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DBS D.C. Point Man Stays Lean

The direct-broadcast satellite industry is adding at least 200,000 subscribers per month, led by its two main players, DirecTV Inc. and EchoStar Communications Corp. While the fractious DBS industry sometimes has trouble speaking with one voice, it is united in the view that taking market share from cable is its chief goal. In an edited interview with Multichannel News Washington bureau chief Ted Hearn, Charles M. Hewitt, president of the Satellite Broadcasting & Communications Association, discusses the industry's rapid growth, its growing pains and its regulatory and business challenges in Washington, D.C. The SBCA occupies a small suite of offices in Alexandria, Va., and employs about 25 people.

MCN: The DBS industry is on a roll. What are the signs that people in Washington are listening more to its concerns?

CH: There's no doubt that the industry has grown dramatically, as you well know. Any association is represented by the strength of its industry and its ability to be in the marketplace and do what it needs to do.

And that, certainly, has been a major thing that has occurred that's really boosted our ability to have a little more influence or a little more opportunity to express our side of a story on Capitol Hill.

I think also the issues that we've been facing over the past several years have been really pretty serious issues. I mean there are issues-like local-into-and local as a prime example-that will or will not make us more or less competitive with cable.

So when you take a look at these actions and what we're dealing with, they're issues that have a direct impact, a very big impact upon our industry.

That means our energies and efforts have picked up in all of the issues that we face, whether it's the FCC [Federal Communications Commission] or Congress. And I think our presence is being felt stronger than it ever has. But we're still the new kid on the block as compared to the cable industry, the motion-picture industry, the broadcasters and others. We're still the little guy on the block, trying to be heard.

MCN: For an industry that is growing so quickly in power and influence, why is it that you don't have a temple on Massachusetts Avenue or a palace on Connecticut Avenue in D.C. like the National Cable Television Association or the National Association of Broadcasters?

CH: Our members are saying they're trying to keep us lean and mean. Certainly, we would, if we had our druthers, probably be in D.C.

It's just we don't have the budget. And as fast as the industry's grown, we've been impacted pretty strongly by mergers, so our actual income for the association has maintained itself fairly flat.

Now I see a change in that. I foresee that this is going to start changing over the next two or three years. But for the time being, it's been fairly flat. So we've had to be pretty much tight on the money belt when it comes to making these kinds of decisions.

MCN: Cable last year declared the multichannel-video-programming-distribution market to be fully competitive. At the time, you didn't buy that. With local-into-local and with the large channel capacity of DBS and its rapid growth, are you still saying cable has market power that needs to be checked by regulation?

CH: You're absolutely right that we've had a great deal of growth and we are showing a much stronger position in the marketplace. I don't think we've quite arrived yet, and I think there are things you can look at.

I guess the best example is that when cable companies have to pay broadcasters retransmission-consent payments at the same level we do, then there will be competition. In other words, when we have the market power to go in and negotiate on the same level as cable does for carriage, then that's when it happens. We're not even close.

There's not a cable system we're aware of that pays a local broadcaster for retransmission consent, even though there's a battle in Houston going on as we speak. That's the first one we're aware of where.and we're not even too sure what the contract terms are. It may or may not be payment.

But the flip side of it is that with basically no market power, the demands made on us to pay fees are very strong. So you take a look at that and say we'll be pretty much in the same market position when we're both treated the same in the marketplace, and we're not there yet.

MCN: Are you acknowledging that DirecTV and EchoStar have agreed to pay per-subscriber fees to broadcasters?

CH: I can't speak for either of those companies, but our understanding is that there are fees required in certain retransmission-consent agreements.

MCN: You say cable doesn't pay for retransmission consent, but what about the argument that those fees are implicit for broadcasters that own cable networks, the argument being that The Walt Disney Co. buries the retransmission-consent fee in ESPN, and NBC in CNBC and MSNBC?

CH: I think that might be true of the O & Os [owned-and-operated broadcast stations]. It's certainly not going to be true with an independent station or an affiliate station that's not an O & O. So I think that's kind of a pretty weak argument.

MCN: So it's the non-O & Os and the independents that are asking for money and getting it?

