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a364DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.J` ` @  ` `  a464DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.S` `  @  a564DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.\` `  @hh# hhh 2]a664DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.e` `  hh#@( hh# a764DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.n` `  hh#(@- ( a864DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.w` `  hh#(-@pp2 -ppp a165DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.8@   2 !  `  a265DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.A@` `  ` ` ` a365DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.J` ` @  ` `  a465DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.S` `  @  a565DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.\` `  @hh# hhh 2  | Ma665DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.e` `  hh#@( hh# a765DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.n` `  hh#(@- ( a865DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.w` `  hh#(-@pp2 -ppp a166DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.8@   2Pa266DE+p@xRight-Aligned Paragraph Numbersp~ 0*p.A@` `  ` ` ` 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Roman (TT)uV  P7/QuP  `CG Times (W1)uC\  P0QP\  `*Times New Roman (TT)uV  P71QuP  `CG Times (W1)uC\  P2QP\  `*Times New Roman (TT)uV  P73QuP  `CG Times (W1)uC\  P4QP\  `*Times New Roman (TT)uV  P75QuP  `CG Times (W1)uC\  P6QP\  `*Times New Roman (TT)uV  P77QuP  `CG Times (W1)uC\  P8QP\  `*Times New Roman (TT)uV  P79QuP  `CG Times (W1)uC\  P:QP\  `*Times New Roman (TT)uV  P7;QuP  `CG Times (W1)uC\  P<QP\  `*Times New Roman (TT)uV  P7=QuP  `CG Times (W1)uC\  P>QP\  `*Times New Roman (TT)uV  P7?QuP  `CG Times (W1)uC\  P@QP\  `*Times New Roman (TT)uV  P7AQuP  `CG Times (W1)uC\  PBQP\  `*Times New Roman (TT)uV  P7CQuP  `CG Times (W1)uC\  PDQP\  `*Times New Roman (TT)uV  P7EQuP  `CG Times (W1)uC\  PFQP\  `*Times New Roman (TT)uV  P7GQuP  `CG Times (W1)uC\  PHQP\  `*Times New Roman (TT)uV  P7IQuP  `CG Times (W1)uC\  PJQP\  `*Times New Roman (TT)uV  P7KQuP  `CG Times (W1)uC\  PLQP\  `*Times New Roman (TT)uV  P7MQuP  `CG Times (W1)uC\  PNQP\  `*Times New Roman (TT)uV  P7OQuP  `CG Times (W1)uC\  PPQP\  `*Times New Roman (TT)uV  P7QQuP  `CG Times (W1)uC\  PRQP\  `*Times New Roman (TT)uV  P7SQuP  `CG Times (W1)uC\  PTQP\  `*Times New Roman (TT)uV  P7UQuP  `CG Times (W1)uC\  PVQP\  `*Times New Roman (TT)uV  P7WQuP  `CG Times (W1)uC\  PXQP\  `*Times New Roman (TT)uV  P7YQuP  `CG Times (W1)uC\  PZQP\  `*Times New Roman (TT)uV  P7[QuP  `CG Times (W1)uC\  P\QP\  `*Times New Roman (TT)uV  P7]QuP  `CG Times (W1)uC\  P^QP\  `*Times New Roman (TT)uV  P7_QuP  `CG Times (W1)uC\  P`QP\  `*Times New Roman (TT)uV  P7aQuP  `CG Times (W1)uC\  PbQP\  `*Times New Roman (TT)uV  P7cQuP  `CG Times (W1)uC\  PdQP\  `*Times New Roman (TT)uV  P7eQuP  `CG Times (W1)uC\  PfQP\  `*Times New Roman (TT)uV  P7gQuP  `CG Times (W1)uC\  PhQP\  `*Times New Roman (TT)uV  P7iQuP  `CG Times (W1)uC\  PjQP\  `*Times New Roman (TT)uV  P7kQuP  `CG Times (W1)uC\  PlQP\  `*Times New Roman (TT)uV  P7mQuP  `CG Times (W1)uC\  PnQP\  `*Times New Roman (TT)uV  P7oQuP  `CG Times (W1)uC\  PpQP\  `*Times New Roman (TT)uV  P7qQuP  `CG Times (W1)uC\  PrQP\  `*Times New Roman (TT)uV  P7sQuP  `CG Times (W1)uC\  PtQP\  `*Times New Roman (TT)uV  P7uQuP  `CG Times (W1)uC\  PvQP\  `*Times New Roman (TT)uV  P7wQuP  `CG Times (W1)uC\  PxQP\  `*Times New Roman (TT)uV  P7yQuP  `CG Times (W1)uC\  PzQP\  `*Times New Roman (TT)uV  P7{QuP  `CG Times (W1)uC\  P|QP\  `*Times New Roman (TT)23|V  #XP\  PzQXP#FCC 95507  Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of hh#(-) ` `  hh#(-)pp2IB Docket No. 95168 Revision of Rules and Policies for the( -)pp2PP Docket No. 93253 Direct Broadcast Satellite Servicehh#(-)  REPORT AND ORDER Adopted: December 14, 1995(-pp2Released: December 15, 1995 By the Commission: Commissioners Quello and Barrett concurring in part and dissenting in part and issuing separate statements.  TABLE OF CONTENTS Para.  I.INTRODUCTION p"'J1 II.ADOPTION OF NEW SERVICE AND ONETIME AUCTION RULES p"'J8 A.` ` Performance Objectivesp"'J8 B.` ` Use of DBS Capacityp`"'I12 C.` ` Rules and Policies Designed to Promote Competitionp`"'I23 ` ` 1. The State of Competition Among MVPDs ` `  and the Role of DBS Rivalryp`"'I32 ` ` 2. Spectrum Aggregation Limitationsp`"'I52 ` `  a.IntraDBS Spectrum Limitationsp`"'I55 ` `  b.MVPD/DBS Spectrum Limitationsp`"'I70 ` `  c.Orbital Locations Covered by Spectrum Limitationsp`"'I77 ` `  d.Mechanism for Divestiturep`"'I80 ` `  e.Attribution Rulesp`"'I85 ` ` 3. Conduct Rulesp`"'I98 ` ` 4. "Headend in the Sky" Servicep!'H110 ` ` 5. Other Concerns About DBSRelated Conductp!'H119 ` ` 6. East/West Paired Assignmentsp!'H123 D.` ` Service to Alaska and Hawaiip!'H125E.` ` License Termp!'H129 III.ADOPTION OF A NEW METHODOLOGY FOR REASSIGNING DBS RESOURCES p!'H131 IV.ADOPTION OF RULES FOR AUCTIONING DBS PERMITS p!'H153 A.` ` Authority to Conduct Auctionsp!'H153 B.` ` Competitive Bidding Designp!'H166 C.` ` Bidding Proceduresp!'H182 D.` ` Procedural and Payment Issuesp!'H191 E.` ` Regulatory Safeguardsp!'H204 F.` ` Designated Entitiesp!'H211 V.CONCLUSION AND ORDERING CLAUSES p!'H218 Appendix A:` ` List of Parties Filing Comments and Reply Comments Appendix B:` ` Final Rules Appendix C:` ` OneTime Auction Spectrum Limitations Appendix D:` ` Final Regulatory Flexibility Analysis  I. INTRODUCTION  I. 1. 1. a.(1)(a) i) a)` ` With this Report and Order, we adopt new rules and policies for the Direct Broadcast Satellite ("DBS") service that are designed to better reflect the realities of the service as it has evolved to date than do the existing "interim" rules and policies that were formulated in a different regulatory environment and without the benefit of experience with actual operation of a DBS licensee. ` ` We initiated this proceeding on October 30, 1995, when we issued a Notice of Proposed Rulemaking ("NPRM") to revise the rules and policies for the DBS service.S#uV  P7{QuP##C\  P|QP#эSee Revision of Rules and Policies for the Direct Broadcast Satellite Service, Notice of Proposed Rulemaking, FCC 95443, IB Docket No. 95168, PP Docket No. 93253 (released Oct. 30, 1995).S Our action was precipitated by our recent decision to cancel the DBS construction permit of Advanced Communications Corporation ("ACC") for failure to meet its obligation to proceed with due diligence toward construction and operation of its DBS system.#uV  P7}QuP##C\  P~QP#эAdvanced Communications Corp., FCC 95428 (adopted Oct. 16, 1995)("Advanced Order"). We tentatively concluded that the method we had previously stated would be used to reassign recovered DBS resources no longer serves the public interest, and accordingly proposed to use competitive bidding when the Commission has received mutually exclusive applications for reassignment of such DBS resources. Specifically, we proposed to auction two large blocks of channels that are currently available at two orbital locations. ` ` In addition, the NPRM proposed new service rules that would: (1) impose performance criteria intended to ensure that DBS resources are utilized in a timely manner; (2) guard against potential anticompetitive conduct by DBS providers; and (3) ensure timely DBS service to Alaska and Hawaii. We also requested comment on our existing policy governing the extent to which DBS resources may be put to alternative uses. ` ` In response to the NPRM, the Commission received 27 initial comments and 24 reply comments from entities representing many sectors of the communications industry.D#uV  P7QuP##C\  PQP#эAppendix A contains a list of those parties who submitted comments and reply comments in this proceeding. The commenters will be referred to herein by the abbreviations noted in that appendix.D Many of our proposed service rules enjoyed broadbased support. Others, especially those relating to competition issues, elicited spirited debate. For example, the comments indicate the large division between the views of existing DBS permittees and those seeking to enter the service, as well as between those who own other multichannel video programming distributors ("MVPDs"), such as cable operators, and those who do not. ` ` In light of the comments submitted in this proceeding, we have decided to adopt a number of the rules we proposed. After considering the range of suggestions for rules to protect competition, however, we have decided to adopt a single onetime rule specifically designed to promote and protect competition: no person with an attributable interest in channels at a fullCONUS location shall acquire an attributable interest in the channels currently available at the 110$ orbital location without divesting its existing interest in fullCONUS channels at another location within twelve months of such acquisition. Under this rule, a person currently holding an attributable interest in channels at one of the three orbital locations capable of fullCONUS service would be allowed to bid for the channels currently available at 110$, but if successful would have to divest its current fullCONUS channels within one year. This rule is intended to ensure that, for the time being, each fullCONUS orbital location will have an operator that is independent of and competitive with the other fullCONUS operators. Since this rule expires upon completion of the auction process, the Commission will be free to reevaluate this "one location" approach in the course of considering future transactions in the DBS service that are subject to our approval. ` ` We have also concluded that the public interest is no longer served by the pro rata methodology established in Continental for reassigning reclaimed DBS channels. Although a number of current permittees object to this change in policy as unjustified, unfair, and even unconstitutional, we believe that the public interest would be served by adopting rules that will result in efficient and expedited DBS service from the channels currently available. ` ` We have concluded that the Commission has the authority to award DBS construction permits by means of competitive bidding, and that the use of competitive bidding to assign DBS spectrum will promote the rapid deployment of DBS service and the efficient use of DBS spectrum more effectively than any other assignment method. We have decided to award construction permits for the channels available at 110$ and 148$ by means of a sequential multiple round electronic auction, and we adopt rules to implement this auction. At the same time, we recognize that other auction designs could be suitable for DBS under certain circumstances in the future, and we therefore also adopt rules to provide for these auction designs.  OD II. ADOPTION OF NEW SERVICE AND ONETIME AUCTION RULES ă A.Performance Objectives ` ` The NPRM tentatively concluded that combining existing due diligence requirements with additional milestones for construction and operation of DBS systems by new permittees will prevent unnecessary delays in the commencement of service. Accordingly, the NPRM proposed rules to add two additional performance criteria for those receiving DBS construction permits after the effective date of the proposed rule: (1) completion of construction of the first satellite in a DBS system within four years of authorization; and (2) launch and operation of all satellites in a DBS system within six years of authorization.