Will DBS Ops Challenge Must-Carry?

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Washington -- Dumped on the sidelines by Congress, Charlie
Ergen has at least one option left to make improvements in the new satellite law: The
EchoStar Communications Corp. chairman can sue over what he considers to be onerous
must-carry requirements.

While satellite-industry sources expressed confidence that
they could defeat must-carry in court, some Capitol Hill sources and communications
lawyers indicated that Ergen would fare no better than the cable industry at escaping
mandatory carriage of all local broadcast-TV stations.

If Ergen -- who, as of last week, had not threatened a
lawsuit -- or another direct-broadcast satellite challenger were to prevail in court, that
success would threaten the balancing act that helped to pass the bill enabling DBS
carriers to retransmit broadcast signals in local markets. Local-into-local is considered
to be DBS' biggest handicap relative to cable.

Congress passed the law as a part of a massive,
end-of-the-year, $400 billion budget package that President Clinton is expected to sign
before Dec. 2.

In calling the new law anti-consumer, Ergen pointed to an
array of offending provisions, including one that mandates DBS carriage of all local TV
signals in a served market starting Jan. 1, 2002.

Must-carry, Ergen said, would chew up his channel capacity,
limiting the number of markets that his company could reach with the "Big Four"
networks in order to promote competition to cable operators.

Throughout the debate, Ergen said he might be able to
endorse a must-carry provision, but it had to be tied to a showing that his company had 15
percent of the pay TV subscribers in a market.

With Congress rejecting that option under pressure from the
cable and broadcasting industries, Ergen is now free to turn to the courts to attack
must-carry as a First Amendment invasion, much as the cable industry did after the 1992
Cable Act passed.

For now, EchoStar is saying little other than it is
studying its options. "We are against it, and we do want to address this issue next
year, either in Congress or the courts," spokesman Marc Lumpkin said. "We just
don't have the satellite capacity to carry all of the small niche channels in every
market."

DirecTV Inc., which is also covered by the must-carry
mandate, is in position to challenge the law, as well. "We have concerns about the
must-carry provisions, and we will be looking at this issue further in coming weeks and
months," DirecTV spokesman Robert Mercer said.

A broadcasting attorney said last week that EchoStar and
DirecTV may have to wait until 2002 to challenge the statute because the courts might not
want to jump in until after the law and the related Federal Communications Commission
rules took effect.

Were EchoStar or DirecTV to overturn must-carry in court,
it would upset an important compromise in the bill. The cable industry said it would not
oppose the bill if must-carry were included, and broadcasters staked out the same
position. Yet the two industries relented to lawmakers' wishes by agreeing to delay
full carriage for two years.

Daniel Brenner, senior vice president of law and regulatory
policy at the National Cable Television Association, said if DBS must-carry were struck
down, the continuation of must-carry applied to cable would be a
"front-and-center" topic.

"Why does a speaker with 500 channels at its disposal
get protection, but a speaker with 78 channels or fewer does not?" Brenner said.

Even though the Supreme Court barely upheld cable
must-carry in a 5-4 vote in 1997, Capitol Hill sources said they were confident that DBS
must-carry would more readily withstand a legal challenge.

In the cable context, the high court agreed with
Congress' judgment that must-carry was necessary to preserve free, over-the-air
broadcasting for noncable subscribers, and that a local TV station denied carriage at a
time of 65 percent cable penetration was probably doomed.

But in applying must-carry to DBS, Congress dropped the
"cable-bottleneck" rationale and came up with a new one that has apparently
survived testing in courts.

The new theory posits that an entity that accepts a
government benefit -- such as the copyright compulsory license to retransmit local TV
signals in the satellite law -- is not entitled to the same First Amendment protections as
an entity that refuses it.

"Parties can broker away their First Amendment rights,
and they do it all the time," a Senate source said. "That's what the courts
have held in the past."

Under the satellite law, must-carry applies if a DBS
carrier avails itself of the compulsory license to carry local TV signals. If EchoStar and
DirecTV obtain all of the necessary copyright clearances for a TV station, they could
carry that station without having to carry others in the market.

It's that tradeoff that will persuade courts that DBS
must-carry is constitutional, congressional sources said.

"If someone wants to launch a frontal assault on
must-carry as being violative of the First Amendment, there is an argument that given the
fact that must-carry is a condition of a government benefit, it's more likely to
withstand constitutional review," a House Commerce Committee source said.

Greg Schmidt, vice president of new development and general
counsel of LIN Television Corp., said the legal foundation for cable and DBS must-carry
should have rested on the fact that they provide local TV signals under a special
exemption from copyright law.

"That should have been the rationale from the get-go.
It is, I think, the important point in the whole must-carry debate, which is that these
guys are getting a compulsory license. That has not been the ground on which it has been
put in the past," he said.

Proponents of DBS must-carry said putting the spotlight on
the compulsory license was necessary because the cable analogy was weak. Unlike cable, DBS
has no history of carrying local TV signals, and there was no evidence generated by years
of congressional investigation that free over-the-air television would be imperiled by the
lack of DBS carriage.

"If I look at a situation where there is not only
cable, but there is DBS, there are, by definition, two providers, and there is, by
definition, no bottleneck. That's not looking too good. That's a real
crapshoot" in the Supreme Court, a Senate Commerce Committee source said.

As one DBS source put it: "The justification used by
the Supreme Court to uphold cable must-carry does not apply to DBS."

A DBS lawyer doubted that the courts would accept the idea
that must-carry was constitutional because of its link to use of the compulsory license.
"If this were so, it would be such an easy floodgate for evasion of the
Constitution," the lawyer said. "It is just a stratagem, and I think it would be
struck down."

In drafting the law, some said Congress inserted a sort of
"poison pill" to keep EchoStar and DirecTV out of the courts.

According to some interpretations of the law, if a court
were to strike down DBS must-carry as unconstitutional, the local-signal compulsory
license would go down, too.

A DBS source said last week that the law does not operate
in that fashion, and a Washington satellite attorney said it was unlikely that a court
would accept that kind of linkage.

"I think there is an effort to frame that argument,
but I don't think they would prevail. You are talking about one thing that is in the
Copyright Act and another thing that is in the Communications Act," the lawyer said.

An attorney for the National Association of Broadcasters
said broadcasters agreed that must-carry and the copyright license were not linked in that
fashion.

The FCC and the Department of Justice will take the lead in
defending Congress' action on DBS must-carry. The Federal Trade Commission
wouldn't have a formal role, unfortunately for the satellite carriers.

Back in 1998, FTC staff filed comments with the Copyright
Office opining that "consumer welfare may be best served if DBS, like other
technologies that provide alternatives to cable, were exempt from the
'must-carry' rules."

The FTC explained its position by stating that DBS
companies "lack market power now, and they are unlikely to acquire it in the near
future," adding that must-carry would place "a disproportionate burden on DBS
operators."

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