Filed by General Motors Corporation
Subject Company - General Motors Corporation
and Hughes Electronics Corporation
Pursuant to Rule 425 under the Securities Act of 1933
and Deemed Filed Pursuant to Rule 14a-12
under the Securities Exchange Act of 1934
Commission File No.: 001-00143
The following was filed with the Federal Communications Commission on December
3, 2001, and posted on Hughes Electronics Corporation's and General Motors
Corporation's respective websites on December 4, 2001:
SUMMARY
The merger of EchoStar and Hughes to create New EchoStar presents
consumers with numerous benefits: more services; more choices; competitive
pricing; and a viable alternative to entrenched cable companies. The merger
implicates no Commission rule, is consistent with the Communications Act, and
will serve the public interest.
THE MERGER WILL "FREE UP" SPECTRUM CURRENTLY USED BY THE TWO COMPANIES
BECAUSE DUPLICATIVE PROGRAMMING WILL BE ELIMINATED. As a result:
o New EchoStar will offer significantly more local-into-local
programming, up from a total of 42 major metropolitan areas now served
by one or the other company (36 served by ECC and 41 served by
DIRECTV, with 35 areas overlapping) to 100 or more, accounting for at
least 85 percent of American households. This will significantly
increase competition with cable companies in those areas.
o The reclaimed spectrum will enable New EchoStar to offer greatly
expanded high-definition television programming, pay-per-view and
video-on-demand services, educational, specialty, and foreign language
programming and other new and improved product offerings, including
interactive services. DBS will have the ability to go head-to-head in
competition with cable companies.
o The merger will allow New EchoStar to provide meaningful broadband
competition with cable and telephone companies as a virtual third line
into the home for a bundle of video/data/Internet services.
Competitively priced, high-speed Internet access via satellite will
particularly benefit those in rural areas without access to cable
modem service or DSL.
CONSUMERS WILL HAVE A REAL, FULLY COMPETITIVE ALTERNATIVE TO CABLE.
Although DBS has historically offered a price/quality package that was superior
to cable's packages, it has not been able to restrain cable's regular price
increases because of its inability to offer many local broadcast stations and
other desirable programming resulting from limited capacity. The current
duplicative use of the DBS spectrum has become a debilitating handicap due to
recent
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developments, including the advent of digital cable and satellite
must-carry. By eliminating these disadvantages, the merger will force cable
firms to react competitively to DBS in ways that they have not had to in the
past. Competition will translate into further benefits to consumers:
o BENEFITS FOR RURAL AMERICANS. In addition to enhanced broadband
options, rural consumers will benefit from the vigorous competition
between New EchoStar and cable systems in urban areas because DBS
prices will be the same throughout the U.S., whether the market is
urban or rural. This will transmit urban competitive dynamics into
rural areas.
o BENEFITS FOR CABLE CUSTOMERS. With the increase in competition from
DBS, cable will be forced to improve its own products, pricing service
and overall quality. Thus, even cable customers will benefit from the
enhanced competition among multi-channel television and Internet
access providers.
THE MERGER WILL ALSO CONTRIBUTE TO THE DIVERSITY OF INDEPENDENT
PROGRAMMING VOICES, as it will create a significant multi-channel distributor
that has no strategy of vertical integration with programmers. With the spectrum
that will be freed up by the combination, New EchoStar can serve as an
attractive potential outlet for independent programmers.
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TABLE OF CONTENTS
Page
SUMMARY ....................................................................i
I. INTRODUCTION ..........................................................3
A. Description of the Parties .......................................9
1. ECC and its Present Affiliates ..............................9
2. The GM and Hughes Parties ...................................12
3. New EchoStar ................................................15
B. Description of the Transactions ..................................17
II. PUBLIC INTEREST STATEMENT .............................................19
A. The Transaction Will Comply With the Requirements of the
Communications Act, All Other Applicable Statutes, and With
the Commission's Rules ...........................................21
B. The Transaction Will Not Impair Any Statutory Objectives and
Will Yield Substantial Affirmative Public Interest Benefits ......22
1. The Transaction Will Promote Competition With Cable by
Allowing Increased Spectrum and Satellite Resource
Efficiency ..................................................22
(a) More Local Channels to More Areas .....................28
(b) More Programming Choices, Including HDTV Channels
and More Pay-Per-View .................................29
(c) Expanded Product Offerings to Meet Competition from
Digital Cable .........................................30
(d) Better Service to Rural Areas, Alaska and Hawaii ......32
(e) More Ethnic, Foreign Language and Niche Programming ...34
(f) More Educational Programming ..........................34
(g) Other Efficiencies That Will Result From the Merger ...35
2. The Merger Will Have Other Significant Pro-Competitive
Effects and Will Not Have An Anti-Competitive Impact In
Any of the Relevant Markets .................................36
3. The Merger Will Promote Deployment of Advanced Broadband
Services to All Americans ...................................42
4. The PanAmSat Purchase Is In The Public Interest .............48
III. WAIVER REQUESTS: APPLICATION CUT-OFF RULES AND ADDITIONAL
APPLICATIONS ..........................................................49
IV. SECTION 304 WAIVER ....................................................51
V. CONCLUSION ............................................................51
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ATTACHMENT INDEX
VOLUME I
A. Declaration of Dr. Robert D. Willig on behalf of EchoStar Communications
Corporation, General Motors Corporation and Hughes Electronics Corporation
B. Joint Engineering Statement in Support of Transfer of Control Application
C. List of FCC Licenses and Authorizations
D. EchoStar Communications Corporation Ownership Structure (Pre-Merger),
Principle Ownership List and List of Subsidiaries
E. GM/Hughes Ownership Structure Chart (Pre-Merger), Principle Ownership List
and List of Subsidiaries
F. New EchoStar Ownership Chart
G. List of Pending FCC Applications
H. List of Enforcement Actions (Pending or Resolved)
VOLUME II
Agreement and Plan of Merger by and between EchoStar Communications Corporation
and Hughes Electronics Corporation (October 28, 2001)
Implementation Agreement by and among General Motors Corporation, Hughes
Electronics Corporation and EchoStar Communications Corporation (October 28,
2001)
Separation Agreement by and between General Motors Corporation and Hughes
Electronics Corporation (October 28, 2001)
Stock Purchase Agreement Among EchoStar Communications Corporation, Hughes
Electronics Corporation, Hughes Communications Galaxy, Inc., Hughes
Communications Satellite Services, Inc. and Hughes Communications, Inc. (October
28, 2001)
VOLUME III
Transfer of Control Applications for Licenses Controlled by EchoStar
Communications Corporation
VOLUME IV
Transfer of Control Applications for Licenses Controlled by Hughes Electronics
Corporation
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
------------------------------------------
)
Application of )
)
ECHOSTAR COMMUNICATIONS CORPORATION, )
GENERAL MOTORS CORPORATION, )
HUGHES ELECTRONICS CORPORATION, )
)
Transferors, ) File Nos. _____________
)
and )
)
ECHOSTAR COMMUNICATIONS CORPORATION, )
)
Transferee, )
)
For Authority to Transfer Control. )
------------------------------------------)
CONSOLIDATED APPLICATION FOR AUTHORITY
TO TRANSFER CONTROL
Gary M. Epstein Pantelis Michalopoulos
James H. Barker Philip L. Malet
Arthur S. Landerholm Rhonda M. Bolton
Latham & Watkins STEPTOE & JOHNSON LLP
555 11th Street, N.W. 1330 Connecticut Avenue, N.W.
Suite 1000 Washington, D.C. 20036-1795
Washington, DC 20004 202-429-3000
202-637-2200
Counsel for General Motors Corporation Counsel for EchoStar
and Hughes Electronics Corporation Communications Corporation
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
------------------------------------------
)
Application of )
)
ECHOSTAR COMMUNICATIONS CORPORATION )
GENERAL MOTORS CORPORATION )
HUGHES ELECTRONICS CORPORATION, )
)
Transferors, ) File Nos. _____________
)
and )
)
ECHOSTAR COMMUNICATIONS CORPORATION, )
)
Transferee, )
)
For Authority to Transfer Control. )
------------------------------------------)
CONSOLIDATED APPLICATION FOR AUTHORITY
TO TRANSFER CONTROL
EchoStar Communications Corporation ("ECC"), General Motors Corporation
("GM") and Hughes Electronics Corporation ("Hughes"), a subsidiary of GM
(collectively, the "Merger Parties" or "Applicants"), have agreed to a merger
and series of related transactions that will create an integrated, full-service
satellite company better able to compete effectively with dominant cable
operators in the multichannel video programming distribution ("MVPD") market.
The Merger Parties hereby request the Commission's consent, in accordance with
Sections 214 and 310 of the Communications Act of 1934, as amended,1 to transfer
control of the satellite, earth station, and other related authorizations held
by their wholly- or majority-owned
--------------------
1 47 U.S.C. SS.214, 310 (1994 & Supp. V 1999).
subsidiaries to Hughes (or a newly formed holding company above Hughes that will
hold all of the capital stock of Hughes, also referred to as "Hughes").2 The
merged entity will have a new ownership structure and will be renamed EchoStar
Communications Corporation ("New EchoStar").3 The proposed license transfers
will result from the split-off of Hughes from GM, the merger of ECC into Hughes,
and the transfer of Hughes' indirect majority equity stake in PanAmSat
Corporation ("PanAmSat"), either to New EchoStar through the merger, or to ECC
through a separate purchase of Hughes' indirect stake in PanAmSat in the event
the merger agreement is terminated under certain circumstances (the "PanAmSat
Purchase").4 The Merger Parties request that approval of these transfers be
granted expeditiously.
--------------------
2 Although the Implementation Agreement and Merger Agreement (as
defined below) call for ECC to merge with and into Hughes Electronics
Corporation and for Hughes Electronics Corporation (renamed EchoStar
Communications Corporation) to be the top level entity in the post-merger
ownership structure, GM has the ability under those agreements to (and the
Merger Parties currently expect that GM will) form a new subsidiary (which is
expected to be a Delaware Corporation named HEC Holdings, Inc.) and contribute
all of the capital stock of Hughes Electronics Corporation to HEC Holdings, Inc.
prior to the split-off and the merger. The effect of this transaction would be
to insert an additional corporation above Hughes Electronics Corporation in the
post-split-off and post-merger ownership structure, to substitute HEC Holdings,
Inc. for Hughes Electronics Corporation as the merger partner with ECC and to
substitute HEC Holdings, Inc. (renamed EchoStar Communications Corporation) for
Hughes Electronics Corporation as the top level entity in the post-merger
ownership structure. However, this transaction would have no practical impact on
the rights of the parties or the Commission's review of the transaction because
HEC Holdings, Inc. would have a governance structure identical to that described
herein for the merged entity and the post-merger, and because relative
percentage holdings of the capital stock of HEC Holdings, Inc. by the current
ECC shareholders, the GM Class H shareholders and GM would remain the same.
3 Attachment C hereto provides a consolidated list of authorizations to
be transferred and the entities that currently hold them.
4 These transactions are the subject of a definitive Agreement and Plan
of Merger dated October 28, 2001 between ECC and Hughes ("Merger Agreement"), a
Stock Purchase Agreement between ECC, Hughes, and several Hughes entities
regarding
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I. INTRODUCTION
When measured against various components of the Commission's public
interest standard, the proposed merger of ECC and Hughes is consistent with all
relevant Commission rules and policies, and will result in extraordinary,
affirmative public interest benefits. It will advance the Commission's core
policies in favor of a more competitive video marketplace, efficient use of
scarce spectrum and satellite resources, and the provision of advanced broadband
services to all Americans.
Unfortunately for consumers, today's MVPD market remains dominated by
cable operators, which hold a share of about 80%. As described in the attached
Declaration of Dr. Robert D. Willig,5 New EchoStar will become an integrated,
full-service satellite company that can contend with cable systems and create
the kind of vigorous competition that will benefit all Americans. In the
process, the merger will allow the combined company to provide many other public
benefits that Congress and the Commission have been striving for years to
achieve.
One of the most compelling efficiencies of the ECC-Hughes merger will
be the elimination of a major restraint on the ability of Direct Broadcast
Satellite ("DBS") operators to compete with cable systems in the MVPD market -
duplicative use of the
--------------------
Hughes' stake in PanAmSat ("PanAmSat Stock Purchase Agreement"), and several
related agreements executed on the same date. The Merger Agreement and the
PanAmSat Stock Purchase Agreement are conditioned, among other things, on
approval of the transfers proposed herein. See Volume II of the Application for
copies of each of these merger-related agreements and the PanAmSat Stock
Purchase Agreement.
5 Declaration of Dr. Robert D. Willig on Behalf of EchoStar
Communications Corporation, General Motors Corporation, and Hughes Electronics
Corporation ("Willig Decl.") (appended hereto as Attachment A). The Willig
Declaration, among other matters, sets forth an analysis of the relevant market
for this transaction, see id. at P.P. 7-18.
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radio spectrum that the Commission has allocated for DBS service. Currently, ECC
and Hughes' subsidiary DIRECTV, Inc. ("DIRECTV") use different portions of the
DBS spectrum, each with its own expensive satellite fleet, each to provide
overlapping programming services - the same HBO channels, the same CNN channels,
in most cases the same local network channels to the same local metropolitan
areas and, starting in January 2002, even many of the same home shopping local
channels in the same local areas.6
Today, like never before, this spectrum inefficiency has become a
potentially debilitating competitive impediment for DBS providers due to a
combination of factors, including the imposition of satellite mandatory carriage
obligations, the advent of digital cable services and the new bandwidth that
"going-digital" gives to cable operators. The merger will eliminate the
inefficient duplicative use of the DBS spectrum and liberate DBS capacity that
will be used to facilitate the offering of new and expanded programming choices
to consumers, ultimately introducing more meaningful competition to cable
systems.
One dramatic example of this effect will be the addition of more
satellite-delivered local broadcast channels to more local metropolitan areas.
New EchoStar will provide local broadcast programming to far more metropolitan
areas - 100 or more - compared to the 36 and 41 metropolitan areas (with an
overlap of 35) served respectively by ECC and DIRECTV now.7 This dramatic
expansion of the number of local channels
--------------------
6 See Joint Engineering Statement in Support of Transfer of Control
Application, at 8-9 (Attachment B hereto) ("Joint Engineering Statement").
7 Id. at 9.
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that can be carried on a DBS system will allow New EchoStar to compete more
vigorously against the cable industry's carriage of local broadcast television
channels in more U.S. metropolitan areas and also help achieve Congress's goal
of broad-based local television service by satellite, as reflected in the
Satellite Home Viewer Improvement Act of 1999 ("SHVIA").8
There will be other significant consumer benefits resulting from the
expanded programming choices delivered by New EchoStar, as well. The merged
entity will provide consumers with many more programming choices than each
company is able to offer standing alone, including the bandwidth-intensive high
definition programming that will encourage consumer adoption of digital
television equipment. The merger also will bring significantly more programming
and a better quality DBS service to Americans living in rural areas, as well as
in the states of Alaska and Hawaii, than would be achievable by each company
operating independently.9
Moreover, there will be no anticompetitive MVPD market effects
associated with the proposed transaction. As Dr. Willig observes, the
characteristics of the MVPD market in general and of DBS firms in particular
"make it very unlikely that . . . [this merger] will result in higher prices and
lower output through either coordinated behavior among participants in the MVPD
market or unilateral behavior by the merged firm."10 And in response to concerns
regarding the merger's possible effects on rural consumers, Dr. Willig notes
that the expansion of programming and new services that
--------------------
8 Act of Nov. 29, 1999, Publ. L. No. 106-113, S. 1008, 113 Stat. 1501,
Appendix I (1999)(codified in scattered sections of 47 U.S.C. and 17 U.S.C.).
9 Joint Engineering Statement at 10.
10 Willig Decl. at P. 6.
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will be made available to these consumers, combined with New EchoStar's
commitment to maintain uniform national pricing for DBS services, renders it
"more likely that the merger would be of distinct benefit to rural TV households
than that it would diminish competition available to them."11
The proposed merger also will have positive effects in the programming
market. Unlike most large cable operators, ECC has no ownership stake in any
programming producer, and the Merger Parties do not intend to pursue a strategy
of vertical integration with programmers post-merger. With the spectrum that
would be freed up by this transaction, New EchoStar will have both the ability
and the incentive to serve as an important outlet for promoting the development
of new independent programming services. Furthermore, as Dr. Willig observes,
the approximately 15 million subscribers of the combined entity "should provide
an attractive platform for launching new programs, providing an interested
programmer with a large percentage of the subscribers it would need to create a
viable network."12
The merger will also dramatically aid New EchoStar in its efforts to
introduce nationwide competition to broadband products and bring true broadband
services to rural and underserved areas - another respect in which the effect of
this transaction is aligned with Congress's and the Commission's objectives and
the public interest. The bandwidth advantage of digital cable systems has
allowed cable operators to bundle their traditional video offerings with
high-speed Internet access, a package that
--------------------
11 Id. at P. 40.
12 Id. at P. 42. This estimate of the combined subscriber base of New
EchoStar excludes the subscribers of the National Rural Telecommunications
Cooperative and its affiliate entities who receive DIRECTV programming.
-6-
consumers increasingly demand. The current transitional broadband products of
ECC and Hughes are struggling to achieve a critical mass of subscribers using
Ku-band satellite platforms that are not optimized for broadband services. The
next-generation Ka-band broadband satellite systems will be optimized for very
high speed Internet services, but are also highly capital-intensive, being the
first generation of commercial spacecraft to operate in these frequencies.
The proposed combination will allow New EchoStar to proceed with prompt
and robust broadband deployment in the Ka-band by spreading the high fixed costs
of deployment over a critical mass of broadband subscribers and achieving an
offering that combines a competitive price and a reasonably short time to
market. Each company standing alone would face significantly greater challenges
in accomplishing those objectives within the time frame that is necessary to
effectively compete with cable's bundled broadband offering of high speed
Internet access products. The creation of New EchoStar will resolve the
inefficiencies and uncertainties that would arise if both companies were faced
with replicating investments in satellite platforms and will eliminate the
spectrum inefficiencies that would exist if each company, in its own right,
conducts duplicative multicasting and broadcast-type IP services. New EchoStar,
by contrast, will have the significantly greater wherewithal to construct the
type of advanced, high-capacity, cost-effective space platform to offer
competitive, next generation high-speed Internet access nationwide - including
to areas served neither by cable nor other broadband offerings - that are
essential if the satellite technology is to
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have any chance of competing with the bundled video/IP services offered by cable
companies.13
The potential consumer benefits of maximizing New EchoStar's prospects
in the Ka-band are extremely significant for rural areas as well. In those
areas, the New EchoStar Ka-band system will be an important element in bridging
the "digital divide" because it can provide the same high-quality advanced
Internet and IP services to rural subscribers and to subscribers in urban and
suburban areas.
The acquisition of PanAmSat either by New EchoStar or ECC14 is in the
public interest as well. Significant benefits to consumers will result from
combining the Fixed-Satellite Service ("FSS") resources of ECC and Hughes to
bring broadband satellite services to market faster. The transaction will not
create any significant overlap in the provision of FSS services in the same
product and geographic markets that should raise any concern, as ECC does not
currently provide any telecommunications services of the same type as PanAmSat
in the United States or elsewhere.
The proposed merger marks the conclusion of a long and careful search
on the part of GM and Hughes for the optimal merger partner for Hughes. GM and
Hughes have chosen ECC as that partner, in large part due to the extraordinary
spectrum efficiencies and cost and revenue synergies promised by the proposed
merger. These benefits cannot be realized unless and until this proposed
transaction is consummated.
--------------------
13 Joint Engineering Statement at 14-16.
14 As noted above, Hughes' interest in PanAmSat will either be
transferred to New EchoStar through the merger or transferred through a separate
purchase by ECC of Hughes' interest in the event the merger agreement is
terminated under certain circumstances.
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Accordingly, the Applicants respectfully request that this consolidated
Application be granted as expeditiously as possible.
This consolidated Application consists of a narrative description of
the parties and the transaction, including a discussion of the public interest
benefits of the transaction, along with several attachments containing the
completed FCC forms and other materials. Each FCC form and its associated
exhibits and filing fee have been filed separately in accordance with the
Commission's Rules. Following the closing of the transactions, the Applicants
will supplement all pending applications under the Commission's Rules, 47 C.F.R.
ss. 1.65 (2000), to reflect the new party in interest. To the extent that any
pending applications, or any other applications for new facilities or for
renewal or modification of existing facilities, are granted prior to the closing
of this transaction, the Merger Parties request a determination by the
Commission that the grant of this Application includes authority for New
EchoStar to acquire control of any subsequently granted authorizations.
A. DESCRIPTION OF THE PARTIES
1. ECC AND ITS PRESENT AFFILIATES
ECC was started more than twenty years ago when its Chairman and CEO,
Charles W. Ergen, entered the satellite television business as a distributor of
C-band television satellite systems under the name Echosphere. Since its
founding, ECC has earned a reputation as an innovator in the satellite
television business by achieving a number of significant firsts, including:
development of the first UHF remote control; the first nationwide installation
network dedicated solely to satellite television systems; and
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the first company to offer an Integrated Receiver Descrambler for C-band
satellite television.