CH: I'm not saying the O & Os aren't, either. Let's take Disney. The fastest-growing segment for Disney is satellite. We're the fastest-growing area for them, yet we're being treated much differently than maybe cable is when it comes to negotiating agreements.

I think when you take a look at the marketplace, those are the signs you need to look at. How are we being treated in the marketplace as compared to cable? And we just haven't gotten there yet.

MCN: In the context of retransmission consent, are you upset with where the FCC came out in its 'good-faith' rulemaking?

CH: First of all, I don't think Congress gave them a lot to work with, and I think the FCC didn't want to go very far. So are we happy with it? No. We'll have to just go forward and see what the results are and see what can be done. Hopefully, there will be retransmission agreements, and it'll all go forward well, and we will have no disruption of service to consumers, and we'll have reasonableness in the agreements.

MCN: Are you confident that May 29, 2000, is going to pass without some sort of big collision?

CH: I would not want to predict that for anything. I can't speak as to where our member companies sit, other than what they've announced publicly in terms of their retransmission-consent agreements. I would not want to predict what will happen on that date.

MCN: This metric that you've outlined for effective competition-retransmission-consent terms-doesn't seem to be the metric that's in the law. It's usually a penetration test of some kind. So when can cable plausibly argue that the market is effectively competitive?

CH: I think when the satellite industry is in a position to have so much viewership that no regional sports network would pull out of the satellite distribution, as what happened with Comcast [Corp.] in Philadelphia with the regional sports network [Comcast SportsNet]. That's when you start getting into real competitive dangers, because the tremendous market power and the strength of the cable industry allowed [Comcast] to do that.

I think if it were declared today that it's open competition, a lot of these [cable-owned] programmers might be lost to satellite consumers. What happened with Comcast is potentially the tip of the iceberg.

I think that until the programmer-especially if it's a cable-owned programmer-just would not want to lose the number of subscribers that they would lose by withdrawing it from satellite distribution. Until that happens, then that's another way that obviously competition isn't there.

MCN: That seemed to be a rather isolated event, where it was a terrestrial service not covered by program-access laws. Correct?

CH: It was satellite transfer to a terrestrial service. And in spite of what Comcast says, we believe it was moved there in order not to allow satellite consumers to get access to it. And that could have been the tip of the iceberg.

MCN: So you would want to make sure that a lot of valuable programming owned by cable is not migrated off satellite to terrestrial in order to evade the program-access rules?

CH: I think you'll find that the satellite industry believes that if it was fully competitive right now and the [Cable] Act were reversed, we would have lost a lot of programming by now.

MCN: NCTA president Robert Sachs announced in December that the cable industry will not endorse extension of the program-access rules in 2002.

CH: They probably didn't endorse it when it first passed.

MCN: Most people say the program-access law was the gas in your tank. Are you bracing for a clash with cable over extension of program access?

CH: It's a serious problem, absolutely. Right now, we don't really anticipate anything occurring in the year 2000, and if anything occurs on the access provisions, it'll be in 2001.

We have a policy that supports the extension of the present access rules five more years, to the year 2007, and to take into account any satellite-delivered programming that is moved to a terrestrial service still be subject to the rules. And that's our policy. I think we'll have to wait and see where we stand at the end of this year and try to examine it. We will have to evaluate the situation ourselves and what's going on in the marketplace.

MCN: Does the presidential election factor into this? I would imagine that if Vice President Al Gore wins, then you'll have the status quo at the FCC. But a George W. Bush administration, with a Republican, free-market bent, might bury those rules. Are you thinking about that at all?

CH: I'm not thinking about that at all. We have a lot on our plate right now. Since we can't influence the outcome of the presidential election.

MCN: You can't?

CH: No, we can't. Since we can't impact that, we have to cross that bridge when we get to it to see what the response is from whoever the president is and his administration.

MCN: When it got slapped with must-carry, cable went bananas and spent a fortune fighting it in court for five years. And they're still fighting it at the FCC in digital. Why has the satellite industry declined to take must-carry as applied to DBS to court?

CH: We haven't declined. We haven't asserted ourselves, either. We are, frankly, examining all of our avenues as we speak on how to approach must-carry.