#uV  P7QuP##C\  PQP#эSee NPRM at  2527. ` ` The comments reveal a great deal of support for tightened performance objectives to ensure the timely development of the DBS service. A number of commenters support the rule as proposed,#uV  P7QuP##C\  PQP#эSee, e.g., BellSouth Comments at 23; DIRECTV Comments at 23; GE Americom Comments at 20; MCI Comments at 7. while Primestar and Tempo advocate stronger rules that would apply to existing permittees as well as new entrants in light of the slow pace of construction in the service to date. DBSC opposes as unfair the imposition of additional requirements upon existing permittees.#uV  P7QuP##C\  PQP#эDBSC Comments at 15. Primestar also proposes to shorten the contracting period from one year to six months, require the first satellite to be built within three and a half years rather than four years, and require all satellites to be in operation in five rather than six years from authorization.#uV  P7QuP##C\  PQP#эSee Primestar Comments at 1213. Tempo supports the fouryear first satellite construction period, but encourages a stronger mechanism for enforcement than has been implemented to date.#uV  P7QuP##C\  PQP#эSee Tempo Comments at 31. ` ` We will adopt the performance objectives as proposed in the NPRM. We believe that these new objectives, combined with existing due diligence requirements, #uV  P7QuP##C\  PQP#эSee 47 C.F.R.  100.19. will ensure consistent and purposeful progress toward construction and operation of DBS systems by those receiving permits after the effective date of this rule. These performance requirements will apply to any person who acquires a permit through the competitive bidding process, and thus further the congressional goals of preventing warehousing of spectrum and encouraging investment in and rapid deployment of new services. #uV  P7QuP##C\  PQP#эSee 47 U.S.C.  309(j)(4)(B). We decline to apply the rule to existing permittees, however. Of the eight current DBS permittees, two (DIRECTV and USSB) have already built and launched satellites, and three more (Tempo, EchoStar, and Directsat) have nearly completed construction of at least one satellite. Two others (Continental and DBSC) were recently granted permit extensions based on their demonstrated commitment to and capability of providing DBS service in an expedited manner.- #uV  P7QuP##C\  PQP#эPermit extensions granted to two permittees who only recently received their channel assignments have been tied to compliance with their respective construction contracts, both of which provide for operational systems within four years. See Continental Satellite Corp., DA 952347 (Int'l Bureau, released Nov. 21, 1995); Direct Broadcasting Satellite Corp., DA 952439 (Int'l Bureau, released Dec. 8, 1995).- The remaining permittee (Dominion) was determined to have met the first prong of our due diligence requirements and granted orbital/channel assignments only four months ago. #uV  P7QuP##C\  PQP#эSee Dominion Video Satellite, Inc., DA 951734 (Int'l Bureau, released Aug. 7, 1995). Under these circumstances, we believe it would be inappropriate to apply the new rules to existing permittees. ` ` In addition, we decline to accelerate the milestones as proposed by Tempo. Of the five new permittees that entered the DBS service as a result of our Continental proceeding, only one EchoStar submitted its contractual due diligence showing within six months, although Tempo Satellite submitted its showing in just over six months. #uV  P7QuP##C\  PQP#эSee Continental Satellite Corp., 4 FCC Rcd 6292 (1989), partial recon. denied, 5 FCC Rcd 7421 (1990). The Continental order was released on August 15, 1989. EchoStar filed its due diligence showing on February 8, 1990; Tempo Satellite on February 22, 1990; Directsat on March 21, 1990; DBSC on April 3, 1990; and Continental on August 14, 1990.  Although their order in the assignment queue was to be determined by the speed of their due diligence filings, the other three permittees took up to the full year allowed in the regulations to make their submissions. New entrants, having paid for their channels at auction, would have a demonstrable incentive to accelerate their progress toward operation in order to recoup their investment as quickly as possible. We do not, however, find it necessary to allow them less time to contract for satellite construction than has been required by prior permittees. Since the contracting period remains one year, and even Tempo does not dispute the three year interval between contracting and completion of the first satellite, we also will not shorten the construction periods. We will, however, monitor semiannual reports more closely in the future to identify any permittee that appears to be falling behind schedule so that we can address the situation in a timely manner.  B.Use of DBS Capacity ` ` As explained in the NPRM,#uV  P7QuP##C\  PQP#эSee NPRM at  28. the channels and orbital locations allocated to the United States under the ITU Radio Regulations, Appendices 30 and 30A, are designated for use in the Broadcast Satellite Service ("BSS"). This service is defined as a "radiocommunication service in which signals transmitted or retransmitted by space stations are intended for direct reception by the general public."#uV  P7QuP##C\  PQP#эITU Radio Reg. 37, Chapter 1. For purposes of this definition, "direct reception" encompasses both individual reception and community reception. Id. This is also the definition of DBS service adopted in the Commission's Rules.#uV  P7QuP##C\  PQP#эSee 47 C.F.R.  100.3. Thus, the terms "DBS service" and "BSS service" are interchangeable. Under the Region 2 BSS Plan, resources allocated for DBS service "may also be used for transmission in the fixedsatellite service" so long as certain interference parameters are met, but those resources must be used "principally" for BSS service.#uV  P7QuP##C\  PQP#эITU Radio Reg. 846, Article 8. ` ` The NPRM requested comment on the Commission's existing policy for nonconforming uses of DBS resources. That policy requires each DBS licensee to begin DBS operations before the end of its first fiveyear license term, but allows otherwise unrestricted use of the spectrum during that term. After expiration of the first term, a DBS operator may continue to provide nonDBS service only on those transponders on which it also provides DBS service, and only up to half of the use of each transponder each day.4#uV  P7QuP##C\  PQP#эSee NPRM at  2930 (discussing United States Satellite Broadcasting Co., 1 FCC Rcd 977 (1986) and Potential Uses of DBS, 6 FCC Rcd 2581 (1991)).4 ` ` The commenters generally favored making the restrictions on use of DBS resources a function of capacity instead of time.##uV  P7QuP##C\  PQP#эSee DBSC Comments at 15; DIRECTV Comments at 24; Hawaii Comments at 56; MCI Comments at 78; NRTC Comments at 10; DOJ Comments at 19; USSB Comments at 2.# DIRECTV argues that the capacitybased approach will enable licensees to better tailor new program offerings to public demand, while MCI, DOJ, and USSB see the proposal as promoting efficiency as well as technological advancement and thus optimizing use of satellite capacity. Hawaii believes that the greater flexibility would encourage development of western DBS orbital locations, speeding service to areas currently unserved or underserved. ` ` Only Primestar, Tempo, and GE Americom oppose reformulating the rule in terms of capacity, arguing that additional flexibility in use of DBS spectrum would undermine the Commission's commitment to DBS service and in effect work a reallocation of DBS spectrum to other services.#uV  P7QuP##C\  PQP#эSee GE Americom Comments at 2021; Primestar Comments at 1517; Tempo Comments at 3233. We believe that this opposition is based on a misapprehension of the effect that reformulating the rule would have. Whether stated in temporal or capacity terms, our restrictions ensure that DBS channels will be used principally for DBS service. The capacitybased restrictions maintain all other parameters of the current temporallybased restrictions, and thus do not decrease the amount of DBS service that licensees must provide in absolute terms. Rather, capacitybased restrictions allow licensees more flexibility in how they will configure their satellites as a matter of technical efficiency in complying with the limitations we have imposed. ` ` We expect that DBS service will be the most economically efficient and profitable use of DBS resources, and we retain our commitment to promoting this service as an important competitor in the MVPD market. Moreover, as the Commission stated when it first adopted its use restrictions, DBS use will be encouraged by the fact that only those individual channels providing DBS service for a substantial portion of the day will be entitled to protection from interference, and then only during the time of DBS operation.#uV  P7QuP##C\  PQP#эUSSB, 1 FCC Rcd at 979. We do not see any reason to phrase our policies in terms that are more restrictive than necessary to achieve their ends. ` ` Accordingly, we will restate our policy restricting the use of DBS resources as a function of capacity rather than time. Since we have decided to lengthen the term of a nonbroadcast DBS license from five years to ten years,#uV  P7QuP##C\  PQP#эSee  130, infra. we will require that each licensee initiate DBS service within five years of licensure, rather than within the term of its first license. Thus, the new policy will be that a DBS licensee must begin DBS operations within five years of receipt of its license, but may otherwise make unrestricted use of the spectrum during that time. After that five year period, such a licensee may continue to provide nonDBS service so long as at least half of its total capacity at a given orbital location is used for DBS service. ` ` We will not, however, implement MCI's suggestion that this capacity restriction be assessed over a thirtyday period. We believe that DBS service should be an important part of a licensee's operations each and every day, and that such a manner of operation carries out the spirit of the international allocation of these resources to the United States for DBS use. As required under our prior policy, DBS operators must notify the Commission of the initiation of a nonDBS service and describe the service offering.#uV  P7QuP##C\  PQP#эUSSB, 1 FCC Rcd at 979. We also will retain the requirement that a DBS operator which provides nonDBS service demonstrate to the Commission the substantiality of its DBS service in terms of hours and specific times devoted to DBS service in order to receive protection for its DBS transmissions.#uV  P7QuP##C\  PQP#эId. at 980 n.10. ` ` The NPRM also referred to the possibility that, as a result of a separate proceeding, operators using DBS channels and orbital locations may be permitted to provide both domestic and international service. In light of that possibility, and the discussion of the permissible nonstandard uses of DBS channels, the NPRM requested comment on whether the U.S. has the authority to auction permits which may include the provision of international service.#uV  P7QuP##C\  PQP#эSee NPRM at  32. ` ` While commenters generally support the provision of international DBS service by United States licensees,#uV  P7QuP##C\  PQP#эSee, e.g., Hawaii Comments at 5; Primestar Comments at 10; Tempo Comments at 28. some commenters caution against deciding this issue in this proceeding. Others suggest that allowing international service would make conducting an auction unwise.