ECC was granted authorization to use the 119(degree) W.L. orbital
location in 1992.15 ECC launched its first satellite to that location in
December 1995,16 and has provided continuous DBS service to customers throughout
the continental United States since early 1996. Also in 1995, the Commission
approved ECC's acquisition of control over Directsat Corporation, which launched
its first satellite to the 119(degree) W.L. orbital location in September 1996.
The combination allowed ECC, upon acquiring Directsat, to integrate the two
satellites into an offering of about 125 video channels.17 Since that time, ECC
has deployed four additional satellites, including one to the 110(degree) W.L.
orbital slot after the Commission's 1999 approval of ECC's acquisition of the
authorization held jointly by MCI Telecommunications Corp. and The News
Corporation Limited ("News Corp.").18 ECC's subsidiaries hold several DBS
authorizations and own and operate six operational DBS satellites located at the
61.5(degree) W.L., 110(degree) W.L., 119(degree) W.L., and 148(degree) W.L.
orbital positions.19 Through its DISH Network brand, ECC is now a provider of
DBS television services in the United States to more than 6 million subscribers.
ECC is
--------------------
15 See EchoStar Satellite Corporation, 7 FCC Rcd. 1765 (1992).
16 See EchoStar Satellite Corporation, 11 FCC Rcd. 3015, 3015 (Int'l
Bur. 1996).
17 See Directsat Corporation, 11 FCC Rcd. 10575, 10577 (1996); see also
Directsat Corporation and EchoStar Communications Corp., Application for
Commission Consent to Transfer of Control, 10 FCC Rcd. 88 (1995).
18 In re Application of MCI Telecommunications Corp. and EchoStar 110
Corp., For Consent to Assignment of Authorization to Construct, Launch and
Operate a Direct Broadcast Satellite System Using 28 Frequency Channels at the
110(degree) W.L. Orbital Location, FCC 99-109, 15 Communications Reg. (P&F) 1038
(1999)("MCIT").
19 See Attachment C for a list of ECC authorizations.
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also an international supplier of digital satellite receiver systems and a
provider of other satellite services.
ECC continues to upgrade its fleet of satellites. EchoStar 7, its
seventh DBS satellite, equipped with state-of-the-art spot-beam technology, is
scheduled to launch soon. ECC plans to launch an additional spot beam satellite,
EchoStar 8, in the year 2002. ECC also has Commission authorizations for Ku-band
and Ka-band FSS systems. ECC's first FSS satellite, a hybrid Ku-band/Ka-band
satellite, is expected to be launched in 2002.
In addition, ECC currently holds an approximate 32% percent interest in
StarBand Communications, which began offering consumers a two-way, "always-on,"
high-speed Internet access service along with DISH Network programming in
November 2000. ECC also holds less than 20 percent interests in Wildblue
Communications, Inc. and Celsat America, Inc., both of which hope to offer a
similar high-speed Internet service from Ka-band satellites in the future. The
Commission recently approved the acquisition by an ECC subsidiary of a
controlling interest in VisionStar, Inc., another Ka-band licensee.20 This
transaction is expected to close shortly.
Attachment D contains a chart summarizing the relevant ECC ownership
structure prior to the proposed transaction.
--------------------
20 In the Matter of Application of VisionStar, Inc. and EchoStar
VisionStar Corp. for Consent to Transfer of Control Over Authorization to
Construct, Launch and Operate a Ka-band Satellite System in the Fixed-Satellite
Service at the 113(degree) W.L. Orbital Location, File No.
SAT-T/C-20001215-00163, DA 01-2481 (Int'l Bur. rel. Oct. 30, 2001).
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2. THE GM AND HUGHES PARTIES
Hughes, a Delaware corporation, is a wholly-owned subsidiary of GM,
which is also a Delaware corporation.21 Hughes is the corporate parent of
several other companies that provide specialized communications services to a
wide range of end users. Hughes directly owns all of the issued and outstanding
stock of DIRECTV Enterprises, Inc., a Commission DBS licensee.22 In addition,
Hughes controls various Commission licenses and authorizations through various
other subsidiaries that are directly or indirectly wholly owned, including
Hughes Communications, Inc.; Hughes Communications Galaxy, Inc.; Hughes
Communications Satellite Services, Inc.; Hughes Global Services, Inc.; HOT
Telecommunications, Ltd.; and USSB II, Inc.23 Hughes
--------------------
21 As discussed herein, GM has created a publicly-traded tracking stock
of GM (GM Class H common stock) designed to provide holders with financial
returns based on the financial performance of GM's wholly-owned Hughes
subsidiary.
22 DIRECTV Enterprises, Inc. ("DTVE, Inc.") is filing contemporaneously
with this Application several applications for consent, inter alia, to the pro
forma assignment of certain Commission licenses held by DTVE, Inc. and certain
of its subsidiaries to a new Delaware limited liability company, DIRECTV
Enterprises, LLC. Those applications are intended to obtain Commission consent
to the conversion of DTVE, Inc. from the corporate form or organization to the
limited liability company form of organization under Delaware law. It is
anticipated that this pro forma assignment to DIRECTV Enterprises LLC will
occur, upon Commission consent, well in advance of,and without regard to, the
transactions contemplated by this Appplication. Thus, the attached
organizational chart and the attached Form 312s reflect the consummation of that
pro forma assigment.
23 Hughes Network Systems, Inc. ("New HNS"), a new Delaware corporation
wholly owned by Hughes, is filing contemporaneously with this Application
several applications for consent, inter alia, to the pro forma assignment of
certain Commission licenses held by Hughes and certain Hughes subsidiaries to
New HNS. It is anticipated in advance of, and without regard to, the
transactions contemplated by this Application. Thus, the attached organizational
chart and the attached Form 312s reflect the consummation of that pro forma
assignment.
-12-
indirectly holds an approximately 81% economic and voting interest in
PanAmSat,24 a publicly-traded Delaware corporation and Commission licensee.25
Attachment E includes a chart summarizing the relevant GM/Hughes ownership
structure prior to the proposed transaction.
DIRECTV launched the United States' first DBS satellite in December
1993 and a second DBS satellite in August 1994.26 In June 1995, DIRECTV launched
a third high-power DBS satellite and in April and May 1999, the Commission
authorized the transfer to DIRECTV of DBS assets and related authorizations held
by United States Satellite Broadcasting Company, Inc. ("USSB")27 and Tempo
Satellite, Inc., respectively.28 As a result of these transactions, DIRECTV
currently provides service to U.S. consumers from five DBS satellites using 32
channels at 101(degree) W.L., 3 channels at 110(degree) W.L., and 11 channels at
119(degree) W.L.29 DIRECTV, together with certain independent distributors, now
have approximately 10.3 million subscribers in the United States.30
--------------------
24 PanAmSat has recently filed, an application for consent to the pro
forma assignment of certain Commission licenses held by PanAmSat Corporation to
its indirect wholly owned subsidiary, PanAmSat Licensee Corp. It is anticipated
that this pro forma assignment to PanAmSat Licensee Corp. will occur, upon
Commission consent, well in advance of, and without regard to, the transactions
contemplated by this Application. Thus, the attached Form 312s reflect the
consummation of that pro forma assignment.
25 Hughes Communications, Inc., 12 FCC Rcd. 7534 (1997).
26 United States Satellit Broadcasting Co., 7 FCC Rcd. 7247 (1992).
27 United States Satellite Broadcasting Co., 14 FCC Rcd. 4585 (Int'l
Bur. 1999).
28 Tempo Satellite, Inc., 14 FCC Rcd. 7946 (Int'l Bur. 1999)
29 DIRECTV voluntarily surrendered the DBS channels previously
allocated to it at the 157(degree) W.L. orbital location in May 1998. See Public
Notice, Rep. No. SPB-127 (rel. June 10, 1998).
30 Hughes also has interests in direct-to-home ("DTH") satellite
services in several other countries. For example, it holds a 74.7% interest in
DIRECTV Latin America LLC,
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Hughes Network Systems ("HNS"), a division of Hughes, provides
broadband satellite network solutions for businesses and consumers around the
world. HNS's high-speed, satellite-based Internet access service is marketed
globally under the DirecPC(R) and DIRECWAY(R) brands. The current satellite
broadband services are provided using leased Ku-band transponders. HNS supplies
mobile satellite networks and user terminals and manufactures DIRECTV(TM)
satellite television receivers and set-top boxes. HNS is also responsible for
designing and managing the development, deployment and operation of the Hughes
SPACEWAY system, a next generation, Ka-band satellite platform that will provide
new and advanced services for DIRECWAY customers, consumer and business alike.
SPACEWAY is currently scheduled to begin North American service in 2003. DIRECTV
Broadband, Inc. (formerly known as Telocity, Inc.) offers terrestrial high-speed
DSL service across the country where DSL is available.
Directly and through its subsidiaries, PanAmSat owns and operates a
fleet of 21 satellites around the world that operate in the FSS bands and a
comprehensive system of teleports and terrestrial resources. PanAmSat carries
programming for broadcasters and programmers to millions of households
worldwide, provides Internet backbone support to Internet service providers,
supports private business communications networks to corporations, and provides
essential pipelines worldwide for telecommunications providers. PanAmSat and its
subsidiaries hold various FCC satellite
--------------------
which provides DTH pay television services throughout Latin America. The
licenses for the services provided in foreign countries are not part of this
Application.
-14-
earth station licenses as well as Section 214 authorizations for the provision
of international services.
3. NEW ECHOSTAR
As described in more detail in Section B below, the transferee, New
EchoStar, is Hughes Electronics Corporation (or a newly formed holding company
above Hughes Electronics Corporation)31 with a new ownership structure that will
result from the merger of ECC with and into Hughes after Hughes is split off
from GM. New EchoStar will control indirectly the interests in all of the FCC
licensees that are the subject of this Application, including Hughes' indirect
interest in PanAmSat that is proposed to be transferred pursuant to the Merger
Agreement. The new company will be renamed EchoStar Communications Corporation
(for clarity, referred to herein as "New EchoStar"). After closing, New EchoStar
will use the DIRECTV(TM) brand for all of its Direct-to-Home ("DTH") consumer
offerings. New EchoStar will have three classes of common stock. As of the
closing of this transaction, Mr. Charles W. Ergen, ECC's controlling shareholder
and a U.S. citizen, will be the Chairman and Chief Executive Officer of New
EchoStar, and through a family trust, will be New EchoStar's largest individual
shareholder, holding all of the outstanding shares of Class B common stock of
New EchoStar, which would represent approximately 16.7% of the total shares of
outstanding common stock (and an approximate 39% voting interest) in New
EchoStar.32 The other ECC public shareholders at the time of the closing will
receive shares of Class
--------------------
31 See n. 2 above.
32 Certain matters will also require a separate class vote of the
holders of the shares of Class B common stock of New EchoStar.
-15-
A common stock representing approximately 24.3% of the economic interest (and
approximately 5.7% of the voting interest) in New EchoStar (including newly
issued shares and convertibles). GM potentially would retain (after giving
effect to the Debt/Equity Exchange, (as defined below)) shares of Class C common
stock representing an approximate 4.9% economic interest (and an approximate
4.6% voting interest) in New EchoStar while the GM Class H shareholders would
own shares of Class C common stock representing an approximate 54.1% economic
interest (and an approximate 50.7 % voting interest) in New EchoStar.33
Attachment F summarizes the relevant New EchoStar ownership structure
post-merger.
B. DESCRIPTION OF THE TRANSACTIONS
ECC and Hughes plan to merge their businesses in accordance with the
Merger Agreement. This agreement, as well as an Implementation Agreement and a
Separation Agreement (and various ancillary agreements contemplated thereby),
set forth the transactions contemplated by the parties to effect the business
combination. The PanAmSat Stock Purchase Agreement sets forth the terms under
which ECC would purchase Hughes' approximately 81% indirect interest in PanAmSat
in the event the Merger Agreement is terminated under certain circumstances. The
transactions will be accomplished in a series of interrelated steps, as follows.
--------------------
33 All of the economic and voting interest percentages above are
estimated, as of the consummation of the merger, based on the recent trading
prices of ECC common stock, and certain assumptions regarding the pre-merger
issuance of new ECC equity securities, conversion of currently outstanding
preference shares and other convertible securities, as well as the treatment of
certain shares for federal income tax purposes.
-16-
The Recapitalization and Split-off of Hughes. At present a "tracking
stock" GM security related to Hughes' operations is available to the public and
is traded on the New York Stock Exchange and on other exchanges as GM Class H
common stock. While this tracking stock is designed to provide holders with
financial returns based on the financial performance of Hughes, actual ownership
of all Hughes' capital stock remains with GM. Accordingly, to accomplish the
proposed business combination with ECC, prior to the merger, Hughes must be
recapitalized and its stock distributed to GM's stockholders in order to
separate Hughes from GM.
To accomplish the recapitalization and split-off, the Separation
Agreement calls for Hughes to pay a dividend of up to $4.2 billion to GM (or to
a wholly-owned limited liability subsidiary company of GM)34 and for GM's deemed
retained economic interest in Hughes to be reduced by an amount commensurate
with the dividend. In addition to the dividend to GM, Hughes will issue to GM
shares of new Hughes Class C common stock pursuant to the Separation Agreement.
Next, GM will split off Hughes by distributing to GM Class H common stockholders
one share of new Hughes Class C common stock in redemption of and in exchange
for each share of GM Class H common stock that they hold. GM will either retain
or distribute to holders of its $1-2/3 common stock all or a portion of the
remaining shares of Hughes Class C common stock representing its deemed retained
economic interest in Hughes. In connection with the
--------------------
34 GM has the ability under the Merger and Implementation Agreements to
create a new wholly-owned limited liability company and insert that company into
the ownership structure between GM and Hughes (or HEC Holdings, Inc., as the
case may be) prior to the split-off and merger.
-17-
split-off, the GM Class H common stock will be cancelled. Upon completion of
these transactions, Hughes will be an independent, publicly-owned company.
The Merger. Immediately following the re-capitalization and split-off,
ECC will merge with and into Hughes or a newly-formed holding company above
Hughes. Hughes will be the surviving corporation, and the merged entity will be
renamed EchoStar Communications Corporation ("New EchoStar"). As a result of the
merger: (i) the holders of ECC Class A common stock before the merger will
receive shares of the Class A Common Stock of New EchoStar, (ii) the holders of
ECC Class B common stock before the merger will receive shares of the Class B
Common Stock of New EchoStar, and (iii) the holders of Class C Common Stock of
Hughes before the merger (the former GM Class H shareholders and GM and/or the
holders of GM's $1-2/3 common stock who obtained their Class C shares in
connection with the split-off) will retain their Class C Common Stock, now in
New EchoStar. The Class A, Class B and Class C classes of stock will exercise
the voting percentages described above with respect to New EchoStar immediately
after the merger.
Debt for Equity Exchange. GM has the option, at any time up until the
date that is six months after the closing of the merger, to satisfy certain of
its outstanding debt obligations by issuing or distributing GM Class H common
stock or New EchoStar Class C common stock, respectively, to creditors in
exchange for such debt obligations pursuant to one or more transactions (each a
"Debt/Equity Exchange"). Prior to the merger, GM would effect the Debt/Equity
Exchanges using newly issued shares of GM Class H common stock. After the
merger, the Debt/Equity Exchanges would be effected using shares of New EchoStar
Class C common stock retained by GM after the split-off.
-18-
The transaction documents allow GM to distribute up to 100 million shares of GM
Class H common stock or New EchoStar Class C common stock pursuant to
Debt/Equity Exchanges.
The PanAmSat Purchase. GM and Hughes currently own indirectly through
various Hughes subsidiaries an approximate 81% controlling interest in PanAmSat.
These subsidiaries would become subsidiaries of New EchoStar pursuant to the
merger. However, in the event the merger transaction is not consummated under
certain circumstances, the GM and Hughes interest in PanAmSat (currently held
through subsidiaries of Hughes) will be transferred, upon Commission consent and
upon satisfaction of other conditions, in its entirety to ECC pursuant to the
PanAmSat Stock Purchase Agreement.
II. PUBLIC INTEREST STATEMENT
To approve the transfer of the Hughes and ECC licenses to New EchoStar,
the Commission must find that the proposed transfer serves the public interest,
convenience, and necessity.35 To make this finding, the Commission has
traditionally weighed the public interest benefits of the proposed transaction
against any potential public interest harms to determine whether, on balance,
the benefits outweigh any harms.
The Commission's public interest analysis generally has included an
examination of the following fundamental questions: (i) whether the transaction
would result in a violation of the Communications Act or the Commission's rules;
(ii) whether the transaction would substantially frustrate or impair the
Commission's implementation or enforcement of the Communications Act or other
related statutes or interfere with the
--------------------
35 47 U.S.C. ss.ss. 214(a), 310(d).
-19-
Act's objectives; and (iii) whether the transaction promises to yield
affirmative public interest benefits.36
The analysis also includes an evaluation of the likely competitive
effects of the transaction and whether the proposed transfer creates a
significant likelihood of competitive harm.37 On this issue, more than mere
speculation is required.38 At the same time, Chairman Powell has stated his
intention that the Commission subject proposed mergers to careful "rules-based"
scrutiny and otherwise focus its inquiry in a manner that limits duplication of
effort between its own review and the work of the agencies charged with
evaluating such transactions under the antitrust laws.39
Each of the fundamental questions considered by the Commission as part
of its analysis is addressed below. The unavoidable conclusion is that the
proposed merger of ECC and Hughes is manifestly in the public interest. The
synergies created by the combination will create substantial public interest
benefits with respect to MVPD competition,40 new programming and other content,
and improved broadband services for millions of Americans. The transaction will
create an integrated, spectrally efficient, full-service satellite competitor
that is truly equipped to combat the dominance of incumbent
--------------------
36 See, e.g., Time Warner Inc. and America Online, Inc., 16 FCC Rcd.
6547 P. 1 (2001)("AOL/Time Warner"); MCIT, 15 Comm. Reg. (P&F) 1038, P. 7.
37 Id.
38 See, e.g., United States v. Citizens & S. Nat'l Bank, 422 U.S. 86,
122 (1975)("The Clayton Act is concerned with 'probable' effects on competition,
not with 'ephemeral possibilities.'")(quoting Brown Shoe Co. v. United States,
370 U.S. 294, 323 (1962)); see also United States v. Baker Hughes, Inc., 908
F.2d 981, 984 (D.C. Cir. 1990).
39 See "Powell Offers Views on CLEC Woes, Spectrum Policy,"
Communications Daily, May 23, 2001, at 5. "Powell Urges Restraint in FCC Merger
Reviews," Communications Daily, Dec. 11, 1998, at 1; cf. AOL/Time Warner, 16 FCC
Rcd. at 6555 (concurring statements).
40 See Willig Decl. at P.P. 21-25.
-20-
cable Multiple System Operators ("MSOs"), and to provide new and expanded
services, including state-of-the-art broadband services, to consumers in both
urban areas as well as underserved and rural areas. At the same time, the
structure of the market in which the combined entity will compete, as well as
the combined entity's commitment to non-discriminatory pricing and service,
prevent the merger from posing any risk of harm to the public interest.
Accordingly, the Commission should not only grant this application - it should
do so expeditiously.
A. The Transaction Will Comply With the Requirements of the Communications
Act, All Other Applicable Statutes, and With the Commission's Rules.
The proposed transaction does not implicate any foreign ownership,
aggregation, cross-ownership, or any other restrictions imposed by the
Communications Act, Commission regulation or applicable statute. Both ECC and
Hughes are currently shareholders of a number of companies that are Commission
licensees, and New EchoStar's Chief Executive Officer will be Mr. Charles W.
Ergen, now Chief Executive Officer of ECC. The qualifications of all relevant
parties are therefore a matter of record before the Commission. The combined
entity will not have alien ownership that even approaches the benchmark of any
applicable foreign ownership rule.41 Nor does the proposed merger implicate any
Commission rule or policy governing cross-ownership or MVPD programming
relationships.42
--------------------
41 While ECC has received from the Commission a waiver of certain
foreign ownership rules (to the extent applicable) to allow an investment from
an Australian corporation, New Corp., that investment is now well below 5% and
nowhere near the 25% limit of these rules to the extent they apply. See In re
Application of MCI Telecommunications Corp., File No. 73-SAT-P/L-96, FCC 99-110
(rel. May 19, 1999).
42 AOL Time Warner Inc. has an indirect ownership interest in DIRECTV,
which would represent less than five percent interest in the combined company.
-21-
B. The Transaction Will Not Impair Any Statutory Objectives and Will Yield
Substantial Affirmative Public Interest Benefits
Far from impairing any statutory policies or objectives, the proposed
transaction will in fact further the important Commission policies in favor of
vigorous competition, the efficient use of spectrum and satellite resources, and
the provision of advanced broadband communication services to all Americans. In
doing so, the merger will yield a number of significant affirmative benefits to
the public interest. The Commission is well-suited to recognize and weigh these
benefits in light of its statutory responsibilities.
