DBS Asks Court for Must-Carry Relief

9/24/2000 8:00 PM Eastern

New York-Backed by DirecTV Inc. and Echo-Star Communications Corp., the Satellite Broadcasting & Communications Association last Wednesday filed suit on constitutional grounds against government-imposed must-carry rules.

Under terms of the Satellite Home Viewer Improvement Act, once a direct-broadcast satellite provider provides even one local broadcast signal to a given market, it must provide all of the signals within that DMA by Jan. 1, 2002.

At a press conference here last Wednesday, SBCA president Chuck Hewitt said DirecTV and EchoStar-which retransmit the top four broadcast-network affiliates in many large markets-would be required to carry all 23 full-power broadcast television stations in Los Angeles, 23 in New York, 22 in San Francisco, 18 in Washington, D.C., and 16 in Chicago.

Both DirecTV and EchoStar plan to launch spot-beam satellites that would allow them to meet the must-carry requirements in the 30-plus markets that each serves at present. Even with spot beams, if must-carry rules are enforced, channel-capacity constraints would restrict the number of local broadcast markets the DBS companies could serve.

Pegasus Communications Corp., a DirecTV reseller that serves mostly rural markets, did not sign on as a plaintiff. Pegasus chairman Mark Pagon said at SkyForum last week that there are reasons for the broadcast and DBS industries to seek alliances. "The history of each side poking each other in the eye for the past five years has been ill-advised."

Also at SkyForum, Hughes Electronics Corp. consumer-sector senior executive vice president Eddy Hartenstein said DirecTV has "no beef with the broadcast industry whatsoever. We have been telling [National Association of Broadcasters president] Eddie Fritts that for years, and I hope he'll believe us. We want to deliver as many broadcast stations as we can."

The DBS industry waited nearly 10 months to file the suit, launching a litigation battle with the federal government and broadcasters that, if the U.S. Supreme Court becomes involved, could take three years to conclude.

Cable's must-carry case took nearly five years. That included two trips to the Supreme Court and ended with a 5-4 victory for broadcasters in March 1997.

As a result, the DBS industry might have to labor under the must-carry law until well into 2003, even if it wins favorable decisions in the lower courts. The industry can't run the risk of launching the four major networks in small and midsize markets if it must later terminate service should the Supreme Court decide must-carry is constitutional.

"Until this issue is resolved, we would need to err on the side of being conservative," said DirecTV executive vice president David Baylor.

The suit claims must-carry violates the First Amendment because it forces DBS carriers to distribute low-rated TV stations in large markets and deprives them of their right to use channel capacity to sell the four major networks in additional markets.

"Our message is fairly simple: Without must-carry we can offer more programming to more consumers and better compete with cable," said Baylor. DirecTV could use current capacity to increase local signal service from 34 to 70 markets if it didn't fear must-carry, he added.

The suit also claimed that DBS must-carry discriminated against cable networks, because local TV stations would occupy channels that DBS carriers had earmarked for national and regional programming services.

In another argument, the DBS industry claimed the rules violate the Fifth Amendment, which bars the taking of private property without fair compensation. The DBS industry said it cannot demand compensation from TV stations that exercise must-carry, and must absorb the cost of backhauling local signals to distant uplink facilities.

Lastly, the DBS industry asserted that the law overstepped Congress's power to promote copyrighted works by linking carriage of any local TV station in a market to carriage of all local TV stations in a market.

DBS players were confident they would win in court, but broadcast attorneys said the courts would rely on the cable must-carry decision to find that application of must-carry to DBS was constitutional.

"Cable made similar arguments before the Supreme Court, and they were found lacking by the Supreme Court," said David Donovan, vice president of legal and legislative affairs for the Association of Local Television Stations. His group represents dozens of independent stations that the DBS industry is unlikely to carry in large numbers.

Last year's SHVIA granted DBS carriers a compulsory license to transmit local-TV signals for free. But Congress said if DBS carriers availed themselves of the license, they had to comply with must-carry.

However, must-carry would not apply if a DBS carrier inked deals with stations that included the necessary copyright clearances.

"If they don't like the largess of the compulsory license, they are free to negotiate in the marketplace for their programming, and they don't have to comply with must-carry," said Ben Ivins, a lawyer with NAB.

The litmus test would be whether Congress could impose must-carry in exchange for a free copyright license, Ivins said. "The constitutional question is: When Congress gives you a benefit like that, can it impose conditions on it?"

Despite the competitive imbalance that would result, the cable industry endorsed the SBCA's decision to go to court.

"In today's competitive environment, in which consumers have the choice of several multichannel-video providers, we do not believe there is any constitutional justification for must-carry requirements," a National Cable Television Association spokesman said.

If successful, DBS providers could compete against cable operators without mandatory-carriage rules, while cable operators would still be required to devote up to one-third of all channels for such signals.

"We wish the SBCA well in its legal challenge," the NCTA spokesman added.

The SCBA suit did not go over well with one key member of Congress, however.

Ken Johnson, spokesman for House Telecommunications Subcommittee chairman Billy Tauzin (R-La.), said his boss-a major satellite-industry supporter for a decade-was unhappy with the decision to go to court.

"Someone gave them some bad advice," Johnson said. "The satellite industry's attempt to circumvent the law certainly isn't going to win it any new friends or supporters on Capitol Hill."

The courts will undoubtedly compare the burden posed by cable and DBS must-carry. On the one hand, unlike cable, the amount of spectrum that DBS providers must allocate for local signals is not capped.

On the other hand, cable operators may not sell national programming services before a subscriber purchases local-TV signals. DBS carriers are under no obligation to provide any local stations.

Cable narrowly lost its must-carry case after the Supreme Court found the industry had substantial market power, as well as the incentive and ability to drop local-TV stations that compete for local advertising revenue with cable-owned networks.

The high court also found that must-carry was necessary to preserve over-the-air broadcasting for millions of households that do not subscribe to cable.

The DBS industry said it was confident of victory because none of the Supreme Court's rationales for cable must-carry apply to DBS: it does not have a bottleneck, own any networks or compete for local ad dollars.

"We think the Supreme Court will look at this case extremely differently than the.cable must-carry cases," said Andrew McBride, a Washington lawyer with Cooper, Carvin & Rosenthal. McBride filed the DBS industry's suit, which names the federal government, the Federal Communications Commission, and the U.S. Copyright Office as defendants.

At least one cable attorney agreed, saying a court victory for DBS was "a slam dunk."

But ALTV's Donovan insisted that DBS possessed a bottleneck on viewers just as strong as cable's.

"If you look at the cable [court] decision, I am not sure it is different in the homes that subscribe to DBS," Donovan said.

The cable industry has to worry about a DBS victory and its competitive impact, said Robert Kaimowitz, managing director and head of satellite services research at ING Barings.

"If they are successful, what it would mean is that there would be an abundance of capacity on the satellite system for other programming and services," Kaimowitz said. "I think that would give them a continued advantage over cable."

One benefit of a DBS win, a cable attorney said, was that the industry would likely have an easier time stopping the FCC from requiring cable operators to carry TV stations' analog and digital TV signals.

The case was filed in the U.S. District Court for the Eastern District of Virginia. That court is known as the "rocket docket" for its expeditious handling of lawsuits.

The DBS industry expects a decision in six to eight months, McBride said.

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