roughly twice the capacity for programming as each company 
standing alone.
    With the spectrum efficiencies gained by eliminating duplicative 
programming between EchoStar and DirecTV, New EchoStar will 
significantly enhance its video programming offerings. First, by 
utilizing spectrum efficiencies in conjunction with existing and 
planned satellites, as well as the launch of a new spot beam satellite, 
New EchoStar will serve all 210 DMAs with local broadcast service, as 
detailed in the New EchoStar 1 satellite application filed with the 
FCC. Second, New EchoStar will be able to expand its offerings of 
national networks, particularly niche services such as foreign language 
programming and other content that traditionally has not gained 
carriage on cable systems. Third, spectrum efficiencies will allow for 
expanding the number of HDTV programming channels from the 2-3 channels 
offered today to 12 or more channels (HDTV channels require 
approximately 8 times the bandwidth of an ordinary digital channel).
    Spectrum efficiencies will also translate into new interactive 
services. These likely will include near Video-On-Demand, games, 
educational interactive programs, television commerce, and other 
services which create a two-way interactive television experience. Such 
services become more feasible with the advent of additional spectrum 
capacity, and' by virtue of its roughly doubled spectrum capacity, New 
EchoStar will be able to implement interactive services while 
simultaneously carrying more traditional video services. In addition, 
New EchoStar will be able to offer bandwidth-intensive applications 
such as telemedicine, particularly relevant to the rural subscriber 
base.
    Of course, it would be incorrect to suggest that New EchoStar would 
control ``all satellite spectrum.'' Numerous other businesses control 
all of the allocated C-Band spectrum, and numerous other firms control 
Ka-band and medium-power (FSS) Ku-band licenses. With respect to high-
power (DBS) Ku-band, R/L DBS and Dominion control DBS licenses. In 
addition, there is unallocated DBS spectrum, and Northpoint recently 
applied for a portion. Furthermore, two firms have applied to use 
orbital locations allocated to Mexico and Canada to provide service to 
the United States.

    Question 7: Mr. Ergen, are satellite services currently competitive 
with digital cable services? If so, does this undercut your argument 
that the merger is necessary for satellite to be competitive with 
cable? As a result of the proposed merger, will satellite services be 
more compatible with standard cable (non-digital) services?
    Answer: EchoStar faces difficult obstacles to effective competition 
with cable firms, including its inability to carry local programming 
beyond the largest DMAs, the need to install satellite dishes on 
consumers' homes, more expensive installation and consumer equipment, 
cable's incumbency, and difficulty obtaining important programming at 
reasonable rates from the vertically integrated cable MSOs.
    Historically, EchoStar had certain advantages over cable. EchoStar 
was able to offer superior, digital quality video and sound. Moreover, 
EchoStar was able to offer a broader channel selection, including 
multiplexed premium movie channels, digital music channels, and out-of-
area sports programming. These advantages, plus significant investment 
by EchoStar in subsidies for consumer equipment, allowed EchoStar to 
lure some customers from incumbent cable providers, and also exerted 
some competitive pressure against cable, moderating cable's price 
increases and encouraging cable's investment in digital infrastructure.
    Cable's roll-out of digital service, however, has largely erased 
EchoStar's historical advantages in many areas. Digital cable offers 
video and sound quality and broad channel selections similar to those 
offered by EchoStar. At the same time, EchoStar's historical 
disadvantages remain. Moreover, digital cable is also creating new 
advantages, such as video-on-demand, true interactive services, and a 
bundle of video programming and affordable high-speed Internet access, 
all of which EchoStar cannot currently match.
    The merger will enable EchoStar to become more competitive with 
both traditional (analog) and digital cable. By enabling the merged DBS 
firm to offer local programming in all 210 DMAs, DBS will become a much 
closer competitor to cable in the areas that are currently unserved by 
local programming. In addition, the other merger efficiencies--
including the expanded selection of HDTV, national, specialty, and 
educational programming, pay-per-view, interactive services, and video-
on-demand; significant cost savings; and a bundle of affordable, high-
speed, satellite Internet access--the merged firm will be better able 
to compensate for DBS's inherent disadvantages vis-a-vis cable, as well 
as meet digital cable's new competitive challenges. In the face of such 
competitive pressure, cable should respond through such measures as 
more competitive prices and expanded service offerings.

    Question 8: Mr. Ergen, irrespective of the potential merits of the 
proposed merger, what are your arguments as to the legality of the 
merger in view of Section 7 of the Clayton Act, which prohibits 
acquisitions the effect of which ``may be substantially to lessen 
competition, or to tend to create a monopoly'' in ``any line of 
commerce or in any activity affecting commerce in any section of the 
country. . . .''? 15 U.S.C. Sec. 18. Specifically, how do you deal with 
the fact that a monopoly in multi-channel video programming will exist 
in many rural areas if the merger goes through? Because these rural 
areas should qualify as ``any section of the country,'' won't the 
creation of a monopoly directly violate the statute?
    Answer: The Clayton Act's reference to ``any line of commerce or in 
any activity affecting commerce in any section of the country'' means a 
relevant antitrust market.\8\ As explained more thoroughly in response 
to Senator Hatch's fifth question, above, the merger will not create 
monopoly power or cause any antitrust harm in any relevant antitrust 
market. With the merger, consumers in every section of the country, 
including rural areas, can expect more video programming and lower 
prices than possible without the merger.
---------------------------------------------------------------------------
    \8\ See, e.g.,. United States v. Philadelphia National Bank, 370 
U.S.321, 356 (1963).