1. THE TRANSACTION WILL PROMOTE COMPETITION WITH CABLE BY ALLOWING
INCREASED SPECTRUM AND SATELLITE RESOURCE EFFICIENCY
For almost a decade now, both Congress and the Commission have made
concerted efforts to open up the MVPD market to effective competition - Congress
with the enactment of the Cable Television Consumer Protection and Competition
Act of 1992 and the Satellite Home Viewer Improvement Act of 1999, and the
Commission with its rules implementing these laws. Nothwithstanding these
efforts, however, the MVPD market is still dominated by cable operators.43 Both
Congress and the Commission have noted this competitive problem on a myriad of
occasions.44 Moreover, policy makers and
--------------------
43 See Willig Decl. at P.P. 7-18, and below at 37-41, for an analysis
of the relevant market.
44 See, e.g., S. Rep. No. 102-92, at 1 (1992)(explaining that Congress
enacted the Cable Television Consumer Protection and Competition Act of 1992
("1992 Cable Act") "to promote competition in the multichannel video marketplace
and to provide protection for consumers against monopoly rates and poor
service."); In the Matter of Implementation of Section 19 of the Cable
Television Consumer Protection and Competition Act of 1992: Annual Assessment of
the Status of Competition in the Market for Delivery of Video Programming, First
Report, 9 FCC Rcd. 7442 (1994)("First Competition Report"), at P. 5 (observing
that "Congress...found that without
-22-
regulators alike have envisioned DBS as the most promising alternative MVPD
technology that could help alleviate this problem and ultimately cure it.45
DBS, however, remains fundamentally constrained by its dependence upon
the radio spectrum for operations. DBS providers must use limited bandwidth from
orbital locations that were not originally optimized for digital transmissions.
The problem of finite bandwidth is seriously exacerbated by the currently
duplicative use of the DBS spectrum. To help accomplish the Commission's vision
of promoting DBS as a complete substitute for cable, DBS providers have had to
offer subscribers programming services similar to those provided by cable
systems, resulting in the use of each provider's spectrum for largely
overlapping programming services.46 For example,
--------------------
competition, there was 'undue market power for the cable operator as compared to
that of consumers and video programmers,' and that 'the cable television
industry has become a dominant nationwide video medium.'" (citing 1992 Cable
Act, ss.ss. 2(a)(2-3), 106 Stat. 1460)); In the Matter of Implementation of the
Satellite Home Viewer Improvement Act of 1999; Retransmission Consent Issues:
Good Faith Negotiation and Exclusivity, CS Docket No. 99-363 (rel. Mar. 16,
2000)(promulgating rules under SHVIA designed "to place satellite carriers on an
equal footing with local cable operators when it comes to the availability of
broadcast programming, and thus give consumers more and better choices in
selecting a multichannel video program distributor.").
45 Congress noted in 1999 that "with the development of high-powered
satellite service, or DSS, which delivers programming to a satellite dish as
small as 18 inches in diameter, the satellite industry now serves homes
nationwide with a wide range of high quality programming....it offers an
attractive alternative to other providers of multichannel video programming; in
particular, cable television." H.R. Conf. Rep. No. 106-464, at 91 (1999); see
also First Competition Report, 9 FCC Rcd. 7442, at P. 62 (noting the
Commission's expectation in 1990 that DBS "had the potential to 'readily compete
with cable.'")(citing Rate Deregulation & the Commission's Policies Relating to
the Provision of Cable Television Service, Report on Competition, 5 FCC Rcd.
4962 (1990)).
46 In fact, the current duplicative use of this spectrum was not always
the model for DTH satellite services. In the 1980s, when the Commission first
authorized the DBS service, DTH satellite services were analog, meaning that
each provider could not deliver much more than a handful of channels. Indeed,
DBS itself was first contemplated as an analog service. The DTH satellite
providers therefore planned to use their limited
-23-
currently, ECC and DIRECTV use portions of the same DBS spectrum, each with its
own expensive satellite fleet, each to provide the same HBO channels, the same
CNN channels, and in most cases the same local network channels to the same
metropolitan areas.47 DBS operators have attempted to mitigate this inefficient
duplicative use of DBS spectrum by relying on upgrades in digital compression
and other technologies to "squeeze" as many digital programming channels as
possible in their licensed bandwidth, and indeed, to offer more channels and
superior picture and sound quality relative to analog cable systems. In
addition, DBS providers historically had no need to allocate channel capacity
for the provision of local network signals because they were legally hampered
from retransmitting them in most instances.
Today, however, DBS spectrum inefficiency has become progressively a
more debilitating problem owing to a number of factors, including satellite
mandatory carriage obligations and the increased competitive threat posed by the
enhanced capabilities of digital cable. While the enactment of the SHVIA
alleviated some of the disparity between DBS and cable program offerings by
giving DBS providers a limited legal ability to retransmit local broadcast
signals starting in November 1999, it did so at a significant cost - the
unprecedented spectrum requirements associated with satellite mandatory carriage
obligations. Without the merger, must-carry obligations will
--------------------
capacity to provide programming services that generally complemented, rather
than duplicated, one another. It was in that environment that the Commission
decided to fragment the DBS spectrum into a patchwork of small channel
assignments - issuing separate permits for 11, 3 or even 1 DBS channel at each
orbital location. The emergence of digital DBS in the early 1990s and the desire
to introduce price competition to cable systems made that paradigm completely
obsolete, and led to the current problem of duplicative use of the DBS spectrum.
47 See Joint Engineering Statement at 8-10.
-24-
effectively preclude the potential of effective competition with cable in all
but the largest metropolitan areas now served by each DBS provider - DIRECTV now
serves 41 local areas and ECC serves 36 local areas, for a total of 42 areas and
with an overlap of 35 areas. All in all, each of ECC and DIRECTV expects to have
to carry upwards of 300-400 local must-carry stations starting in January 2002,
and most of these stations will be the same from one DBS provider to the
other.48 Must-carry is expected to bring the total of overlapping programs (both
national and local) transmitted by the two companies to over 500.
Moreover, cable operators have aggressively upgraded the capacity of
their systems to allow for the digital retransmission of video programming.49
Although DBS's digital quality and former capacity superiority have allowed it
initially to make inroads into cable's dominant market position, the roll-out of
upgraded, digital cable
--------------------
48 For example, as of January 1, 2002, ECC expects that it will be
required to transmit numerous local home shopping channels because of the
satellite must-carry obligations imposed under the SHVIA. See 47 U.S.C. ss. 338
(Supp. V 1999)(as a condition of using the compulsory license made available by
SHVIA for retransmission of local broadcast stations into their "home" market,
DBS providers must carry, on request, the signals of all television broadcast
stations located within the same local market, subject only to certain limited
exceptions).
49 Comments of National Cable & Telecommunications Association
responding to Notice of Inquiry, In the Matter of Annual Assessment of the
Status of Competition in the Market for the Delivery of Video Programming,
Notice of Inquiry, CS Docket No. 01-129, CS Docket No. 01-129 (dated Aug. 2,
2001), at 25-29 (describing cable companies' $50 billion investment in upgraded
infrastructure over the past five years to facilitate "a broad range of video,
voice and high-speed data possibilities, as well as improved signal reliability,
improved pictures and two-way transmission capability."); see also Annual
Assessment of the Status of Competition in the Market for the Delivery of Video
Programming, Seventh Annual Report, 16 FCC Rcd. 6005, 6009 (2001)("Seventh MVPD
Competition Report")(Commission observation that "[v]irtually all the major MSOs
offer Internet access via cable modems in portions of their nationwide service
areas....Many cable operators also are planning to integrate telephony and
high-speed data access.").
-25-
facilities has compounded cable's incumbency advantages. A fully upgraded
digital cable system now utilizes up to 750 MHz or 850 MHz of equivalent
bandwidth, with no theoretical limitation on the ability to increase its
bandwidth utilization by upgrading its physical plant.50
Digital cable also allows MSOs to offer a bundle of video and
high-speed Internet access offerings, which has significantly and negatively
affected the willingness of cable subscribers to switch to DBS, as well as other
interactive broadband services. For example, many of the MSOs are now running
trials of their Video on Demand ("VOD") products in test markets, and some have
already commercially launched this service. One observer has noted that "VOD has
emerged as the silver-bullet to DBS, and the MSOs are stockpiling for a 2002
showdown."51 Even before that showdown, the impact of the video/Internet
access/broadband bundle offered by cable has been acutely felt by the DBS
providers. As a result of these developments, cable dominance persists and may
yet be augmented.52 Indeed, in its most recent annual cable competition report,
the Commission notes that the cable industry continues to maintain a dominant
position in the MVPD market, providing service to about 80% of the national MVPD
--------------------
50 The information capacity per MHz of a digital cable system is not
limited by the signal propagation constraints inherent in DBS systems.
51 Morgan Stanley, Notes from NCTA 2001 (June 15, 2001); see also
Deutsche Banc Alex. Brown, Cable Industry Outlook, Apr. 16, 2001, at 19, 38 (VOD
is cable's "killer app" that will highlight cable's technological advances over
DBS).
52 Brigitte Greenberg, "VOD, High-Speed Data, Voice Keys to Cable
Future, Operators Say," Communications Daily (Nov. 29, 2001) at 7 (noting cable
operators' "optimism that services satellite couldn't deliver - video-on-demand
("VOD"), subscription VOD, interactivity, high-speed data and telephony - would
solidify cable's relationship with current customers and bring many defectors to
satellite back into fold.").
-26-
subscribership.53
Combining the satellite and spectrum resources of ECC and Hughes will
eliminate the duplicative use of the limited amount of available DBS spectrum to
deliver the same programming,54 and allow DBS to compete more effectively
against cable's recent offerings. Elimination of this duplication is an enormous
efficiency resulting from the merger. The Commission is uniquely equipped to
evaluate this benefit because the increased spectrum efficiency resulting from
the merger would promote directly its long-standing policy in favor of efficient
and non-duplicative use of the spectrum.55
The proposed transaction will do much more, however, than serve the
Commission's spectrum policies in the abstract. Increased spectrum efficiency
will translate into concrete benefits for customers, each recognized
specifically by Congress or the Commission as important in its own right: more
local channels to more markets; more high definition television ("HDTV")
channels; better service to rural areas, Alaska and Hawaii; more diverse and
educational programming; and broader availability of
--------------------
53 See Seventh MVPD Competition Report, 16 FCC Rcd. at 6008. Cable
claimed more than a 77% share of the MVPD market in August 2001. See Comments of
National Cable & Telecommunications Association responding to Notice of Inquiry,
In the Matter of Annual Assessment of the Status of Competition in the Market
for the Delivery of Video Programming, CS Docket No. 01-129, at 7.
54 See Joint Engineering Statement at 8-9.
55 See, e.g., In the Matter of Implementation of the Cable Television
Consumer Protection and Competition Act of 1992, 10 FCC Rcd. 3105, 3120 (1994),
at 3120 P. 39 (1994)(recognizing the public interest in avoiding "duplication of
programming" in the DBS service, which leads to "more diversity in programming
for the consumer"); cf. Hughes Communications Galaxy, Inc., 3 FCC Rcd. 7015 P. 2
(1988)(noting that use of INTELSAT system "to duplicate programming already
available on domestic satellites would be an inefficient use of the available
radio spectrum"); In re Revision of Radio Rules & Policies, 7 FCC Rcd. 2755,
2783 (1992)(explaining that the Commission restricts duplicative use of spectrum
utilized by commercial AM and FM radio stations with overlapping service areas
because "[t]he limited amount of available spectrum could be used more
efficiently by other parties to serve competition and diversity goals.").
-27-
satellite-based Internet access services. These benefits will in turn spur the
incumbent cable operators to greater efforts for the benefit of cable as well as
cable consumers.56 In short, DBS spectrum efficiency will serve as a means to
the all-important end: more vigorous competition in the MVPD market.
(a) MORE LOCAL CHANNELS TO MORE AREAS
New EchoStar will provide local broadcast programming to far more
communities - 100 or more, including at least one city in each state, compared
to the 36 and 41 metropolitan areas that ECC and DIRECTV each respectively serve
now.57 The inability to provide local programming has been recognized by
Congress and the Commission as a significant impediment to DBS becoming fully
competitive with cable.58 The legal constraints that contributed to the
competitive imbalance were
--------------------
56 See, e.g., Merger Impact on Cable: A Wall Street View, skyreport.com
(Nov. 26, 2001) available at
http://www.skyreport.com/skyreport/nov2001/112601.htm#one (noting financial
analysts' prediction that the advantages resulting from "a combination of DBS
assets" would prompt cable to "convert their systems to 100 percent digital,
.... become more aggressive in developing and distributing both broadband
content and communications in order to drive the penetration of broadband
connectivity," and to "bundle aggressively," with the end result being that
"[c]osts to the consumer will come down through bundled pricing."); Valerie
Milano, "Cable Sees PVRs as Serious Threat, SvoD the Answer," Communications
Daily (Nov. 29, 2001) at 8 (pending merger will spur cable toward more
innovation).
57 See Joint Engineering Statement at 9. The total number of metropolitan
areas now served by either DIRECTV or ECC is 42, with 35 of these areas served
by both companies.
58 In the Conference Report accompanying SHVIA, Congress declared that
enabling DBS operators to offer local channels would "allow satellite carriers
for the first time to provide their subscribers with the television signals they
want most: their local stations," and "create parity and enhanced competition
between the satellite and cable industries in the provision of local television
broadcast stations." H.R. Conf. Rep. No. 106-464, at 93; see also Seventh MVPD
Competition Report, 16 FCC Rcd. at 6010P. 13 (observing that "[c]onsumers
historically reported that their inability to receive local signals from DBS
operators negatively affected their decision as to whether to subscribe to DBS .
. . . Under SHVIA, DBS operators can offer a programming package more comparable
to and competitive with the services offered by cable operators.")
-28-
alleviated somewhat by the passage of SHVIA. The limited channel capacity of DBS
providers, however, as well as the burdens to be soon imposed upon that capacity
in the form of satellite must carry, continue to limit DBS's ability - even with
the implementation of spot-beam satellites and other new technologies - to offer
local programming to many consumers. As a result, local-into-local service has
for now been confined only to the relatively larger metropolitan areas.59 The
merger will dramatically expand the number of areas that can receive local
broadcast station signals and will result in more vigorous competition to cable
in these areas.
(b) MORE PROGRAMMING CHOICES, INCLUDING HDTV CHANNELS AND
MORE PAY-PER-VIEW
New EchoStar also will have the ability to provide consumers with many
more national programming choices than each company is able to provide standing
alone. Just as the merger will eliminate the need to duplicate carriage of local
channels, it will also eliminate the duplication of national channels, thereby
freeing spectrum for more diverse programming choices. This includes more high
definition programming that will encourage consumer adoption of digital
equipment - another explicit Commission objective.60 Currently, ECC and DIRECTV
each offer a limited number of HDTV channels - 2 for DIRECTV and 3 full-time
HDTV channels for ECC. The combined entity will be able to devote several times
that number of channels to HDTV content,61
--------------------
59 See Joint Engineering Statement at Exhibit 2.
60 See, e.g., In the Matter of Review of the Commission's Rules and
Policies Affecting the Conversion to Digital Television, Report and Order and
Further Notice of Proposed Rulemaking, 16 FCC Rcd. 5946 (2001) (stressing the
Commission's desire for a "rapid" conversion to digital television ("DTV")); id.
at 5950 P. 11 (Commission expressing its "agree[ment] that the wide availability
of digital programming . . . will help speed the transition to DTV.").
61 See Joint Engineering Statement at 10.
-29-
driving demand for both HDTV content and equipment, and breaking the vicious
circle of too little HDTV content to drive consumers to purchase HDTV equipment
and too little equipment to justify investment in more content.
The savings in spectrum that will result from the merger will also
enable New EchoStar to offer greatly expanded pay-per-view ("PPV") and
VOD-like62 services - services that are very important to the economics and
competitiveness of MVPD providers. For example, capacity can be devoted to
caching (i.e., saving for future viewing) on Personal Video Recorders, allowing
users to play PPV movies or have access to specialty programming virtually on
demand.63
(c) EXPANDED PRODUCT OFFERINGS TO MEET COMPETITION FROM DIGITAL
CABLE
The merger will enhance competition by enabling New EchoStar to compete
better with new MSO product offerings made possible by the advent of digital
cable. As mentioned above, the digital cable roll-out has allowed cable MSOs to
offer consumers a broadband bundle, packaging the conventional video services
with high-speed Internet access, VOD and other interactive services, and
Internet telephony. These packages are increasingly popular with MVPD
subscribers.64 DBS, on the other hand, is competitively disadvantaged in this
regard. The DBS spectrum to a consumer's home is
--------------------
62 See discussion in B(1)(c) below.
63 See Joint Engineering Statement at 11.
64 As early in the digital cable roll-out as 1998, the Commission
recognized that "[m]ulti-service offerings and bundling services for sale seem
to enhance subscription to alternative services offered by cable companies. . .
. Indications are that customers value receiving these services through
'one-stop-shopping.' . . . For example, many large MSO's have found that
bundling increases penetration of video and of new services." In the Matter of
Annual Assessment of the Status of Competition in the Market for the Delivery of
Video Programming, Fifth Annual Report, 13 FCC Rcd. 24284, 24322 P. 60 (1998)
(footnotes omitted).
-30-
now only one-way via satellite and needs to be supplemented by the use of
different frequencies and satellites or by using terrestrial technologies to
allow a broadband two-way offering. Both ECC and Hughes have attempted to create
such broadband packages, ECC with its StarBand investment, and Hughes with its
HNS DirecPC and DIRECWAY offerings. However, during the first year of service,
subscription rates have been low, with only one percent of total DBS
subscribers, less than 200,000, subscribing to these data services nationwide.65
As will be seen below, next-generation satellite broadband services require
significant investment and will be dramatically improved by combining the
resources of both companies.
As mentioned above, the deployment of digital cable has also provided
cable operators with the ability to offer new interactive services. These
services include video-on-demand, information-on-demand (e.g., sports scores,
financial market information, electronic yellow pages, etc.) and electronic
shopping services. These services are typically enabled through two-way
interaction between the digital cable set-top and server equipment located at
the cable operator's headend.
Even though the "one-way via satellite" architecture of a DBS operator
does not allow for the same type of headend to set-top connectivity as exists in
a digital cable system, a DBS service can provide many of the same types of
interactive offerings as the digital cable operator provided sufficient
bandwidth for content distribution is available to the satellite operator.66 The
latency of this type of service (i.e., how quickly
--------------------
65 See Joint Engineering Statement at 14.
66 In contrast to cable operators, a DBS provider enables its interactive
services by the continuous broadcast of content "carousels" to its set-top
boxes. Under the direction of either the operator or the consumer, each set-top
box selects and presents or stores
-31-
the information is presented to the viewer) and depth of the service (i.e., how
much information is available to the viewer) is directly proportional to the
amount of satellite bandwidth allocated to the content carousel associated with
the service. Simply put, the more bandwidth that is applied to a service, the
more interactive and robust (and consequently the more competitive) the consumer
experience.
Thus the DBS spectrum efficiencies created through the merger will
allow New EchoStar to offer satellite-based interactive services that can
compete favorably against increasingly sophisticated digital cable offerings and
at the same time provide rural consumers with access to interactive services
they might otherwise not be able to obtain.
The merger also will enable New EchoStar to compete more effectively
against cable companies (and the telephone companies) as a possible third line
for a bundle of video/data/Internet services into the home. Cable companies with
digital infrastructure can now offer consumers the attractive bundles of video,
high-speed Internet access and other interactive services, and Internet
telephony. As will be seen below, the merger will allow New EchoStar to provide
a truly competitive broadband service, as the new entity will be able to combine
the spectrum available to each company for broadband services and use the
combined potential subscriber base to achieve more
--------------------
information from the content carousel transmitted by the satellite. For example,
in the case of an interactive financial information service, the consumer would
identify the particular stock symbols of interest and the set-top box would wait
for the relevant information to be transmitted over the carousel, "grab" it and
display it to the consumer. If the content is transmitted frequently enough,
this interaction appears to be instantaneous to the viewer. This content
carousel approach applies not only to information-on-demand services but to
almost any satellite-delivered interactive service, including video-on-demand
services and electronic shopping services.
-32-
competitive price points and sustain the extraordinary high up-front capital
investment that is required to launch quickly an advanced satellite broadband
network.
New EchoStar will thus be able to establish a viable satellite-based
Internet/data service that would compete with cable modem access and telephone
lines as a third line into the home. This efficiency will confer significant
consumer benefits by creating an effective competitive alternative in a line of
business that is increasingly important to consumers - and in which consumer
options currently are limited.67
(d) BETTER SERVICE TO RURAL AREAS, ALASKA AND HAWAII
Another major benefit of the newly-freed spectrum will be New
EchoStar's ability to provide Americans living in rural areas, Alaska and Hawaii
with more national programming networks and a better signal.68 As explained
above, by not duplicating each other's programming over the same spectrum, the
combined entity will be able to offer a much greater variety of national
networks than rural and remote areas can receive today.