#uV  P7QuP##C\  PQP#эSee, e.g., DIRECTV Comments at 22; GE Americom Comments at 1920; Lockheed Martin Comments at 9; MCI Comments at 6; and PanAmSat Comments at 4. We will not resolve the international service issue in this proceeding. It is more properly addressed in the ongoing proceeding reviewing the regulatory distinction we now draw between domestic and international satellite service generally.#uV  P7QuP##C\  PQP#эSee NPRM at  24 (discussing Transborder/Separate Systems proceeding). Because this issue may be resolved before the auction, however, we must address the relationship between auctions and international service. ` ` We do not agree that allowing DBS operators the option of providing international service would make auctions unwarranted or unwise. Our DBS permits and licenses authorize the use of orbital locations and frequencies specifically assigned to the United States. There is no reason why these limited orbital and spectrum resources cannot be auctioned for the benefit of the United States. Moreover, even if we decide to permit international service, our DBS licenses will constitute final authorization for domestic service only. Those who wish to provide international service will still need to request that we notify the ITU, coordinate with any affected foreign administrations, and comply with any other United States treaty requirements.#uV  P7QuP##C\  PQP#эWith respect to DIRECTV's request for clarification as to whether consent of the receiving country is required prior to beginning international DBS transmissions, the impact of any United States treaty requirements or a foreign country's requirements on the provision of international DBS service will be addressed in the context of the Transborder/Separate Systems proceeding.֌` ` In addition, we again remind potential DBS permittees of the other use restrictions that apply to the DBS service. For example, Section 25 of the 1992 Cable Act mandates that the Commission adopt rules imposing public interest requirements upon each "provider of DBS service" including, at a minimum, the political programming requirements set forth in Section 312(a)(7) and 315 of the Communications Act.Z#uV  P7QuP##C\  PQP#эSection 312(a)(7) requires broadcast stations to afford reasonable access for federal candidates to their facilities, or to permit federal candidates to purchase "reasonable amounts of time." See 47 U.S.C.  312(a)(7). Section 315(a) provides that, if a broadcast licensee permits any legally qualified candidate to use its station, the licensee must afford equal opportunities to all other such candidates in the use of the station. Id. at  315(a).Z In addition, Section 25 also directs the Commission to require each DBS operator providing video programming to reserve four to seven percent of its total channel capacity exclusively for noncommercial, educational, or informational programming and make it available to national educational programming suppliers upon reasonable prices, terms, and conditions as determined by the Commission.#uV  P7QuP##C\  PQP#э47 U.S.C.  335(b). Pursuant to the requirements of Section 25, the Commission has commenced a rulemaking proceeding "to impose, on providers of direct broadcast satellite service, public interest and other requirements for providing video programming." #uV  P7QuP##C\  PQP#эId. at  335(a); see also Direct Broadcast Satellite Public Service Obligations, 8 FCC Rcd 1589 (1993). After that rulemaking was initiated, a United States District Court struck down the noncommercial carriage obligations of Section 25, but the decision has been stayed pending appeal.Q!#uV  P7QuP##C\  PQP#эSee Daniels Cablevision, Inc. v. United States, 835 F. Supp. 1 (D.D.C. 1993), appeals pending sub nom. Time Warner Entertainment Co. v. FCC, No. 935349 and consolidated cases (D.C. Cir.).Q The rulemaking proceeding to implement Section 25 also remains pending. All DBS licensees will be required to comply with these statutory provisions, and the rules implementing them, if the statute is ultimately upheld on appeal and following adoption of final rules.  C.Rules and Policies Designed to Promote Competition ` ` As we stated in the NPRM, we have consistently sought to promote effective competition to the services provided by cable systems, and we have encouraged the development of the DBS spectrum in precisely that context.X"#uV  P7QuP##C\  PQP#эNPRM at 36. See also Implementation of Section 19 of the Cable Television Consumer Protection and Competition Act of 1992, 9 FCC Rcd 7442, 7466 (1994) ("1994 Competition Report"); Tempo Satellite, Inc., 7 FCC Rcd 2728, 2730 (1992)("Tempo II") ("We have long anticipated that the DBS service, along with other multichannel video technologies, will provide an effective, competitive alternative to cable television").X In addition, in order to satisfy our obligations under Title III of the Communications Act, we "seriously consider[] the antitrust consequences of a proposal and weigh[] those consequences with other public interest factors."##uV  P7QuP##C\  PQP#эFCC v. RCA Communications, Inc., 346 U.S. 86, 88 (1953). As the United States Supreme Court has long recognized, "[t]here can be no doubt that competition is a relevant factor in weighing the public interest."c$#uV  P7QuP##C\  PQP#эId. at 94. See also United States v. FCC, 652 F.2d 72, 8182 (D.C. Cir. 1980) (competitive considerations are an important element of the "public interest" standard which governs federal agency decisions).c ` ` The NPRM proposed certain rules intended to prevent strategic use of DBS resources for anticompetitive purposes, and also requested comment on whether additional steps were necessary to achieve the desired goal of fostering competition in markets for the delivery of video programming. Two of the rules proposed were structural in that they placed limits on the number of fullCONUS DBS channels a single entity could use, while the other proposed rules were aimed at preventing specific types of potentially anticompetitive conduct. The NPRM also requested comments upon the sufficiency of existing rules to deal with competitionrelated issues. ` ` As discussed more fully below, a number of commenters assert in response to these proposals and inquiries that the current record does not support the adoption of additional procompetitive rules.%#uV  P7QuP##C\  PQP#эSee, e.g., Primestar Comments at 88, 1720; Tempo Comments at 23. In support of that position, several parties have cited to Cincinnati Bell Telephone Co. v. FCC,&#uV  P7QuP##C\  PQP#эDocket Nos. 943701/4113, 953023/3238/3315 (slip op., 6th Cir., decided Nov. 9, 1995). a recent decision in which the United States Court of Appeals for the Sixth Circuit remanded to the Commission for further consideration an attribution standard applicable to cellular/PCS cross ownership and the eligibility of cellular licensees to hold PCS licenses in their service areas. The court based its remand of the cellular attribution standard on its conclusion that, in adopting the rule, the Commission had failed to support its predictive judgment as to the rule's necessity with sufficient statistical data or an economic theory, and had failed to explain why it had declined to adopt less restrictive measures to achieve the same ends.'#uV  P7QuP##C\  PQP#эCincinnati Bell, slip op. at 1113. Based upon this decision, these commenters argue that the lack of any demonstrated anticompetitive behavior of the type identified by the Commission in the NPRM precludes the promulgation of rules to address competitive concerns.)(#uV  P7QuP##C\  PQP#эSee, e.g., Continental Cablevision Comments at 1014; Primestar Comments at 2530; Tempo Comments at 2223; Time Warner Comments at 1516; Primestar Reply at 4.) ` ` We believe these commenters have overread the significance of Cincinnati Bell, particularly as it would apply in the context of this rulemaking proceeding. As explained by DOJ, any rule designed to curtail future industry concentration must be based in part upon a prediction as to what would occur in the absence of the rule.)#uV  P7QuP##C\  PQP#эSee DOJ Reply at 2. Where factual determinations underlying a rule are "primarily of a judgmental or predictive nature," the Supreme Court recognizes that "complete factual support in the record for the Commission's judgment or prediction is not possible or required; a forecast of the direction in which future public interest lies necessarily involves deductions based on the expert knowledge of the agency."*#uV  P7QuP##C\  PQP#эFCC v. National Citizens Comm. for Broadcasting, 436 U.S. 775, 81314 (1978). The Court has specifically reiterated that predictions as to the probable conduct of licensees and the functioning of the market are within the institutional competence of the Commission.+#uV  P7QuP##C\  PQP#эFCC v. WNCN Listeners Guild, 450 U.S. 582, 59495 (1981). ` ` As the evidence discussed extensively below demonstrates, there is more than ample evidence of concentration in markets for the delivery of video programming, which could give rise to competitive concerns under a variety of recognized economic theories. To use DOJ's characterization, these markets are, at present, essentially a series of local monopolies controlled by cable television systems.,0Í/,0Í/,  Њ#uV  P7QuP##C\  PQP#Í/See DOJ Comments at 2; EchoStar Reply at 2324; see also Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, Second Annual Report, FCC 95491 (adopted Dec. 7, 1995)("1995 Competition Report") at  5, 9. Congress acted on similar concerns when it adopted program access and carriage laws to protect potential competitors to incumbent cable operators from obstacles that interfered with competitors' access to programming needed to provide viable and competitive multichannel alternatives to the public.,0Í/Í/,0Í/Í/Q-#uV  P7QuP##C\  PQP#эSee 1992 Cable Act  2(a)(5), P.L. 102385,  2(a)(5), 106 Stat. 1460 (Oct. 2, 1992); 138 Cong. Rec. H6540 (daily ed. July 23, 1992)(statement of Rep. Eckart in support of the Tauzin amendment).Q In fact, in 1992, Congress considered a cable/DBS cross ownership ban, but did not adopt one based upon "the fact that there [were] no DBS systems operating in the United States at [that] time," and further expressed the expectation that the Commission would "exercise its existing authority to adopt such limitations should it be determined that such limitations would serve the public interest.".