******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) United States Satellite Broadcasting Co., Inc.) Transferor ) ) and ) ) DIRECTV Enterprises, Inc. ) Transferee ) ) For Consent to Transfer of Control of the ) File Nos.: DBS-81-07 USSB II, Inc. Authorization to Operate a) DBS-81-07(II) Direct Broadcast Satellite System Using ) IBFS File Nos.: SAT-T/C-19981217-00098 Five Channels at the 101o W.L. Orbital) SES-T/C-19981217-01876 Location; Authorization to Construct, ) Launch, and Operate a Direct Broadcast ) Satellite System Using Three Channels ) at the 110o W.L. Orbital Location; and the ) Related Earth Registration (Call Sign E930437)) ) ) In the Matter of ) ) United States Satellite Broadcasting Co., Inc.) File No.: 45-SAT-EXT-97 Application for Additional Time to Construct) IBFS File No.: SAT-MOD-19970226-00020 and Launch a Direct Broadcast Satellite at the) 110o W.L. Orbital Location ) ORDER AND AUTHORIZATION Adopted: April 1, 1999 Released: April 1, 1999 By the Acting Chief, International Bureau: I. Introduction 1. By this Order, we grant the joint application of United States Satellite Broadcasting Co., Inc. ("USSB") and DIRECTV Enterprises, Inc. ("DIRECTV") for consent to transfer control of USSB's direct broadcast satellite ("DBS") authorizations and the related earth station registration (Call Sign E930437) from USSB to DIRECTV. We find, conditioned on service using the three DBS channels at 110o W.L. being implemented by December 31, 1999, that grant of this application is in the public interest and will allow DIRECTV to compete more effectively in multichannel video programming distribution ("MVPD") markets. Pursuant to our authority under Section 1.3 of the Commission's Rules, we also waive the due diligence requirement of Section 100.19(a) of the Rules and, therefore, dismiss USSB's application for additional time to construct and launch a DBS system using three channels at the 110o W.L. orbit location. II. Background 2. USSB received its initial permit to construct and launch a DBS system in 1982. In 1990, the Commission assigned USSB five channels at the 101o W.L. orbit location. In 1985, Hughes Communications Galaxy, Inc. ("Hughes"), DIRECTV's predecessor-in-interest, was assigned 27 channels at 101o W.L. In December 1993, DIRECTV and USSB, as joint owners, launched the nation's first DBS satellite into the 101o W.L. orbit location. Since June 1994, USSB has provided service to consumers using five transponders on this satellite while DIRECTV has provided service from 27 transponders. Both companies use the same subscriber receiving equipment and offer a joint program guide, but use separate billing and customer service systems. 3. In addition to its channels at 101o W.L., USSB was assigned three DBS channels at 110o W.L. In 1988, the Commission granted USSB an extension of time in which to commence DBS service from this orbit location. The Commission granted another extension in 1992, allowing USSB until December 4, 1997 to initiate service from 110o W.L. In February 1997, USSB filed a request for an extension of an additional two years, until December 1999, to implement these channel assignments. This request has been pending. As described below, it is the subject of the waiver granted in this Order and is dismissed. 4. USSB and DIRECTV assert that grant of their proposed application will strengthen DIRECTV's competitive position in the MVPD market and will facilitate provision of service to "underserved communities." No "petitions to deny" were filed. Three parties filed comments stating that grant of the Joint Transfer Application would reduce competition among satellite distributors. III. Discussion 5. The applications before us raise two primary issues. The first issue is whether the Commission should grant the proposed transfer of USSB's DBS authorizations to DIRECTV. The second issue concerns the resolution of USSB's pending request for extension of time to commence operation of its three DBS channels at 110o W.L., in order to determine whether these channels are available to be transferred to DIRECTV. A. USSB/DIRECTV's Request for Transfer 6. On December 14, 1998, Hughes Electronics Corporation announced it had reached an agreement to acquire all of the assets of USSB. To complete this transaction, Hughes proposes to transfer the stock of USSB II, a wholly-owned subsidiary of USSB (and the entity that holds the licenses under consideration in this proceeding) to DIRECTV, a wholly-owned subsidiary of Hughes. On December 17, 1998, USSB and DIRECTV filed a joint application requesting Commission consent to transfer control of USSB II's DBS and related earth station registration to DIRECTV. The parties propose to transfer USSB II's authorizations for five DBS channels at the 101o W.L. orbit location, three DBS channels at the 110o W.L. orbit location, and the related receive-only earth station registration, call sign E930437. 