    Question 9: Mr. Ergen, what are your arguments as to the legality 
of the merger in light of the Supreme Court's decision in U.S. v. 
Philadelphia National Bank, 370 U.S. 321 (1963), wherein the Court 
refused to justify anticompetitive effects in one market because of the 
procompetitive consequences in another? If there are anticompetitive 
effects in some rural areas, doesn't Supreme Court precedent defeat 
your argument that procompetitive effects will occur in those markets 
where cable and satellite services are in direct competition?Answer: 
Consumers in rural areas will benefit from the merger in numerous ways, 
particularly with local programming for the smaller DMAs, affordable 
high-speed satellite Internet access, and more competitive pricing. As 
explained in detail in response to Senator Hatch's fifth question, 
above, the merger will have procompetitive effects in every relevant 
market, and will have anticompetitive effects in no relevant market. 
---------------------------------------------------------------------------
Accordingly, there is no anticompetitive effect to ``justify.''

                                

Responses of Edward O. Fritts to questions submitted by Senator Herbert 
                                  Kohl

    Question 1: Please provide the most current list of all 210 United 
States television markets and all of the stations that would qualify 
for must-carry rights in those markets.
    Answer: Attached is a list of all 210 television markets and all of 
the full-power commercial and non-commercial stations in those markets. 
Under SHVIA, stations are eligible for carriage if they can provide a 
good quality signal to the satellite company, if they properly filed 
their request for carriage with the satellite company, and if they 
satisfy certain non-duplication requirements. Thus, the attached list 
contains all TV stations in the markets; however, because of the 
additional conditions required for eligibility for carriage, it is not 
possible for NAB to state precisely which of these stations are 
eligible at this time.

    Question 2: You suggested at the hearing that Mr. Ergen has 
frivolously filed complaints against broadcasters at the Federal 
Communications Commission regarding retransmission consent 
negotiations. Specifically, these challenges were brought under 
provisions included in the Satellite Home Viewer Improvements Act of 
1999 that govern good faith negotiations between satellite providers 
and broadcasters during such retransmission consent bargaining 
sessions. Please detail the various complaints filed by EchoStar 
pursuant to this law and explain why the National Association of 
Broadcasters believes they were frivolous.
    Answer: There are four instances where EchoStar filed a complaint 
against a broadcast station owner regarding retransmission consent 
negotiations. See EchoStar Satellite Corp. v. Landmark Communications 
(WTVF-TV), File No. CRS-5554-C (May 30, 2000); EchoStar Satellite Corp. 
v. Clear Channel (WFTC-TV), File No. CRS-5553-C (May 30, 2000); 
EchoStar Satellite Corp. v. Chris-Craft (KTVX and WWOR-TV), File No. 
CRS-5555-C (May 30, 2000); and EchoStar Satellite Corp. v. Young 
Broadcasting (KRON-TV, WKRN and KCAL-TV), File No. CSR-5655-C (Feb. 
2001).
    Each complaint alleged that the broadcast owner failed to negotiate 
in good faith in violation of the SHVIA. NAB believes the complaints 
were merely used to ``punish'' broadcasters and as leverage to force 
retransmission consent agreements.
    The background regarding the complaints against Landmark, Chris 
Craft, and Clear Channel, as NAB believes, is as follows:

         After enactment of the SHVIA, satellite companies were 
        given a 6-month ``free ride'' to carry stations that elected to 
        be carried by the satellite companies through a retransmission 
        consent agreement without paying any retransmission fees to 
        stations. This 6-month period was intended to give the parties 
        time to complete agreements.
         This period ended on May 29, 2000. At that time, 
        Landmark, Chris Craft and Clear Channel told EchoStar to take 
        their signals off of the satellite because an agreement hadn't 
        been reached.
         EchoStar responded by filing complaints with the FCC, 
        claiming the companies were negotiating in bad faith.
         Each complaint was subsequently dismissed (all within 
        3 months) when the parties reached an agreement.

    In the case of Young Broadcasting, the complaint was followed 
through to the end:

         EchoStar filed a complaint in February 2001, after 
        receiving interim permission to carry Young Broadcasting's 
        signals past the May 29, 2000 cut off date.
         After months of filings--and a request by EchoStar for 
        confidentiality--the FCC denied EchoStar's complaint, chastised 
        EchoStar for ``abuse of process'' and found it failed in its 
        duty of candor to the Commission by publicly disclosing the 
        very material it claimed should be kept confidential. See 
        EchoStar Satellite Corp. v. Young Broadcasting, Memorandum 
        Opinion and Order, File No. CSR-5655-C (Aug. 6, 2001).
         The FCC found that Young Broadcasting's actions in 
        negotiation were consistent with competitive marketplace 
        considerations and in line with the requirements of the SHVIA.

