High Times For DBS Could Be Blocked By Must Carry Cloud

You wouldn’t know it by their sliding stock prices, but DirecTV and EchoStar Communications have just completed a watershed year in the history of the satellite TV industry.

The two companies have rolled out local station packages, enabling them to compete more completely with cable, and new subscribers are snapping them up. They are also beginning to take concrete steps to bundle high-speed Internet services along with their video offering.

However, the party may soon be over. Both companies seem to be bumping up against capacity restraints and the possibility of must carry being imposed on their systems.

Local channel service has been one of the cornerstones of growth for the industry, according to Jimmy Schaeffler of The Carmel Group. The consulting and research firm estimates the satellite TV industry will post record subscriber growth this year and next year, based primarily on the availability of local channels.

However, he adds that if must carry rules are put in place, satellite TV companies will be hampered in their ability to fully serve rural areas, which hold much of the industry’s base.

DirecTV now is delivering local stations — primarily ABC, CBS, Fox and NBC affiliates — in 41 television markets.

The DBS leader charges $5.99 a month for its local channel package and has a staggering 60% take rate for new customers, according to Marsocci. The absence of local channels is still cited as one of the top reasons cable subscribers do not switch to DBS service.

Obviously the satellite TV provider would like to serve as many markets as possible. But while DirecTV has met its year-end rollout target, it could be at the end of the line.

"Will we be able to serve more markets beyond those first 41? It remains to be seen, depending on must carry," Marsocci says. "If we don’t have to comply with must carry rules, we’ll probably be able to serve more than 70 markets. Although we don’t have a hard number yet, if must carry is applied to satellite, we might be able to do two or three more markets, but that would be it."

The company will launch DirecTV 4-S, a "spot-beam" satellite, late next year, Marsocci adds, to carry its local channels. The satellite will conserve spectrum and transponder space by broadcasting local channels to their specific markets. DirecTV 4-S will have the capacity to carry all the local channels in the top 45 markets, Marsocci says, reiterating the company will likely not be able to deliver any more local channels because of capacity restraints.

Similarly, EchoStar is serving 34 markets with local stations and plans to rollout more. However, company representatives were cryptic as to how many local markets the company will be able to serve under any scenario.

"We’re in 34 cities today with ABC, NBC, CBS and Fox and a national PBS feed," company spokesman Marc Lumpkin says. "We’re looking to add more. However, we haven’t set a final goal, and it really depends on must carry. If it’s implemented, we’ll comply with it, but again we haven’t released any numbers yet."

Like DirecTV, EchoStar plans to launch a spot beam satellite to maximize capacity and spectrum for local channels. If must carry is implemented for satellite TV providers, that will mean carrying more stations for each market. If must carry is overturned, it could mean serving more markets.

The fate of the satellite TV industry’s ability to expand local service into more than just the top 45 markets now rests with the Federal District Court of the Eastern District of Virginia. However, most satellite TV industry observers agree the case will likely be appealed all the way to the U.S. Supreme Court no matter who wins the first round.

The case is in the discovery phase, and both satellite TV industry representatives, and those on the government and broadcasting sides are gathering documents to help plead their case, according to Satellite Broadcasting and Communications Association spokesman James Ashurst. Arguments in the trial are scheduled to resume at the end of March, he adds.

"We asked for a summary judgment, and the judge found we raised some ‘serious constitutional concerns,’ but he still ordered a short discovery period," Ashurst says. "Still, we were encouraged by his wording."

There has been much speculation as to how the cable industry would handle the satellite TV industry case against must carry. Some argue the industry could benefit from a must carry reversal. However, it now appears MSOs and the National Cable Television Association will remain on the sidelines.

"We generally think must carry is not a good policy and is increasingly problematic in a competitive environment," Dan Brenner NCTA SVP-law and regulatory policy says. "On the other hand, this case pertains to satellite, and it’s probably inappropriate for us to be involved."

NCTA president Robert Sachs says it should be noted that C-SPAN, which is supported by the cable industry, has filed in support of the satellite TV industry’s case.

While DirecTV and EchoStar wait to see if they will have to negotiate with broadcasters under must carry rules, they already have been exposed to the world of retransmission consent negotiations.

According to sources familiar with negotiations between the satellite TV companies and broadcasters, DirecTV and EchoStar have had similar experiences as cable companies when it comes to hammering out retransmission consent agreements. They point out that cable companies often attempt to get carriage agreements for sister cable channels when negotiating retransmission consent deals. More often than not, DirecTV and EchoStar have negotiated similar deals, broadcasting sources say.

"It’s safe to assume that, in a lot of the cases, the DBS companies are getting similar deals and going through similar negotiations as cable operators," one person familiar with the process says.

However, others in the broadcasting community say the satellite TV providers are likely to have more cash involved in their negotiations because they are more likely to already be carrying cable channels offered in negotiations. This, they say, is a result of satellite TV’s greater capacity and need to fill that capacity with national programming.

If must carry is imposed on the satellite TV industry, they warn that retransmission consent negotiations could begin to look more and more similar to cable deals. If DirecTV and EchoStar are forced to comply with must carry, their capacity will dwindle, and channel placement will be at a greater premium.

Right now, according to NCTA spokesman David Beckwith, satellite TV’s local channel service has yet to make a significant dent in cable TV subscriber growth. Although, the group hasn’t done a concrete studies on how local channel rollout has affected cable TV numbers, Beckwith says MSOs had a "decent year with average subscriber growth."

He concedes that DBS companies had an exceptional year for subscriber growth that was sparked, in part, by their local channel offerings.

"We’ve been stressing here that there’s real competition, and, frankly, we were encouraging DBS growth because it held regulation at bay," Beckwith says. "Now we’ve moved to a more competitive bent, and some companies have done dish buy-backs and other programs."

He also notes that the industry’s efforts to roll out digital services are being done to directly counter a threat from DBS.

"Where cable has brought out digital services, the temptation to switch to satellite virtually disappears," he says.

Even as DirecTV and EchoStar fight must carry obligations, they are seeking other ways of expanding their customer base through broadband services. EchoStar is marketing the StarBand system it created with partners Gilat Satellite Networks and Microsoft.

The system is the first two-way high-speed consumer Internet service to hit the market.

DirecTV is will ship its fourth generation of DirecPC in the first quarter of this year. The new system also will provide a two-way Internet connection over satellite.

In addition, Hughes purchased digital subscriber line provider Telocity and plans to bundle DSL service with the DirecTV video service.

"With the addition of Telocity, we achieve nearly unlimited capacity," Hughes chairman Michael T. Smith said when the acquisition was announced last month, "and can offer our customers a choice of DSL where it is available and two-way satellite broadband in circumstances where customers prefer satellite delivery or where DSL is not and will not be available.’’