by Marc Crossman

A new era for all multichannel programs, cable and DBS operators alike, came to life when the U.S. Senate passed a satellite bill in late May that allows satellite television services to carry local stations into local markets for the first time since DBS came into operation in the United States. However, this new legislation is not without pitfalls.

The expeditious nature in which both the House and the Senate reacted was motivated primarily by the conclusion of cable regulation back in March. The cable regulation now allows the cable industry to operate with more freedom, and Congress put forward the new DBS legislation with the intention of empowering the DBS industry to become a strong competitor to cable. The next step in this process is for the Senate bill to be reconciled with the House bill and then sent to the president. In keeping with the pace of this topic so far, it is anticipated that we will have a "new" or "revised" Satellite Act by mid-summer.

According to experts in the DBS industry, the inability of DBS service providers to broadcast local television programming has thwarted business; studies indicate that this has been the principal reason why customers would choose cable over DBS when given a choice. The ability to offer local broadcasting should thus expand the DBS market.

However, the "must-carry" situation has not been completely resolved with the passing of these two bills by Congress. In order for the two bills to be passed, the "must-carry" issue needs to be addressed in a manner acceptable for all interested parties, especially the broadcasters. The cable industry is strongly advocating that DBS providers be required to carry all local channels in the markets they serve. The DBS industry’s desire to carry local programming is largely confined to the major network affiliates of ABC, NBC, CBS and Fox.

According to both bills, the DBS operators will be required to carry every broadcast channel starting January 1, 2002.

Although this "phased-in," must-carry approach would appear to satisfy everyone, the current schedule raises grave concerns for the satellite industry. An enormous amount of satellite capacity is required for the DBS operators to carry all channels in all markets where they have a presence. For example, before the must-carry requirements come into effect, DBS operators plan to immediately offer four local channels (ABC, NBC, CBS and Fox) per market. By targeting the top 20 markets, each DBS operator will need an additional 80 channels. Given the consolidations in the industry, this is achievable.

However, after the implementation of the must-carry requirements in 2002, if each local market had only 10 to 20 local channels, the DBS operators would need an additional 120 to 320 channels. In all probability they would require more capacity than they currently have. This is assuming all of their existing capacity remains intact. Given that it takes 15 to 20 months to build and launch a satellite, the 2002 deadline is more of a compromise to please the broadcasters than it is to help the DBS operators.

In the meantime, however, the market seems to be very much in favor of a new satellite bill and believes it will be good for the DBS sector, as evident by the strength in GMH’s stock price lately and the meteoric rise of Echostar’s stock price as of late May. As a DBS pureplay, Echostar has benefited more from this new favorable DBS environment than GMH, DirecTV’s parent company. However, if both Echostar and DirecTV continue to show strong subscriber growth, especially once the local broadcasting issue has been lifted when this bill is scheduled to become law later this summer, both their stocks will continue to be rewarded by the market.

Marc Crossman is a vice president at J.P. Morgan in New York City. These views are those of the author and do not necessarily reflect the views of the Via Satellite editors or J.P. Morgan.