This means that New EchoStar will be better able to provide subscribers
in Alaska and Hawaii with a programming package more akin to what is available
to their fellow citizens on the mainland today. Moreover, the combination of
assets, including uplink facilities, will make more feasible the redeployment of
finite satellite assets to non-CONUS western orbital slots, portending further
improvements to service in Alaska and Hawaii.
--------------------
67 The necessity and importance of spreading the huge costs of pure
broadband satellite services across the required critical mass of broadband
subscribers is discussed in greater detail below.
68 See Joint Engineering Statement at 10.
-33-
The same spectrum and satellite efficiency that will facilitate a greater
variety of programming also will provide for a more reliable signal in all rural
and remote areas. This could translate into any number of benefits, including
potentially smaller dish sizes for some subscribers in remote areas such as
Alaska and Hawaii.69
In addition, as discussed further below, citizens in rural America will
also benefit from the extent to which the combination of ECC and Hughes will
improve competition with cable incumbents in numerous metropolitan areas.
National pricing is the most practicable and efficient method of DBS pricing,
and New EchoStar will commit to continued uniform and non-discriminatory pricing
and service throughout the country. As a result of national pricing, rural DBS
customers will reap many of the benefits that enhanced competition with cable
will provide to customers in non-rural areas. In effect, the national price will
act as a conduit that allows the competitive dynamic in such important, highly
competitive regions to have a beneficial impact on consumers throughout the
nation, including in rural areas where cable does not exist.70
Finally, perhaps one of the largest benefits promised by the
transaction for rural areas is that the merger will help make seamless satellite
broadband a reality for all Americans - deploying faster to all regions, with
greater applications and service offerings. Broadband deployment is discussed in
more detail below.
(e) MORE ETHNIC, FOREIGN LANGUAGE AND NICHE PROGRAMMING
The same principle of spectrum efficiency will apply to niche
programming such as ethnic, foreign language, or other programs that appeal to
--------------------
69 See Joint Engineering Statement at 11.
70 See Willig Decl. atP.P. 38-39.
-34-
specialized audiences. These audiences would have greatly expanded viewing
opportunities with the additional programming available as a result of the
merger. For example, the merged entity could provide several more channels of
Spanish-language programming than the companies' combined current offerings, as
well as increased exposure for foreign language programming with smaller
followings - a very important benefit for audiences that desire this
programming.
(f) MORE EDUCATIONAL PROGRAMMING
The spectrum efficiencies resulting from the merger will allow the
provision of additional educational programming, another area in which the
benefits from the transaction serve explicit statutory goals. Congress has
required DBS providers to set aside a percentage of their capacity for such
programming,71 but the qualified programmers using ECC's and DIRECTV's set-aside
channels overlap. For example, DIRECTV and ECC now use different portions of the
spectrum to provide the same C-SPAN and C-SPAN II feeds. Eliminating this
overlap would free spectrum for additional public interest programming.
(g) OTHER EFFICIENCIES THAT WILL RESULT FROM THE MERGER
The combination will also allow the rationalization of the two
companies' satellite fleets. These satellites are now inefficiently deployed due
to the fragmentation of DBS spectrum assignments, which was in turn based on the
now-discarded model of analog DBS. The deployment of satellites at 110(degree)
W.L. is a good example of this inefficiency. DIRECTV has a satellite at that
location for the purpose of using its
--------------------
71 See 47 U.S.C.ss.335(b) (1994) (DBS providers are required to set aside
four to seven percent of channel capacity "exclusively for noncommercial
programming of an educational or informational nature.").
-35-
assignment of only 3 DBS channels, even as EchoStar's EchoStar 5 satellite now
located at that slot and the EchoStar 8 satellite to be launched to that slot
are each equipped with 32 transponders and stand ready to use all of the
spectrum at that location. The result is that the two DBS companies are
constrained in their ability to compete by outdated requirements that are the
equivalent of an airline being required to fly its planes only half-full. The
merger will allow the companies to align their combined satellite fleet to the
dictates of market efficiency.72
In addition, New EchoStar will achieve greater economies of scale and
substantial cost synergies as a result of the integration of the ECC and DIRECTV
satellite platforms. For example, the proposed merger will allow New EchoStar to
offer a common service platform to new customers; to combine and improve each
company's distribution networks; and to use the satellite uplink centers for
new, rather than redundant, services. The resulting cost synergies resulting
from such steps will include: reduced subscriber acquisition costs; reduced
customer turnover, or "churn"; improved signal security as a result of moving to
a standardized DBS service platform; reduced programming costs as a result of
having a larger subscriber base; and the elimination of duplicative overhead.73
All of these synergies will contribute to the creation of a dramatically
stronger competitor to cable's dominance of the MVPD marketplace and will be
manifested to the DBS consumer.
--------------------
72 See Joint Engineering Statement at 4-7.
73 See Joint Engineering Statement at 2-3, 7-8, 12.
-36-
2. THE MERGER WILL HAVE OTHER SIGNIFICANT PRO-COMPETITIVE
EFFECTS AND WILL NOT HAVE AN ANTI-COMPETITIVE IMPACT IN ANY
OF THE RELEVANT MARKETS
MVPD Market. The merger will have significant pro-competitive effects -
increased competition to cable operators - and will not have an anticompetitive
impact in the relevant product market - the MVPD market. Recent technological
and regulatory developments have left no doubt that the relevant market for
purposes of analyzing this transaction, as previously defined by the Department
of Justice ("DOJ"), is now "the delivery of multiple channels of video
programming to the home . . . via . . . cable, satellite, or wireless
technologies."74 As Dr. Willig testifies, definition of a "relevant market" for
the purpose of competition analysis of mergers depends crucially on demand
substitution considerations - the degree to which consumers view the products as
substitutable.75 This ability to raise prices profitably is a function of the
degree to which
--------------------
74 See Willig Decl. atP.P. 12-13 (discussing the relevant market
determination made by the Department of Justice in the Primestar case.) In 1998,
Primestar, a joint venture of large cable companies, sought to acquire rights to
an orbital slot for nationwide DBS service that were held jointly by News Corp.
and MCI Telecommunications Corp. DOJ sued to enjoin that acquisition, alleging
that allowing cable operators through Primestar to control those DBS assets
would eliminate the possibility that those assets could be used to compete
against cable. In its complaint, DOJ alleged that the MVPD market was the
relevant product market for the purpose of evaluating Primestar's proposed
purchase of the DBS assets. See United States v. Primestar, Inc., Civ. No.
1:98CV01193 (JLG) (D.D.C. May 12, 1998).
75 See Willig Decl. atP. 8. In particular, the U.S. Department of Justice
and Federal Trade Commission define a market "as a product or group of products
and a geographic area in which it is produced or sold such that a hypothetical
profit-maximizing firm, not subject to price regulation, that was the only
present and future producer or seller of those products in that area likely
would impose at least a 'small but significant and nontransitory' increase in
price, assuming the terms of sale of all other products are held constant." Id.
(citing Department of Justice and Federal Trade Commission, Horizontal Merger
Guidelines, available at http://www.usdoj.gov.atr.public/guidelines/horiz_book/
toc.html).
-37-
consumers view two products as providing similar services or benefits. If one
firm came to become the only provider of one of the products, but not the other,
and if consumers found the products to be good substitutes, then the presence of
the second product would prevent the firm from realizing an increase in profits
by significantly raising its price. Therefore, the second product would directly
constrain the price of the first product, and the relevant market would include
the second product.
Dr. Willig has concluded, based on the business behavior of the DBS
industry, federal government cases and studies, the views of the cable industry,
and the views of independent analysts, that DBS prices are directly constrained
by cable prices. Therefore, the relevant market for evaluating the merger of ECC
and DIRECTV includes cable providers.76
For example, Dr. Willig observes, DBS pricing decisions appear to be
driven by competition with cable companies, as the stated primary objective of
both companies 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.
Additionally, Dr. Willig observes that each company has laid claim to success in
luring subscribers away from cable, which is corroborated by public statements
of cable companies attributing DBS subscriber growth to aggressive efforts by
DBS to target cable customers, the fact that the
--------------------
76 Indeed, Dr. Willig explains that the market is dynamic and the boundary
of the market in which DBS providers compete may well expand. As bundled
packages with digital television, high-speed Internet access, and
video-on-demand become relatively more important in the MVPD market, the
participants in the relevant market may grow beyond the historical MVPD
participants to include DSL providers, incumbent phone companies, and cellular
phone providers. See id. at P. 17.
-38-
cable industry itself views DBS as a significant competitor, and the
acknowledgement by cable companies that their pricing and advertising strategies
are influenced by competition from DBS.
Dr. Willig also notes that a number of cases and studies by the federal
government confirm that cable firms are part of the relevant market. The DOJ,
for example, found that the MVPD market was the relevant market in the Primestar
case, discussed above. And in its annual analysis of competition in video
programming, the FCC groups the cable industry and the DBS industry in the MVPD
market.77 The FCC has also concluded that DBS and cable services are
substitutes.78 In sum, Dr. Willig concludes, the relevant market for analyzing a
merger between ECC and DIRECTV is the MVPD market.79
As previously noted by the Commission, over 96 percent of all
television households in the United States are passed by cable television
systems and these cable
--------------------
77 See Seventh MVPD Competition Report, 16 FCC Rcd. 6037, atP. 61.
78 In its 2000 Report on Cable Industry Prices, the FCC concluded that DBS
puts statistically significant downward pressure on demand for cable services.
The report continues to state that "DBS is a substitute for cable services. 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 . . . [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 In the Matter of Implementation of Section 3
of the Cable Television Consumer Protection and Competition Act of 1992;
Statistical Report on Average Rates for Basic Service, Cable Programming
Services, and Equipment, Report on Cable Industry Prices, 16 FCC Rcd. 4346, 4364
(2001), P. 53.
79 Dr. Willig also explains that, for the purposes of evaluating the
competitive impact of the proposed merger, the national pricing for monthly
subscription and programming fees by both EchoStar and DIRECTV suggest that a
national-level analysis is the most appropriate. See Willig Decl. atP. 18.
-39-
operators continue to be the dominant distributors in the national MVPD
market.80 Indeed, cable television operators maintain nearly an 80 percent share
of the total MVPD market.81 DBS also competes with a number of other MVPD
distributors using different transmission media, such as wireless cable, SMATV,
open video systems, direct-to-home analog and digital satellite offerings, cable
overbuilds and electric utilities.82 In addition, there may soon be a number of
new providers using technologies and frequency bands that will compete in this
market, including terrestrial point-to-multipoint services in several fixed
service bands and potential new satellite entrants.83
Evaluated in this market, the proposed merger will have decidedly
pro-competitive effects. The effect on competition is not adequately measured by
the number of competitors, but rather by their effectiveness. As the DOJ and the
Commission have recognized, increasing the effectiveness of DBS competition (and
thus ensuring adequate MVPD competition) may only be achievable by foregoing
additional DBS competitors.84
--------------------
80 See Seventh MVPD Competition Report, 16 FCC Rcd. 6005, at App. B, Table
B-1 (noting that approximately 96.6 percent of U.S. households with at least one
television were passed by cable at the end of 1999); MCIT, 15 Comm. Reg. (P&F)
1038, atP. 16.
81 Seventh MVPD Competition Report, 16 FCC Rcd. 6005 atP. 15.
82 Id.
83 See, e.g., OpTel, Inc.'s Request for Action, In the Matter of Petition
for Rulemaking To Amend 47 C.F.R.ss. 101.603 and Related Rules - To Allow the
use of 12 GHz OFS Frequencies for the Delivery of Video Programming Material, CS
Docket No. 99-250, RM-9257 (dated Nov. 6, 2001).
84 For example, when the Commission considered the application of an ECC
subsidiary to acquire additional DBS licenses, the Department of Justice
commented that "MVPD competition is best served by the emergence of a strong
high-power DBS competitor with enough capacity to compete effectively with
cable." Comments of the United States Department of Justice, In the Matter of
the Application of MCI Telecommunications Corp. and EchoStar 110 Corp., File No.
SAT-ASG-19981202-00093, at 8 (Jan. 14, 1999). The Commission agreed: "[W]e view
the potential competitive benefits of allowing EchoStar to become a stronger
competitor in MVPD
-40-
As described above and by Dr. Willig, the transaction will result in improved
and expanded programming choices for consumers, as well as the provision of
innovative new services, which will make New EchoStar a better competitor to
cable.85 Indeed, as all cable firms roll out their digital upgrades, DBS has a
narrow window of opportunity to ignite full-scale competition as cable customers
transition to digital service, before consumer inertia and the high switching
costs from cable to DBS leave consumers locked in, and cable further entrenched.
Moreover, as Dr. Willig discusses, the characteristics of the MVPD market in
general and of DBS firms in particular "make it very unlikely that a merger of
EchoStar and DirecTV would result in higher prices and lower output through
either coordinated behavior among participants in the MVPD market or unilateral
behavior by the merged firm."86
As outlined above, this transaction will produce enormous benefits for
all Americans, including the small percentage of U.S. households that are not
currently passed by cable operators. These sparsely populated areas already are
being served by a number of C-band providers that are beginning to roll out new
digital offerings (e.g., 4DTV products) and offer over 500 programming
channels.87 These products remain very attractive, particularly in areas where
dish size is not a significant deterrent.
--------------------
markets as outweighing the potential competitive costs of
reduced entry into the DBS industry." MCIT, 15 Comm. Reg. (P&F) 1038, atP. 21.
85 Willig Decl. at P. P. 23-24 (discussing merger specific efficiencies
that will lead to benefits such as greater geographic coverage of local
channels, more specialty, ethnic and foreign language programming, interactive
television services, and video-on-demand).
86 Id. atP. 6.
87 Satellite Today, C-Band Subscribers on Motorola's Front Burner, April
13, 2001. See also, www.4DTV.com.
-41-
In addition, recognizing the concerns of consumers in the 3.4% of U.S.
television households not passed by cable,88 New EchoStar is committed to
pricing its DBS services on a uniform, nationwide basis. This means that, after
the merger, the few consumers in areas not served by cable will in fact benefit
from the intensified MVPD competition that will exist in all other areas where
New EchoStar will compete with cable. In this way, these rural customers will
obtain the benefits of competition between and among DBS, different cable MSOs,
as well as the newer cable overbuilders and other emerging competitors offering
other solutions throughout the country that increasingly are promoting and
comparing their digital offerings to DBS. In other words, those consumers
located in sparsely populated areas not currently served by cable will obtain
DBS service at prices developed as a result of the more vigorous competition
among New EchoStar and the 8 or 9 largest cable operators and other new entrants
providing overbuild and other solutions in the rest of the country. In short,
not only will the merger not have an anti-competitive impact in rural areas, it
will produce tangible competitive benefits for consumers in those areas, too.
Programming. The programming market also will benefit from the proposed
merger as a result of the more efficient use of spectrum and the creation of a
much stronger alternative distribution outlet for programmers not affiliated
with cable MSOs. In this regard, the proposed merger will not create the types
of vertical relationships that raised concern in other transactions. The DOJ and
the Federal Trade
--------------------
88 See note 81, supra. The Commission noted that there were approximately
100.8 million television households during the 1999-2000 television season. See
Seventh MVPD Competition Report, 16 FCC Rcd. 6005, at P. 18. Based on this
total, it may be estimated that roughly 3.4 million are not passed by cable.
-42-
Commission have brought a number of cases addressing the vertical relationships
between cable MSOs and competition in programming that were settled by consent
decree.89 In contrast, the Merger Parties do not intend to pursue a strategy of
vertical integration with programmers post merger. Combined with the amount of
available spectrum that will be freed up, this absence of vertical integration
will help create a significant outlet for existing and new non-affiliated cable
programmers, which now find it difficult to obtain carriage on the platforms of
vertically integrated cable operators.90
3. THE MERGER WILL PROMOTE DEPLOYMENT OF ADVANCED
BROADBAND SERVICES TO ALL AMERICANS
The merger of ECC and Hughes will have a profoundly positive effect on
the deployment of facilities-based, advanced, two-way, broadband services via
satellite to all Americans, especially in rural areas outside the reach of other
broadband alternatives such as DSL and cable modem services. The combined
resources of ECC and Hughes will enable the merged company to accelerate and
better promote the deployment of such services to both rural and urban
markets.91 This will support the Congressional and Commission policy objectives
of providing affordable, high-speed Internet access to all Americans,
particularly those living in rural areas.
--------------------
89 See, e.g., Time Warner Inc., et al.; Prohibited Trade Practices, and
Affirmative Corrective Actions, 62 Fed. Reg. 11202 (Federal Trade Comm'n Mar.
11, 1997) (consent order).
90 Gary Thorne, President of Moviewatch, a programming service expected to
premiere next year, underscored this potential benefit, observing that with the
proposed merger "the additional spectrum at least gives us opportunities to
place networks. Because if there was - if there is - one place where spectrum
eventually does get used up, it's on the satellite side of the world." Linda
Moss, New Nets Squeeze Into Consolidated Market, Multichannel News, Nov. 26,
2001.
91 See Joint Engineering Statement at 14-16.
-43-
The Telecommunications Act of 1996 specifically directs the Commission
to "encourage the deployment on a reasonable and timely basis of advanced
telecommunications capability to all Americans . . ."92 In its most recent
annual report on advanced broadband services, the Commission emphatically stated
its commitment "to ensuring that advanced services become available to all
Americans."93 The Commission went on to note, however, that certain consumers
(e.g., those in rural areas) are "particularly vulnerable" to not receiving such
services.94
Satellite systems are especially well-suited for the provision of
broadband services in rural and other underserved areas and for providing a
critical competitive alternative in suburban and urban environments. Satellite
systems have nationwide coverage areas and are able to offer high-quality,
ubiquitous service as soon as the satellite system is launched and operational.
As such, satellite systems offer instantaneous deployment to low-population
density and low-income areas that may not have enough demand to justify a
terrestrial build-out.95
--------------------
92 See Telecommunications Act of 1996, Tit. VII,ss.706(a), Pub. L. No.
104-104, 110 Stat. 153 (1996), reproduced in the notes following 47 U.S.C.ss.157
(Supp. 2001).
93 See In the Matter of Inquiry Concerning the Deployment of Advanced
Telecommunications Capability to All Americans in a Reasonable and Timely
Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section
706 of the Telecommunications Act of 1996, Second Report, 15 FCC Rcd. 20913,
20917 P. 8 (2000) ("Second Report").
94 Id. at 20918.
95 In addition, satellites offer ubiquitous service at prices that are
distance insensitive, in contrast to the distance-based prices that are
characteristic of many terrestrial networks. These advantages allow satellite
operators to provide first- and last-mile connectivity more cost-effectively
than terrestrial systems, which have historically focused their deployment on
high-density urban areas. See Extending Wireless Telecommunications Services to
Tribal Lands, Notice of Proposed Rulemaking, FCC 99-205, WT Docket No. 99-266,
P. 24 (rel. Aug. 18, 1999).
-44-
In spite of this potential, however true, satellite broadband
deployment to date has been minimal. According to the Second Report, high speed
services over satellite as of 1999 accounted for less than 50,000 lines, with
none of these lines satisfying the Commission's definition of advanced services
due to the limited upstream capabilities of these facilities.96 ECC and Hughes
have made reasonable progress compared to that baseline with early-entry
interactive Ku-band broadband products. However, to date, only one percent of
DBS subscribers has purchased high-speed satellite data services. The current
consumer costs for these products, including equipment and monthly fees, given
the low market penetration and lack of economies of scale, place them out of
reach for many consumers, and make them less competitive with terrestrial
offerings that offer bundled video and IP services in one package.97
As the Commission has recognized, the future of truly seamless
satellite broadband communications lies with the deployment of next-generation
systems in the Ka-band. The Commission has licensed these systems in the hope
that they would usher in "a new age in satellite communications" by providing "a
wide variety of broadband interactive digital services in the United States and
around the world."98 The reality, however, is that deployment of these new
satellite systems is taking longer and requiring more capital than many
companies/licensees have been able to sustain. In the more than
--------------------
96 Id.P. 111.
97 See Joint Engineering Statement at 14-16.
98 See In the Matter of Rulemaking to Amend Parts 1, 2, 21 and 25 of the
Commission's Rules to Redesignate the 27.5-29.5 GHz Frequency Band, to
Reallocate the 29.5-30.0 GHz Frequency Band, and to Establish Rules and Policies
for Local Multipoint Distribution Service and for Fixed Satellite Services, 12
FCC Rcd. 22310, 22310 (1997).