                                

 Responses of Edward O. Fritts to questions submitted by Senator Orrin 
                                G. Hatch

    Question: Attorney General Nixon, Mr. Fritts, and Mr. Pitofsky, 
would each of you please explain your respective interpretations of the 
recent announcement by DirecTV and EchoStar that they have suddenly 
found sufficient spectrum to carry all stations in all 210 television 
markets?
    Answer: The announcement that a merged EchoStarADirecTV could offer 
local-to-local service in all 210 TV markets was no surprise to NAB. We 
have always maintained that either company--individually--has the 
capacity to serve all 210 markets, so plainly the two companies 
combined could easily do so.
    A closer look at what they've said they can do--and when they've 
said it makes it clear this is a political ``Hail Mary.'' When the 
merger was announced, EchoStar and DirecTV were already carrying 36 and 
41 markets, respectively. At the end of 2001, DirecTV somehow found 
capacity on its own--without a merger--to carry a total of 51 markets 
by the end of 2002, proving that the two companies could expand (and 
had the incentive to expand) their local-to-local service without 
merging to a monopoly.
    In their FCC application in December 2001, the two companies said 
that with the merger, the two companies would only be able to serve 100 
markets. In February 2002, however, DirecTV finally was forced to admit 
that before the merger, it had already launched or planned to launch 
spot beam satellites that would enable it to serve more than 100 
markets. With political pressure against the merger mounting, and 
having been forced to admit that they were already planning to serve 
more than 100 markets without the merger, the two firms decided to 
announce their 210market plan. Even then, however, their Hail Mary 
promise was hedged in with qualifications, contained no time deadline--
and, for the ultimate stinger, did not actually promise to all local 
stations, but only a cherry-picked selection of local stations, if 
their continuing legal attack on the SHVIA were to prove successful.

    Question: Attorney General Nixon and Mr. Fritts, in your respective 
opinions, are Mr. Ergen's assurances regarding television carriage and 
internet open access sufficient to safe guard the legitimate interests 
of consumers and competing ISPs?
    Answer: At first blush, the announcement to carry all stations in 
all 210 TV markets might appear to meet NAB's goal of universal 
carriage of all stations in all markets. However, broadcasters have 
numerous concerns with the announcement: (1) there is no definite 
deadline--EchoStar says they may cover all markets ``as soon as'' two 
years from approval; (2) EchoStar has specifically reserved the right 
in its application to the FCC to continue to force consumers to acquire 
a second dish to get some local stations--a completely unworkable, 
consumer-unfriendly approach; (3) EchoStar has appealed the ``carry 
one, carry all'' law to the Supreme Court--it is attempting to overturn 
the underlying law that requires them to carry any station in any 
market in which they offer local-to-local using the SHVIA license; (4) 
there is no enforcement mechanism. In short, the promise made by 
Charlie Ergen does not provide assurance that all consumer's will be 
served with all their local TV channels.

                                

Responses of Edward O. Fritts to questions submitted by Senator Edward 
                               M. Kennedy

    Question: What impact, if any, would approval of the proposed 
merger have on efforts to bridge the digital divide by providing 
greater high speed internet access to underserved urban and rural 
communities?
    Answer: NAB generally focuses on the issue of local TV carriage; 
however, the issue of broadband was addressed in our Petition to Deny 
filed at the FCC. In there, NAB notes that currently, both EchoStar and 
DirecTV offer nationwide satellite-based broadband. Additionally, 
EchoStar recently announced a joint venture with SES Global to provide 
additional broadband services using SES's orbital slot. The merger 
would ultimately harm consumers by taking away any competition for 
satellite broadband services, and no spectrum efficiency with regards 
to broadband is gained through the merger. Finally, it is the antitrust 
laws that govern whether this merger is approved--not the alleged 
benefits resulting from promises.

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 Response of Robert Pitofsky to a question submitted by Senator Edward 
                                Kennedy

    Question: What impact, if any, would approval of the proposed 
merger have on efforts to bridge the digital divide by providing 
greater high speed internet access to underserved urban and rural 
communities?
    Answer: For many communities in the United States without access to 
cable or DSL, satellite broadband is the most likely option for the 
foreseeable future for their obtaining high-speed Internet access. I 
have seen no indication, however, that this merger is necessary to 
increase the availability of such satellite broadband services. 
Subsidiaries of both EchoStar and DirecTV are currently providing those 
services and have announced plans to expand those services. Consumers 
would be better off with two providers of satellite broadband services 
rather than one.