#uV  P7QuP##C\  PQP#эSee H.R. Conf. Rep. No. 862, 102d Cong., 2d Sess. 82 (1992); EchoStar Reply at 1314. Moreover, DOJ and forty state attorneys general were sufficiently concerned about anticompetitive actions by Primestar and its cable partners that they brought civil antitrust complaints, which resulted in two consent decrees that constrain the conduct of the country's largest cable operators and Primestar itself.h/#uV  P7QuP##C\  PQP#эSee United States v. Primestar Partners, L.P., 19941 Trade Cas. (CCH)  70,562 (S.D.N.Y. 1994); New York ex rel. Abrams v. Primestar Partners, L.P., 19932 Trade Cas. (CCH)  74,403 (S.D.N.Y. 1993).h Although we have granted a single DBS permit for eleven fullCONUS channels to a whollyowned subsidiary of TeleCommunications, Inc. ("TCI"), the nation's largest cable system operator, we did so recognizing "that legitimate competitive concerns do exist regarding the relationship between TEMPO's proposed DBS service and TCI's cable service," and only after imposing conditions we deemed necessary to ensure that competition to cable "is fostered, not hindered."0#uV  P7QuP##C\  PQP#эTempo II, 7 FCC Rcd at 2730, 2731. ` ` As discussed more fully below, there are three orbital locations that we believe to be capable of fullCONUS service 101$, 110$, and 119$. We believe that the auction rule we implement today is necessary given the scarcity of fullCONUS DBS spectrum and the impact that concentration of this spectrum might have on the overall MVPD market. Under this onetime auction rule, a party currently holding an attributable interest in fullCONUS channels at one location may bid at auction for channels currently available at the 110$ location, but if successful must divest its existing fullCONUS channels at any other location within twelve months. ` ` Like Congress, we believe that competition should be favored over regulation wherever possible.71#uV  P7QuP##C\  PQP#эSee, e.g., 47 U.S.C.  543(a)(2)(if the Commission finds that a cable system is subject to effective competition, the rates for that system are not subject to regulation).7 The DBS service is in its early stages, and the ultimate structure of the industry is presently far from clear. However, we believe that reducing concentration of fullCONUS DBS resources will promote rivalry among all MVPDs in a way that would benefit consumer welfare. This onetime auction rule will essentially ensure that each of the three fullCONUS DBS orbital locations will initially be controlled by entities that do not share interests with DBS operators at the other two orbital locations. We believe that this will permit the development of fully competitive DBS services. Increased competition among DBS systems is likely to improve market performance for the nearly four million television households in the United States that are unable to receive cable services. In addition, competition involving several fullCONUS DBS operators should also constrain a cableaffiliated DBS operator from positioning its services in a manner that avoids competition with cable systems. Moreover, in our view, under the current record, the competition among MVPDs resulting from the presence of an additional fullCONUS DBS system will serve the public interest. This is a reasonable response to current market conditions, but does not dictate a particular vision of DBS industry structure beyond the near term. ` ` We acknowledge, however, that many of the comments we address below raise substantial competitive issues, which we have seriously considered. At this time, balancing the competitive concerns against other public interest concerns such as expedition of service and allowing the market to maximize efficient use of public resources we believe that the single, temporary structural rule discussed above should be adequate. In addition, we believe that this rule will address most of the concerns that were raised in the NPRM and in the comments that have been filed in this proceeding. ` ` In sum, given current market conditions, it would not serve the public interest to allow an entity to acquire an interest in the fullCONUS 28 channels being auctioned and to continue to hold an interest in channels at another fullCONUS orbital location. On the other hand, we do not believe that the public interest would be furthered by freezing this industry structure through a rule permanently precluding future channel combinations at multiple fullCONUS locations. Thus, the rule we adopt leaves us free to evaluate future transactions on a casebycase basis under our Title III authority.2#uV  P7QuP##C\  PQP#эSee 47 U.S.C.  310(d). In addition, we continue to have rulemaking authority to remedy anticompetitive conduct and we will consider additional rules if experience indicates that they are required.  1.` ` The State of Competition Among MVPDs and the Role of DBS Rivalry ` ` Comments. Many commenters express concerns about concentration in markets for the delivery of video programming. DOJ argues that in a concentrated market, firms have an incentive to engage in a joint profit maximization strategy that may lead to higher profits but may harm consumer welfare.3#uV  P7QuP##C\  PQP#эDOJ Comments at 56. DIRECTV and others contend that the these markets are concentrated, that cable operators have market power, and that the Commission should, therefore, limit the ability of large cable operators to acquire scarce DBS resources. 4#uV  P7QuP##C\  PQP#эDIRECTV Comments at 9, 14; NYNEX Comments at 23; see also Hausman Statement at  6, 1316 (attached to DIRECTV Comments).  ` ` On the other hand, several commenters claim that the markets for the delivery of video programming are currently competitive.5#uV  P7QuP##C\  PQP#эSee, e.g., NCTA Comments at 5; Time Warner Comments at 79. In particular, Continental Cablevision argues that there are 5.8 million noncable MVPD subscribers, and that this figure is projected to expand 300 percent within five years.6#uV  P7QuP##C\  PQP#эContinental Cablevision Comments at 14. Continental and others also claim that entry from other distribution media, and in particular telephone company entry, into video markets is on the horizon and promises to provide significant competition to cable systems.7#uV  P7QuP##C\  PQP#эId. at 1416; NCTA Comments at 8; Time Warner Comments at 69. Continental, Primestar, Tempo, and Time Warner also argue that providers of or applicants for mediumpowered or FSS services should be considered potential competitors in the market.8#uV  P7QuP##C\  PQP#эContinental Cablevision Comments at 1012; Time Warner Comments at 46; Primestar Reply at 7; Tempo Reply at 78. ` ` Based on their perception of competitive markets, several parties contend that any regulation of competition in the DBS service is inappropriate. Primestar and others state that such competition obviates the need for any restriction in the use of fullCONUS channels, and argues that the Commission recently came to the same conclusion in authorizing the merger of EchoStar and Directsat.9#uV  P7QuP##C\  PQP#эSee Primestar Comments at 23 (citing Directsat Corp., 10 FCC Rcd 88, 89 (1995)); Tempo Reply at 1; Time Warner Reply at 12. GE Americom argues that there is no support in the record for the proposed limitations on DBS spectrum aggregation, that DBS subscribership is growing, and that existing federal and state antitrust laws and the 1992 Cable Act provide sufficient protection for competition.:#uV  P7QuP##C\  PQP#эGE Americom Comments at 57. As additional evidence that markets for the delivery of video programming are competitive and need no further regulation, Time Warner cites the Commission's recent decision to solicit comments regarding whether the deployment of a video dial tone ("VDT") system in Dover Township, Delaware was sufficient competition to justify removal of pricing restrictions on cable operators.;#uV  P7QuP##C\  PQP#эDover Waiver Order, FCC 95455 (Nov. 6, 1995); Time Warner Comments at 69.  ` ` Several commenters make a number of arguments based upon product differentiation between DBS and cable services. Dr. Hausman argues that DIRECTV will not engage in coordinated interaction with cable systems even if it were to expand its service to two fullCONUS orbital locations because, "[a]s a matter of economics, coordinated interaction is extremely unlikely in differentiated product markets."<#uV  P7QuP##C\  PQP#эHausman Statement at  21 (attached to DIRECTV Comments). Continental argues that market forces are driving competitors to price differentiated products in combined packages, and that the Commission should reject the desire to "compartmentalize and homogenize video services."=#uV  P7QuP##C\  PQP#эContinental Cablevision Comments at 1920. Time Warner makes a similar argument, writing that "homogenization of the MVPD product will only detract from the programming options which DBS operators and other MVPDs would offer to the competitive mix.">#uV  P7QuP##C\  PQP#эTime Warner Comments at 1517. Indeed, Time Warner attributes the success of DIRECTV and USSB in part to their ability to offer unique programming such as outofmarket sports, and encourages the Commission to leave MVPDs free to differentiate based on quality, type, and mix of services.?#uV  P7QuP##C\  PQP#эId. at 1517. Several parties point out that the Commission, in approving USSB's use of exclusive DBS distribution contracts, approved of product differentiation as an appropriate competitive strategy in DBS services.@#uV  P7QuP##C\  PQP#эImplementation of Sections 12 & 19 of the 1992 Cable Act, 10 FCC Rcd 3105, 312122 (1994). Primestar Comments at 3031 (exclusivity agreements are "universally recognized method of differentiating among competitors" and exclusivity may expand consumer choice, result in more efficient use of spectrum, create demand for programming and lead to development of more programming); NCTA Comments at 1112. ` ` Market Structure. The comments reflect general agreement with our conclusion that the market for the delivery of video programming the market in which MVPDs compete is the relevant product market.A#uV  P7QuP##C\  PQP#эSee, e.g., DIRECTV Comments at 7; DOJ Comments at 13; NCTA Comments at 8; Primestar Comments at 18 n.41; MCI Reply at 11. Similarly, the commenters appear to agree that the effects of competition among MVPDs are felt most strongly at the local level in local markets for the delivery of video programming.B#uV  P7QuP##C\  PQP#эSee, e.g., DOJ Comments at 2; EchoStar/Directsat Reply at 17. Accordingly, we have conducted our analysis based on these conclusions and will proceed without further discussion of these definitional issues. ` ` We have recently found that local markets for providing multichannel video programming remain highly concentrated and that cable systems remain the primary providers of video programming.C#uV  P7QuP##C\  PQP#э1995 Competition Report at 5, 194. Despite the growth in subscribership to DBS and Multichannel Multipoint Distribution Service ("MMDS") in the last year, the combined national market share of noncable MVPDs at the end of September 1995 was less than nine percent.D#uV  P7QuP##C\  PQP#э1995 Competition Report at  5, 194, App. G, Tbl. 1. In addition, the average household in the United States today can only choose from among at most a few MVPDs a cable system, DIRECTV/USSB, Primestar, and perhaps an MMDS system.DE#uV  P7QuP##C\  PQP#эId. at  13233 and App. G, Tbl 1. Television households in MDUs would appear to have generally even fewer choices, with many of them being served by only a SMATV or cable system.D We also note that home satellite dish ("HSD") users have been able to receive multiple channels of video programming for a number of years and yet this option for consumers does not appear to have constrained cable systems' exercise of market power.FF#uV  P7QuP##C\  PQP#эId. at  6567. Cband service to HSD users does not appear to be an alternative to cable for most subscribers, given the size of the receiving dish required. Id. at 66.F ` ` Significant barriers delaying entry of new competitors in markets for the delivery of video programming remain.G#uV  P7QuP##C\  PQP#э Id. at  57, 20514. With respect to DBS services, the availability of spectrum is currently greatly limited. As discussed in the NPRM, under the ITU's BSS Plan, the United States has been allocated thirtytwo channels at each of eight orbital locations in Region 2 (encompassing North and South America) from which to provide domestic DBS service.,0Í/,0Í/H  Њ#uV  P7 QuP##C\  P QP#Í/See NPRM at  18. The BSS Plan also allocates frequencies for transmitting radio signals from a DBS operator's ground facilities to a DBS satellite ("uplink") and from the DBS satellite to the United States, Puerto Rico and the Virgin Islands ("downlink"). A DBS license includes authority to transmit pursuant to these allocations in accordance with the BSS Plan.  