Obviously, must-carry has a devastating impact on our industry. As you take a look at local-into-local and our ability to serve markets being already limited by the amount of spectrum we have, it has a very definite negative impact on our ability to compete and for consumers to have choice.

So it's obvious that it's a high issue for us. We are examining what legislative, regulatory and judicial remedies we may have.

MCN: Could you be a litle more specific? The judicial options are kind of obvious. I heard House Speaker J. Dennis Hastert (R-Ill.) say he won't go along with reopening the Satellite Home Viewer Improvement Act. Is the FCC in any position to postpone the onset of must-carry in 2002?

CH: I don't believe they are. But again, we've got to go through an election process here. That's No. 1. If you sit back and take a look at this whole issue, for both cable and satellite, it's ironic. The court ruled on cable because the cable bottleneck, or the monopoly, was justification for requiring must-carry.

But for us, obviously, we don't have a bottleneck. For us, it's really ironic that on one hand, the Congress has said that we have to go let the open, free market determine the rates in retransmission consent, but they have to mandate on carriage. That's quite contrary to free-market concepts.

As we're going through all of these battles, at the same time, you look at what's going on in the broadcasting world. Is it going to explode or implode? There's going to be major changes in broadcast over the next three to five years, which is going to impact must-carry for both cable and ourselves.

MCN: What do you mean?

CH: I think that when the networks start moving in certain directions, and I think when the whole affiliate system starts undergoing tremendous change, which I believe it will.

MCN: Are you talking about the digital moves the affiliates have made?

CH: It's a combination of the digital moves the affiliates are making, whether or not it's going to be a six-channel service or an HDTV [high-definition television] service. It's the difference between the networks and their affiliates. It comes down to how they're going to do business.

When you take a look at the changing marketplace and what it's going to require to compete with cable and with satellite, I think the broadcast industry is in for major change. And if they don't change, I think they're going to be left behind.

MCN: Do you mean this argument that the networks are going to abandon the affiliates in order to get carriage of their programming on cable?

CH: That's speculation. There are a lot of different scenarios that you can paint, but it's going to have to change.

One thing we know is that they're going to have to change. And when you start getting into the smaller markets, that's where it really stands out.

Let's take Montana: under 300,000 TV households, seven TV stations. It doesn't work. Those numbers are bad. You start going into the Plains states, and you start looking at the cities all having duplicate channels that aren't really providing local news and weather and sports. They're really providing more national news, weather and sports, with some tidbit centered around the big city, and not around the whole broad market. At least all of that in our viewpoint is going to change.

Now whether it changes in three to five years, or it changes in 10 years, who really knows? But it's going to change. All of that's going to have impact on everything from must-carry and retransmission consent and everything else.

Backing up and taking a look at must-carry, I think it's incumbent upon our industry to take some sort of action, and I think we will take some sort of action to try to get out from underneath what I consider to be almost an unconstitutional requirement.

MCN: Is there something in the works?

CH: We're looking at our possible [options].

MCN: Are you referring to a recent exchange between some House lawmakers that must-carry really can't exist legally in a market where cable and DBS are really going head-to-head?

CH: I'll say this: That was the first time we've heard from Congress any kind of, shall we say, light at the end of the tunnel when it comes to the must-carry provisions.

But as you know, that's a long and tedious process, sometimes without the kind of outcome that you'd like to have. Again, that's one of the things we'll be looking at: Is there a potential move in the Congress?

Obviously, we don't believe there is at the FCC. We think the FCC is pretty limited in what they're going to be able to do.

And we can't forget that the broadcasters are probably the most powerful lobby in telecommunications, if not all of lobbying.

So that is a difficult road to take, but we will be looking at what we can do, both legislatively and judicially.

MCN: What does the SBCA do when its two key members-DirecTV and EchoStar-disagree? Does the SBCA take a position? Do the companies lobby by themselves?

CH: We're a little unique for two reasons. One is that we have 70 or 80 company members. If it's 80, 78 of them are dependent upon the two. So that creates one dynamic in and of itself.