                                

 Responses of Robert Pitofsky to questions submitted by Senator Strom 
                                Thurmond

    Question 1: Mr. Pitofsky, assuming that a merger between EchoStar 
and Hughes DIRECTV would result in enhanced competition between 
satellite and cable services in the shortrun, what will be the long-
term effects on competition in the multi-channel video programming 
market? Are any short-term benefits worth the long-term risks? If the 
merger takes place, how can we be assured that a competitive market 
will exist ten years from now?
    Answer: EchoStar and DirecTV have been doing very well on their own 
in competing against cable services. They claim they cannot be 
effective in their competition with digital cable without a merger, but 
it is hard to see why that would be true. Their record of success over 
the last six years undermines that argument. As a result, even in the 
short term, there is every reason to believe that existing competition 
between the two satellite providers will continue to serve consumers 
well.
    With respect to the long term, if the merger is permitted, it is 
permanent. We could see a single satellite company dominating consumer 
services in this area for a long time--with the indifferent service and 
higher prices that high levels of market power usually produce.

    Question 2: Mr. Pitofsky, it has been suggested that the ``one 
nation, one rate card'' will protect rural markets where cable services 
are not available, thereby preventing the new corporation from abusing 
its monopoly in multi-channel video programming in those areas. 
However, if a cable provider in a metropolitan area cuts prices 
drastically, the new corporation would be unable to lower the rates in 
that metropolitan area without lowering rates everywhere in the nation. 
Therefore, while rural areas would be protected, the new company would 
be unable to compete in the metropolitan areas where cable cuts its 
rates. If this merger is approved, won't the concept of ``one nation, 
one rate card'' be a hindrance to vibrant competition in some markets?
    Answer: I believe the premise of your question is exactly right. 
The concept of a national rate card seems appealing only so long as one 
does not carefully examine the consequences. If there is a single rate 
card and a cable company were to cut prices in a particular area, the 
merged firm will only be able to meet those prices if it lowered its 
national rate card across the entire country. That is unlikely to 
happen. Also, the concept that competition comes in a single form--a 
single national rate card--is not consistent with experience. The 
satellite companies have aggressively competed with each other through 
new subscriber promotions, equipment discounts, and other incentives. 
Thus, even if the rates in rural areas where the combined company would 
have a monopoly were the same as elsewhere in the United States, the 
rural areas could be denied all of these inducements and concessions 
that have been so important in the DBS industry. Nor will a national 
rate card substitute for the loss in competition to offer new services 
and technological innovation.
    There is also the question of who will monitor this unusual 
commitment by the merged firms. One possibility is just to take their 
word for it, but antitrust enforcement doesn't usually work that way. 
The alternative is for a government agency to monitor each and every 
term of sale in each and every community in the United States to ensure 
that the ``one nation, one rate card'' concept is being respected. That 
is a form of direct and intrusive government regulation in the media 
area that Congress, the FCC, and the courts have been trying to avoid.

    Question 3: Mr. Pitofsky, if the Department of Justice were to 
approve the merger, what kind of safeguards should be implemented to 
ensure that prices are kept constant in those rural areas without 
access to cable? Can these safeguards be effective?
    Answer: As I said in my previous answer, the kind of monitoring 
that would be required may be impractical and ineffective, and 
certainly is inconsistent with the general thrust of antitrust law in 
relying on the free market to ensure fair and nondiscriminatory prices.

    Question 4: Mr. Pitofsky, what safeguards are necessary to prevent 
the new corporation from requiring consumers to erect two dishes so 
that they may receive local channels? Would these safeguards be 
effective? If two dishes were eventually required, would many local 
channels be relegated to second-class status?
    Answer: The question raises the very legitimate concern that the 
merger may produce inefficiencies in the way DBS service is provided. I 
don't have the technical expertise to know whether it will be necessary 
for consumers to purchase and own two satellite dishes rather than one, 
but the main point is that either of these companies separately could 
provide local TV channels. They are doing it now, and they are 
expanding. I see no reason why a merger is necessary to achieve that 
service--assuming willing consumers are available to purchase the 
service.

    Question 5: Mr. Pitofsky, will the concentration of all the 
satellite spectrum in one company be a benefit or a detriment to 
consumers?
    Answer: The theory of antitrust in this country for over 100 years 
is that monopoly market power in the long run is bad for consumers. 
That is particularly true where the market is barricaded by high entry 
barriers so that, if the monopolist raises prices or reduces service, 
others cannot enter. That is the situation that consumers would face if 
the proposed merger goes through.

    Question 6: Mr. Pitofsky, are satellite services currently 
competitive with digital cable services? If so, does this undercut the 
argument that the merger is necessary for satellite to be competitive 
with cable?
    Answer: I believe that satellite services are currently competitive 
with digital cable services in terms of the number of channels, quality 
of reception, advanced services that can be available to consumers and 
other features. Even if that were not true, this is an exceptionally 
dynamic sector of the economy, and services are modified and improved 
constantly. The real threat to continued competition would occur if 
EchoStar and DirecTV were permitted to merge so that they would amount 
to a satellite monopoly. Then the rivalry between the two, which has 
led to such obvious success in dramatic subscriber growth and expansion 
and enhancement of service in recent years, would disappear.

    Question 7: Mr. Pitofsky, a guiding principle in American antitrust 
policy is the effect of a proposed merger on the consumer. How will the 
consumer of multi-channel video programming be affected by a merger 
between EchoStar and Hughes DirecTV?
    Answer: It is the most fundamental tenet of American antitrust 
enforcement that mergers to monopoly (or even duopoly) will lead to 
higher prices, poorer service, and less innovation than would occur if 
there were competition. Congress and the courts have never wavered from 
their commitment to a free market protected by competition. I 
understand that the shareholders of the two companies proposing to 
merge might be enriched, but I simply can't see how consumers would be 
any better off.