Orbital locations not allocated to the United States are not currently available to provide service to subscribers in the United States.,0Í/Í/,0Í/Í/cI#uV  P7 QuP##C\  P QP#эThe Commission is currently considering issues raised by applying for additional orbital locations and permitting foreignlicensed DBS operators to provide service to subscribers in the United States. NPRM at  24.c Although we agree with Tempo that our analysis of market participation should be forward looking,J#uV  P7 QuP##C\  PQP#эSee Tempo Reply at 89. we decline to make public interest determinations based upon speculation that the international plan may be modified to make additional locations available. ` ` The Nature of DBS Service and Current DBS Providers. The most important limiting factors for a DBS service provider are its orbital location (literally, the longitude in which its satellites might be positioned), the bandwidth of spectrum it may utilize from that orbital location, and compression technology (the amount of digital information that may be carried through that bandwidth). Based on technology available today and the economics associated with the operation of a DBS system that appear to prevail in the industry at this time, we conclude that there are only three orbital locations 101$, 110$, and 119$ from which it is feasible for a DBS operator to offer fullCONUS service. We tentatively concluded in the NPRM that fullCONUS service could also be provided from the 61.5$ orbital location. Almost all of the commenters that addressed the issue, however, disagreed with that tentative conclusion.K#uV  P7QuP##C\  PQP#эSee  78, infra. Based on those comments and our reexamination of the facts, we conclude that the 61.5$ orbital location should not be deemed to be capable of supporting fullCONUS service at this time. An operator serving customers in the western United States from 61.5$ would face interference from tall objects that an operator from the other three locations would not face due to their better look angles. Even if much of this interference could be overcome by the use of larger receiving dishes, an operator at 61.5$ would be at a qualitative disadvantage in attracting customers who could receive service from an operator at one of the three fullCONUS locations without compromising on the quality of reception or the unobtrusiveness of the satellite dish. ` ` Several firms currently hold permits or licenses for fullCONUS radio frequency (RF) channels. DIRECTV and USSB provide service that together uses all 32 channels at the 101$ orbital location. DIRECTV had approximately 600,000 subscribers by June 1995,L#uV  P7QuP##C\  PQP#эDIRECTV Comments at 5. and projects that it will have 1.5 million subscribing households by the end of 1995, and 10 million by the end of 2000.M#uV  P7QuP##C\  PQP#э1995 Competition Report at  51. IJ USSB supplies services to subscribers using the same 18inch dishes that are used to receive DIRECTV's services. Because these two services offer mutually exclusive programming, a customer must subscribe to both services in order to receive a full package similar to that offered by cable systems. As a result, nearly all subscribers to one service also subscribe to the other,N#uV  P7QuP##C\  PQP#эId. Đ and they can be viewed as offering complementary as opposed to competitive services. ` ` EchoStar and its affiliate, Directsat, plan to offer approximately 126 channels of programming using 21 channels at the 119$ orbital location over the next year. EchoStar's first satellite is scheduled to be launched by the end of 1995.O#uV  P7QuP##C\  PQP#эId. at  52. Tempo holds a permit for the other 11 channels at the 119$ orbital location. This Report and Order implements a plan to auction 28 channels at the 110$ location. Directsat has been assigned one channel at 110$ and USSB holds the other three channels at this location.  ` ` Although not currently using BSS frequencies, Primestar, a joint venture of six of the largest cable system operators and GE Americom,(P#uV  P7QuP##C\  PQP#эThe cable companies are Comcast, Continental Cablevision, Cox Communications, TCI, Newhouse Broadcasting and Time Warner. E.g., Primestar Comments at 18 n.40. Newhouse and Time Warner have entered into a joint venture whereby Time Warner has a controlling interest and operational control over the cable systems in which Newhouse has an ownership interest. 1994 Competition Report, 9 FCC Rcd at 7587. ( currently provides DBSlike video programming using frequencies in the Fixed Satellite Service ("FSS").Q#uV  P7QuP##C\  PQP#э1995 Competition Report at  51. IJ Primestar's programming is similar to the programming of DIRECTV and USSB, but subscribers must use receiving dishes that are more than twice as large as the DIRECTV/USSB dishes. Moreover, Primestar has less than onehalf the channel capacity of DIRECTV and USSB combined. Primestar reports that it has over 800,000 subscribers.R#uV  P7QuP##C\  PQP#эPrimestar Reply at 8. It has argued, however, that it needs to migrate to the highpowered DBS spectrum in order to remain competitive, and it projects that its subscribership will grow to 34 million by the year 2000 if it can migrate to highpower DBS channels.S#uV  P7QuP##C\  P QP#эPrimestar Comments at 4. ` ` AlphaStar, a Canadian firm, is reportedly scheduled to offer service to the continental United States with approximately 90 channels of digital video programming services.T#uV  P7!QuP##C\  P"QP#эSatellite and International, Comm. Daily, Aug. 22, 1995, at 8; DirecttoHome: Industry at a Glance, SkyTRENDS, Sept. 1995, at 9. AlphaStar reportedly has leased fourteen transponders on an AT&T Telstar Kuband satellite that was launched in the fall of 1995, and to begin offering service to subscribers in early 1996.(U#uV  P7#QuP##C\  P$QP#эAlphaStar Digital Television, AlphaStar Moving Closer to Service Commencement with OnTime Activation of AT&T's 402R Satellite, Canada NewsWire, Nov. 28, 1995.( The company currently owns an uplinking facility in Canada. The new service would apparently transmit programming over FSS frequencies to subscribers who purchase or lease AlphaStar's twentyfour inch dishes.V#uV  P7%QuP##C\  P&QP#эId.Č AlphaStar thus will be using dishes that are larger than the eighteen inch dishes used by DIRECTV/USSB subscribers. On the whole, it appears that AlphaStar's services will share many characteristics with the services currently offered by Primestar. We note that Primestar has stated that it needs to migrate to highpower DBS channels to remain competitive. Thus, the likely competitive impact of AlphaStar's entry into markets in the United States is unclear. ` ` The recent growth of DIRECTV/USSB and Primestar has demonstrated the viability of DBS or DBSlike technology to distribute strongly competitive video programming services. If there is one thing commenters agree upon in this docket, it is that DBS systems have at least the potential to be formidable competitor in markets for the delivery of video programming.~W#uV  P7'QuP##C\  P(QP#эSee, e.g., DIRECTV Comments at 67; DOJ Comments at 3; USSB Comments at 1; MCI Comments at 10; Viacom Comments at 3; Primestar Comments at 2122; Owen Nov. 22, 1994 Declaration at 11 (attached to Tempo Comments); NCTA Comments at 78.~ As DOJ points out, the potential of DBS as a "tool for competition in the MVPD market is critically important" yet, the number of DBS firms is necessarily limited by the number of fullCONUS orbital locations.X#uV  P7)QuP##C\  P*QP#эDOJ Comments at 4; see also MCI Comments at 1213. As a result, we believe that we have the obligation to prevent the undue accumulation of fullCONUS DBS spectrum by any one firm and to encourage additional DBS entry by other firms as long as markets for the delivery of video programming remain highly concentrated. In the short term, we believe that entry by additional fullCONUS DBS providers would bring more vigorous competition among MVPDs generally, and in particular, among DBS and cable providers. Such increased competition is clearly in the public interest. ` ` The Nature of Competition Among MVPDs and The Role of Rivalry Among DBS Providers. While the Commission continues to believe that the multichannel video programming distribution market is the relevant market in which the various services compete, we recognize that MVPDs use different distribution technologies that can each be described by a unique set of attributes, which can be similar to or significantly different from the attributes of a typical cable system. For example, products within this market can differ from each other in terms of the number of channels, quality of reception, and types of programming offered. Demand for the services of different MVPDs is a function of consumer preferences for the different attributes of each distribution system.Y#uV  P7+QuP##C\  P,QP#э1995 Competition Report at  134. For example, the distribution of consumer preferences and income have important consequences for product differentiation strategies. For a general discussion, see Stephen Martin, Advanced Industrial Economics, Ch. 10. ` ` All other things being equal, firms that offer services with dissimilar attributes are likely to attempt to position their services in a manner that will minimize competition between their services and those offered by rivals. Such a product differentiation strategy is naturally substantially more difficult to accomplish in less concentrated markets because there are more firms. Markets for the delivery of video programming, however, are highly concentrated and, to a certain extent, MVPDs can choose the attributes of the services they offer, which may allow them to decrease the amount of price competition in the industry.Z#uV  P7-QuP##C\  P.QP#эSee, e.g., Avner Shaked & John Sutton, Relaxing Price Competition Through Product Differentiation, 49 Rev. Econ. Stud. 1, 313 (1982). This is especially true to the extent that the firms can commit to their choice of attributes, since this credibly signals their willingness to pursue this strategy.[#uV  P7/QuP##C\  P0QP#эFor a discussion of how actions by firms can be used to signal whether they are likely to compete aggressively or not, see Drew Fudenberg & Jean Tirole, The Fat Cat Effect, the Puppy Dog Ploy and the Lean and Hungry Look, 74 Am. Econ. Rev. 361 (1984). For example, one MVPD may decide to specialize in the offering of sports programming. Such a strategy could differentiate its services from those offered by most cable systems, which typically provide a variety of programming, including some sports. By differentiating its services, the MVPD might reduce the extent of competition between its services and those offered by cable systems and other MVPDs. ` ` DBS services have attributes that are different from the attributes of other MVPDs' services, particularly those offered by cable systems. For example, DBS subscribers can currently receive substantially more channels than are offered by other MVPDs, can obtain unique programming not available elsewhere, receive digital as opposed to analog programming, and receive programming through small satellite dishes instead of wires, or larger receiving antennas.