Hearing on Loan Guarantees and Rural Television Service


Prepared Testimony of Mr. K. James Yager
President
Benedek Broadcasting

10:00 a.m., Tuesday, February 1, 2000 - Dirksen 628

INTRODUCTION

Thank you, Mr. Chairman, for the opportunity to appear before the Senate Banking Committee today. I am K. James Yager, President and Chief Operating Officer of Benedek Broadcasting, which owns 26 television stations in small markets across the nation. I also serve as Joint Board Chairman of the National Association of Broadcasters (NAB), on whose behalf I appear today. NAB represents the owners and operators of America's radio and television stations. My remarks today will address the loan guarantee program as proposed by the House and Senate conferees last year.

The satellite TV industry began as a service primarily targeting rural Americans who could not receive broadcast television signals over the air. The passage of the Satellite Home Viewer Act in 1988, which permitted delivery of network stations to unserved households, led to vigorous growth of the satellite industry. The recent enactment of the Satellite Home Viewer Improvement Act ("SHVIA") has further enhanced the competitiveness of the satellite industry vis-a-vis the cable industry by providing satellite carriers a statutory copyright license to deliver local television broadcast signals within a station's market.

NAB applauds the committee's interest in ensuring that all Americans, particularly those in rural and small markets, benefit from the recently passed Satellite Home Viewer Improvement Act. The House and Senate conferees recognized that the current plans of satellite carriers did not include delivery of local signals in most smaller television markets. By example, more than one-half of all stations may not be available on satellite to local viewers. To address this concern, they drafted the loan guarantee program in an attempt to ensure that rural Americans could receive local television signals by way of satellite. Beginning in 2002, carriers will be obligated to carry all stations in any market where they elect to serve with local signals. Given the rapidly growing popularity of Direct Broadcast Satellite, NAB believes that the vitality of the local free over-the-air broadcast system that Congress has consistently worked to preserve may be threatened if half of the nation's television stations (a vital source of local information) are shut out from satellite carriage.

THE STATE OF THE SATELLITE MARKETPLACE

Current trends indicate that satellite companies will in fact provide local broadcast television signals via satellite only in the largest markets and not in rural areas. Despite huge capacity (up to 500 channels, many of which are devoted to pay-per-view and other premium services) and strong demand for local stations, satellite operators have stated that providing local signals to rural markets is not feasible at this time. NAB understands that both DirecTV and EchoStar currently provide local signals to approximately 42% of the nation's television households in 19 and 20 markets, respectively. EchoStar plans to provide local signals to 60% of U.S. television households by the end of March 2000 (approximately the top 37 markets). DirecTV plans to add 4 more markets in the next few weeks. A market-by-market listing as of January 27, 2000 is set forth in Table A.

Table A

DMAs Served by DIRECTV and EchoStar
January 27, 2000
Rank Market TV Households % of U.S. DIRECTV EchoStar
1 New York 6,812540 6.854 Yes yes
2 Los Angeles 5,135,140 5.167 Yes yes
3 Chicago 3,164,500 3.184 Yes yes
4 Philadelphia 2,667,520 2.684 Yes yes
5 San Francisco-Oakland
San Jose
2,368,970 2.383 Yes yes
6 Boston 2,186,100 2.199 Yes yes
7 Dallas-Ft. Worth 1,959,680 1.972 Yes yes
8 Washington, DC-Hagerstown 1,956,160 1.968 Yes yes
9 Detroit 1,846,950 1.858 Yes yes
10 Atlanta 1,722,130 1.733 Yes yes
11 Houston 1,665,550 1.676 Yes yes
12 Seattle-Tacoma 1,548,200 1.558 yes
13 Cleveland 1,475,820 1.485 Yes
14 Tampa-St.Petersburg 1,463,090 1.472 Yes
15 Minneapolis-St. Paul 1,457,820 1.466 Yes yes
16 Miami-Ft. Lauderdale 1,418,940 1.428 Yes yes
17 Phoenix 1,343,040 1.351 Yes yes
18 Denver 1,230,440 1.238 Yes yes
19 Pittsburgh 1,136,230 1.143 yes
29 Raleigh-Durham 834,260 0.839 Yes
30 Nashville 811,870 0.817 yes
33 Kansas City 802,290 0.807 yes
35 Greenville-Spartanburg
Asheville-Anderson
739,850 0.744 Yes
36 Salt Lake City 707,070 0.711 yes
Total % of U.S. Served 41.701% 42.197%

Source: Nielsen Media Research 1999 Estimates; DIRECTV and EchoStar Company Press Releases

For a time, it appeared that Local TV on Satellite, founded by Capitol Broadcasting and other investors, would provide local-into-local in all markets. That company, however, appears to have revised its business plan and now may only provide local stations in the top 68 markets.