7. The applicants state that grant of the Joint Transfer Application would serve the public interest by strengthening the competitive position of DIRECTV in the MVPD market. With respect to the transfer of channels at 101o W.L., they state that the grant will allow DIRECTV to "eliminate the redundant operations and customer confusion that are inherent by-products of providing DBS service from the same satellite through two independent entities." In addition, they assert that the transfer will not threaten competition because DIRECTV and USSB offer complementary, not competitive services. With regard to the channels at 110o W.L., DIRECTV states that it plans to move one of its current DIRECTV satellites from 101o W.L. (DBS-I) to 110o W.L. and offer Spanish language programming from that location. It also states that the company plans to launch a replacement satellite into 101o W.L. DIRECTV asserts that the three channels at 110o W.L. will be in use by the Fall of 1999, providing service to an "underserved" segment of the country's population. 8. The applicable legal standard for evaluating this transaction is Section 310(d) of the Communications Act. Under Section 310(d), we must find that the proposed transfer serves the public interest, convenience, and necessity. To make this finding, we must weigh the potential public interest harms against the potential public interest benefits, considering both its competitive effects and other public interest benefits and harms. At a minimum, this analysis requires that the transfer not interfere with the objectives of the Communications Act. Also, this analysis necessarily includes an evaluation of the possible competitive effects of the transfer. As the Commission recently explained, "[O]ur public interest analysis is not, however, limited by traditional antitrust principles. . . . It also encompasses the broad aims of the Communications Act. . . . To apply our public interest test, then, we must determine whether the merger violates our rules, or would otherwise frustrate our implementation or enforcement of the Communications Act and federal communications policy. That policy is, of course, shaped by Congress and deeply rooted in a preference for competitive processes and outcomes." 9. Consistent with this precedent, in the first part of the analysis of the competitive effects of the proposed transfer, we identify the relevant product markets. Next, we consider whether the transfer is likely to result in anti-competitive effects or has other potential harmful public interest effects. 10. The Commission, in its annual assessment of the video marketplace, has considered DIRECTV and USSB as competing in two product markets. First, DIRECTV and USSB compete with each other and other distributors of video programming to a consumer's home for the acquisition of programming (the "programming market"). Second, DIRECTV and USSB compete with each other and other multichannel video program distributors in the delivery of multiple channels of video programming to a consumer's home (the multichannel video program distribution or "MVPD" market). 11. Next, we define the geographic scope of each product market. First, as to the "programming market," the Commission has considered this market to be national or regional in scope depending upon whether or not the programmer wishes to reach a national or regional audience. Because DIRECTV and USSB generally distribute programming to a national audience, they typically obtain programming from programmers wishing to reach a national audience. Thus, we view DIRECTV and USSB as competing in the national programming market. Second, as to the MVPD market, we note that the Commission has found that the relevant geographic market for assessing MVPD competition is a local area. The scope of the local area is defined by the overlap of the "footprints" of the various service providers in that area. Because DIRECTV and USSB distribute programming to consumers across the United States, they compete in each of the local MVPD markets. 12. We now analyze the proposed transfer's potential effects on competition in the national programming market. Under this analysis, if one entity has sufficient market power to exclude others from being able to obtain programming, or to force others to obtain programming at discriminatory prices, then this entity could seriously undermine competition in both the supply of programming and its distribution. We do not view the merger of DIRECTV and USSB as harming competition in this market. While we do not have data on DIRECTV's and USSB's purchases of video programming, as of June 1998, there were approximately 98 million households with a television set ("TV households") in the United States, and DIRECTV had approximately 4.3 million subscribers and USSB had approximately 2 million subscribers. These figures suggest that DIRECTV and USSB combined would not serve a sufficient number of TV households to enable them to them to exercise market power in the purchase of programming in the national programming market. 13. Concerning the geographic MVPD markets in which DIRECTV and USSB compete, we were unable to obtain data on DIRECTV and USSB subscribership at the local level; the only data available to us is national data. Consequently, we are not able to evaluate the competitive effects of their proposed transaction in each of the relevant local MVPD markets. Nevertheless, we do not believe that DIRECTV's acquisition of USSB's DBS licenses will enable DIRECTV to exercise significant market power in all of the markets in which it competes for two reasons. First, the 1998 Cable Competition Report notes that USSB's offerings are typically viewed by consumers as complementary to DIRECTV's offerings. As of the announcement date of the proposed transaction, 1.8 million of USSB's approximately 2 million subscribers also subscribed to DIRECTV's service. Thus, DIRECTV would gain only about 200,000 consumers by acquiring USSB. Therefore, after acquiring USSB, DIRECTV would have, at most, approximately 5.94% of the 76.6 million subscribers in the national MVPD market. This change, which would be less than 1%, would be too insignificant to raise competitive concerns under the DOJ/FTC merger guidelines. We view this national analysis as descriptive of the average effect of the proposed merger across local MVPD markets. 