The second is that we're very diverse. We pretty much try to represent all of the interests of our members. That includes over 1,000 retailer members and all sorts of distributors that all play a role. But how we approach legislation, or a regulatory matter, is by seeking out the companies that are interested in that particular topic.

Copyright is the best example. In the beginning of the copyright battle, only 12 of our member companies were interested, and they all participated. By the end of the copyright battle, that number was down to either five or six, between mergers and dropouts.

MCN: But as a rule of thumb, can't you just say that if EchoStar and DirecTV care about it, then the whole industry's got to care about it?

CH: Exactly. That's true. Now there are occasions where DirecTV's and EchoStar's position might, if they're united on an issue, be so contrary to the rest of the industry that it causes hiccups.

Normally, you're right. If DirecTV and EchoStar are in agreement with an issue, then pretty much, the whole is in agreement with it.

MCN: Last year, DirecTV made the deal with the NAB and EchoStar was off the reservation. Did that kind of complicate things?

CH: I'd rather put it like this: 1998 and 1999 were hopefully a wonderful learning experience for all of us. We had a very, very difficult time keeping all of our members together, not just DirecTV and EchoStar. But there was straying from time to time that caused us difficulty.

MCN: The National Football League is on your board. The NFL, for instance, was probably on the other side of the copyright-fee reduction.

CH: That wasn't a big issue for them, but the blackouts were a big issue for them. In fact, they have filed against our position at the FCC on blackouts, syndicated exclusivity and [network] nonduplication rules.

But, you know, that's not unusual. The best example is Stan Hubbard [president and CEO of Hubbard Media Group and vice president of Hubbard Broadcasting Inc.]. Stan Hubbard was the chairman of the organization when we went up and battled the broadcasters for two years.

So that happens in every association, and I think people who understand that can function in that arena. They just say, 'I have to pull out of this issue, I'll be on the other side, you have to do what you have to do.' do.' And almost all associations are faced with that, day in and day out, and who's going to be in what area.

So what you try to do is do what's best for the satellite industry first, and then get the members to support what you're trying to do. Last year was a very tough year. I think that we're still, even though the industry has been around since 1980, basically a new industry.

We're not the same industry we were five years ago, let alone what we were 20 years ago. We have a lot of new players, and a lot of new players who are just getting the opportunity to experience how you function as an industry.

The whole copyright issue, we should have been united and negotiated it back in 1996 with the broadcasters, as a united industry.

All of the negotiations that took place between the broadcasters were between the broadcasters united and our individual companies. Well, that's doomed for failure.

MCN: Why is the NFL on your board?

CH: We have 30-some programmers that are members of ours. They are a programmer.

MCN: Programmer in what sense?

CH: They package their [NFL] Sunday Ticket,'and so they're a member.

MCN: I see that Home Box Office is on your board. Time Warner Inc., which owns HBO, filed at the FCC to have the agency collect a 5 percent fee on your revenue.

CH: They file against us 90 percent of the time. You know, that was Time Warner Cable that filed that.

Let me tell you a story on a whole different company. It has nothing to do with any of us, but it's a good example. RCA Records filed, with the support of the MPAA [Motion Picture Association of America], to put a tax on blank tapes. RCA, manufacturing TV sets and radios, fought it. Both companies, owned by the same company, were on the totally opposite issue. And both participated very dramatically in the battle on opposite sides. Time Warner has got a studio that's not always going to be in agreement with its programming service or its cable service. That's the way it works. Not unlike an association, where you are moving forward and you're trying to get consensus, but there are times when it's obviously to the opposite interest of some of your members. The same thing is true of a corporation.

If you take a look at the NCTA, which has programmer members, they've not always represented those programmers' interests. They've always, rightfully so, represented the cable industry.

The programmers are in a position to take advantage of their membership in the NCTA and take advantage of membership with the SBCA because it provides them two different avenues to accomplish what they want to accomplish. And sometimes it's in their interest to work with us, and sometimes it's in their interest to work with the cable industry.

MCN: In this whole battle between cable and DBS, it sounds like the ones that are in the best position to sort of leverage that fight are the programmers, because they can play one off against the other. Do you agree with that?