-45-
four years that have elapsed since the Commission's May 1997 authorization of
the construction, launch and operation of Ka-band satellites in the first round
of Ka-band licensing, certain licensees have encountered serious obstacles in
their attempts to marshal the enormous capital and infrastructure required to
construct, launch and operate satellite systems.99 Even well-established
satellite companies such as Lockheed Martin Corporation have backed away from
the challenge of developing a Ka-band system, with its recent announcement that
it will not invest further in its Ka-band venture, Astrolink.100
Each of ECC and Hughes has already made significant broadband
investments and plans future deployment of additional high-speed Internet access
services, but there are tremendous economic and technological hurdles that must
be overcome to do so using satellites.101 For example, in view partly of the
financing community's reluctance to finance such projects, ECC's first Ka-band
satellite, EchoStar 9 (to be launched in 2002), is a cautiously modest project,
equipped with only a limited number of spot beams designed to serve only a few
geographical areas in the United States. And while Hughes will invest
approximately $1.5 billion and has already spent nearly $1 billion to begin
deploying SPACEWAY system spacecraft in early 2003,102 Hughes is not immune to
downturns in the capital markets that could affect the timing of its deployment
or its ability to offer competitively priced offerings. Current investments,
--------------------
99 Global Wireless, Pie in the Sky, September 1, 2001.
100 Decision Near on Astrolink as Lockheed Ends Funding, Communications
Daily, November 1, 2001.
101 See Joint Engineering Statement at 14-16.
102 The first phase of the SPACEWAY system will consist of two satellites
and one spare to serve North America.
-46-
divided between the firms, may lack the economies of scale to compete with
terrestrial services, thus implying higher prices to rural communities and less
competition in non-rural areas.103
The merger will promote exponentially the efforts of both companies to
implement truly competitive next-generation broadband systems in a fashion that,
absent the merger, would likely be significantly less beneficial to the public.
The parties expect that the proposed transaction will allow the two companies to
develop a combined critical mass of broadband subscribers to spread the
tremendous fixed costs that, as noted above, have deterred other satellite
companies from proceeding with broadband satellite systems. The merger will
speed broadband service availability, significantly improve subscriber growth,
and therefore substantially enhance the competitive position of broadband
satellite services vis-a-vis cable operators that can and do offer fully bundled
Internet Protocol/video packages.104 Cross-technology competition always
benefits the public. The lower prices resulting from "intermodal" competition in
urban areas will also benefit rural and underserved users with lower prices.
Second, a greater breadth of service will be implemented by the
combined company more rapidly than would be possible absent the combination, and
thereby will reach the consuming public more quickly. Time to market is of the
essence. If next-generation satellite broadband services reach the market only
after cable and DSL have commanded 60% of potential broadband customers, it is
not clear whether any late-coming service would be able to attract enough of the
remaining customers to become
--------------------
103 See Joint Engineering Statement at 14-16.
104 Id.
-47-
viable. This consideration highlights the more general point, noted above, that
only a narrow window of opportunity is presented for imposing heightened
competitive pressure on cable before cable is able to lock in its dominant
position. The fact that effective competition occurs on the basis of bundles of
offerings, and that broadband is a critical element of the bundle, reinforces
the point further.
The merger will also boost broadband deployment by combining the
Ka-band spectrum resources available to each entity. To be competitive with
cable high-speed access, a satellite broadband platform needs to be capable of
supporting several million U.S. subscribers. Each of ECC and Hughes (including
PanAmSat) now has access to Ka-band spectrum at 3 orbital locations (in ECC's
case, only two of these slots can support a one-dish solution), but Ka-band
spectrum is limited in its ability to provide ubiquitous broadband services as a
result of the Commission's satellite-terrestrial sharing decisions in the 18 GHz
band. Even with the most advanced technology, each orbital location can only
serve a finite number of customers. The number of customers that can be served
is directly proportional to the amount of spectrum that is available. By
combining resources in a merged entity, ECC and Hughes will be better positioned
to create a Ka-band system capable of serving the nation's broadband service
requirements while effectively and competitively challenging cable modem and DSL
services.105
In short, commercialization of the Ka-band has been a cornerstone in
the Commission's laudable effort to promote rapid deployment and competition in
the provision of advanced broadband services and to promote the efficient use of
spectrum
--------------------
105 Id.
-48-
by using the Ka-band to provide a new class of service that is simply not
possible in the crowded Ku- and C-bands used for traditional Fixed-Satellite
Service.106 Approval of the proposed transaction will pave the way for the rapid
deployment of a Ka-band satellite system capable of providing competitive
broadband and other advanced services to all Americans, including those in rural
areas, consistent with the Commission's goals and the public interest.
4. THE PANAMSAT PURCHASE IS IN THE PUBLIC INTEREST
The ECC-Hughes combination will result in a transfer of control of
Hughes' controlling interest in PanAmSat, either to New EchoStar as a
consequence of the merger, or through a separate purchase by ECC of Hughes'
indirect interest in PanAmSat in the event the merger agreement is terminated
under certain circumstances. In either event, the transfer of control of Hughes'
interest in PanAmSat is in the public interest and should be approved.
As outlined above, significant benefits to consumers will result from
combining the FSS resources of ECC and Hughes to bring broadband satellite
services to market faster. The merger will not create any significant overlap in
the provision of FSS services in the same product and geographic markets that
should be of any concern to the Commission.107 ECC does not currently provide
any telecommunications services of the type provided by PanAmSat in the United
States or elsewhere. While Hughes and
--------------------
106 See Rulemaking to Amend Parts 1, 2, 21, and 25 of the Commission's
Rules, 12 FCC Rcd. at 22312.
107 While ECC is a potential competitor in the FSS market, there are a
number of other existing domestic and international FSS service providers (e.g.
Loral/Orion, GE/SES, New Skies, etc.) as well as new entrants.
-49-
PanAmSat own and operate a fleet of FSS satellites and associated earth stations
that are utilized primarily to provide domestic and international satellite
services, respectively, the Commission has already determined that the
consolidation of their businesses and operations under the control of Hughes
serves the public interest.108 Moreover, the combined FSS authorizations held by
all three companies do not create market power in any one company in light of
the large number of FSS satellite licenses held by other non-affiliated
companies.109
III. WAIVER REQUESTS: APPLICATION CUT-OFF RULES AND
ADDITIONAL APPLICATIONS
In connection with the approval of this transaction, the parties
respectfully request that the Commission waive the application of its "cut-off"
rules with respect to all pending applications filed by Hughes or its
subsidiaries (including PanAmSat) and by ECC for additional space station
authorizations, to the extent that those applications have been the subject of
an FCC cut-off notice prior to the closing date.110
Section 25.116 of the Commission's rules provides that any pending
application will be considered "newly filed" and therefore may lose its place in
a processing round if it is modified by a "major amendment" - including an
amendment that specifies a substantial change in beneficial ownership or control
of the applicant.111 An amendment will not be deemed a major amendment, however,
if it reflects a change
--------------------
108 See Hughes Comm., Inc., and Anselmo Group Voting Trust/PanAmSat
Licensee Corp., 12 FCC Rcd. 7534 (1997).
109 See, e.g., TRW, Inc., 16 FCC Rcd. 14407 (Int'l Bur. rel. Aug. 3, 1999);
CAI Data Systems, Inc., 16 FCC Rcd. 14269 (Int'l Bur. rel. Aug. 3, 1999);
110 Attachment G appended hereto provides a consolidated list of pending
applications filed by Hughes and its subsidiaries and by ECC.
-50-
in ownership or control that the Commission determines is in the public interest
and the Commission grants an exemption from the cut-off date.112 The Commission
has traditionally granted such exemptions where the proposed transaction will
serve a legitimate business purpose and will serve the public interest.113
As described throughout this application, the proposed transaction
serves a legitimate business purpose. By combining their satellite assets and
operational resources, the transaction will enhance the combined enterprise's
U.S. and global service capabilities, allowing it to compete more effectively
and efficiently with dominant cable and other MVPD service providers. The
transaction involves - indeed, it is primarily focused upon - operational
satellites. Moreover, the applications currently pending are an integral part of
Hughes' and ECC's expansion plans that were announced well before this proposed
transaction and are essential to the continued competitiveness of their
respective businesses. Under these circumstances, there can be no question that
the transaction serves an independent business purpose and was not entered into
for the purpose of acquiring the pending applications.114 For these reasons, the
Commission should exempt all currently pending applications filed by Hughes and
its subsidiaries and by ECC from any applicable cut-off rules.
--------------------
111 See 47 C.F.R.ss.25.116(b) (2000).
112 See 47 C.F.R. atss.25.116(c)(2) (2000).
113 See, e.g., DirectCom Networks, Inc., DA 01-1683P. 16 (Int'l Bur. rel.
Aug. 3, 2001); Loral Space & Comm. & Orion Network Syst., 13 FCC Rcd. 4592,
4599,P. 17 (1998); Hughes Comm., Inc. & Anselmo Group Voting Trust/PanAmSat
Licensee Corp., 12 FCC Rcd. 7534 (1997); AT&T Corp. & Loral SpaceCom Corp., 12
FCC Rcd. 925 (1997).
114 GE/SES, DA 01-2100 atP. 56; Loral/Orion, 13 FCC Rcd. at 4599.
-51-
IV. SECTION 304 WAIVER
In accordance with Section 304 of the Communications Act of 1934, 47
U.S.C. ss. 304, the Applicants hereby waive any claim to the use of any
particular frequency or of the electromagnetic spectrum because of previous use
of the same, whether by license or otherwise.
V. CONCLUSION
For the foregoing reasons, the Applicants respectfully request that the
Commission grant this application promptly and provide for any other authority
that the Commission finds necessary or appropriate to enable the Applicants to
consummate the proposed transactions.
-52-
Respectfully submitted,
GENERAL MOTORS CORPORATION
By: ____________________________
[name]
[title]
-53-
HUGHES ELECTRONICS CORPORATION
By: ____________________________
[name]
[title]
-54-
ECHOSTAR COMMUNICATIONS
CORPORATION
By: ____________________________
David K. Moskowitz
Senior Vice President and General
Counsel
-55-
ECHOSTAR COMMUNICATIONS
CORPORATION
By: ____________________________
David K. Moskowitz
Senior Vice President and General
Counsel
Dated: November ___, 2001
-56-
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
------------------------------------------
Application of
ECHOSTAR COMMUNICATIONS CORPORATION,
GENERAL MOTORS CORPORATION,
HUGHES ELECTRONICS CORPORATION
Transferors,
and
ECHOSTAR COMMUNICATIONS CORPORATION
Transferee,
For Authority to Transfer Control
------------------------------------------
DECLARATION OF DR. ROBERT D. WILLIG
ON BEHALF OF
ECHOSTAR COMMUNICATIONS CORPORATION, GENERAL MOTORS
CORPORATION, AND HUGHES ELECTRONICS CORPORATION
I. QUALIFICATIONS
1. My name is Robert D. Willig. I am Professor of Economics and Public
Affairs at the Woodrow Wilson School and the Economics Department of Princeton
University, a position I have held since 1978. Before that, I was Supervisor in
the Economics Research Department of
1
Bell Laboratories. My teaching and research have specialized in the fields of
industrial organization, government-business relations, and welfare theory.
2. I served as Deputy Assistant Attorney General for Economics in the
Antitrust Division of the Department of Justice (DOJ) from 1989 to 1991. I also
served on the Defense Science Board task force on the antitrust aspects of
defense industry consolidation and on the Governor of New Jersey's task force on
the market pricing of electricity.
3. I am the author of Welfare Analysis of Policies Affecting Prices
and Products, Contestable Markets and the Theory of Industry Structure (with
William Baumol and John Panzar), and numerous articles, including "Merger
Analysis, IO Theory, and Merger Guidelines." I am also a co-editor of The
Handbook of Industrial Organization, and have served on the editorial boards of
the American Economic Review, the Journal of Industrial Economics and the MIT
Press Series on regulation. I am an elected Fellow of the Econometric Society
and an associate of The Center for International Studies.
4. I have been active in both theoretical and applied analysis of
telecommunications issues. Since leaving Bell Laboratories, I have been a
consultant to AT&T, Bell Atlantic, Telstra, and New Zealand Telecom, and have
testified before the U.S. Congress, the FCC, and the public utility commissions
of about a dozen states. I have been on government and privately supported
missions involving telecommunications throughout South America, Canada, Europe,
and Asia. I have written and testified on a wide range of telecommunications
issues, including
2
the scope of competition, end-user service pricing and costing, unbundled access
arrangements and pricing, the design of regulation and methodologies for
assessing what activities should be subject to regulation, directory services,
bypass arrangements, and network externalities and universal service. On other
matters, I have worked as a consultant with the Federal Trade Commission, the
Organization for Economic Cooperation and Development, the Inter-American
Development Bank, the World Bank, and various private clients. A full list of my
articles and other professional publications and activities is presented in my
curriculum vitae, which is attached as Exhibit A.
II. PURPOSE OF STATEMENT
5. I have been asked by EchoStar Communications Corporation, General
Motors Corporation, and Hughes Electronics Corporation to address certain issues
related to the proposed merger between EchoStar and DIRECTV (a subsidiary of
Hughes), including the impact of the proposed merger on competition and
consumers, and the degree to which there are merger-specific efficiencies that
cannot be achieved in the absence of the transaction.
6. To summarize my analysis, which is based on information obtained
from interviews of senior executives at both EchoStar and DIRECTV as well as
from publicly available information, I conclude that (a) the relevant market for
analyzing a merger between EchoStar and DIRECTV is no narrower than the
Multi-Channel Video Programming Distributor (MVPD) market, and may be broader
than that; (b) the proposed merger offers the possibility of
3
substantial efficiency improvements, especially in radio spectrum use, which
would directly benefit DBS consumers by providing an expanded array of services
(e.g., the provision of local broadcast programming to more metropolitan areas,
more High-Definition Television channels, and more specialized programming), and
also benefit an even broader group of consumers by creating a more effective
competitor to cable providers than either company could be on its own; (c) the
nature of competition in the MVPD market makes it very unlikely that a merger of
EchoStar and DIRECTV would result in higher prices and lower output through
either coordinated behavior among the participants in the MVPD market or
unilateral behavior by the merged firm; (d) the proposed merger is more likely
to be of distinct benefit to rural TV households than to diminish competitive
benefits available to them; and (e) a merger between EchoStar and DIRECTV would
not create or exacerbate any valid concerns the Federal Communications
Commission (FCC) has about vertical integration because EchoStar and DIRECTV do
not have any significant vertical relationships with programmers, and if
anything, the merger could increase competition among program providers.
III. DELINEATION OF RELEVANT MARKET
7. A key step in the competitive analysis of any merger or acquisition
is the delineation of the relevant market(s). In the case of a merger between
EchoStar and DIRECTV, the relevant market is no narrower than the MVPD market,
and may be broader than that.1 The
--------------------
1 The MVPD market includes the cable industry and Direct Broadcasting Satellite
(DBS) services. Other available MVPD services include home satellite dishes
(HSD), multi-channel multi-point distribution service (MMDS), and private cable
or satellite master antenna television (SMATV) systems. See Annual Assessment of
the Status of
4
cable industry has been preeminent in the MVPD market.2 Although Direct
Broadcasting Satellite (DBS) providers have made significant inroads, cable
firms still provided service for more than 77 percent of all MVPD subscribers in
July 2001.3
8. The definition of a "relevant market" for the purpose of
competition analysis of mergers depends crucially on demand substitution
considerations - the degree to which consumers view the products as
substitutable. In particular, the U.S. Department of Justice and Federal Trade
Commission define a market "as a product or group of products and a geographic
area in which it is produced or sold such that a hypothetical profit-maximizing
firm, not subject to price regulation, that was the only present and future
producer or seller of those products in that area likely would impose at least a
`small but significant and nontransitory' increase in price, assuming the terms
of sale of all other products are held constant."4 This ability to raise prices
profitably is a function of the degree to which consumers view two products as
providing similar services or benefits. If one firm came to become the sole
provider of one of the products, but not the other, and if consumers found the
products to be good substitutes, then the presence of the second product would
prevent the firm from realizing an increase in profits by significantly raising
its price. The second product would directly constrain the price of the first
product, and the relevant market would therefore include the second product.
--------------------
Competition in the Market for the Delivery of Video Programming, Seventh Annual
Report, 16 FCC Rcd. 6005, 6008 (2001) ("Seventh Cable Competition Report"), at
P. 3.
2 Seventh Cable Competition Report atP. 5. The FCC stated: "Cable television
still is the dominant technology for the delivery of video programming to
consumers in the MVPD marketplace."
3 See Comments of National Cable & Telecommunications Association, In the Matter
of Annual Assessment of the Status of Competition in the Market for the Delivery
of Video Programming, Notice of Inquiry, CS Docket No. 01-129, (dated August 2,
2001), atP. 7.
4 See Department of Justice and Federal Trade Commission, Horizontal Merger
Guidelines, available at http://www.usdoj.gov/atr/public/guidelines/horiz_book/
toc.html
5
9. The business behavior of the DBS industry indicates, and Federal
government cases and studies, the views of the cable industry, and the views of
independent analysts appear to confirm, that DBS prices are directly constrained
by cable prices. Therefore, the relevant market for evaluating the merger of
EchoStar and DIRECTV includes cable providers.
10. DBS pricing decisions appear to be driven by competition with
cable companies. 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. In
determining their prices, the companies collect detailed data on cable pricing
of many systems and, as necessary, adjust their pricing to remain competitive on
a national basis.5 Moreover, the focus on cable providers, rather than the other
DBS firm, is highlighted by DIRECTV's lack of response to EchoStar's recent "I
Like 9" pricing strategy.6 According to a DIRECTV executive, EchoStar's "I Like
9" package did not affect DIRECTV's pricing decisions because DIRECTV's focus is
on obtaining new customers from cable providers, not the other DBS provider.
--------------------
5 When queried regarding their pricing decisions relative to the other DBS
provider, executives at both EchoStar and DIRECTV indicated that they monitor
the pricing of the other firm, but that such pricing plays little (if any) role
in their own pricing decisions. The executives repeatedly emphasized that the
primary determinant of their pricing was the price required to lure cable
subscribers to DBS.
6 In August 2001, EchoStar began its "I Like 9" pricing strategy. Under the
plan, new customers who purchased an EchoStar satellite TV system for $199 or
more received EchoStar's "America's Top 100" programming package for $9 per
month for one year. (EchoStar usually charges $30.99 per month for the America's
Top 100 programming package.) See EchoStar Communications Corporation, "DISH
Network Announces New `I Like 9' Promotion: Over 100 Channels of Satellite
Television for Only $9 a Month," Press Release, July 31, 2001.
6
11. Consistent with the stated focus of DBS providers on attracting
cable subscribers, it appears based on statements by executives of both EchoStar
and DIRECTV that a majority of new DBS consumers had previously been cable
subscribers. In addition, executives responsible for marketing and advertising
at both EchoStar and DIRECTV emphasize that their campaigns are focused on
convincing extant cable consumers that DBS offers a superior product. This
emphasis on cable customers is corroborated by public statements by the cable
firms themselves. For example, Cablevision observed in a recent FCC filing that:
"The growth in DBS subscribers is due in part to the aggressive
efforts of DIRECTV and DISH network to target Cablevision subscribers
in their market efforts. For example, DISH network's recent ad
campaign featured print ads entitled 'Save Money vs. Cablevision,' and
direct mail, door hangers, and radio live-reads advising consumers
that 'Cablevision is raising your rates again.' DIRECTV's 'Cable
Bites' print ads feature side-by-side comparisons of tier pricing and
number of channels."7
12. DBS pricing strategies thus appear to be directly constrained by
the prices of cable providers, and therefore cable companies are part of the
relevant market for analyzing this proposed merger. Such a position has been
affirmed in a number of different cases and studies by the Federal government.
In its 1998 complaint against Primestar, for example, the Department of Justice
alleged that the MVPD market was the relevant product market and stated that:
"Cable and DBS are both MVPD products. While the programming services
are delivered via different technologies, consumers view the services
as similar and to a large degree substitutable. Indeed, most new DBS
subscribers in recent years are former cable subscribers who either
stopped buying cable or downgraded their cable service once they
purchased a DBS system. Cable and DBS compete by
--------------------
7 See Reply Comments of Cablevision Systems Corporation, In the Matter of Annual
Assessment of the Status of Competition in the Market for the Delivery of Video
Programming, Notice of Inquiry, CS Docket No. 01-129, (dated September 5, 2001),
at 3.
7
offering similar packages of basic and premium channels for a monthly
subscription fee."8
13. The Justice Department noted that the cable industry had a
distinct advantage because it could provide consumers with local broadcast
services in local markets (the so-called local-into-local issue). Since the
Justice Department's Primestar complaint, the Congress has allowed DBS providers
to provide local-into-local services, which makes cable and DBS even closer
substitutes than that suggested by the quotation above.
14. In its annual analysis of competition in video programming, the
Federal Communications Commission (FCC) groups the cable industry and the DBS
industry in the MVPD market.9 In addition, the FCC concluded that "DBS
distributors compete with a number of other MVPDs using different transmission
media" and that "competitors in the MVPD market include cable operators, DBS
operators," and other technologies, such as wireless cable operators.10
--------------------
8 See United States v. Primestar, Inc., Civil No. 1:98CV01193 (JLG) (D.D.C.)
(May 12, 1998), atP. 63.
9 See Seventh Cable Competition Report at P. 61. The FCC has also concluded that
DBS and cable services are substitutes. In its 2000 Report on Cable Industry
Prices, the FCC concluded that DBS puts statistically significant downward
pressure on demand for cable services. The report continues to state that "DBS
is a substitute for cable services. 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 P. 53.