                                

Responses of Robert Pitofsky to questions submitted by Senator Herbert 
                                  Kohl

    l. Mr. Pitofsky, in most markets, the EchoStar/DIRECTV merger will 
reduce the number of competitors for subscription TV from three--the 
local cable TV company and the two satellite companies--to two. In 
rural areas not served by cable, the reduction to competition will be 
even worse--from two to one. Can you identify any merger in which a 
reduction in the number of competitors from three to two benefited 
consumers?
    Answer: I cannot. Indeed, the Court of Appeals for the District of 
Columbia could not in the proposed merger of Beech Nut and Heinz, where 
it said it could not find a single case in which a merger of three to 
two under similar circumstances was permitted by a court. The result 
might be different if one of the two companies were failing or if 
barriers to entry into the market in which they operated were extremely 
low. Neither of those factors is present in connection with the 
proposed EchoStar/DirecTV merger.

    Question 2: Mr. Pitofsky, there is no doubt that consumers are 
upset--and rightfully so--by the seeming unending increases in the 
price of cable TV. EchoStar and DIRECTV claim that, by permitting them 
to bring local-into-local service into many more markets, this merger 
will greatly strengthen [satellite] as a competitor to cable and, in 
turn, restrain cable rates. What's your view of this issue? Won't this 
merger make satellite TV a much stronger competitor to cable, and 
therefore much better able restrain cable rate increases?
    Answer: It is hard to see why any of the alleged advantages of the 
merger could not be achieved by each of these companies separately--
continuing to compete vigorously with each other. Experience suggests 
that where there is a three-to-two merger, the result will be to raise 
the price of the two smaller companies rather than lower the price of 
the dominant market leader.

                                

Responses of Robert Pitofsky to questions submitted by Senator Orrin G. 
                                 Hatch

    Question 1: Attorney General Nixon, Mr. Fritts, and Mr. Pitofsky, 
would each of you please explain your respective interpretations of the 
recent announcement by DirecTV and EchoStar that they have suddenly 
found sufficient spectrum to carry all stations in all 210 television 
markets?
    Answer: Of course it would be a welcome development if the DBS 
providers would provide local-into-local service to all consumers 
throughout the country. But the burden is on the merging parties to 
make a showing that the merger will result in efficiencies that are not 
achievable by each company independently, and that any efficiencies 
outweigh the concerns about extreme increased concentration. I have yet 
to see any persuasive evidence that these companies will not get to 
full local-into-local service on their own. Their essential argument 
appears to be that they would make more money if they didn't have to 
compete with each other, and that is a reason to allow the merger. That 
certainly is not a theory that results in consumer benefits.

    Question 2: Attorney General Nixon and Mr. Pitofsky, let me ask you 
both a question that touches on a couple of different antitrust 
principles. There has been some debate about what the relevant market 
is and whether choosing one market over another really makes a 
substantive difference in this case. I would note, for example, that 
EchoStar has taken the position in litigation against DirecTV that DBS 
is the relevant market and that DirecTV is a monopoly in that market, 
but has more recently adopted a different and broader market 
definition. Also, one argument offered in support of the merger is that 
better competition to cable in the more urban areas, as well as more 
local television and pay-per-view offerings by the merged company, 
justify elimination of satellite television and broadband competition 
nationwide. Moreover, Mr. Kimmelman admitted that your analyses of the 
antitrust issues were correct, but that a broader view of some sort was 
required in this case, while attempting to argue that while DBS and 
cable were separate markets now, they would somehow become one market 
if the merger were approved. Could you comment in detail on these 
issues, including the relevant market definition and the nature of 
competition between cable and DBS, and, finally, give us your views of 
whether the antitrust laws allow benefits in one geographical or 
product market to be traded off against harm in another such market?
    Answer: Let's examine the relevant market question from two points 
of view. As to the relevant geographic market, it is clear that the 
market is local. As a result of the merger, many subscribers and 
potential subscribers in rural America who do not have access to cable 
will see their choices reduced from two to one--two satellite companies 
merged to one. That surely is an ominous development for consumers.
    As to relevant product market, I have not done the extensive study 
necessary to reach a firm conclusion. I tend to agree with the position 
advanced by EchoStar in the brief it filed about a year and a half ago 
that the two DBS companies compete most directly and substantially with 
each other and their prices respond to each other rather than to cable. 
That would make DBS a separate market or a submarket and again the 
merger would result in monopoly. Another possibility is that DBS to 
some extent competes with cable so that the three are in the same 
relevant product market. Even in that situation, the merger reduces the 
relevant players from three to two, a level of concentration that has 
invariably been rejected in the courts.
    Finally, you raised the question of whether anticompetitive effects 
in one section of the country can be justified by purported 
improvements in competition in another section. The answer is 
absolutely not. The relevant statute--Section 7 of the Clayton Act--is 
clear on the point. It says that a merger that lessens competition in 
``any section of the country'' is illegal, and the courts have followed 
that plain meaning of the statute ever since it was amended in 1950.