In short, the business plans of satellite providers will leave many rural Americans without access to satellite delivery of the signals of their local stations, which provide viewers with local news, weather, sports and other informational programming.

NAB, therefore, strongly endorses the policy objective of the proposed loan guarantee program, which is to ensure that delivery of all local stations irrespective of market size by satellite is economically feasible. Without satellite delivery of rural television signals, access to 800 of the nation's television stations that serve America's smaller communities is at risk if viewers cannot watch local programming by way of satellite. We are concerned, however, that given the economic and technical hurdles of delivering local signals by satellite, the proposed program may be too limited in scope and too administratively cumbersome to provide the necessary jump start.

ECONOMIC AND TECHNICAL HURDLES TO RURAL DELIVERY OF LOCAL SIGNALS

The satellite industry historically has faced legal, technical and financial obstacles preventing the delivery of local signals. The passage of the SHVIA eliminated a legal obstacle by creating a statutory compulsory copyright, but technical and financial hurdles remain:

A limited rural consumer marketplace. Even though one-half of America's television stations are located in the smallest 154 television markets, only 25% of the U.S. population resides in those markets. Seventy-five percent of the U.S. population (and the other half of the nation's television stations) is located in the largest 60 television markets. Current local-to-local retail packages marketed by EchoStar and DirecTV are $4.99 and $5.99 for four or five local stations. In order to compete with cable, any satellite local-to-local package must remain within this range. At those levels, we very much doubt that a rural provider could ever hope to break even.

The need for a spotbeam satellite design and an orbital slot. Delivering 800 local stations via a conventional satellite from a single orbital slot is not technically feasible for the following reasons:

  1. Capacity--Typically, only 250 to 300 channels can be delivered due to frequency and power limitations.


  2. Geographic Coverage--Current DBS satellites located within the 101 to 119 orbital arc can deliver the same channels to customers located anywhere in the continental U.S. Although this nationwide coverage is practical for channels such as CNN, ESPN, and HBO, it is an expensive and wasteful approach for delivering local television stations that can legally be viewed only in the station's local market.

Relatively new commercial technology--a spotbeam satellite--is the answer, but spotbeam satellites represent expensive design challenges. In addition, a company developing a rural plan must lease or acquire an orbital slot at a potentially high cost.

The need to be a wholesaler, not a retailer. NAB does not believe that it is practicable to develop a rural local plan without partnering with DirecTV or EchoStar. The two primary reasons are the need to create a consumer-friendly, sellable product and the need to limit marketing and backroom costs.

The technical challenges of partnering with DirecTV or EchoStar. A potential relationship between a third party local-to-local service wholesaler and DirecTV or EchoStar requires the resolution of many technical issues. Those issues relate to the location of the local-to-local orbital slot and the development of an affordable consumer receiver and dish. Challenges include:

Locating, building and maintaining numerous uplink sites. If a spotbeam satellite is used, local television stations must be uplinked from a facility located within the footprint of that individual spotbeam. The number of spotbeams determines the number of uplinks. Additional uplinks may be required to comply with legislative restrictions and to reduce the cost of delivery of the local signals to the uplink site.

The overall expense--$600 million to $1 billion. NAB estimates that in order to develop and execute a feasible technical plan to provide all local stations to rural America it will cost from $600 million to $1 billion, depending on 1) whether the plan includes a spare satellite and 2) the number of markets planned to be covered. The cost of building, launching and insuring a spotbeam satellite is hundreds of millions of dollars, even without the redundancy of a spare satellite that prudence might require. An orbital slot must be acquired or leased. Numerous local uplink facilities must be located, built and maintained costing several million dollars each. Other major costs include a master control center and conditional access to ensure that consumers are only receiving stations in the market in which they live.

IS THE LOAN GUARANTEE PROGRAM AN APPROPRIATE ECONOMIC INCENTIVE?