\#uV  P71QuP##C\  P2QP#эDOJ Comments at 34 (DBS's smaller dish superior to FSS); NCTA Comments at 7; see also 1995 Competition Report at 53, 58, 65. Finally, DBS services are, by nature, nationally provided and, therefore, DBS providers are likely less able than other MVPDs to air local broadcast signals and otherwise respond to differing local market characteristics. ` ` It appears that the services offered by DBS providers are currently positioned as higherquality, higherpriced options targeted at those consumers that live outside cable markets or have strong preferences for niche programming, a large number of channels, and/or digital quality video signals.]#uV  P73QuP##C\  P4QP#э 1995 Competition Report at  137. This product differentiation appears to be borne out in evidence submitted by DIRECTV. Its expert, Dr. Jerry Hausman, cites evidence that sixty percent of DIRECTV's subscribers that were cable subscribers prior to purchasing a DSS system cancelled their cable service, twenty percent reduced their cable service, and the remaining twenty percent kept their service at the same level.^#uV  P75QuP##C\  P6QP#эDIRECTV Comments at 7; Hausman Statement at  1316. Accordingly, it is reasonable to conclude that approximately sixty percent of those subscribers essentially view DIRECTV as highly substitutable for cable (i.e., they cancelled all cable service after subscribing), twenty percent view DIRECTV's service as a substitute for some, but not all, cable service offerings, and twenty percent view DIRECTV's service as a complementary or even separate product from cable service. While we note Dr. Hausman's statement that "it is quite clear that DBS will be a substitute, not a complement, for cable television" due to programming overlap,_#uV  P77QuP##C\  P8QP#эHausman December 1994 Aff. at  21 (emphasis added). the evidence of current market performance indicates that DBS and cable are at present differentiated products. ` ` Additional fullCONUS DBS service providers, however, will likely find it difficult to differentiate substantially their services from those of the incumbent DBS operators. As a result, competition among DBS operators is likely to be enhanced by the entry of additional DBS operators that are not connected with current providers, and this price competition will translate into price competition with cable operators.`#uV  P79QuP##C\  P:QP#эThe relationship between product differentiation and price competition is consistent with empirical evidence on competition in the cable industry. Numerous economic studies of the cable television industry show that basic cable rates in markets where two rival cable systems compete for customers are over 20 percent less than prices in monopoly cable markets. They generally appear to provide programming choices that are very similar to the ones provided by incumbent cable systems and try to draw customers away by offering lower prices. Alternatively, where a cable systems faces direct competition from a MMDS system basic cable prices are, on average, less than 10 percent below monopoly cable prices. See George S. Ford, Fragmented Duopoly: An Empirical Analysis of the Cable Television Industry (Presented at the 1994 Telecommunications Policy Research Conference). Thus, while rival cable operators are often unable to substantially differentiate their services, rival cable and MMDS systems appear to have pursued a competitive strategy based on a certain degree of price competition mixed with product differentiation. Therefore, the apportionment of fullCONUS locations is critical in our efforts to foster a deconcentrated market structure at this time. ` ` As additional fullCONUS DBS entry occurs, DBS operators' incentive to compete with each other and other MVPDs will be reinforced by the cost structure of satellite technology. Satellitebased video distribution systems are characterized by substantial setup costs that are effectively sunk upon entry, and low marginal costs arising from the publicgood nature of the DBS signal.3a#uV  P7;QuP##C\  P<QP#эThe DBS signal is nondepletable and nonrival in consumption. In other words, one consumers reception of the signal does not affect any other individuals reception. 3 Where the cost of adding additional subscribers is low and the fixed costs necessary to enter the market are incurred up front, a firm has an incentive to lower price in response to competition, expanding output in order to lower unit costs.b#uV  P7=QuP##C\  P>QP#эFor a discussion of behavior by firms in the industries with fixed costs, see Jean Tirole, The Theory of Industrial Organization 30560 (1988). To maximize the output effect of a lower price, the firm might position its services as closer substitutes for its rivals services.c#uV  P7?QuP##C\  P@QP#эSee, e.g., Stephen Martin, Advanced Industrial Economics 3540 (1993). As services become more substitutable, the motivation to increase profit by cutting price becomes stronger. Through the interaction of these incentives, therefore, DBS operators that are unable to avoid competition with other MVPDs are likely to enter into vigorous competition with those MVPDs. ` ` Not only is it important to promote the entry of an additional DBS provider, it is also important to prevent each fullCONUS DBS operator from influencing the development of competitive services at the other fullCONUS orbital locations. For example, EchoStar and Directsat argue that their current service plans, which would use only 21 channels on 119$ location "will be considerably less competitive" than a 32channel system.d#uV  P7AQuP##C\  PBQP#эEchoStar/Directsat Comments at 36. Therefore, even holding 11 channels at a location, as Tempo does at 119$, can have a significant impact on the fullCONUS service available from that location. Operation of each fullCONUS DBS orbital location by an independent provider will limit the ability of all DBS providers and cable systems to engage in strategic product differentiation in an attempt to create, maintain, or exercise market power in markets for the delivery of video programming. ٌ2.` ` Spectrum Aggregation Limitations ` ` In the NPRM, we expressed the concern that allowing an entity to control too much of the DBS spectrum capable of fullCONUS service could result in a lessening of competition among DBS providers and in the broader market for the distribution of multichannel video programming.e#uV  P7CQuP##C\  PDQP#эSee NPRM at  33. We tentatively concluded that: (1) DBS service rules should address competitive issues relating to the use of DBS spectrum to provide the wholesale distribution of DBS services to cable operators and other MVPDs; (2) the effect of DBS competition in the broader MVPD market will principally be felt in essentially local markets; and (3) crossownership between DBS operators and other MVPDs may present opportunities for anticompetitive strategic conduct that potentially has adverse effects at the firm or national level.f#uV  P7EQuP##C\  PFQP#эId. at  3334.  ` ` Accordingly, we proposed in the NPRM two separate limitations on the aggregation of fullCONUS DBS channels. One proposal would limit aggregation of channels by any DBS licensee, permittee, or operator to a total of 32 at any combination of those fullCONUS orbital locations, and further sought comment on whether the Commission should impose a limitation on ownership or use of a significant number of channels at each of multiple fullCONUS orbital locations.g#uV  P7GQuP##C\  PHQP#эId. at  42. The other proposal would provide that any DBS licensee or operator affiliated with a nonDBS MVPD would be permitted to control or use DBS channel assignments at only one fullCONUS orbital location, and sought comment on whether the proposed spectrum limitations should be related to the size of the MVPD involved and whether such limitations should differentiate between cable operators and other MVPDs.h#uV  P7IQuP##C\  PJQP#эId. at  40. ` ` As discussed in detail below, we have decided instead to adopt a single spectrum aggregation rule that prohibits a party from acquiring at the upcoming auction an attributable interest in channels at a second fullCONUS location. We believe this onetime auction rule will encourage the entry of another fullCONUS DBS service, and will essentially ensure that each of the three fullCONUS DBS orbital locations will initially be controlled by entities that do not share interests with DBS operators at the other two locations. We also believe that the likely increase in rivalry among MVPDs as a result of this additional entry will serve the public interest while avoiding any unnecessary regulatory intrusion. ٌ` ` a. IntraDBS Spectrum Limitations ` ` The above discussion demonstrates that MVPD markets are highly concentrated and that competition among competing distribution media in these markets is likely to involve product differentiation strategies rather than competition. Based on this analysis of current conditions in the MVPD market, the Commission has determined that preventing undue concentration at the three fullCONUS locations at this time would be an important step in promoting vigorous competition among MVPDs, and in particular, between DBS and cable systems. This section discusses the various proposals in the NPRM concerning aggregation of fullCONUS RF channels and explains our decision to limit firms operating at one fullCONUS location from acquiring at auction an interest in RF channels at any other fullCONUS location without divesting its prior interest. We believe that by taking this opportunity to encourage entry by a new fullCONUS operator we will best promote competition among MVPDs, and at the same time leave licensees and the Commission the flexibility to consider a different configuration in the future if warranted by thenprevailing market conditions. ` ` Comments. Several commenters favor measures to avoid undue concentration of fullCONUS DBS RF channels such as the one we have adopted.i#uV  P7KQuP##C\  PLQP#эSee, e.g., CTA Comments at 1415; USSB Comments at 7; Viacom Comments at 5. PanAmSat argues that such concentration would inhibit the growth of competition in the MVPD market.j#uV  P7MQuP##C\  PNQP#эPanAmSat Comments at 2. MCI contends that the Commission should not allow as few as two entities to control all three fullCONUS locations if it expects DBS to provide effective competition to entrenched cable monopolies.k#uV  P7OQuP##C\  PPQP#эMCI Reply at 15. BellSouth agrees that an intraDBS cap will allow DBS providers to offer a competitive mix of services to consumers without risking undue concentration.l#uV  P7QQuP##C\  PRQP#эBellSouth Comments at 3. DOJ also raises the concern that an entity with channels at more than one fullCONUS location would be in a position to reach mutual accommodations with others holding channels at that location, and thus could exert substantial influence over the use of several otherwise competitive DBS systems.m#uV  P7SQuP##C\  PTQP#эDOJ Comments at 19. ` ` Primestar and NCTA argue that if the Commission imposes DBS spectrum aggregation rules, competitive equity dictates that the same cap apply to all participants.n#uV  P7UQuP##C\  PVQP#эPrimestar Comments at 2223; NCTA Comments at 9 n. 20. Tempo states that it would be "irrational" to apply a rule only to cableaffiliated DBS permittees and claims that there is no evidence indicating that "control of channels at multiple orbital locations is a concern unique to MVPDaffiliated DBS operators."o#uV  P7WQuP##C\  PXQP#эTempo Comments at 1415. ` ` DIRECTV opposes any structural rule, arguing that structural regulation is unnecessary