10 See In re Application of MCI Telecommunications Corp. and EchoStar 110 Corp.,
File No. SAT-ASG-19981202-00093, FCC 99-109 (released May 19, 1999), at P. 15
and footnote 40. The U.S. Department of Justice (DOJ) agreed with the FCC's
finding in the case. Specifically, the DOJ stated that "the transaction will
greatly increase EchoStar's capacity to transmit video programming and will
enhance its ability to compete aggressively and effectively against other
distributors of multichannel video programming, including the cable companies
that dominate these distribution markets." See Department of Justice, "Justice
Department Urges FCC To Approve Direct Broadcasting Satellite Deal," News
Release, January 14, 1999. Similarly, in response to a General Accounting Office
study on the competition between DBS and cable, the FCC filed a comment that it
was concerned
8
15. Although not itself a proof that cable prices constrain DBS
prices, further evidence is provided by the fact that the cable industry itself
views DBS as a significant competitor.11 The CEO of Cox Communications, Inc.,
one of the largest cable providers in the nation, argued, "The satellite
companies are very real, very serious competitors for our core business, and we
take them extremely seriously."12 Similarly, in testimony to the Senate
Judiciary Committee, National Cable and Telecommunications Association President
and CEO Robert Sachs stated that:
"Before 1996, cable operators faced video competition primarily from
over-the-air television, C-band satellite receivers, video rentals,
and movie theaters. Direct broadcast satellite (DBS) competition has
changed that forever. Being digital from the start, and having the
advantage of substantially greater channel capacity, DBS spurred cable
operators to replace hundreds of thousands of miles of coaxial cable
with fiber optics so that they too could offer consumers hundreds of
channels of digital video and audio services. In responding to
vigorous competition from DBS, cable operators have made enormous
investments in not just plant but computers, billing systems,
personnel, and training - resulting in significant improvements in the
quality of service we provide to our customers."13
--------------------
about the study's results because the FCC believed "that DBS penetration not
only influences cable rates but also is influenced by them." See Comments from
the Federal Communications Commission in General Accounting Office, "The Effect
of Competition From Satellite Providers on Cable Rates," July 2000, page 40.
11 Further confirmation that cable and DBS compete within a single market comes
from Wall Street analysts. A number of analyst reports explain changes in DBS
subscriber growth by actions taken by cable companies, and vice versa. For
example, Merrill Lynch recently cited "aggressive digital cable rollouts" as a
reason for the decline in projected DBS subscriber growth. See Merrill Lynch:
"Eye in the Sky: 3Q01 Preview," October 8, 2001, page 2. Similarly, Goldman
Sachs argued that "Increased competition from cable operators not only has the
potential of increasing churn of DIRECTV ("winning back" cable subscribers), but
also affecting the amount of gross subscribers the company adds." See Goldman
Sachs, "Hughes Electronics Corp.," September 18, 2001, page 2.
12 See Christopher Stern, "Cable's Satellite Wars: Communications Giants Are
Waging A Multibillion-Dollar House-to-House Battle for Subscribers," The
Washington Post, August 13, 2000, page H01. 13 Robert Sachs, Testimony Before
Subcommittee on Antitrust, Business Rights, and Competition, Committee on the
Judiciary, United States Senate, April 4, 2001, pages 2-3. The National Cable
and Telecommunications Association (NCTA) further argued, "Today consumers
nationwide may turn to direct broadcasting satellite ("DBS") as a fully
substitutable alternative to cable for MVPD service." See Reply Comments of
National Cable & Telecommunications Association, In the Matter of Annual
Assessment of the Status of Competition in the Market for the Delivery of Video
Programming, Notice of Inquiry, CS Docket No. 01-129, (dated September 5, 2001),
at 1-2. In addition, Daniel Brenner of NCTA wrote to the General Accounting
Office that "Cable operators have responded to competition from DBS in a variety
of ways that increase the value of their services to customers." These include:
(1) DBS's far greater channel capacity has spurred cable operations to increase
the number of
9
16. Cable companies have also stated that their pricing decisions and
advertising strategies are influenced by competition from DBS providers. AT&T
has argued that, "Cable operators' behavior reflects the significant marketplace
constraints imposed by DBS."14 In addition, AT&T Broadband has focused entire
advertising campaigns on luring DBS customers back to digital cable -
underscoring AT&T's apparent belief that digital cable is a substitute to DBS.15
Furthermore, in explaining a recent pricing decision, a general manager of a New
England cable company said that "We have sought to strike a balance between the
need to offset some of our increased programming costs, and the need to price
our products competitively against DIRECTV and other satellite providers."16
17. Based on the evidence presented above, I conclude that the cable
industry should be included in the relevant market for analyzing a merger
between EchoStar and DIRECTV. Moreover, markets are dynamic and the boundary of
the market in which DBS providers compete with cable operators may be expanding.
For example, as bundled packages with digital
---------------------
channels they provide; (2) cable operators have improved reliability and added
new services; and (3) operators have introduced new program packaging options.
See Comments from the National Cable and Telecommunications Association in
General Accounting Office, "The Effect of Competition From Satellite Providers
on Cable Rates," July 2000, page 44.
14 See Comments of AT&T Corporation, In the Matter of Annual Assessment of the
Status of Competition in the Market for the Delivery of Video Programming,
Notice of Inquiry, CS Docket No. 01-129, (dated August 3, 2001), at 12.
15 In a November 2001 AT&T Broadband television commercial, a woman states that
"so, with this basic satellite plan, we have to share a receiver? The service
man replies, "well, look on the bright side, ma'am. While your husband's
watchin' sports in the den, you'll have sports in your room, you'll have sports
in the kids' room, and you have sports right here in the kitchen. Be like a
sports bar." The announcer then says, "with satellite, additional TVs are a
problem. Different channels on different TVs at the same time. No extra
equipment to buy. Problem solved. Digital cable from AT&T Broadband." Campaign
Media Analysis Group, "AT&T Broadband Sports," November 2001.
16 Lisa Marie Pane, "Cox To Increase Cable Rates Statewide," Associated Press
State and Local Wire, July 10, 2001.
10
television, high-speed Internet access, and video-on-demand become relatively
more important in the MVPD market, the participants in the relevant market may
well grow beyond the historical MVPD participants - which include cable firms,
DBS providers, "overbuilders," C-Band providers, private cable or satellite
master antenna television (SMATV) systems, and multi-channel multi-point
distribution service (MMDS) providers - to include DSL providers, incumbent
phone companies, and cellular phone providers. As technologies evolve, the
distinction between "video" and "data" services may become increasingly blurred
(e.g., video could increasingly be delivered over the Internet, and broadband
data services could increasingly be delivered via satellite). To be sure,
predicting the future course of the industry is extremely difficult and the
market structure may develop in ways that are unanticipated today. Nevertheless,
cable and DBS operate in a dynamic market and the relevant market may extend
beyond the current MVPD industry.
18. Finally, for the purposes of evaluating the competitive impact of
the proposed merger, the national pricing for monthly subscription and
programming fees by both EchoStar and DIRECTV suggest that a national-level
analysis is the most appropriate (see below for further discussion of the
competitive effects of the proposed merger).
IV. MERGER-SPECIFIC EFFICIENCIES
19. The evidence that I have examined shows that the merger offers
substantial efficiency benefits, especially in radio spectrum use.
11
20. Spectrum has become an increasingly scarce resource as the number
of commercially viable uses of the spectrum has expanded over the past several
decades. Both DBS firms indicate that each is making full use of its current
spectrum to provide its existing services, and the prospects for the DBS
industry to receive additional spectrum in the next few years are small.
Therefore, improving the efficiency with which the DBS sector uses its spectrum
is the only viable way for additional spectrum-intensive services to be provided
to DBS customers. Such efficiency improvements would directly benefit DBS
consumers by providing an expanded array of services, and also benefit a broader
number of consumers by increasing competition with the cable industry. Both
EchoStar and DIRECTV emphasize that the potential for additional improvements in
spectrum efficiency by each firm individually is minimal. Future spectrum
efficiency improvements must therefore reflect the elimination of redundant DBS
spectrum use or some technological advance that is not currently anticipated by
the DBS industry.
21. In the DBS industry, most of the communication is one-way and the
marginal consumer requires virtually no additional spectrum.17 In other words,
unlike some other uses of spectrum, doubling the number of DBS consumers
receiving one-way services requires essentially no increase in spectrum.
Currently, EchoStar and DIRECTV each broadcast many identical cable channels and
broadcast station feeds - that is, they both use spectrum for identical
programming (e.g., CNN, HBO, local network affiliates, etc.). Such programming
could be
--------------------
17 The trivial increase in spectrum requirements reflects the need to transmit
instructions to the set-top box regarding the relevant service package. The
amount of spectrum required for such purposes is extremely small.
12
eventually provided with roughly half the current spectrum if EchoStar and
DIRECTV were combined. And the spectrum ultimately "freed up" by a merger of
EchoStar and DIRECTV would thus allow "New EchoStar" to provide new services and
other content - especially local channels in many local communities that would
not otherwise receive them - that DBS executives emphasize would not be possible
in the absence of the merger.
22. Increased spectrum efficiency obtained through a merger of
EchoStar and DIRECTV would benefit consumers in a variety of ways.18 Several
broad categories of benefits are apparent. The most important benefit may be
that additional DBS spectrum efficiency would facilitate new and improved
services (such as greater geographic coverage of local channels, more specialty,
ethnic, and foreign language programming, interactive television services, and
video-on-demand) that would help DBS more vigorously compete against the cable
industry's ability to upgrade unilaterally its bandwidth to provide these
services on a digital-cable tier.
23. Examples of the potential consumer benefits that would result from
spectrum made available through the merger include improved and expanded
programming choices:
O More local channels to more metropolitan areas. New EchoStar
believes it can provide local broadcast programming for 100 or
more communities (while fulfilling
--------------------
18 As the Joint Engineering Statement attached to this application notes, many
merger-specific benefits will occur almost immediately, while others will take
some period of time to be fully achieved. For example, New EchoStar will need to
transition to a common set-top box platform to capture the full benefits of
eliminating the current duplicative use of spectrum. The transition to a common
set-top box platform, however, will take some time and cost to implement. As a
result, the full merger-specific efficiencies will not be achieved until the
transition to a common set-top box platform is complete. See the Joint
Engineering Statement for further discussion of this issue.
13
the "must-carry" rules), compared to roughly 40 overlapping
communities that the companies serve now.19 Providing local
programming is spectrum intensive, which limits the ability of
current DBS providers to deliver such service outside the largest
metropolitan areas. Both EchoStar and DIRECTV are launching new
"spot beam" satellites to satisfy the must-carry rules for the
roughly 40 local metropolitan areas that are already served. To
use the spot beam technology, each company has to set aside a
certain amount of spectrum (and a corresponding amount of
transponder capacity) for regional use. Further upgrades using
spot beams to serve even more local areas would require the
sacrifice of yet more spectrum, as well as the substantial costs
of launching more satellites with spot beam transponders for less
potential return as they attempt to serve less populated
communities. With only a fixed amount of spectrum (and
transponder capacity), each company faces the opportunity cost of
giving up frequencies that would otherwise carry satellite
networks that are necessary to compete with cable. EchoStar and
DIRECTV executives indicated that providing local programming is
crucial to encouraging subscribers to switch to DBS from cable;
EchoStar and DIRECTV executives added that their internal data
show that subscriber growth in areas where local programming is
now available has been higher than that in areas without such
local programming. The lack of such services in all
--------------------
19 EchoStar currently provides local broadcasting services in 36 metropolitan
areas, while DIRECTV provides local services in 41 communities. The communities
with local broadcasting service overlap significantly: both firms currently
provide "local-into-local" service in 35 of the same metropolitan areas.
14
but the largest metropolitan areas attenuates the competitive
pressures imposed on cable providers by the DBS industry.20
O More HDTV channels. New EchoStar has committed to use a portion
of the spectrum freed up by the merger to provide consumers with
additional high-definition programming. Each company currently
offers only two to four channels of HDTV programming, largely
because HDTV is extremely spectrum intensive.21 By freeing up
additional spectrum, the combined entity will be able to offer an
expanded number of HDTV channels. This commitment of spectrum to
HDTV programming will provide additional incentives for consumers
to invest in HDTV hardware, and for producers to invest in HDTV
content. It may thus help to jump-start the sluggish HDTV
adoption process.
O More diverse programming. Spectrum efficiencies will also permit
expanded specialized programming. Such programming could include
ethnic, foreign language, educational, or other programs that
appeal to specialized audiences.
--------------------
20 See Seventh Cable Competition Report at P. 13. The FCC stated that
"[c]onsumers historically reported that their inability to receive local signals
from DBS operators negatively affected their decision as to whether to subscribe
to DBS." Goldman Sachs added that, "The ability to offer local-into-local
programming is extremely important for DIRECTV and DISH Network because it
enables the companies to more effectively compete with cable operators." See
Goldman Sachs, "Satellite Communications: DBS Operators," December 18, 2000,
page 26.
21 EchoStar currently offers four HDTV channels (including a pay-per-view
channel), while DIRECTV offers two channels. In addition to a HDTV HBO channel,
DIRECTV provides a combination of live and taped sports and entertainment
programming and pay-per-view programming on one of its HDTV channels. (The
sports and entertainment programming is broadcast for roughly 18 hours per day,
while pay-per-view is available for approximately six hours per day.)
15
24. Another important benefit is that the merger may spur further
innovations in DBS product offerings. New EchoStar's larger subscriber base
would significantly increase the ability of the firm to make the investments
necessary to develop advanced services, such as price-competitive high-speed
Internet access, and to achieve the scale necessary to spread the fixed costs
among a sufficient number of subscribers.22 These new services could include:
O Competitive broadband services. A larger customer base would
allow New EchoStar to increase the speed of deployment and the
scale of investment in satellite-based, high-speed Internet
access systems that could effectively compete with cable modem
and DSL services. Industry executives believe that current
satellite-based, high-speed Internet offerings are not
competitive with cable modem and DSL services for a variety of
reasons. For example, given current spectrum allocations and
technological constraints, executives stated that the number of
subscribers that could be provided broadband service by either
EchoStar or DIRECTV was significantly below the subscriber levels
needed to achieve a price-competitive satellite-based system.
Because of its broader base of DBS subscribers, however, the
combined entity would be in a better position to develop a
satellite-based broadband system that achieves sufficient
economies of scale to compete with cable modem and DSL services.
Such economies of scale could be captured by the proposed merger
because satellite-based broadband service requires a "redundancy"
system, in case a primary
--------------------
22 The FCC has recognized that firms that can take advantage of scale economies
by spreading development costs over a larger customer base are more likely to
invest in infrastructure. See Competition, Rate Regulation, and the FCC's
Policies Relating to the Provision of Cable Television Services, Report, 5 FCC
Rec. 4962, 5003, at P. 71:
16
satellite fails, and doubling the number of subscribers does not
require a doubling of the number of back-up satellites. The
acceleration of competitive satellite-based broadband services
would benefit consumers across the United States by providing an
alternative to cable modem and DSL services; it would also be
particularly beneficial to those in areas - such as rural America
- without access to cable modem or DSL service. (See below for
further discussion of the competitive impact on the high-speed
Internet access market and the consumer benefits to rural areas.)
O New services. The elimination of spectrum redundancies will allow
New EchoStar to provide a variety of services, including
interactive offerings and the necessary bandwidth to provide
video-on-demand using personal video recording devices. DBS
providers are currently adding these options, but spectrum
constraints limit their ability to expand the services to include
more choices and more features. For example, as I understand it,
spectrum constraints limit the "near" video-on-demand offerings
of DBS providers to the top 10 or 20 movies; additional bandwidth
would allow New EchoStar to significantly expand such services to
include a larger library of movies and potentially "true"
video-on-demand. Because digital cable has more bandwidth
available and is therefore able to offer such advanced services,
DBS providers must offer a similar set of services to be
competitive.
25. The merger would also reduce per subscriber programming costs
through the
--------------------
"[I]ncreased concentration [in the cable industry] has provided economies of
scale and fostered program investment."
17
expansion of the subscriber base. According to executives at EchoStar and
DIRECTV, programming costs account for between one-third and two-fifths of the
firms' expenses of providing service, and a significant share of MVPD/programmer
contracts - including many existing contracts between programmers and either
EchoStar and DIRECTV - include volume discount clauses. Since the merger will
increase the customer base of New EchoStar substantially, such volume discount
clauses would allow the combined entity to benefit immediately from lower
programming costs. The larger customer base would also allow New EchoStar to
obtain future programming contracts that are more consistent with the prices
paid by the largest cable operators, such as AT&T and Time Warner Cable. Neither
DBS company believes it would be able to achieve such programming cost savings
on its own.
26. Another obvious area of cost savings involves operational costs. A merger
would produce significant savings in key business areas, such as uplink and
backhaul expenditures and satellites (satellites typically cost between $220
million and $300 million to construct, launch, and insure).23 One other
potential long-term efficiency gain involves the standardization of set-top
boxes. Such standardization could reduce manufacturing costs through volume
purchasing, allow easier integration into TVs and other hardware, and facilitate
the production of new technologies. Moreover, the merger would produce
administrative cost savings.
--------------------
23 The costs of construction, launch, maintenance, and insurance of the "spot
beam" satellites do not depend on the number of consumers receiving the signal.
A combined entity, with a larger customer base in each local area, would be more
willing to assume the fixed costs associated with the required satellites.
18
V. COMPETITIVE EFFECTS
27. The characteristics of the MVPD market and of DBS firms, in
particular, make it very unlikely that this merger will result in higher prices
and lower output through either coordinated behavior among the participants in
the MVPD market or unilateral behavior by the merged firm.
28. A price increase as a result of coordinated interaction is
unlikely following the proposed merger, in part due to the way the DBS and cable
industries are structured. Both DBS firms currently set their monthly
subscription and other programming fees on a national basis;24 both firms'
executives indicate that allowing the price to vary on a regional or local basis
would be impractical.25 First, customers not adequately served by cable are
geographically dispersed.
--------------------
24 In 1992, DIRECTV entered into an agreement with the National Rural
Telecommunications Cooperative (NRTC). As part of the agreement, which was
substantially revised in 1994, NRTC paid more than $100 million and, in
exchange, received an exclusive right in certain regions of the country to
distribute most DIRECTV programming transmitted on 27 of the 32 frequencies at
the 101(0) slot. (According to NRTC, it holds such exclusive distribution rights
for eight percent of television households.) The influx of resources for DIRECTV
was important in the early 1990s because it provided a rural distribution
network and, as the Chief Executive Officer of NRTC has noted, it helped to
"capitalize the launch of the first DBS service in America." See, for example,
B.R. Phillips, Chief Executive Officer of NRTC, Testimony Before Subcommittee on
Courts and Intellectual Property, Committee of the Judiciary, United States
House of Representatives, February 4, 1998. As a result of the agreement, for
customers in "NRTC areas," prices for the DIRECTV programming exclusively
distributed by NRTC and its affiliate entities are determined by NRTC and its
affiliate entities; prices for all other programming distributed by DIRECTV
(e.g., premium channels) are determined by DIRECTV on a national basis. DIRECTV
and NRTC are currently engaged in a contractual dispute regarding the scope of
NRTC's exclusive distribution rights. New EchoStar will commit to continued
uniform and non-discriminatory pricing and service throughout the country.
25 Another element of obtaining DBS service is the upfront cost to the
subscriber for the equipment and installation. Local variations for such costs
are more practical, and both firms, in fact, have offered temporary local
promotions on equipment and installation in the past. However, these local
promotions have been offered as a reaction to cable firm activities (e.g., a
cable price increase) in particular local areas; according to executives of both
firms, these promotions have been aimed at cable subscribers - and not in
response to activity by the other DBS provider. Furthermore, several factors
suggest that New EchoStar would not want to, and likely could not, raise
equipment and installation prices in specific regions above their competitive
levels, especially for any extended period of time. First, consumers could
purchase their equipment at any location - including over the Internet - making
extended regional price differentiation difficult, if not impossible, to
implement. Second, EchoStar and DIRECTV executives
19
Thus, it would be extremely difficult to segment such customers from others.
Second, pricing by region or local area would require modifications to the
companies' billing and customer support systems; would require retraining of
customer service representatives; would limit the companies' ability to engage
in national price advertising, including advertising and marketing over the
Internet; and may cause customer confusion and dissatisfaction. New EchoStar has
committed to maintaining its policy of uniform national pricing for its
programming.
29. To set their national prices, DBS firms examine the prices charged
by the various cable systems around the country and use these cable prices as a
benchmark for setting their prices. Cable firms, on the other hand, set price on
a local franchise-by-franchise basis, and prices can differ depending on many
factors that are specific to the market in which the franchise is located.