    Question 3: It was reported in the Wall Street Journal on February 
e [th]at--right up to the time at which the merger agreement was 
signed--EchoStar and DirecTV had been exploring ways to achieve these 
same spectrum efficiencies through a joint venture, but that effort 
failed due to control and economic factors. I would be interested in 
Mr. Ergen's and Mr. Hartenstein's elaboration on why such a joint 
venture is not a feasible alternative to this merger, and in Mr. 
Pitofsky's and [Attorney] General Nixon's analysis of that alternative. 
Could you both please provide a detailed explanation of the reasons 
that a joint venture is not a feasible alternative?
    Answer: I am not familiar with the details of possible arrangements 
to serve consumers of satellite services through a joint venture. 
Often, a joint venture is a less restrictive alternative to a merger 
and can be equally efficient; I don't know if that is a possibility 
here.

    Question 4: Attorney General Nixon and Mr. Pitofsky, I have heard 
that sensitive competitive information, such as specific programming 
contract terms, may have been disclosed by DirecTV to EchoStar in a 
manner that is not traditionally part of the normal due diligence 
process of a merger. I have also heard that some DirecTV customers have 
been contacted about needing to switch to EchoStar now, in advance of 
merger approval, to keep uninterrupted television service, reportedly 
by postcard, phone, and advertisement. Mr. Nixon and Mr. Pitofsky, 
would either of these activities, if true, raise concerns in the minds 
of antitrust enforcers as they review this merger?
    Answer: It is important that parties, in the period leading up to 
merger approval, not ``jump the gun'' and exchange competitively 
sensitive information not reasonably necessary to negotiations. They 
should, of course, continue to compete until the proposed merger is 
approved. I have no independent information as to whether inappropriate 
actions occurred between EchoStar and DirecTV in negotiations leading 
up to the announcement of their proposed merger.

                                

                       SUBMISSIONS FOR THE RECORD

 Statement of Kirk Kirkpatrick, President and Chief Executive Officer, 
               MDS America, Incorporated, Stuart, Florida

    Mr. Chairman, Senator DeWine, and members of the Subcommittee:
    Thank you for giving me this opportunity to submit written 
testimony as part of the official record of this important hearing 
examining the proposed merger between EchoStar and DirecTV.
    My name is Kirk Kirkpatrick and I am the president and chief 
executive officer of MDS America, Incorporated (``MDS America''), a 
company headquartered in Stuart, Florida. MDS America is the North 
American licensee of MDS International, a company based in Lyon, 
France, that is the leading designer and manufacturer of terrestrial 
broadband transmission equipment in the 12.2 to 12.7 GHz band (the 
``DBS band''). MDS terrestrial systems utilize a wireless technology 
capable of transmitting video and high-speed Internet data in the DBS 
band, without causing harmful interference to satellite services 
operating at the same frequencies.
    MDS International has been developing wireless terrestrial 
broadcast systems since 1986 and sold its first commercial system to 
the U.S. Government in 1997 to provide AFRTS for American military 
personnel in Oman. In the intervening time, it has deployed many of 
these systems worldwide in locations such as France, Kazakhstan, 
Cameroon, Gabon, New Zealand, and Greenland. Some of these systems 
share frequencies with DBS services in their areas. Most recently, the 
PTT of the United Arab Emirates awarded MDS International a pilot 
system toward a multi-million dollar contract to deploy a 300-hundred 
channel terrestrial system that will broadcast video programming 
throughout the seven emirates of the U.A.E.
    Having achieved a track record of success overseas, MDS 
International, through its North American licensee MDS America, would 
now like to participate in the emerging U.S. market for fixed 
terrestrial wireless services. The prospect that DBS terrestrial 
spectrum-sharing will become a reality here in the United States is an 
exciting development: Spectrum sharing should increase competition in 
the multichannel video and broadband Internet access markets, lower 
consumer costs, and provide new services to consumers in rural and 
other underserved areas.