14. Second, according to the 1998 Cable Competition Report, as of June, 1998, 68.8% of homes passed by cable subscribe to basic cable services. Consequently, cable operators have a substantial share of TV households across many of the regions of the United States in which DIRECTV and USSB also compete. Further, based on available data, only 3.4% of U.S. TV households are not passed by a cable system. Thus, for most U.S. TV households, DIRECTV must potentially compete with at least one cable operator that likely will have a significant share of the local MVPD market. 15. The next part of our competitive analysis focuses on the effect that the proposed Joint Transfer Application, if granted, would have on potential competition in the product markets at issue here - - the national programming market and the local MVPD markets. The key competitive issue is whether or not allowing DIRECTV to acquire an additional eight full-CONUS DBS channels might prevent entry by another potential MVPD provider and thereby lessen competition in any of the relevant product markets in which it competes. 16. Because this transaction only involves a total of eight DBS channels at two different orbital locations, five at 101o W.L. and three at 110o W.L., we do not believe that grant of the Joint Transfer Application would be likely to preclude entry into the relevant product markets by another MVPD entrant. Further, existing competitors in local MVPD markets are investing heavily in additional capacity. Cable operators, for instance, have invested large amounts to increase their capacity to deliver more programming and other services to consumers. This has meant that for DBS operators to compete with cable operators, they also must acquire additional capacity to provide similar services. 17. Thus, we find that the grant of this application would allow DIRECTV to become a stronger competitor in the MVPD market, which we believe would further the overall public interest in increasing the strength of competitive alternatives to cable within the MVPD market. B. USSB Request for Additional Time 18. As part of the proposed transaction, DIRECTV would acquire the three channels that USSB is assigned to at the 110o W.L. orbital location. USSB has not yet implemented service at these channels. USSB received its initial assignment for these channels in 1984. In 1988, the Commission granted USSB an extension of time within which to commence service at this location, from December 3, 1988 to December 4, 1992. In 1992, USSB received a second extension of five years, extending USSB's operation deadline from December 4, 1992 to December 4, 1997. The Mass Media Bureau noted that this second extension was justified due to the considerable effort and money expended -- a financial commitment of over twenty-three million dollars --, the progress attained, USSB's overall contribution to the development of DBS, and the compelling interest of service to the public. On February 26, 1997, USSB filed a request for additional time, from December 12, 1997 to December 12, 1999, to implement its authorization to construct and launch a satellite using three DBS channels at the 110o W.L. orbit location. No party filed comments or opposed this request. We address this request here in order to determine whether USSB can transfer its assignment of these DBS channels to DIRECTV. 19. Section 100.19 of the Commission's rules, requires that an entity receiving a DBS authorization proceed with "due diligence" in implementing its authorization, unless the Commission determines otherwise after a "proper showing." An application for transfer of control, however, cannot justify an extension of the due diligence deadlines. The due diligence requirement has two prongs. The first prong requires a permittee to either begin construction or complete a contract for construction within one year of receiving a construction permit. USSB has complied with this requirement. The second prong requires the permittee to begin operation within six years of receiving that permit. Although we find that USSB has not met the second prong of the due diligence rule within the requisite time, on our own motion, we find that it is in the public interest to waive Section 100.19(a) of the rule. 20. Commission rules allow for waiver where good cause is shown. In regard to the Commission's waiver standard, the United States Court of Appeals has stated that granting a waiver of a particular rule may be appropriate if unique circumstances support a finding that strict adherence would not be in the public interest and where a grant would not undermine the underlying policy objectives of the rule in question. As the court stated, though "an agency may discharge its responsibilities by promulgating rules of general application which, in the overall perspective, establish the 'public interest' for a broad range of situations, [this] does not relieve it of an obligation to seek out the 'public interest' in particular, individualized cases." We believe that the public interest is served by granting a waiver of the Commission's DBS due diligence requirement under these unique circumstances. We also conclude that the underlying policy objectives of the due diligence rule are not compromised by this waiver. However, we condition grant of the Joint Transfer Application on DIRECTV's commencing service from 110o W.L. orbit location, using the three DBS channels, by December 31, 1999. If DIRECTV fails to commence service by this time, the Commission will reclaim these channels by cancelling DIRECTV's authorization. 