PrimeStar Expects Consent Decree

2/08/1998 7:00 PM Eastern

Washington -- The Department of Justice will likely seek a
consent decree as a condition for approval of PrimeStar Partners L.P.'s move into
high-power direct-broadcast satellite service in partnership with News Corp., PrimeStar
sources said last week.

PrimeStar is angling to obtain dominance over the last DBS
slot with full U.S. coverage, but DBS rivals DirecTv Inc. and EchoStar Communications
Corp., as well as some non-DBS players, want the deal scuttled as an anti-competitive
alignment of cable and DBS interests.

Of the three plausible scenarios facing PrimeStar, the
'most likely' one is for the DOJ to approve the controversial merger, but with
conditions that will probably force PrimeStar to divest some DBS spectrum and to adhere to
programming-nondiscrimination terms beyond the 2002 sunset in the 1992 Cable Act.

The other options -- either approval with no conditions, or
an antitrust suit to block it -- were all but ruled out as likely outcomes by PrimeStar
sources, who said they expect the DOJ to render a decision 'quite soon.'

Yet PrimeStar sources cautioned more than once that no one
at the DOJ has broached the topic of a consent decree.

'I don't think that we know what the department
believes about this right now,' said one PrimeStar source, who asked to remain

A source at the DOJ said last Friday, 'All that we are
saying is that we are looking at the transaction.'

PrimeStar sources might be a little optimistic in gauging
the DOJ's intentions. More so than the Federal Communications Commission, which also
must OK the deal, the DOJ's telecommunications experts have in the past advocated a
near-total cable-DBS cross-ownership ban.

PrimeStar sources said they were hoping that FCC action
would occur prior to an announcement by the DOJ. They noted that personnel at the DOJ have
changed so much that it's hard to know whether past cable-DBS policy recommendations
are shared by the department's current antitrust chief, Joel Klein.

Regina Keeney, chief of the FCC's International
Bureau, said last week that the FCC would not act on PrimeStar's merger applications
before the end of March.

'We are taking a hard look at it. It's a very
important transaction,' Keeney told reporters. 'I think it's too early to
announce any leanings one way or the other.'

When the FCC auctioned coveted DBS spectrum under rules
adopted in 1995, the agency encouraged cable operators to participate in the bidding,
which was eventually won by MCI Communications Corp. with a bid of $682.5 million.

The FCC now seems to be having second thoughts, wondering
whether it's a good idea to allow cable interests to acquire the same DBS license in
the secondary market that they failed to win in the auction.

'I think that is something we would think about,'
said Keeney. '[The FCC] has espoused certain policies and, whether it is time to
change those or amend those ... it's something that we are looking at.'

The deal involves two transactions.

The first is the license transfer of 11 DBS channels at 119
degrees west longitude controlled by Tempo Satellite Inc., a subsidiary of TCI Satellite
Entertainment Inc. (TSAT).

The second is the license transfer of 28 DBS channels at
110 west controlled since December 1996 by MCI, in partnership with Rupert Murdoch's
News Corp.

'We have decided to look at the two transactions
together, because it's too difficult to consider them separately,' Keeney said.

As part of a deal with the DOJ, PrimeStar has already said
that it would divest Tempo's 11 channels at 119 to a party acceptable to the DOJ.

But regulators might demand more from PrimeStar.

The DOJ -- or the FCC -- may force PrimeStar's
cable-operator partners with programming interests to adhere to program-access rules for a
five- to 10-year period beyond their 2002 expiration date.

'You could imagine the [DOJ] saying [about the 2002
sunset],'That's too soon,'' a PrimeStar source said.

Some opponents are asking the DOJ to place limits on News
Corp.'s ability to use retransmission consent to leverage carriage of its cable
programming by cable operators that are unaffiliated with PrimeStar.

In recent weeks, PrimeStar has showered FCC officials with
company records; an economic analysis of PrimeStar's past and future market behavior;
and legal memoranda designed to counter arguments made by opponents of the deal that
PrimeStar will either fail to compete against its cable owners, or that it will act in a
predatory fashion to drive DirecTv and EchoStar out of the business.

To disprove the theory that PrimeStar will pull its
punches, PrimeStar submitted to the FCC an economic study of PrimeStar's past
behavior and market incentives going forward.

A controlled analysis prepared by Charles River Associates
Inc. and Georgetown University Law Center professor Steven C. Salop concluded that there
is no historical evidence showing that PrimeStar has competed selectively to boost its
penetration in cable markets unserved by a PrimeStar cable partner.

The study also concluded that PrimeStar -- even with its
cable-affiliated owners and their large stable of programming -- had the same incentives
to compete in the DBS market as another DBS player with no financial interest in cable
systems or cable networks.

The FCC has asked that comments on the study be submitted
by Feb. 13 and reply comments by Feb. 20.

A PrimeStar memo to the FCC said accusations that PrimeStar
will engage in predatory pricing were baseless, in addition to being contradictory with
the other chief accusation that PrimeStar would compete only selectively.

The memo said that below-cost pricing would be easy to
detect, and that it was a high-risk strategy because the recovery of lost revenue at a
later time would depend on there being only one DBS company standing -- PrimeStar. The
memo dismissed this as a plausible outcome given DirecTv's ownership: General Motors
Corp.'s Hughes Electronics Corp.

'What can the [PrimeStar] owners do to hurt
competition? Nothing. We think that at the end of all of this, we get the clearance that
we are seeking,' a PrimeStar source said.

PrimeStar sources said they were confident that the DBS
deal with News Corp. would receive fair treatment, even though the impression today is,
'These cable guys are not the favorite corporate players' among some Washington
policymakers, who may be inclined to kill the deal.

'I have a hell of a lot more faith in the integrity of
FCC officials,' a PrimeStar source said.

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