   1. Multichannel Video Distribution and Data Service Will Enhance 
                            Consumer Choice.
    The importance of allowing this new terrestrial service-also known 
as Multichannel Video Distribution and Data Service (``MVDDS'')--is 
only heightened by the proposed merger between EchoStar and DirecTV. As 
you well know, many rural areas of the United States have no cable 
infrastructure. Today, consumers in these areas have only two choices 
for pay--TV services--EchoStar's Dish Network and DirecTV. If the 
merger between EchoStar and DirecTV is in fact consummated, there will 
be only one provider of pay--TV services in these rural communities.
    In such a post-merger world, MVDDS providers like MDS America can 
step into the market, offer choice, and generate the competitive 
pressures necessary to keep consumer costs low and service adequate. 
While the two DBS operators have voluntarily agreed to maintain a 
``uniform nationwide pricing'' system and to provide local programming 
in all markets once the merger is complete, it is likely to be the 
competition offered by MDS America and other MVDDS providers that will 
be the guarantor of these commitments for rural America.
    Furthermore, without the creation of a new MVDDS market, it is 
unlikely that the single merged DBS operator will address in any 
significant way the so-called rain fade problem that has plagued the 
DBS industry since its inception. Rain fade, the loss of hundreds of 
minutes of DBS signal each year as a result of atmospheric conditions, 
remains a problem today even though EchoStar and DirecTV aggressively 
compete for market share. I can assure this Subcommittee that rain fade 
will continue to be a serious problem if much of rural America is left 
with one DBS choice and nothing else. However, if the rural consumer is 
at least given the option of migrating to an MVDDS provider that offers 
a comparable package, in terms of both price and service, there will be 
a competitive incentive to address service issues like rain fade.
    In fact, MDS America's MVDDS system is particularly well suited for 
deployment in rural areas untouched by cable and served exclusively by 
the DBS operators. MDS cells can reach from the tower to the curve of 
the earth, allowing us to deliver signal over thousands of square 
miles. With their extensive coverage capabilities, MDS cells are likely 
to reach enough of the population in rural areas of the United States 
to actually pay for the deployment of an MVDDS system. This is not an 
insignificant issue. There is a huge difference between an experimental 
system that works theoretically and a system that can actually be 
deployed in a way that makes it an economically viable venture.
    The potential introduction of MVDDS technology into the United 
States took a big step forward in December 2000 when the Federal 
Communications Commission (``FCC'') preliminarily concluded that 
terrestrial wireless broadband services could be delivered in the DBS 
band without causing interference to satellites operating in the same 
range. The FCC has since initiated a rulemaking proceeding to establish 
technical rules governing such service. Unfortunately, this proceeding 
has been noteworthy for the acrimony it has generated. We are hopeful 
that the FCC will conclude the proceeding in short order and finally 
give a green light to the deployment of MVDDS systems throughout the 
United States.
    I might add that, in May 2001, the FCC granted MDS America an 
experimental license to demonstrate that its MVDDS technology, already 
successful in other parts of the world, would not cause harmful 
interference with DBS transmissions in the United States. Pursuant to 
this license, LCCI International (``LCC''), an internationally 
recognized engineering and consulting firm working independently of MDS 
America, conducted a series of tests of the MDS system in 12 separate 
locations around Florida. Testing was conducted under more extreme 
conditions than would be normal during actual deployment of the MDS 
system in order to ensure that the technology will be able to handle 
the rigors of real-world implementation.
    We are pleased that the LCC tests emphatically prove what we have 
known all along-that MVDDS technology can be successfully deployed 
without causing harmful interference with DBS systems operating at the 
same frequencies. In its written report, which has been submitted to 
the FCC, LCC concluded that ``[b]ased on the analysis of the collected 
data, the MDS transmitter can very well co-exist with DBS signal in 
this type of environment with a limited mitigation zone . . . as small 
as 100 m around the transmitter.'' The LCC report has been submitted to 
the FCC and is available in its entirety on our company website at 
www.mdsamerica.com. Although the LCC report has been publicly available 
for several months now, it is noteworthy that neither EchoStar nor 
DirecTV has publicly challenged its methodology and conclusions.