21. First, we find that this situation presents unique and unusual circumstances that justify a waiver. As an experienced DBS operator and pioneer, USSB has demonstrated a genuine commitment and progress in the implementation of its DBS service. The efforts of USSB in bringing its DBS authorization at 101o W.L. into productive use almost five years ago is well established and commendable. Those efforts, which included making financial arrangements, contracting with DBS home receiving equipment suppliers, and making significant monetary investments, have helped it develop a valuable history and expertise in the DBS industry. USSB has continued to apply the same type of effort to bring its three channels at 110o W.L. into productive use. Prior to the announcement of the proposed transfer of control to DIRECTV, its efforts included its continued compliance with the construction contract with Lockheed Martin Corporation ("Lockheed Martin") -- which was placed on an accelerated schedule at the time of its application for additional time. USSB continued to make monthly payments on the construction contract; payments to date total $7.6 million. It also has expended efforts to negotiate launch vehicle services with Arianespace. Moreover, USSB continues to oversee its previously established broadcast centers, handles program distribution agreements with programmers, administers its subscriber services center, markets its DBS service to the public, and generally promotes its DBS service, as it has done over the past decade. 22. Nevertheless, as described in the record, USSB has encountered significant difficulties in implementing its DBS service at the 110o W.L. orbit location, which have made it difficult for USSB to strictly comply with our due diligence rule. We believe, however, that USSB has made reasonable attempts to overcome these difficulties. The primary difficulty is the fact that for nine years, USSB has had only three DBS channels at the 110o W.L. orbit location. It is commercially difficult to finance and construct a satellite designed with so few authorized channels. We note, that the issue of a minimal channel assignment at any particular DBS orbit location was not addressed when the due diligence rule was originally formulated. The Commission, however, now recognizes that an assignment of a small number of channels can be a serious difficulty. In particular, the Commission has stated that "[f]our channels may not provide sufficient capacity to operate a viable system, [and] such piecemeal assignment of channels could render the potentially full-CONUS orbital location at 110o W.L. unusable by any single permittee." USSB resolved a similar problem at the 101o W.L. orbit location by purchasing an equity interest in DIRECTV's satellite there and by implementing a complementary service. 23. As the record demonstrates, USSB has made consistent attempts over the past several years to achieve a similar contractual sharing-type arrangement for its authorization at 110o W.L., but has been unsuccessful. USSB asserts that its attempts to negotiate a sharing agreement have been made uniquely difficult by several factors. First, it contends that the failure of Advanced Communications Corp. ("ACC") to proceed with due diligence in the construction and launch of its DBS system and the Commission's subsequent denial of ACC's proposal to sell its DBS authorization to Tempo Satellite, Inc., led to what was, in effect, a lost opportunity for USSB to negotiate a sharing agreement. Adding to the delay, ACC's reclaimed channels were subsequently auctioned to MCI. USSB asserts that, although MCI was originally receptive to a sharing proposal, it ultimately chose not to negotiate. USSB, therefore, states that it then proceeded to expeditiously complete construction and launch of its own DBS satellite. 24. We acknowledge the unique difficulties that USSB has encountered in attempting to negotiate a sharing arrangement at 110o W.L. The minimal channels it has been assigned at this location has hampered its implementation of a DBS service at 110o W.L. In addition, we find that a waiver will not undermine the policies underlying Section 100.19. The primary purpose of our DBS due diligence requirement is to prevent warehousing of "substantial blocks of spectrum and valuable orbital positions." In this case, USSB has neither a substantial block of spectrum nor control of a valuable orbital location. Given that USSB's current assignment at the 110o W.L. orbit location contains only three DBS channels, a waiver would not undermine our warehousing policy, which is the basis of the due diligence rule. We further note that no