Statement Of

LOCAL TV ON SATELLITE, LLC

Before The

Committee On Agriculture, Nutrition And Forestry

U.S. Senate

Hearing On

Rural Satellite And Cable Systems Loan Guarantees

February 3, 2000

Good morning, and thank you for inviting me to appear at today's hearing on federal loan guarantees to promote the satellite delivery of local television signals to rural areas. I am John Hutchison, Executive Vice President and Chief Operating Officer of Local TV on Satellite, LLC ("LTVS"). LTVS was founded in 1997 by Capitol Broadcasting Co., Inc., its subsidiary, Microspace Communications Corporation, and certain other shareholders.

LTVS was founded to develop a basic local television station satellite delivery service that will deliver via direct broadcast satellite ("DBS") systems all local television stations in a given market. LTVS has developed a business plan and the technology to distribute via satellite all over-the-air, full power, commercial and noncommercial television stations within a given station's Designated Market Area or DMA. LTVS will provide the signals of all stations in approximately the top 66 markets in the United States and reach approximately 75% of the U.S. television households.

Our intent is to deliver individual local station packages to all DBS providers, who will then retail these packages to their subscribers. LTVS will enable consumers to have the convenience of receiving their national DBS program service and local television signals with one dish, one box, and with one bill.

Last year Congress passed the Satellite Home Viewer Improvement Act. That important legislation will provide long-awaited benefits to consumers. Consumers who subscribe to DBS will now be able to receive local broadcast programming through their DBS provider. Consumers who were hesitant to consider subscribing to a DBS service because of the absence of local station signals can now choose among competing multichannel video programming distributors. The legislation removes a primary competitive obstacle for DBS in competition with cable.

The passage of the Satellite Home Viewer Improvement Act will enable LTVS to move forward with its plan for providing consumers with improved DBS service. We are pleased to report that since the passage of the Satellite Home Viewer Improvement Act, LTVS has made steady progress in implementing its business plan. LTVS is in the process of making the strategic alliances necessary to bring its ALL STATIONS IN A MARKET plan to fruition.

With that introduction and background, I turn now to the reason for this hearing -- to ensure that rural America is able to receive local television signals via satellite. LTVS strongly agrees with this committee and the Senate Banking Committee that local television coverage is vitally important for rural development efforts. Specifically, local television broadcasts of crop reports, local news, weather reports, public service announcements, and advertisements by local businesses are important to rural development. Accordingly, LTVS supports legislation that would provide loan guarantees for satellite carriers to deliver local television signals to small and rural markets.

LTVS has studied the plan of providing local-into-local broadcast service to these small and rural markets. Based on our business model, we have determined that it cannot be done without government assistance. Given that private investors seek to maximize their short or near-term returns, a local-into-local solution for rural America cannot be funded on a purely commercial basis. Let me explain. The capital costs to serve the smaller 144 markets will be at least as much as the capital costs to serve the larger 66 markets, both of which are served by 800 television stations. I say "at least as much" because the capital costs to serve the small and rural markets would likely be even greater given the need for the greater number of uplink sites and the likelihood of a longer period of operating losses.

Despite the potential of greater capital costs, the smaller 144 markets, served by 800 stations, represent only 25% of the population. The larger 66 markets, also served by 800 stations, provide three times that subscriber base. In addition, currently there is no market research to show that satellite providers could gain enough subscribers in the rural areas to secure an adequate and early return on their investments. Under these circumstances, the private investment community would simply refuse to finance the disproportionately expensive technical program necessary to serve a smaller subscriber base.

A federal loan guarantee, therefore, is desirable in that it will enable capital to be raised to finance satellite systems for the delivery of local television signals to rural viewers. Based on a conservatively constructed business model, LTVS believes that such a loan would be fully repaid. Our business model shows that in the first two years, a satellite provider of local television stations should cover its costs. In year three, it should generate enough income to cover its interest costs, and by year five there would be sufficient positive cash flow to begin amortizing the loan. In addition, by this date, the enterprise would have reached a critical mass of subscribers that could then make it a more attractive investment opportunity for private investors. This additional private capital would be used to further service the debt. Finally, our business model shows that the loan would be fully repaid by year 15.

In short, we believe the private marketplace will not provide the majority of the initial funds necessary to construct, launch and operate a satellite system to provide local-into-local television service to small and rural markets. With the support of a federal loan guarantee, however, LTVS believes that a common industry platform can be developed to ensure that small and rural markets across the United States can receive local television stations via satellite.

However, in order for a rural local-into-local satellite system to work today and in the future, the enabling legislation should establish strong eligibility criteria. In order to qualify for a loan, a satellite provider must demonstrate that it will (1) develop a common industry platform to be used by all DBS providers, (2) design the satellite to carry the entire 19.4 Mbps digital signal of a broadcast station, and (3) provide full must carry. I will address each of these criteria in turn.

First, a common industry platform is essential to minimize unnecessary duplication of the use of government funds and government allocated spectrum. By a common industry platform I am referring to a local-into-local satellite system that is technically compatible with DirecTV and Echostar, the two main DBS providers. In other words, the satellite system will permit all DBS subscribers, whether DirecTV's or Echostar's, to receive from their individual DBS provider the delivery of their national DBS program service as well as their local television signals with one dish and one set-top box.

The satellite will retransmit all of the local television stations in the small and rural markets and deliver the appropriate signals directly to DBS subscribers. Using this common platform approach, both DirecTV's and Echostar's receivers will be designed to enable their subscribers to receive and unscramble the local television signals.

To gain the necessary number of subscribers to make the plan financially viable, both DirecTV and Echostar must include the local stations in their packages. By marketing a single, unified service, similar to cable, each of DirecTV and Echostar will encourage the purchase of the local station packages along with other program offerings. Only in this way will consumers have a genuine choice in selecting a multichannel video program distributor.

Second, satellite carriers must be required to carry every station's full digital signal of 19.4 Mbps. A satellite is expected to have a life of 15 years. Thus, a satellite system must be designed to be forward compatible in anticipation of the future digital environment. The satellite should be able to accommodate the government mandated digital television rollout. It would be financially impractical and commercially short-sighted to build a satellite that would be obsolete early in its life.

Finally, in order to ensure parity with cable in terms of the availability of all local broadcast programming, the legislation must require full must carry. Through the Satellite Home Viewer Improvement Act, Congress has now allowed consumers to receive their DBS signal and ALL of their local broadcast stations from their DBS provider with full must carry required as of January 1, 2002. If no single DBS provider carried all of the available broadcast programming in the local market, then the very purpose of the Satellite Home Viewer Improvement Act would be eviscerated. As a result, small and rural market viewers would never enjoy the full benefits of the Satellite Home Viewer Improvement Act.

In conclusion, a loan guarantee program to ensure that the rural viewer can receive local television signals via satellite would serve an important public interest purpose, and LTVS supports such a loan program. The enabling legislation should establish strong criteria to ensure that rural viewers receive the full benefits of a local-into-local satellite service. Accordingly, the loan guarantee should be available only to satellite providers that will carry ALL of the local television stations in a given market with every station's FULL digital signal of 19.4 Mbps.

I thank you for the opportunity to appear before you today. LTVS is ready to work with this committee to ensure improved access to local television signals in rural and underserved areas. I would be pleased to answer any questions.

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