Given these challenges, NAB believes that an economic incentive of some kind is appropriate, but is unsure whether the loan program as proposed will meet its important objective. Understandably, the proposal contains numerous mechanisms to protect the government against the risk of default. While the government needs some security, the loan guarantee program should not dictate a borrower's business plan. Likewise, given the lead time necessary to undertake a satellite project (even if work were begun immediately, a satellite project of this scale has a lead time of at least two years), a borrower's qualification for the loan guarantee should not be unduly delayed by multiple layers of bureaucracy.

Cap on loan amounts. The conferees' bill contains caps on the amount of the loan guarantees that are too low to ensure success of the program. The government would guarantee one loan not to exceed $625 million, and any other loan could not exceed $100 million. These caps pose a potentially serious problem for borrowers and would benefit one borrower to the exclusion of others.

Cumbersome approval process. The proposal also contains several layers of approval, any one of which is susceptible to delays that could threaten the success of the program. Prospective borrowers may be unwilling to front the substantial development costs of planning and structuring a $600 million to $1 billion satellite project without assurance of approval of the various entities involved: Congress, the Secretary of Agriculture, OMB and NTIA.

Specifically, the conferees' bill would require Congress to authorize funds before the Secretary could approve any loan guarantees. The bill also imposes a broad panoply of consultation requirements on the Secretary of Agriculture, which will administer the program. The Secretary must consult with the OMB and an outside accounting firm within 180 days of enactment, and then must obtain NTIA certification for each loan application. The NTIA may take up to 90 days, a time period that does not even commence until after the Secretary submits the application for review. In sum, the variegated layers of approval could unduly draw out the borrowing process, yet time is of the essence given the commencement of must-carry requirements under the SHVIA in 2002.

Priority lien. The conferees' bill would require the Secretary to take a priority lien on the borrower's assets. This lien would trump the liens of any other creditors. Under predecessor loan programs, such as the Rural Electrification Act, the law specifically allowed the government to take a subordinated interest. Subordination allows borrowers to secure senior loans, in addition to their federally guaranteed loans, and reduces equity requirements. In view of the high risks and speculative returns of a rural satellite project, subordination may be necessary to the success of the project. Alternatively, if the government is not permitted to take a subordinated lien, the cap on loan guarantees should be raised to reduce the risk to lenders.

Disqualification of existing DBS operators. While satellite carriers are critical to the delivery of local signals, the language in the bill appears to exclude the two existing DBS operators. The success of this program may well depend on the satellite carriers' cooperation since subscribers are likely to prefer hardware that is inexpensive and interoperable with their existing DBS equipment. Yet, under this proposal, satellite carriers with suitable unused spectrum may not participate in the loan program, and the NAB understands that both DirecTV and EchoStar, both likely partners in this process, may have available spectrum. The broad language of the bill would appear to disqualify consortia even when EchoStar, DirecTV or their affiliates hold only a minority interest. Accordingly, this limit on eligibility may be counterproductive in achieving the ultimate goal of delivering local signals to unserved areas.

THE NEED FOR STUDY AND CAREFUL CONSIDERATION

Given the technical and economic hurdles that satellite carriers would have to overcome in order to provide local television signals to rural Americans, and given the complexity of designing an efficient and effective loan guarantee program, NAB thanks the Senate Banking Committee for conducting this hearing, which we assume is the beginning of a thorough inquiry into alternative incentives. We also applaud the NTIA for commencing a wide-ranging public inquiry into local-into-local technology. NTIA has requested public comment on how to ensure the provision of local programming by satellite and other technologies to viewers in smaller communities. Congress likewise should take a careful and thorough look at alternative approaches, such as tax credits or direct loan programs.

CONCLUSION

Mr. Chairman, the NAB applauds Congress' recent action in passing the Satellite Home Viewer Improvement Act and the efforts of Congress to sustain localism by ensuring that rural Americans will benefit from access to local signals by satellite. The future of the 800 television stations operating in smaller markets and access to their signals for millions of Americans will depend on the success of this effort. And it must be a joint effort. It cannot happen without the cooperation of the broadcast, satellite and banking industries.

NAB is concerned, however, for the reasons I have discussed, that the loan guarantee program in its present form will not achieve this important objective. We look forward to working with this committee to design an appropriate economic incentive. Once again I would like to express on behalf of NAB its appreciation for the opportunity to testify before the members of the Senate Banking Committee today.




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