      2. The Potential MVDDS Market Should Be Open to Competition.
    Unfortunately, another company claiming to have a commercially 
viable MVDDS system--Northpoint Technology--is attempting to smother 
competition in the cradle of the new MVDDS industry by asking the FCC 
to waive its rules and grant it and its affiliated companies 
uncontested, monopoly licenses throughout the United States for the 
terrestrial use of the DBS band. If the FCC were to embrace this 
position, it would constitute one of the largest uncompensated grants 
of spectral real estate to a single company in American history. The 
cost to the American taxpayers would be significant, amounting to 
hundreds of millions of dollars.
    To justify its monopoly ambitions, Northpoint has claimed that it 
is the only company in the world with a terrestrial system capable of 
sharing spectrum with DBS services. This claim is simply untrue. Unlike 
MDS International, Northpoint has never, not once, deployed a 
terrestrial system anywhere in the world. Yet it is Northpoint and its 
affiliated companies, not MDS America, that have asked the FCC to grant 
them licenses for 500 MHz of valuable spectrum for free.
    In addition, Northpoint argues that section 1012 of the ``Launching 
Our Communities' Access to Local Television Act of 2000'' (the ``Local 
TV Act'') somehow limits the potential award of a license for 
terrestrial service only to those entities that have already filed an 
application in the ``direct broadcast frequency band'' and whose 
technology has been tested by the MITRE Corporation, the company 
selected by the FCC to fulfill the technical demonstration requirement 
outlined in section 1012(b). This Subcommittee should understand, 
however, that the FCC has never established an application filing 
window for terrestrial systems in the DBS band. The window in which 
Northpoint filed was established by the FCC to accept applications for 
non-geostationary satellite systems, not terrestrial systems like those 
of Northpoint and MDS America. The fact that Northpoint filed an 
application in a window for non-geostationary satellite systems does 
not, and should not, have any bearing whatsoever on the proper 
disposition of the DBS spectrum for terrestrial use.
    A simple reading of section 1012 of the Local TV Act also 
demonstrates that Congress did not intend to limit the potential 
universe of MVDDS applicants nor did it prohibit--explicitly or 
implicitly--the auctioning of the DBS band for terrestrial use in the 
event there are mutually exclusive license applications, including 
applications filed by entities whose MVDDS technology has not been 
tested by the MITRE Corporation. It is also significant that MDS 
America offered its equipment to the FCC for testing by the MITRE 
Corporation prior to the MITRE testing and was instructed by the FCC 
that this was not necessary.
    With respect to the provision of MVDDS, MDS America is prepared to 
compete on a level playing field with Northpoint and any other company 
that may want to enter this market. We would hope that this 
Subcommittee, charged with overseeing the administration of our 
nation's antitrust laws, would not condone a government-created 
monopoly in the MVDDS market when there is no legal or policy 
justification for such a decision. With respect to the terrestrial use 
of the DBS band, MDS America has consistently argued that the FCC 
should follow its standard procedures by a) promptly completing the 
rulemaking process, establishing rules for MVDDS that are flexible and 
technology-agnostic, b) accepting applications for licenses, and c) if 
there is mutual exclusivity, promptly holding an auction.
    As the members of this Subcommittee may know, Northpoint has 
attempted to circumvent the FCC decisionmaking process by supporting a 
legislative proposal that would prohibit the FCC from auctioning the 
DBS band for terrestrial use. There was speculation last year that this 
proposal would be attached as an amendment to one of the appropriations 
bills then pending in Congress. We are very pleased that the Bush 
Administration expressed its ``strong opposition'' to the Northpoint 
anti-auction approach, stating that it ``would interfere with the 
efficient allocation of Federal spectrum licenses, provide a windfall 
to certain users, and reduce Federal revenues.'' See Statement of 
Administration Policy, Department of Agriculture, Rural Development, 
Food and Drug Administration, and Related Agencies Appropriations Bill, 
FY 2002 (October 25, 2001).

       3. CARS Spectrum is Not a Viable Substitute for DBS Band.
    Finally, in an apparent last-minute attempt to delay the deployment 
of MVDDS, the two DBS operators have recently petitioned the FCC to 
move MVDDS from the 12.2 to 12.7 GHz band to the Cable Television Relay 
Service (``CARS'') band at 12.7 to 13.2 GHz.
    Though the CARS band may be a valuable supplement to existing DBS 
spectrum, the CARS band already has too many incumbents to be 
considered a viable substitute for the 12.2 to 12.7 GHz band. Given 
that thousands of cable companies currently use the CARS band to 
transmit internal communications, it is unrealistic to expect that it 
would be conducive for rapid commercial distribution of high-speed 
video programming and Internet access services in the short run. If the 
CARS band were the easy answer to facilitating these services, they 
would have been deployed in this band long ago. MDS America hopes and 
expects that the FCC will reject this obvious effort to delay the 
deployment of MVDDS.
                             4. Conclusion.
    As this Subcommittee continues its examination of the proposed 
merger of EchoStar and DirecTV, we urge you to take a broadly focused 
approach: The issue is not merely whether the country needs two DBS 
operators as opposed to one. Nor is it simply a question of whether the 
creation of a single satellite television company is a necessary 
condition for DBS to be able to compete effectively with cable. Our 
concern is expanding the list of entrants in both the multichannel 
video and Internet access markets and thereby improving competition and 
consumer choice.
    We believe that the new Multipoint Video Distribution and Data 
Service, if permitted by the FCC under appropriate service rules, can 
become a robust competitor to both satellite TV and cable. We also 
believe that the MDS terrestrial system is uniquely situated to become 
an important player in the multichannel video and Internet access 
markets, particularly in rural America.
    Thank you for giving me this opportunity to share my thoughts with 
you.

                                

                       Writers Guild of America, West, Inc.
                                      Los Angeles, CA 90048
                                                      March 5, 2002

Hon. Orrin G. Hatch
Ranking Republican
Senate Committee on Judiciary
Dirksen Office Building Room 152
Washington, DC 20510

    Dear Senator Hatch:

    The Writer Guild of American (West and East, together the ``WGA''), 
which represents the 11,500 men and women who write virtually all the 
national entertainment programming and much of the national news 
Americans see, believes that the television industry has consolidated 
to a degree harmful to DANA the public interest in a competitive market 
for television program's.
    The merger of DirecTV and EchoStar would extend media consolidation 
to an unacceptable degree. The combined entity would wield unacceptable 
power over program suppliers, restricting the diversity of voices on 
American television. The force of a sole direct broadcast satellite 
operator could be exerted directly by threatening to remove a program 
service from distribution. Or, the force could be exerted indirectly, 
by using market power to pay a below-market license fee, starving the 
program service of original programming. In either case, the content of 
the program service is diluted and stunted. Original programming gives 
way to repeats. Original points of view give way to common ones.
    It is in the public interest that EchoStar and DirecTV operate 
separately.

            Sincerely,

                                          Charles B. Slocum
                                        Strategic Planning Director

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