party, including any satellite company that conceivably could provide DBS service at 110o W.L., opposed the extension request or commented on it. 25. Further, the Commission has asserted that a primary goal in initiating DBS service is to provide competition to distributors like cable operators, improve service to remote areas, encourage innovative new programming, and expedite the delivery of DBS service to the public. Here, DIRECTV asserts that it will expeditiously initiate DBS service from the 110o W.L. orbit location within a few months from grant of the Joint Transfer Application. Specifically, the parties assert that DBS service from the 110o W.L. orbit location is imminent -- by the fall of this year. A grant of additional time here satisfies our policy objectives of expeditious delivery of service to U.S. consumers. It is doubtful that the Commission could adopt any alternative plan, for example, reclaiming these channels and auctioning them, that would result in service to consumers any sooner, utilizing the three DBS frequency channels at 110o W.L. In order to assure that consumer service is in fact implemented expeditiously, we condition the Joint Transfer Application, with respect to the three channels at 110o W.L., on the requirement that DIRECTV commence service from the 110o W.L. orbit location by December 31, 1999. If DIRECTV fails to commence service by this time, the Commission will reclaim these channels and cancel DIRECTV's authorization for these three channels at 110o W.L. 26. The facts before us show that, overall, USSB has made a real and measurable commitment to providing a DBS service, and in particular from the 110o W.L. orbital location. Its proposed transaction with DIRECTV is not simply the transfer of bare DBS authorizations but, instead, the transfer of an entire, ongoing business, which includes five operating channels at 101o W.L., an authorization for three channels at 110o W.L., and three earth stations. This situation is clearly different from that of ACC, which was attempting to transfer bare licenses, and nothing else. USSB has made steady progress in implementing its complete DBS service, including operating DBS channels. In contrast, ACC's situation was characterized as "extended inaction and apparent lack of commitment." USSB, as noted above, continued its efforts, including making significant investments in its system. Even with the advantage of a prime orbital location with enough channels to implement a viable and productive DBS service, ACC failed to demonstrate "concrete progress" toward launch and operation. Instead, ACC chose to concentrate its efforts on negotiating a merger or a transfer in lieu of building a DBS business. Its primary goal, unlike USSB's, was to secure a windfall from the authorization of valuable spectrum awarded to it, at virtually no cost. 27. The unique circumstances here justify our decision to grant USSB a waiver of our due diligence rules. The facts before us show that USSB has continued to make significant efforts toward the implementation of DBS service at 110o W.L. in the face of significant difficulties. Further, we find that the policy objectives of the due diligence rule are not undermined by the grant of a waiver. In particular, with the accompanying grant of the application to transfer the licenses to DIRECTV, the public interest will be served by the swift initiation of DBS service from the 110o W.L. orbit location. IV. Conclusion 28. Accordingly, for the reasons stated above, we find that it is in the public interest to grant the Joint Transfer Application of DIRECTV and USSB for consent to transfer control of USSB's DBS authorizations to DIRECTV, subject to the condition that, with respect to the three channels at 110o W.L., DIRECTV commence service from that orbit location by December 31, 1999. We also find that it is in the public interest to waive the due diligence requirement of Section 100.19(a) with regard to USSB's pending application for additional time to construct and launch a Direct Broadcast Satellite at 110o W.L. and dismiss it. V. Ordering Clauses 29. Accordingly, IT IS ORDERED, pursuant to Section 0.261 of the Commission's rules on delegated authority, 47 C.F.R.  0.261, that the application for consent to transfer of control, Files Nos. DBS-81-07 and DBS-81-07(II), IBFS File Nos. SAT-T/C-19981217-00098 and SES-T/C-19981217- 01876, filed by United States Satellite Broadcasting Company, Inc., and DIRECTV Enterprises, Inc. IS GRANTED, SUBJECT TO THE CONDITION that, with respect to the three channels at 110o W.L., DIRECTV Enterprises, Inc., initiate service using these three channels by December 31, 1999. 30. IT IS FURTHER ORDERED, pursuant to Section 1.3 of the Commission's rules, 47 C.F.R.  1.3, that the due diligence requirement of Section 100.19(a) of the Commission's rules, 47 C.F.R.  100.19(a), with respect to the United States Satellite Broadcasting Company, Inc.'s application for additional time, File No. 45-SAT-EXT-97, IBFS File No. SAT-MOD-19970226-00020, IS WAIVED. 31. IT IS FURTHER ORDERED that the United States Satellite Broadcasting Company, Inc.'s application for additional time, File No. 45-SAT-EXT-97, IBFS File No. SAT-MOD-19970226- 00020, IS DISMISSED. 32. IT FURTHER ORDERED THAT this Order is effective upon release. FEDERAL COMMUNICATIONS COMMISSION Roderick K. Porter Acting Chief, International Bureau