Although New EchoStar will face competition from at least one cable firm in any
particular franchise area, tacitly reaching an agreement on a coordinated price
is not simply a question of reaching an agreement with one other firm. New
EchoStar will set its price based on a function of what cable firms are charging
in the various franchise areas. In order to elevate price, the various cable
multiple system operators (MSOs), each of whom owns systems in a mix of areas,
would somehow need to raise price across their range of systems. From the
perspective of the cable firms, the optimal price for New EchoStar to charge
would likely differ from firm to firm, making an agreement all the more
difficult to reach. Thus, a coordinated price increase after the merger would
require an agreement among multiple cable firms and New EchoStar, not just an
agreement between two firms.
--------------------
emphasize that they have reduced upfront costs in the past to attract customers,
and that they would continue to offer promotions and other incentives so that
New EchoStar's upfront consumer costs would be low enough to attract
20
30. The danger of a coordinated price increase is further attenuated
by the fact that many of the major metropolitan areas have more than one
non-cable, non-DBS MVPD provider.26 For example, in New York City, Cablevision
has argued that it "faces significant competition from various providers of
SMATV service.... Terrestrially, RCN also provides service throughout much of
the New York metropolitan area, and boasts of its 'substantial growth' in the
New York market."27 In Washington, DC, Starpower - a joint venture between RCN
and the local utility - is competing against Comcast, the DBS providers, and
SMATV entities.28 More broadly, one overbuilder (RCN) is currently providing
service in seven of the ten largest metropolitan telecommunications markets.29
31. Furthermore, a unilateral price increase is unlikely after this
merger for two principal reasons. First, under current market conditions, I
understand that in response to any price increase by either of the DBS firms,
subscribers who would leave DBS for cable would substantially outnumber the
subscribers who would leave one DBS firm for the other DBS firm. As noted above,
executives at both EchoStar and DIRECTV indicated that the majority of
subscribers to DBS service were previously cable subscribers and the majority of
subscribers that
--------------------
cable consumers to DBS.
26 These non-cable, non-DBS providers include "overbuilders," multi-channel
multi-point distribution service (MMDS), private cable or satellite master
antenna television (SMATV) systems, and incumbent local exchange carriers (ILEC)
using Very High-Speed Digital Subscriber Lines (so-called VDSL).
27 See Reply Comments of Cablevision Systems Corporation, In the Matter of
Annual Assessment of the Status of Competition in the Market for the Delivery of
Video Programming, Notice of Inquiry, CS Docket No. 01-129, (dated September 5,
2001), at 3-4.
28 See Reply Comments of Comcast Corporation, In the Matter of Annual Assessment
of the Status of Competition in the Market for the Delivery of Video
Programming, Notice of Inquiry, CS Docket No. 01-129, (dated September 5, 2001),
at 10-11.
29 See "RCN Announces Third Quarter Results," Press Release, November 7, 2001.
21
discontinue one DBS service choose to subscribe to cable rather than to
subscribe to the other DBS service. The smaller the diversion of subscribers
from one DBS firm to the other, the smaller would be the expected price increase
from conceivable unilateral competitive effects after the merger.30
32. Second, the merger could reduce marginal costs through a reduction
in the cost of programming per additional subscriber. Even if some subscribers
would be diverted from one DBS firm to the other after a price increase, a
reduction in marginal costs resulting from the merger could cause the DBS firms
to lower their price.31
33. In addition, the merger could serve to promote competition by
providing New EchoStar with the bandwidth and economies of scale to match the
new bundled services offered by cable companies. According to executives at both
EchoStar and DIRECTV, the introduction of digital cable - which reduces or
eliminates the historical quality and capacity advantages of DBS over (analog)
cable - combined with the possibility of bundling high-speed Internet access,
video-on-demand, and other advanced services is a competitive threat to future
DBS subscriber growth.32 Given spectrum constraints, DBS firms are unable to
fully match the existing and potential services offered by cable companies that
can unilaterally increase their bandwidth. The danger is therefore that DBS will
become less competitive with the leading cable providers. As
--------------------
30 Robert D. Willig, "Merger Analysis, Industrial Organization Theory and Merger
Guidelines," Brookings Papers on Economic Activity: Microeconomics, 1991 at 299.
31 Carl Shapiro, "Mergers with Differentiated Products," Remarks before the
American Bar Association, 1995.
32 For example, Goldman Sachs concluded that "We see the bundling of [cable]
services as the most significant threat to DBS because of its potential not only
to slow gross additions, but also to win back subscribers (seen through higher
churn). Both have the obvious effect of slowing net subscriber growth for DISH
Network and DIRECTV." See Goldman Sachs, "Satellite Communications: DBS
Operators," December 18, 2000, page 1.
22
discussed above, New EchoStar has committed to providing more local channels,
more diverse programming, and more advanced services. In addition, executives at
the two DBS firms believe that the proposed merger will enable them to develop a
more competitive satellite-based, high-speed Internet access option that will
help New EchoStar better compete with digital cable's bundled offerings. The
combined entity could therefore represent a more effective competitor to the
dominant cable firms than the combined competitive impact from each DBS provider
on its own.
34. Finally, satellite and uplink infrastructure require substantial
investments. By contrast, the marginal costs of providing additional customers
with service are relatively low. Such a cost structure would provide New
EchoStar with strong incentives to spread its fixed costs among a wider
subscriber base. Executives at both firms emphasize that New EchoStar's
incentives are to attract new customers before digital cable becomes further
entrenched, since consumers who commit to a digital cable/cable-modem bundle may
perceive fewer benefits to moving to DBS (relative to analog cable customers).33
The dynamic incentive to expand the customer base of DBS service will continue
after the proposed merger.
Competitive issues in rural America
35. A number of analysts have raised concerns about the impact of an
EchoStar-DIRECTV merger on rural consumers. The concern appears to arise from
the perception that
23
cable is not available in some rural areas, and therefore that the proposed
merger would create a monopoly in the rural MVPD market. Based on interviews
with top executives of both firms and a review of publicly available industry
data, such concerns appear to be unfounded for three reasons.
36. First, nearly every household in America with a television is
passed by cable: according to the FCC, 96.6 percent of TV households are passed
by cable.34 After the merger, the vast majority of households would thus
continue to have the benefit of direct price competition described earlier.
Furthermore, those households not passed by cable are geographically diverse -
that is, they do not appear to be concentrated in any specific areas. Even in
the absence of its national pricing commitment, it would be very difficult for
New EchoStar to price discriminate in its monthly subscription and other
programming fees against households that are not passed by cable (given the
geographical mixing of those with and without cable access and the other
impediments to price discrimination for DBS service described above).35
--------------------
33 Goldman Sachs similarly notes that "As cable operators upgrade their networks
and roll out new service, cable subscribers will have less incentive to 'churn'
to DBS." See Goldman Sachs, "Satellite Communications: DBS Operators," December
18, 2000, page 33.
34 A debate exists about precisely the correct way to calculate the percentage
of households passed by cable. See Seventh Annual Report at P. 18. See also U.S.
Department of Commerce and U.S. Department of Agriculture, Advanced
Telecommunications in Rural America: The Challenge of Bringing Broadband Service
to All Americans, April 2000 at 19. I have cited the most commonly used
statistic, which is also the principal statistic cited by the FCC in the current
and past reports on competition in the market for the delivery of video
programming.
35 As noted in footnote 25, the cost of equipment and installation has on
occasion varied across markets as a result of targeted local promotions. But, as
discussed above, several factors suggest that the prices of equipment and
installation would not rise above their competitive levels following the
proposed merger. Furthermore, rural subscribers should be able to take advantage
of retail subsidies that are made through geographically diverse retail chains
or over the Internet. In other words, rural customers would likely be no worse
off following the merger, and may benefit from more intense competition between
New EchoStar and cable companies; rural customers would also benefit from the
above-mentioned expansions of DBS programming and services that would otherwise
not be available in the absence of the merger.
24
37. Second, many rural consumers not passed by cable would still enjoy
some choice of MVPD providers. For example, C-Band Satellite or Home Satellite
Dish (HSD) has nearly one million subscribers.36 New C-Band digital equipment
continues to be developed and made available to customers in order to access and
view digital programming. Companies like Motorola have developed C-Band products
to compete directly with DBS and allow subscribers to receive digital signals.37
38. Third, New EchoStar has committed to maintaining its national
pricing plan. The implication of such a commitment is that MVPD prices for rural
consumers will be driven by competition in urban areas. As noted above,
executives at both EchoStar and DIRECTV view a national pricing strategy as
providing cost savings and advertising benefits, and contributing to higher
levels of customer satisfaction. This history suggests, and New EchoStar's
stated commitment underscores, that national pricing would be perpetuated.
39. In addition, as noted above, with national pricing, monthly
service prices are not likely to rise as a result of the merger. According to
executives at EchoStar and DIRECTV, these prices are generally driven by the
prices set by the major cable MSOs throughout the country, which often face
competition from overbuilders and other MVPD providers. Such
--------------------
36 See Sky Research, Volume 8, Number 11, November 2001, page 3.
37 It is important to note that C-Band has high up-front costs, with dish costs
averaging $2,000. However, more than a hundred broadcast channels are available
for free, and a package of two movie channels and 50 basic services can be
purchased for as low as $30 to $35 per month. See Orbit magazine's C-band
Frequently Asked Questions (FAQ) at http://www.orbitmagazine.com/orbfaqs.htm.
Motorola's 4DTV offers nearly 300 free channels. For $30 per month, 4DTV offers
59 subscription channels and 22 movie channels, in addition to the free
channels. See http://www.4dtv.com/4DTV/what_4dtv.html.
25
pricing pressure would not change after a merger of EchoStar and DIRECTV.
40. Thus, it is more likely that the merger would be of distinct
benefit to rural TV households than that it would diminish competition's
benefits available to them. First, many of the new programming services that
could be potentially created from spectrum freed up by the merger would benefit
all customers, including rural customers. Second, as emphasized above, the
proposed merger will allow the combined entity to have the subscriber base and
the spectrum needed to offer a more price-competitive, satellite-based broadband
service to rural consumers. For many such rural consumers, satellite broadband
is the only feasible means of obtaining high-speed access to the Internet. In
evaluating the impact of the proposed merger on rural consumers, it is therefore
significant to consider the benefits of expanded broadband delivery.
VI. VERTICAL INTEGRATION
41. In the past, the FCC has raised the concern that vertical
integration between video programmers and MVPD providers may "deter competitive
entry in the video marketplace and/or limit the diversity of programming."38 At
the same time, the FCC has instituted program access rules, with the stated
purpose of preventing vertically integrated MVPDs from treating non-integrated
MVPD providers in a discriminatory fashion to the detriment of competition in
the MVPD market.39 Put simply, the concern is that an integrated entity (a)
would not want to carry programming that competes with programming it owns or
(b) would not make available
--------------------
38 See Seventh Annual Report at P. 172.
39 Id at P. 178.
26
programming it owns to competing MVPD providers on reasonable commercial terms.
This merger, however, clearly does not create or exacerbate any concerns the FCC
might have about vertical integration because EchoStar and DIRECTV do not have
any significant vertical relationships with programmers.40
42. If anything, this merger may increase competition among program
providers. The FCC has noted that many programming services have been planned,
but have not been able to launch. One factor that has limited the launch of
these new networks is the lack of channel capacity, particularly among analog
cable systems.41 The merger between EchoStar and DIRECTV, as stated above, will
remove duplication among the two services and thereby provide bandwidth to be
used as vehicles to launch new programming services.42 In addition, the
approximately 15 million subscribers of the combined entity should provide an
attractive platform for launching new programs, providing an interested
programmer with a large percentage of the subscribers it would need to create a
viable network.43 New EchoStar would be unaffiliated with any programming
interests, and therefore, would not face any disincentives to carry new
programming that its subscribers would value. Therefore, this merger could
result in an increase in the programming offerings available to consumers.
--------------------
40 News Corporation has an ownership interest in EchoStar that it has been
selling off over time. It currently has less than a five-percent interest in
EchoStar.
41 See Seventh Annual Report at P. 176.
42 For example, the President of Moviewatch, a network that will be launched
next year, recently stated that one advantage of an EchoStar and DIRECTV merger
is that "additional spectrum... gives us opportunities to place networks." See
"New Nets Squeeze Into Consolidated Market," Multichannel News, November 26,
2001, page 60.
43 This estimate of the combined subscriber base of New EchoStar excludes the
subscribers of NRTC and its affiliate entities who receive DIRECTV programming.
27
VII. CONCLUSION
43. The proposed merger of EchoStar and DIRECTV offers the possibility
of substantial efficiency improvements, especially in radio spectrum use, which
would directly benefit DBS consumers by providing an expanded array of services
(e.g., the provision of local broadcast programming to more metropolitan areas,
more High-Definition Television channels, more interactive services, and more
specialized programming), and also benefit a broader number of consumers by
increasing competition with the cable industry. These efficiencies do not appear
to be available without the merger.
44. Furthermore, the nature of MVPD market competition makes it
unlikely that a merger of EchoStar and DIRECTV would result in higher prices and
lower output through either coordinated behavior among the participants in the
MVPD market or unilateral behavior by the merged firm. Indeed, the proposed
merger could serve to promote competition by providing New EchoStar with the
bandwidth and economies of scale to match the new bundled services offered by
cable companies. The proposed merger of EchoStar and DIRECTV is thus in the
public interest.
ATTACHMENT B
JOINT ENGINEERING STATEMENT IN SUPPORT OF TRANSFER OF CONTROL APPLICATION
This joint engineering statement is being submitted to the Federal
Communications ("FCC") by EchoStar Communications Corporation ("ECC") and Hughes
Electronics Corporation ("Hughes") in support of their Consolidated Application
for Authority to Transfer Control of various FCC licenses. This statement will
address some of the more significant efficiencies that will be achieved by the
proposed merger of ECC and Hughes.
Transition Plans. ECC and Hughes have determined that there will be
substantial efficiencies and synergies (including expense savings and revenue
enhancements) as a result of the merger of their two businesses. Many of these
benefits will occur almost immediately, while others will take some period of
time to be fully achieved. ECC and Hughes have developed a process for
determining how best to transition their respective businesses upon completion
of the merger. The parties anticipate that many of these transition decisions
will have been made by the time the merger closes within the constraints of
applicable law, while many other decisions will be made upon consummation of the
merger.
Explanation of Transition Process. A joint ECC/Hughes team of key
executives and employees has been formed to address the most important
transition issues associated with the merger of the businesses of both
companies. This team will be led by Charles W. Ergen, the Chairman and Chief
Executive Officer of ECC and the person designated to become the Chairman and
CEO of the combined company ("New EchoStar"). Other members of this transition
team include Michael T. Dugan, President and Chief Operating Officer of ECC,
Eddy Hartenstein, Chairman and CEO of DIRECTV and Jack A. Shaw, President and
CEO of Hughes. All decisions will be made in the best interests of the combined
companies and their subscribers. Some of the
more important operational issues that will need to be addressed include: which
set top box platform to use, how best to transition customers to a common set
top box platform, the repositioning of existing and planned satellite resources
that takes the maximum advantage of the spectrum efficiencies gained by the
merger, and the types of programming to be added to the current mix of local,
national and high definition programming.
Set Top Box Transition. One of the most important issues that will have
to be addressed is which set top box platform to employ on a going forward
basis. Each company has chosen different methods for meeting the anticipated
needs of its respective customers, including different conditional access
systems, transport streams and descrambling structures, which has resulted in
the development of set top boxes that are not compatible with one another. ECC
has chosen to deploy an MPEG-2, DVB compatible digital architecture that allows
for software upgrades via satellite and enhanced addressable security features
to minimize signal piracy. ECC's entire family of receivers and outdoor units
currently supports multiple satellites in multiple orbital locations. While ECC
is the principal manufacturer of its set top boxes, JVC and others also produce
consumer equipment compatible with ECC's system architecture. ECC's latest
models include hard drives that allow for personal video recording (PVR) of up
to 35 hours of programming, as well as a High Definition (HDTV) receiver that
offers state-of-the-art picture quality.
DIRECTV's digital technology to deliver its programming differs from
ECC's in that DIRECTV's receivers use a slightly different error correction
method, slightly different compression techniques, and a substantially different
conditional access system for protection from signal theft. DIRECTV also employs
an MPEG-2 based digital architecture in its set top boxes, but the transport
format differs from ECC's as does its signal encryption scheme. The signal
format
2
and receiver technology used by either company can provide similar, video
quality and consumer oriented features. In many receiver models, the primary
integrated circuits used are identical. The receiver software provides the
unique characteristics associated with either service.
In order to obtain the most significant consumer benefits from the
merger, it will be necessary to transition to a common set top box platform. One
platform will enable the combined company to achieve substantial manufacturing
efficiencies, lowering the overall research and development costs as well as the
per unit cost of building receivers for a larger subscriber base. A common set
top box platform will also allow each subscriber to receive the maximum amount
of programming that a combined fleet of satellites and ground stations can
offer. Also, a common set top box will place the combined company on a more
level playing field with cable, which has for some time had common technology
and shared research and development costs for their set top boxes.
The transition to a common set top box platform will begin almost
immediately after the merger. Currently, ECC and DIRECTV together serve
approximately 15 million subscribers utilizing separate fleets of DBS satellites
located in different orbital positions.1 The amount of time it will take to
complete such a transition is dependent upon the number of set top boxes that
may need to be exchanged. Of course, this exchange program would be done as
seamlessly as possible at no cost to existing subscribers. During this
transition period, satellite signals will be simulcast or simulcrypted, so that
subscribers owning either set top box platform can receive their existing
programming.
--------------------
1 This subscriber number is exclusive of those subscribers who receive
DIRECTV programming directly from NRTC and its affiliate entities.
3
Satellite Fleet Transition. In addition to developing a plan for
obtaining a common set top box platform, it will be necessary to develop a
complementary plan for transitioning the existing and planned satellite fleets
of each company. Today, ECC has six DBS satellites located at four orbital
locations. (See Exhibit 1 attached hereto.) From two of these locations
(119(degree) W.L. and 110(degree) W.L.) ECC can reach virtually all of the
Continental United States (CONUS) as well as Hawaii and portions of Alaska. Due
largely to the fact that its first two satellites were assigned to 119(degree)
W.L., most of ECC's national programming and approximately 10 percent of its
local broadcast programming originate from that location, where it now has two
satellites (EchoStar 4 and 6) operating on 21 DBS frequencies.2 (One of these
satellites - EchoStar 4 -- only has limited operational capacity due to a
deployment failure and other in-orbit anomalies.) ECC's only other CONUS
location is at 110(degree) W.L. where it currently has one satellite (EchoStar
5) providing both national programming and most of its local broadcast
programming over 29 DBS frequencies. Two other DBS satellites (EchoStar 1 and 3)
provide several types of programming, including HDTV, niche and international
programming from the non-CONUS 61.5(degree) W.L. and 148 (degree) W.L. orbital
locations.3 (EchoStar 2 is in the process of relocating to the 148(degree) W.L.
orbital location to augment service at that slot.) In the near future, ECC will
launch its first spot-beam satellite (EchoStar 7) to the 119(degree) W.L.
orbital slot. Later next year ECC intends to launch its second spot-beam
satellite (EchoStar 8) to the 110(degree) W.L. orbital slot.
ECC's satellites operate in a combination of low power and/or high
power modes. Generally, the higher the power, the stronger the received signal,
the less need for error correction,
---------------------
2 Throughout this Engineering Statement, reference will be made to DBS
frequencies or DBS transponders. The FCC has allocated 500 MHz of downlink
spectrum for DBS service at 12.2 - 12.7 GHz. This spectrum has been further
channelized into 32 frequencies/transponders.
3 The 61.5(degree)W.L. and 148(degree)W.L. orbital locations can reach
varying parts of the CONUS with a quality DBS signal.
4
and the more video and audio channels that can be compressed into each DBS
transponder. EchoStar 1 and 2 are only capable of operating in a low power mode
utilizing up to 16 CONUS transponders. EchoStar 3, 4, 5 and 6 were each designed
to operate with up to 32 low power CONUS transponders or up to 16 high power
CONUS transponders or a combination of both, while EchoStar 7 and 8 were each
designed to operate with 16 high power CONUS transponders and, by operating on
five other frequencies re-used 5 times, 25 spot-beam transponders.
While one antenna dish can "see" both the 110(degree) W.L. and
119(degree) W.L. orbital locations, multiple dishes are required to receive
programming from the 110(degree)/119(degree) W.L. and either of the 61.5(degree)
or 148(degree) W.L. non-CONUS slots. Approximately 80 percent of ECC's
subscribers currently have antenna dishes capable of viewing programming from
both the 110(degree) and 119(degree) W.L. orbital locations. Approximately five
percent of ECC's subscribers have installed multiple antenna dishes for viewing
the programming from the non-CONUS orbital locations.