because the Commission, in the future, may be able to accommodate more DBS satellites and providers beyond the current eight locations allocated by international agreement.p#uV  P7YQuP##C\  PZQP#эDIRECTV Comments at 8 n.16. Time Warner raises a similar argument. Time Warner Comments at 46. Continental argues that the conduct rules imposed on Primestar in consent decrees are sufficient to allay competitive concerns should it begin offering service using DBS spectrum, and that further structural rules are unnecessary, as the DOJ and state attorneys general declined to impose any.q#uV  P7[QuP##C\  P\QP#эContinental Comments at 18. ` ` DIRECTV, among others, has raised a number of arguments against the sort of intraDBS aggregation limitation we have decided to adopt. These commenters argue that the Commission should not be concerned about intraDBS competition, but rather should focus on those whose power in the MVPD market make anticompetitive conduct more likely. In particular, DIRECTV and Dr. Hausman argue that only firms that have market power should be excluded from participating in an auction or expanding their DBS capacity.r#uV  P7]QuP##C\  P^QP#эDIRECTV Comments at 7; Hausman Statement at  2021. Dr. Hausman states that "[u]nder a marketoriented auction framework, the acquisition of the DBS spectrum by DIRECTV should only be prohibited if DIRECTV could exercise market power arising from the spectrum acquisition."s#uV  P7_QuP##C\  P`QP#эHausman Statement at  20. Dr. Hausman and DIRECTV argue that DIRECTV, with only a small share of the MVPD market, cannot engage in the exercise of market power, and that any rule limiting its expansion is arbitrary and illadvised.t#uV  P7aQuP##C\  PbQP#эHausman Statement at  2223; DIRECTV Comments at 23, 78. DIRECTV and Dr. Hausman also argue that DBS has competitive importance in the MVPD market and has the potential to provide competition to cable.u#uV  P7cQuP##C\  PdQP#эDIRECTV Comments at 78; Hausman Statement at  1316. EchoStar/Directsat and Time Warner agree that any spectrum limitations should apply only to firms with market power in the MVPD market.v#uV  P7eQuP##C\  PfQP#эSee EchoStar/Directsat Comments at 4345; Time Warner Comments at 1819. ` ` DIRECTV also argues that a onelocation rule would severely limit its ability to expand its bandwidth and channel capacity, as it would limit its system to a maximum of 32 RF channels. DIRECTV believes that an "integrated DBS service could be provided from two orbital locations" through the use of a dualbeam customer antenna similar to those already in use in Japan for simultaneous access to BSS and FSS satellites at different locations.w#uV  P7gQuP##C\  PhQP#эDIRECTV Comments at 11 n.21. It states that DBS faces channel capacity limitations compared to cable, which may soon be able to offer 500 channels, as DBS is limited to a particular portion of the radio frequency spectrum and thus would be "severely constrained" in competing against cable by a radio spectrum cap.x#uV  P7iQuP##C\  PjQP#эDIRECTV Comments at 810; Hausman Statement at  19. EchoStar/Directsat similarly argues that the Commission should refrain from imposing an artificial cap on independent DBS operators and that the market should be allowed to decide the most efficient allocation of channels among nondominant MVPDs, and that any cap would be secondguessing the market.y#uV  P7kQuP##C\  PlQP#эEchoStar/Directsat Comments at 4143. PanAmSat notes that Hughes Communications, Inc. a corporate affiliate of DIRECTV argued in favor of a cap on orbital locations in the FSS service when Hughes was a new entrant, rather than the incumbent as it is in DBS.z#uV  P7mQuP##C\  PnQP#эPanAmSat Comments at 3 (citing Assignment of Orbital Locations to Space Stations in the Domestic Fixed Satellite Service, 84 F.C.C.2d 584, 591 (1981)("To continue the competitive development of the domestic satellite market, Hughes asserts that existing carriers should be limited to three orbital locations so that new entrants can be accommodated")).  ` ` Discussion. In light of our analysis of the MVPD market, we believe that the spectrum aggregation limitations proposed in the NPRM are not sufficiently focused on achieving our goal of encouraging the emergence of an additional fullCONUS DBS competitor unrelated to existing DBS fullCONUS providers. Limiting DBS ownership to 32 fullCONUS channels would not prevent a party from acquiring channels at more than one fullCONUS location and thereby impairing independent development and use of those locations. Moreover, such a service rule would in effect dictate the structure of the MVPD marketplace in the future, even as that marketplace is undergoing dynamic change. ` ` On the other hand, the fullCONUS DBS spectrum to be auctioned is currently a scarce public resource, and markets for the delivery of video programming are likely to remain concentrated for several years. As a result, we believe that the public interest is best served by encouraging the entry of a new fullCONUS DBS service that has the incentive to fully compete with fullCONUS DBS operators at other orbital locations. We have, therefore, decided to adopt a spectrum allocation rule applicable only to the upcoming auction that will prohibit any person with an attributable interest in DBS channels at one fullCONUS orbital location from acquiring an attributable interest in the fullCONUS channels now available at 110$ without divesting its prior interest. This rule will allow a new and viable fullCONUS operator to enter the DBS market with a robust 28channel capacity. In addition, this auction rule will address the concern we share with DOJ that a single party acquiring channels at more than one fullCONUS orbital location would be in a position to exert influence over the use of otherwise competitive systems at multiple locations.{#uV  P7oQuP##C\  PpQP#эDOJ Comments at 19. ` ` We are also aware that two existing permittees hold attributable interests in channels at more than one fullCONUS location: Directsat has been assigned ten channels at 119$ and one channel at 110$, while USSB holds five channels at 101$ and three channels at 110$. We do not believe that the channels held by USSB and Directsat will unduly restrict development of the 28 other channels available for auction at 110$, since DIRECTV has demonstrated the viability of a 27channel system. However, if either USSB or Directsat acquires an attributable interest in additional channels at 110$ at the upcoming auction, it will be required to divest its channels at its other fullCONUS location. ` ` We believe that the auction rule we adopt today, combined with the Commission's casebycase authority to review subsequent transfers of DBS channels,|#uV  P7qQuP##C\  PrQP#э47 U.S.C.  310(d). ğ is more than sufficient to foster competitive rivalry between independent DBS operators, cableaffiliated DBS operators, cable systems, and other MVPDs. Contrary to the argument presented by Dr. Hausman and DIRECTV, we believe that this rule limiting for the moment the expansion of current DBS operators is not arbitrary or illadvised, but instead serves the public interest. Our concern is not that a DBS firm might obtain market power; rather, our goal is to foster rivalry among MVPDs by promoting rivalry within the DBS service. The onetime auction rule is designed to ensure that there is an opportunity for the quickest possible entry by an additional fullCONUS DBS system in order to increase the possibility of vigorous rivalry among MVPDs. As a result, we reject the arguments against placing a restriction on DBS operators that are not affiliated with cable systems. ` ` We share many commenters' reluctance for regulation of the DBS service, which is why we have sought to implement the least intrusive rule possible to further the goals articulated above of fostering competitive rivalry among MVPDs. The auction rule is, we believe, the least intrusive means of achieving these goals. It is sufficient to provide auction participants with the necessary certainty concerning outcomes, yet preserves the industry's ability to respond to change and our ability to review future transactions on a flexible casebycase basis. ` ` We do not believe that DIRECTV, EchoStar, or other DBS providers, limited to one fullCONUS location in the near term, will be faced with channel capacity problems that would cause them not to be able to compete effectively with cable. With digital compression, even a 21channel system is able to provide over 120 video programming channels. As discussed in the 1995 Competition Report, the vast majority of cable systems have fewer than 54 channels.}#uV  P7sQuP##C\  PtQP#эSee 1995 Competition Report at App. B, Tbl. 3. Although we recognize that cable systems are likely to deploy digital technology, a substantial increase in the channel capacity of the average cable system is not imminent. In addition, as discussed below, it is not clear that it is currently feasible for DBS operators to increase capacity by combining channels at two or more orbital locations. In any case, we believe that the public interest benefits provided by ensuring at this point in time that there are separate DBS providers at each of the fullCONUS locations outweigh the temporary restriction on expansion of DIRECTV's operations. ` ` It also appears that DBS systems may be currently unable as a technical matter to combine signals from more than one orbital location in a single service offering. The receiving equipment currently being used by DIRECTV/USSB, and the equipment to be used by EchoStar/Directsat when it initiates service, cannot be used to receive signals simultaneously from more than one orbital location. In its comments, DIRECTV suggested that this problem could be overcome, and cited the use of satellite dishes in Japan to simultaneously receive signals sent via BSS and FSS frequencies.~#uV  P7uQuP##C\  PvQP#эDIRECTV Comments at 11 n.21. This example does not, however, address the more fundamental problem that the same frequencies are used to transmit DBS programming at each and every orbital location. Therefore, transmitting signals simultaneously from multiple orbital locations would likely require subscribers to use additional equipment to avoid interference problems. DIRECTV has not presented any evidence demonstrating that it would be feasible to deploy service in such a manner. ` ` We also find unpersuasive DIRECTV's other arguments against intraDBS spectrum caps. For example, DIRECTV states that a spectrum cap is not warranted given the other handicaps DBS faces, such as local zoning, terrestrial interference, restrictive covenants, and inability to offer local broadcast signals.#uV  P7wQuP##C\  PxQP#эDIRECTV Comments at 10. In the 1995 Competition Report, we recognized and discussed these limitations.#uV  P7yQuP##C\  PzQP#эSee 1995 Competition Report at  58, 6667. However, the existence of these limitations does not justify Commission action to ensure the success of any particular business venture. DIRECTV further argues that a structural rule is not necessary because the Commission may in the future be able to accommodate more DBS satellites and providers beyond the current eight locations allocated by international agreement.