CH: I don't know if I totally agree with that, but I'll say you go back to a big corporation. You have XYZ Corp. And you have a programmer division, and you have a cable division, and you have something else and something else and something else.

A lot of times what the interest is of this program, for them to build their business, is going to be contrary to their cable business.

What they can get accomplished might be different from the way the cable side will do their business. Again, that's going to be true with any large corporation.

MCN: Do you find that as your industry gets bigger and bigger, it has opened doors in Washington that were not open before?

CH: I think two things. One is I think we're shooting well beyond what most people anticipated we'd be able to do in competition.

If you back up to 1992 and to the Telecom Act in the mid-90s, it was going to be the Bell companies against the cable industry.

We've always believed it's going to be wire versus wireless, primarily. Now it doesn't mean there aren't partnerships. But primarily, you've got two primary distribution systems-one's a national platform primarily, the other one's a local or regional platform.

I think those are the natural competitive bodies that create competition. I think that certainly, our visibility on Capitol Hill has grown, and I think it will continue to grow as our industry grows.

I think we need more resources before it's really going to have its impact. If you just take a look at the amount of money we spend as compared to the broadcasters or the cable industry, we're minuscule in terms of whether you're talking about hiring law firms or your inside staff, or if you're talking about contributions, or whatever it might be. We are very small as compared to our competing industries.

MCN: How much does the SBCA give out in campaign contributions? Do you have a political-action committee?

CH: We have a PAC, and we're trying to build the PAC. The PAC has never been bigger than $25,000 in one year. And in many years, it was really what two staff people put into it.

MCN: How high is up? You are at 12.3 million subscribers. Is there a plateau? Is it 20 million or 25 million and that's your universe?

CH: I refuse to ever project. But I will say that there are many, many factors that will determine that. I think you have to take a look at what cable is doing with their digital product and how far they're going to go with their digital product.

You have to take a look at how well Ka-band and broadband work in the satellite field. Obviously, with the advent of broadband two-way with satellite, it really opens up a whole new door.

Obviously, there are large geographic parts of the country, which probably represent anywhere from 20 percent to 30 percent of the marketplace, which may never be served by digital product other than satellite or some form of it.

There are all sorts of scenarios that you can paint. Yeah, we could cap out at 20 million or 25 million, because other services have risen up, whether it's not just cable, but maybe it's telephone companies and others. Or we might find ourselves being at some point in time equal to cable, where we'll have close to the same numbers as cable. Now, whether that'll happen, I would not venture to guess.

MCN: Let's talk about the $1.25 billion loan-guarantee legislation. Does the SBCA support it?

CH: We have not been active on the legislation to a great extent. We support trying to solve the rural problem. Money is one piece of that. The difficulty with the legislation is that it's just one piece. There's great need for spectrum. We need some orbital slots. You need to redesign how you serve rural America.

As I was saying before, do you really need the same number of stations over a large geographic region being required by must-carry?

So you start adding it-yeah, there's an answer to help most of rural America, and money is one piece of it. But there are a lot more issues that are as big, if not bigger.

MCN: Is there going to be spectrum, and are there going to be orbital slots?

CH: We have no indication what might take place in that area.

MCN: So if this bill becomes law, what happens?

CH: I think it helps. You don't have to use DBS-you can use Ku-band satellites and you might even use Ka-band satellites. So it really opens the door for companies to come up hopefully with innovative ways and serve rural America.

MCN: Who's behind this, the National Rural Tele-communications Cooperative?

CH: The NRTC has been a strong supporter of the rural bill. So have some of the other companies that want to serve rural America. Pegasus [Communications Corp.] and Golden Sky [Holdings Inc.] I think have been supportive.

MCN: Is there somebody out there, other than DirecTV and EchoStar, that will have the spectrum and the facilities to make this work?

CH: I think if you go into Ka-band, the answer would be possibly yes. If you sit back and look at 211 markets, that's an awful lot of markets where you're going to have to duplicate must-carry and serve all of those markets with duplicate signals.

MCN: The money couldn't be used to serve markets that are currently being served by DirecTV and EchoStar, right?

CH: Let's say EchoStar and DirecTV still go to 93 markets. That means that money is going to have to serve 118 markets. That's a lot.