DIRECTV currently has five operational DBS satellites located at three
CONUS locations - 101(degree), 110(degree) and 119(degree) W.L. (See Exhibit 1
attached hereto.) Most of its national and local programming currently
originates from the three satellites (DIRECTV 1R, 2 and 3) located at
101(degree) W.L. and operating over its 32 assigned DBS frequencies. Recently,
DIRECTV's first spot-beam satellite (DIRECTV 4S) was launched into orbit and
soon will be located at 101(degree) W.L. to provide primarily additional local
broadcast programming. Additional programming is originated from DIRECTV 6,
which is located at 119(degree) W.L. DIRECTV is assigned 11 DBS frequencies at
that location. Another satellite (DIRECTV 5) is planned to be launched during
the first quarter of 2002 and will be located at 119(degree) W.L. in order to
replace DIRECTV 6, which is operating at reduced capacity due to power subsystem
issues. DIRECTV also has one satellite (DIRECTV 1) operating on 3 assigned DBS
frequencies at 110(degree) W.L. DIRECTV 1 is currently being used for
5
local broadcast service only. DIRECTV currently has on order another spot-beam
satellite that is planned to be in service by the end of the year 2003.
DIRECTV's satellites also have both high power and low power DBS
transponders. DIRECTV 1, 2 and 3 can operate with a maximum of 8 high power
CONUS transponders or 16 low power CONUS transponders. DIRECTV 1R has 16 high
power CONUS frequencies, whereas DIRECTV 5 and 6 were each designed to operate
with a maximum of 16 high power or 32 low power CONUS transponders (although
DIRECTV 6 is now limited to 11 low power DBS transponders due to power
subsystems issues). DIRECTV's newest spot beam satellite (DIRECTV 4S) is capable
of operating on up to 10 high power CONUS transponders as well as 44 spot beam
transponders (by re-using 6 frequencies an average of 7.33 times). Most DIRECTV
subscribers currently have a single antenna dish that can view only the
satellites located at 101(degree) W.L. A small percentage of its subscriber base
have antenna dishes that can view programming from DIRECTV's 101(degree) W.L.
and 119(degree) W.L. satellites, and an even smaller subscriber base can view
programming from the 110(degree) W.L. orbital slot.
There are several possible scenarios for redeploying the combined
satellite fleets post merger that would significantly improve the utilization of
the DBS spectrum and satellite resources. Under one possible scenario, most
national programming could be placed on the 32 DBS frequencies at 110(degree)
W.L. with most Western U.S. local and specialty programming moving to
119(degree) W.L. and most Eastern U.S. local and specialty programming moving to
101(degree) W.L. Under another possible scenario, most national programming
could be placed on the 32 DBS frequencies at 101(degree) W.L. with corresponding
local and specialty programming located on satellites at other CONUS slots. With
the existing satellite resources of both companies (assuming spot beam
satellites are successfully placed in service), New EchoStar could provide from
the three CONUS
6
locations upwards of 320 national standard definition (SDTV) programming
channels (assuming a 10:1 compression ratio - i.e., each DBS transponder
compressing 10 SDTV channels) and over 1000 local broadcast stations for up to
100 metropolitan areas throughout the United States, including Alaska and
Hawaii.
Such a combined fleet of satellites would also eliminate the obvious
inefficiencies associated with splitting up the 32 DBS frequencies at the
110(degree) W.L. and 119(degree) W.L. orbital slots between the two companies.
Today, in order for DIRECTV to provide service from its three assigned DBS
frequencies at 110(degree) W.L. it must place one of its satellites at that
location and equip its subscribers that want to receive its programming with a
special three-feed antenna. Even after its spot beam satellite (DIRECTV 4S)
becomes operational, DIRECTV will use at least two of its CONUS frequencies at
101(degree) W.L. for the retransmission of local broadcast programming, leaving
approximately 240 SDTV video channels available for national programming (again,
assuming 10:1 compression ratios). Conversely, ECC is currently limited to
providing approximately 210 national SDTV video channels from its 21 assigned
DBS frequencies at 119(degree) W.L., assuming no local broadcast channel feeds.
Without spot beam satellites, this figure would be reduced on a one-for-one
basis as every local station is added, and would be lowered to a maximum of
approximately 160 national SDTV video channels when EchoStar 7 becomes
operational (i.e., ECC would be able to retransmit up to 250 local SDTV stations
using five CONUS frequencies, but in so doing reduce the number of SDTV channels
available for national programming by 50).
Ground Station Transition. Today, ECC operates two ground station
complexes, one in Cheyenne, Wyoming and the other in Gilbert, Arizona, primarily
to backhaul national and local programming and to uplink that programming to its
fleet of satellites. These facilities also provide primary and backup telemetry,
tracking and command (TT&C) for its in-orbit satellites.
7
DIRECTV has similar earth station complexes in Los Angeles, California and
Castle Rock, Colorado. Each complex includes numerous earth station antennas and
associated electronics and hardware, and must be manned by an extensive staff of
skilled technicians, operators, and engineers on a 24x7 basis.
There are several potential scenarios post merger that will result in
significant cost savings for the New EchoStar. Clearly, both companies must
invest significant recurring dollars to backhaul local stations across the
country to each of their uplink facilities which requires nearly a one hundred
percent duplication of equipment and fiber. Much of this duplication could be
eliminated post merger. While it is desirable to maintain some site diversity
between uplink centers, additional benefits can be obtained by minimizing
equipment redundancy between the companies, and by eliminating the need to
expand continually the existing facilities to support the growing list of must
carry local broadcast channels.
Comparison of Channel Capacities. A combined ECC/DIRECTV will have
significantly more DBS channel capacity at its disposal to provide more national
and local programming to its subscribers than each company would have absent the
merger. ECC and DIRECTV currently are assigned 50 and 46 CONUS transponders,
respectively. Assuming a 10:1 compression ratio for SDTV channels and no spot
beam satellites (which is the case today), ECC can employ up to 500 SDTV video
channels while DIRECTV can employ up to 460 SDTV video channels. Of this amount,
however, a substantial number of these channels are currently being utilized by
each company for the provision of the same local broadcast channels (4 to 5
channels per metropolitan area) in approximately 35 metropolitan areas. Upon the
successful launch and placement in orbit of spot beam satellites, each company
should be able to maintain approximately
8
the same number of metropolitan areas with local broadcast stations while
fulfilling its must carry obligations under the Satellite Home Viewer
Improvement Act of 1999 ("SHVIA").
Today, each company also offers its subscribers a national programming
lineup that is very similar in content, substantially duplicating each other's
programming. (See Exhibit 2 attached hereto.) ECC has approximately 235 national
programming channels and DIRECTV has approximately 179 national programming
channels. Of these, approximately 150 channels are duplicative. DIRECTV also
carries about 40-50 pay-per-view (PPV) channels depending on the season, whereas
ECC carriers about 39 PPV channels, six of which are simulcast on the satellites
located at 61.5(degree) W.L. and 148(degree) W.L. This leaves only enough
channel capacity to offer the requisite minimum of educational and public
affairs programming and a few HDTV channels, which require significantly more
bandwidth than SDTV video channels.
The combined company would be able to eliminate much of the substantial
duplication of local broadcast and national programming and thereby increase
significantly the amount of national programming choices and local broadcast
areas, as well as more HDTV, educational, niche and international programming.
More Local-Into-Local Stations and Metropolitan Areas. Each DBS company
typically offers only a few local broadcast stations to a small number of
metropolitan areas. Today, ECC offers 4-5 local stations in 36 metropolitan
areas, whereas DIRECTV offers approximately the same number of local stations in
all but one of these metropolitan areas plus an additional 6 metropolitan areas
for a total of 41 metropolitan areas. (See Exhibit 2 attached hereto.) Post
merger, the combined company will be able to eliminate much of this local
channel duplication and free up additional channels to serve upwards of 100
metropolitan areas with local programming, including at least one metropolitan
area in each of the fifty states.
9
More HDTV Programming. Currently, DIRECTV and ECC only have enough
satellite capacity to offer 2-3 full-time HDTV channels to their subscribers.
Moreover, in order for any subscriber to obtain this programming he or she must
purchase and install a special antenna dish. This is because ECC only offers
HDTV programming from its non-CONUS 61.5(degree) W.L. and 148(degree) W.L.
locations, while DIRECTV utilizes some of its capacity at 119(degree) W.L. for
this programming. Absent the merger, it is unlikely that many more, if any,
additional HDTV programming would be carried on either DBS company's channel
lineup due to the significant bandwidth requirements for such programming and
the competing demands for other programming choices. Post merger, with the
spectrum freed up by avoiding the duplication of national and local programming,
it is anticipated that New EchoStar will be able to offer at least 12 HDTV
channels from one or more of its full CONUS orbital locations.
Better Service to Alaska and Hawaii. It has been a challenge for DBS
providers to offer the full range of programming choices to residents in Alaska
and Hawaii due to their far western and northern locations in relation to the
CONUS orbital slots centered over the United States. Most subscribers in these
locations also require larger antenna dishes. Neither company is able to offer
any local broadcast channels over their current operational fleet of satellites;
however, with the upcoming launches of ECC's spot beam satellites, it will be
able to offer such programming if it can do so and still meet its satellite must
carry obligations.
With the combined satellite and spectrum resources of both DBS
companies, New EchoStar will be able to offer more program choices to the
residents of Alaska and Hawaii. Not only will they receive the best available
programming currently being offered by each DBS provider, but they also will
benefit from the increased programming choices available as a result of the
spectrum efficiencies outlined above.
10
More Reliable Service. New EchoStar's increased spectrum efficiency and
better utilization of satellite capacity will also enable it to provide more
reliable service. This benefit is derived from two primary areas: the increased
redundancy associated with more in-orbit satellites in case of unexpected
satellite failures; and the ability to utilize the additional capacity where
available to increase the amount of error correction applied to the DBS signal.
More Diverse National Programming. As shown in Exhibit 2, there is
substantial duplication of the existing national programming currently being
offered by ECC and DIRECTV. There is substantially more video programming, music
programming, and other programming services available to DBS providers than they
currently have the channel capacity to provide to their subscribers. For
example, of the approximate 300 national programming channels available today,
ECC currently includes about 235 on its programming menu. DIRECTV includes even
fewer channels on its programming menu.
Enhanced Near Video-on-Demand Capabilities. Today, due to their
spectrum constraints both ECC and DIRECTV have limited capabilities to offer
their subscribers video-on-demand services. While both companies now offer set
top boxes with personal video recorders (PVR) that allow the viewer to download
up to 35 hours of programming on hard drives for later viewing, this convenience
is not equivalent to video-on-demand service. Such service requires the storage
of an extensive library of movies and other programming by the DBS provider for
almost instantaneous retrieval by millions of active subscribers. Through the
offering of more pay-per-view channels with staggered viewing times, as well as
more extensive use of PVR caching, however, New EchoStar will be better able to
approximate video-on-demand services for its subscribers.
11
Substantial Procurement, Operational and Manufacturing Savings. The
combined company, with its larger subscriber base and unified fleet of
satellites and ground infrastructure, will be able to achieve substantial cost
savings as a result of the merger. ECC's preliminary estimates for these
expected cost savings amount to almost $3 billion per year. A significant
portion of these savings will be achieved through reductions in subscriber
acquisition costs, more efficient distribution of product offerings, reduced
production cost, more cost-effective set-top box research and development, and
more efficient advertising. New EchoStar should also benefit from substantial
savings through reduced programming costs associated with having a larger
subscriber base since most DBS distribution arrangements offer additional
discounts on a volume basis. In addition, New EchoStar can expect to achieve
substantial savings from a reduction in subscriber churn as more services are
offered over a unified platform that can better compete with digital cable.
Moreover, significant cost savings will be achieved by rationalizing the
satellite fleet of both companies, by eliminating future satellite procurements
and capital expenditures, by achieving operating efficiencies and by eliminating
duplicative overhead expenses. For example, the merged company could serve its
national customer base and fully utilize the spectrum resources at the three
CONUS DBS locations with only two satellites at each orbital slot. Indeed, upon
the successful launch of EchoStar 7 and 8, ECC could utilize fully all 32 DBS
transponders at 110(degree) W.L. and 119(degree) W.L. orbital locations
operating just two satellites at each location instead of the four that are
slated to operate at there.
Technological Developments. The combined resources of the merged
companies will also lead to the more rapid and efficient deployment of newer
technologies, including possibly the introduction of advanced modulation, coding
and compression techniques that would further enhance overall channel carrying
capacity. Given the current platforms that each company
12
employs and their existing fleet of satellites, however, neither DBS provider
alone can expect to achieve any significant improvements in channel capacity
using the limited spectrum resources available to them. Each company already
compresses its digital signals to achieve approximately a 10:1 ratio of SDTV
programs per DBS transponder. Four to five years ago, compression ratios of 6-8
were achievable and the future outlook using existing hardware is only expected
to achieve ratios of about 12:1 with acceptable service quality.
Moreover, while spot-beam satellites soon will be launched that will
enable greater frequency reuse and allow for additional local programming over
the same number of DBS transponders, they were designed based upon the current
inefficiencies in the fragmented assignment of DBS frequencies. For example, ECC
designed both of its spot beam satellites with the understanding that it had
access to only 21 DBS transponders at 119(degree) W.L. With this limit in mind,
ECC could only devote five of these transponders to spot beams, since it needed
the remaining 16 DBS frequencies for national programming. Each spot beam
satellite was also designed with the understanding that it could be used as a
backup for the other spot beam satellite in case of a launch or in-orbit
failure.
In any event, these future achievements in spectrum efficiencies are
being more than offset by the increased demands for satellite bandwidth. As
noted above, DBS providers soon will be required by the satellite must carry
provisions of SHVIA to retransmit a significantly greater number of local
broadcast channels in each metropolitan area that they currently provide local
programming. It is estimated that ECC alone will need up to 300 more video
channels to maintain all of its local programming areas. Similarly, DIRECTV will
require approximately 330 more video channels in its local programming areas to
comply with SHVIA. In addition, as viewers begin to watch more HDTV programming,
it will become more difficult to satisfy their demand for
13
such programming using existing satellite and spectrum resources. Today, ECC and
DIRECTV need an entire DBS transponder to produce one HDTV channel (as opposed
to approximately 10 SDTV channels in each transponder). While there may be some
improvements in this compression ratio over time, with the limited spectrum
resources of each company it simply will not be possible to satisfy the
potential demand for high definition programming.
DBS providers also compete today with digital cable that is offering an
ever growing number of national and pay-per-view programming to their
subscribers. ECC and DIRECTV are therefore extremely constrained in devoting any
more of their national DBS capacity to local programming or other services and
expect to continue to compete at a national level. Tradeoffs constantly must be
made as to how best to employ their limited spectrum resources.
Broadband Satellite Deployment Efficiencies. ECC's and Hughes'
experiences to date with their investments in several broadband technology
companies have been mixed. While ECC currently offers a two-way broadband
service through its affiliate, Starband, the subscriber take rate for this
service has been slow with the prospects unlikely for increasing the number of
subscribers significantly in the near future. Starband leases CONUS transponders
on Ku-band satellites and offers a two-way broadband service to residential
consumers starting at about $70 per month. Hughes' satellite broadband offerings
(DirecPC and now DIRECWAY) also have not yet obtained sufficient scale in their
residential subscriber base to achieve stand-alone viability. When used for
point-to-point services, current Ku-band satellite platforms do not provide
sufficient spectral efficiency to achieve the competitive price levels needed
for significantly faster subscriber ramp up.
ECC and Hughes also have investments in Ka-band projects - Wildblue and
Spaceway, respectively. While these programs both use Ka band satellites, they
differ in their
14
technological and commercial approach. Wildblue has announced plans that include
launching a Ka-band payload on board the Canadian satellite Anik F2 in 2002,
whereas Spaceway plans on deploying a number of Ka-band satellites starting in
2003. Both companies are using spot-beams, although Spaceway will be using a
larger number of beams and on-board processing (enabling services using a single
hop) and packet replication which will significantly increase the flexibility of
the platform. ECC also is building a Ku/Ka-band satellite (EchoStar 9) with
limited spot beam capabilities. This satellite could be used to backhaul DBS
programming to ECC's uplink facilities and/or to provide limited broadband
services.
ECC and Hughes believe that Ku-band two-way broadband satellite
services, such as those implemented by Starband and Hughes, will struggle to
achieve sufficient economies of scale to effectively compete with terrestrial
DSL and cable broadband services. Both companies believe, however, that the new
Ka-band satellite platforms offer the opportunity to achieve price points that
will allow broadband satellite services to compete with terrestrial broadband
alternatives. In order to achieve the necessary economies of scale and scope,
one company must have access to a sufficient number of state-of-the-art
satellites in relatively close proximity to one another and must have enough
spectrum to sustain a critical mass of subscribers. ECC and Hughes estimate that
at least 5 million subscribers would be necessary in the next 5 years to recover
the significant up front investment and subscriber acquisition costs associated
with launching and marketing such two-way broadband satellite service. Since
each Ka-band orbital slot can only serve at most 1.5 to 2.0 million subscribers
with the use of spot beam satellites, access to a number of orbital locations is
necessary to begin to meet even these minimum subscriber objectives.
Broadband satellite systems also require ground stations and access
gateways, both primary and redundant, as well as the provision of customer
support facilities. Considerable
15
efficiencies will be achieved through the merger of these operational activities
and investments leading to reduced costs and lower service prices. In addition,
the consumer terminals required for the provision of satellite broadband
services are more expensive than the equivalent terrestrial terminals.
Significant reductions in satellite terminal costs can be achieved by
manufacturing efficiencies brought about by increased volumes. Increasing the
size and rate of development of the Ka-band systems will have a major positive
impact on terminal cost, in turn, significantly increasing the competitiveness
of these systems.
In summary, New EchoStar, with its combined Ka and Ku-band spectrum and
satellite resources, will be able to achieve operating scale and efficiencies
that will allow it to provide broadband services that will compete effectively
with terrestrial broadband systems. It will have access to a sufficient number
of Ka-band orbital slots within an arc of 22 degrees, which will facilitate a
one dish solution for consumers and allow for needed redundancy in case of
operational problems. It also will be able to achieve scale in manufacturing to
significantly reduce subscriber terminal costs, and offer bundled DBS and
broadband services that will permit full competition with digital cable by
significantly increasing the perceived value of the services. In addition, New
EchoStar can offer its broadband services to a much larger DBS subscriber base,
which will help alleviate the high subscriber acquisition costs and provide
services that will compete effectively with terrestrial broadband systems.
Finally, by combining the investments of both companies and standardizing the
product, the fixed costs for the system will be reduced by 50%, providing a more
competitive and compelling product to the American consumer.
16
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 SECs website,
www.sec.gov, and GM stockholders will receive information at an appropriate time
on how to obtain transaction-related documents for free from General Motors.
Such documents are not currently available.
General Motors and its directors and executive officers, Hughes and certain of
its officers, and EchoStar and certain of its executive officers may be deemed
to be participants in GMs solicitation of proxies or consents from the holders
of GM $1-2/3 common stock and GM Class H common stock in connection with the
proposed transactions. Information regarding the participants and their
interests in the solicitation was filed pursuant to Rule 425 with the SEC by
EchoStar on November 1, 2001 and by each of GM and Hughes on November 16, 2001.
Investors may obtain additional information regarding the interests of the
participants by reading the prospectus and proxy/consent solicitation statement
if and when it becomes available.
This communication shall not constitute an offer to sell or the solicitation of
an offer to buy, nor shall there be any sale of securities in any jurisdiction
in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such
jurisdiction. No offering of securities shall be made except by means of a
prospectus meeting the requirements of Section 10 of the Securities Act of 1933,
as amended.
Materials included in this document contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause our actual results to be materially different
from historical results or from any future results expressed or implied by such
forward-looking statements. The factors that could cause actual results of GM,
Hughes, EchoStar, or a combined EchoStar and Hughes, to differ materially, many
of which are beyond the control of EchoStar, Hughes or GM include, but are not
limited to, the following: (1) the businesses of EchoStar and Hughes may not be
integrated successfully or such integration may be more difficult,
time-consuming or costly than expected; (2) expected benefits and synergies from
the combination may not be realized within the expected time frame or at all;
(3) revenues following the transaction may be lower than expected; (4) operating
costs, customer loss and business disruption including, without limitation,
difficulties in maintaining relationships with employees, customers, clients or
suppliers, may be greater than expected following the transaction; (5)
generating the incremental growth in the subscriber base of the combined company
may be more costly or difficult than expected; (6) the regulatory approvals
required for the transaction may not be obtained on the terms expected or on the
anticipated schedule; (7) the effects of legislative and regulatory changes; (8)
an inability to obtain certain retransmission consents; (9) an inability to
retain necessary authorizations from the FCC; (10) an increase in competition
from cable as a result of digital cable or otherwise, direct broadcast
satellite, other satellite system operators, and other providers of subscription
television services; (11) the introduction of new technologies and competitors
into the subscription television business; (12) changes in labor, programming,
equipment and capital costs; (13) future acquisitions, strategic partnership and
divestitures; (14) general business and economic conditions; and (15) other
risks described from time to time in periodic reports filed by EchoStar, Hughes
or GM with the Securities and Exchange Commission. You are urged to consider
statements that include the words may, will, would, could, should, believes,
estimates, projects, potential, expects, plans, anticipates, intends, continues,
forecast, designed, goal, or the negative of those words or other comparable
words to be uncertain and forward-looking. This cautionary statement applies to
all forward-looking statements included in this document.