NRTC Sues DirecTV Over Premium Nets

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In what may be viewed as a David vs. Goliath move, the
National Rural Telecommunications Cooperative filed suit in a federal district court in
California last Thursday against partner DirecTV Inc., seeking to enjoin the
direct-broadcast satellite provider from selling programming within the NRTC's rural
marketing territories.

The programming in question includes multiplex-premium
services from Home Box Office, Showtime Networks Inc. and others, which, until last month,
had been sold by U.S. Satellite Broadcasting.

Last week's dispute between the NRTC and DirecTV dates
back to 1992, when the co-op agreed to invest more than $100 million to help launch the
DirecTV platform. In return, the NRTC gained exclusive rights to sell DirecTV programming
within clearly defined rural territories.

The courts will be asked to decide exactly which DirecTV
programming that contract covers.

According to the NRTC, the contract was amended in 1994,
when it became clear that DirecTV would not be able to give the NRTC the rights to sell
HBO, Showtime, The Movie Channel and Cinemax while USSB had exclusive rights to those
services on the DBS platform.

The NRTC said the new contract gave the nonprofit group the
option to distribute those premium services once DirecTV acquired those rights.

In court documents, the NRTC also said DirecTV contended
that those options do not apply if the premium channels are transmitted from the five
transponders DirecTV recently bought from USSB.

DirecTV received a copy of the NRTC's complaint late
last Wednesday, but it does not comment on pending litigation, spokesman Bob Marsocci
said, adding, "This is fundamentally a contract dispute between the NRTC and DirecTV.
It should not raise concerns for our customers."

For the NRTC -- which now serves roughly 1.2 million DBS
customers -- it's not just a question of revenue sharing, but also one of market
parity and potential consumer confusion.

Until last month, DirecTV subscribers inside and outside of
NRTC territories were generally marketed the same types of programming packages. NRTC
affiliates kept a large cut of the monthly DirecTV programming fees from their own
customers, and USSB billed customers separately for certain premium-movie packages.

Although NRTC customers who opted for USSB's premium
services got two separate monthly bills, that wasn't unlike what DirecTV customers
who took HBO, for example, faced.

But now that DirecTV will be able to offer the majority of
its roughly 5 million high-power DBS customers a single bill, some rural customers might
not get the same level of convenience that their city cousins do if DirecTV bills them
separately for premium services.

"The satellite industry is still very nascent,"
NRTC senior vice president Jay Downen said. "We don't need that kind of
confusion."

Indeed, eliminating the dual-bill confusion was one factor
leading to DirecTV parent Hughes Electronics Corp.'s recent takeover of USSB.

With the merger completed, DirecTV recently began bundling
former USSB premium-multiplex networks in with its other video packages. A high-end
sports, movie and basic-cable-channel package sells for $80.99 per month.

That's almost identical to what former USSB customers
had been paying in combination to USSB and DirecTV for similar programming options.

But unless the NRTC can sell the former USSB channels, rural customers within NRTC
territories must strike a la carte deals with DirecTV to get those premium multiplexes.
And a la carte pricing typically adds up to higher programming costs.

While some of its larger affiliates may view their
relationships with DirecTV as strictly business, the NRTC sees its mission as protecting
the interests of its rural constituents. Rural Americans were among the first to adopt
satellite television -- even in the days of large C-band dishes -- because both broadcast
stations and cable operators typically underserved them.

"We want to stay in the business," Downen said.
"We believe we have a mission to stay in the business."

He added that the NRTC wants DirecTV to offer
local-to-local broadcast service not only to the major markets across the country, but to
smaller ones, too, although the companies have "philosophical differences."

Some analysts believe DirecTV would like nothing more than
to buy out any interest it can in either the NRTC or any of its DirecTV affiliates, the
largest of which are Pegasus Communications Corp. and Golden Sky Systems Inc.

"If you find yourself in court with your partner, it
doesn't help you," Lehman Bros. Inc. analyst Bob Berzins said. "How can you
be in court one day and work together on a marketing plan the next morning?"

Downen called the lawsuit against DirecTV a last-resort
measure. "We went to court with more regret than you could know," he said.
"It's been such a sad day around here. We've been spending 24-hour days
over the past few weeks trying to negotiate alternatives."

Since DirecTV announced plans to acquire the customer bases
of both USSB and PrimeStar Inc. last winter, it has been widely believed that the NRTC
would be asked to help fund those acquisitions in order to share in new programming
revenues.

Tellus Venture Associates president Steve Blum, a former
USSB executive, said there may be reason to doubt that the current contract gives the NRTC
a "crystal-clear right" to programming such as HBO.

"In my history with Hughes and DirecTV, they follow
their contracts to the letter," Blum said. "They go right up to the line, but
they don't cross it."

Uncertainty surrounding the lawsuit poses special concerns
for publicly traded NRTC affiliates such as Pegasus. Its stock took a turn for the worse
last Thursday afternoon, following a small spike earlier in the day.

"The whole market value of Pegasus is based mostly on
its deal with DirecTV," Blum said. "This opens up the question of what happens
to Pegasus and Golden Sky when their [long-term] agreements run out."

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