#uV  P7{QuP##C\  P|QP#эDIRECTV Comments at 8 n.16. See also Time Warner Comments at 46. It is likely that the international allocation of additional orbital locations capable of fullCONUS service would obviate the need for the onelocation rule. Those locations are not now available, however; in the event they do become available, we will analyze transactions, including those involving the new locations, based on the state of competition at that time. In any event, DIRECTV's arguments are largely inapplicable to a rule of limited duration such as the one we have chosen to adopt. ` ` A number of commenters support our suggestion in the NPRM for a rule that would limit concentration of DBS resources by preventing a person with a certain number of fullCONUS channels perhaps more than 16 from aggregating any additional channels at another fullCONUS location.#uV  P7}QuP##C\  P}QP#эSee, e.g., MCI Comments at 1213; CTA Comments at 1415; USSB Comments at 78. We choose not to implement this approach because, as EchoStar points out, the control of even a small number of channels at a fullCONUS location by a DBS operator that predominately offers service from another fullCONUS location can impact the development of a fullCONUS location by limiting channel capacity available to other providers operating there. While the proposal would to some degree limit channel holdings across a number of fullCONUS locations, it would not foster the development of another independent DBS provider as efficiently as does the rule we have adopted. Allowing a third entrant into the fullCONUS DBS market , it achieves what we believe to be a desirable procompetitive result under current market conditions without dictating future DBS market structure.  ` ` b. MVPD/DBS Spectrum Limitations ` ` The NPRM also proposed that the Commission implement a service rule that would limit nonDBS MVPDs from acquiring DBS channels at more than one fullCONUS location. To a certain extent, this proposal is mooted by our decision to limit all firms from acquiring channels at multiple fullCONUS locations through the auction process. However, since a number of parties raised particularized concerns about cable participation in the DBS industry, we feel it necessary to address those concerns. ` ` Comments. While DIRECTV and others argue that independent DBS providers' lack of market power makes any intraDBS spectrum limitations unnecessary, they also assert that the ability of other MVPDs with market power namely, large cable operators to use DBS resources for anticompetitive conduct justifies the imposition or spectrum limitations upon such MVPDs.#uV  P7}QuP##C\  P}QP#эSee, e.g., DIRECTV Comments at 68; MCI Comments at 1112; NRTC Comments at 5; NYNEX Comments at 26. MCI believes that the Commission should limit DBS spectrum aggregation by large cable companies, defined as those with an aggregate national subscribership of 1,000,000 or more households or a market penetration of 50.1 percent or more of the television households in any area that it is licensed to serve, because of their power in the MVPD market.#uV  P7}QuP##C\  P}QP#эSee MCI Comments at 1012. EchoStar/Directsat asserts that since cable interests dominate the MVPD market, they should only be allowed to acquire the 16 fullCONUS channels necessary to provide sufficient capacity to allow Primestar to migrate to highpower DBS service.#uV  P7}QuP##C\  P}QP#эSee EchoStar/Directsat Comments at 4144. ` ` Cox argues that if a onelocation cap is placed on all DBS providers, it is hard to see how limiting cable participation in DBS any further provides any additional procompetitive benefits.#uV  P7}QuP##C\  P}QP#эCox Comments at 56. Tempo, Cox, Primestar and NCTA argue that as long as there is viable competition from nonaffiliated DBS providers, a cableaffiliated DBS provider would have no incentive or ability to operate in a noncompetitive manner.#uV  P7}QuP##C\  P}QP#эCox Comments at 67; Primestar Comments at 2021; NCTA Comments at 89; Tempo Comments at 1113 (citing Owen Declarations). Primestar also argues that an MVPD/DBS limitation would skew the marketplace with an artificial restraint that would decrease the value of DBS spectrum for nonDBS MVPDs and thereby decrease the value of spectrum to be auctioned.#uV  P7}QuP##C\  P}QP#эSee Primestar Reply at 1617. ` ` Discussion. We share the concern that cableaffiliated MVPDs with market power could use DBS resources, including those soon to be available at auction, for coordinated conduct that would not maximize competition in the MVPD market and would therefore fail to give the public the benefits that flow from vigorous competition. On balance, however, we believe that the rule we have decided to adopt obviates the need for a separate spectrum restriction on nonDBS MVPDs. Even if a cableaffiliated MVPD with market power were to acquire the permit for the fullCONUS channels available at 110$, two other fullCONUS locations largely occupied by independent DBS providers would remain.#uV  P7}QuP##C\  P}QP#эIn addition, Tempo is nearing completion of satellites for its elevenchannel system at 119$. The presence of these other providers severely constrains the strategic activities of an MVPDDBS combination, since even if it chooses not to make full use of its DBS channels, consumers will have at least two other competitive sources for DBS service from which to choose. Moreover, we have recognized that cableaffiliated MVPDs bring certain positive attributes as DBS permittees.f#uV  P7}QuP##C\  P}QP#эSee Continental, 4 FCC Rcd at 6299 ("Tempo's participation could well accelerate the initiation of DBS service by bringing valuable marketplace experience and presence and possibly enhancing access to programming").f ` ` Allowing cable participation in DBS is consistent with the policy established in Tempo II. We also believe that it is not necessary to reverse Tempo II and exclude a cableaffiliated DBS operator from the opportunity to control or use DBS spectrum at one of the three fullCONUS orbital locations.#uV  P7}QuP##C\  P}QP#эSee DIRECTV Comments at 13. TCI and Tempo have already invested substantial resources in the creation of a DBS system, which is at least partially attributable to reliance on our decision in Tempo II not to prohibit cable/DBS cross ownership. Moreover, a cable/DBS limitation would be underinclusive; it is necessary at this time to restrict channels available to each market participant and not just a cableaffiliated provider because the incentives discussed above are present without regard to the degree of affiliation with cable system operators. Therefore, a more restrictive limitation on cable participation does not appear likely to add significantly to the promotion of competition. ` ` DOJ points out that, even under a permanent onelocation rule, the three DBS locations capable of fullCONUS service could be controlled by three large cableaffiliated operators.#uV  P7}QuP##C\  P}QP#эSee DOJ Comments at 7. DOJ argues that even if a cableaffiliated DBS provider faced competition from two independent DBS providers, the incentives of the cableaffiliated DBS provider would be to restrain output and set higher prices, and that this could well reduce the incentives of the other two firms to compete vigorously: "[t]hose [independent DBS] firms would recognize that they can now set higher prices as well and not lose business to their cable/DBS competitor."#uV  P7}QuP##C\  P}QP#эDOJ Comments at 67. DOJ also argues that a cable/DBS firm would have an incentive to raise its cable prices because its DBS system would capture at least some of the cable customers who switched to DBS as a result of the price increase.#uV  P7}QuP##C\  P}QP#эSee DOJ Reply at 67. Tempo and its expert, Dr. Bruce Owen, dispute this scenario, arguing that the two independent DBS firms would be more likely to "free ride" by maintaining or lowering prices in order to gain market share.#uV  P7}QuP##C\  P}QP#эSee Tempo Reply at 13; Owen Supp. Decl. at  10. DOJ further contends that a cableaffiliated DBS operator has an incentive to provide lowerquality programming, to raise the costs of independent DBS firms by negotiating less aggressively over price with programming suppliers and thereby creating an unduly high "floor" price, and in any event would be attempting to "meet, not beat" its competitors.#uV  P7}QuP##C\  P}QP#эSee DOJ Reply at 710; see also DIRECTV Reply at 5 n.8; EchoStar/Directsat Reply at 1719 (discussing Primestar's strategy). ` ` At present, four firms unrelated to any cable system operators are either already in operation, or soon will be, at fullCONUS locations DIRECTV and USSB at 101$ and EchoStar and Directsat at 119$. Thus, at present the only fullCONUS channels that appear to be available for acquisition by an entity that is related to a cableaffiliated MVPD are those to be auctioned at the 110$ orbital location. We do recognize that, in the future, one or more of the current unaffiliated fullCONUS DBS operators may seek to assign or transfer control over its license to a cableaffiliated MVPD. The Commission has authority under Title III to approve, reject, or condition the assignment or transfer of DBS channels to other firms#uV  P7}QuP##C\  P}QP#эSee 47 U.S.C.  310(d). and in the event a cable firm or consortium desires to acquire any additional channels, the competitive effect of that transfer in the MVPD market will be a significant issue in that transaction, as it was in approving Tempo's application. Because such a transaction would require Commission approval, we would be in a position to assess the competitive landscape if and when such a transaction was proposed, and to grant, deny, or condition authorization as appropriate under the circumstances at that time. Thus, as advocated by EchoStar/Directsat and DBSC among others, we will be able to monitor DBS channel aggregation on a casebycase basis and retain the flexibility to take appropriate action under the circumstances.#uV  P7}QuP##C\  P}QP#эSee, e.g., DBSC Comments at 15; EchoStar/Directsat Comments at 4143.  ` ` c. Orbital Locations Covered by Spectrum Limitations. ` ` For purposes of implementing the proposed spectrum aggregation limitations, the NPRM proposed to consider four orbital locations 61.5$, 101$, 110$, and 119$ to be capable of fullCONUS service. The NPRM tentatively concluded that applying the spectrum cap to these four orbital locations will ensure that there is sufficient channel capacity for a minimum of four fullCONUS DBS providers. It also concluded that channels at the other four DBS orbital locations, which are not capable of fullCONUS service, probably cannot match the economies of scale in domestic service achieved by fullCONUS operators, and thus should be exempt from the proposed spectrum limitations.#uV  P7}QuP##C\  P}QP#эSee NPRM at  4445. ` ` A clear majority of the parties that commented on this proposal agreed that the 61.5$ location should not be considered to be a fullCONUS orbital location. Continental Satellite, whose submission on planned service from its channels at 61.5$ was part of the basis for deeming that location to be fullCONUS,#uV  P7}QuP##C\  P}QP#эId. at footnote 78. states that its submission shows only that its satellite beam is capable of covering the entire United States, not that it expects to provide fullCONUS service from that location. In fact, Continental Satellite states that it will not be able to serve the West Coast from the 61.5$ orbital location since the poor look angle from its satellite into that region allows buildings, trees, and other tall impediments to interfere with the DBS signal.#uV  P7}QuP##C\  P}QP#эSee Continental Satellite Comments at 1314. EchoStar/Directsat agrees that 61.5$ is not suitable for fullCONUS service.#uV  P7}QuP##C\  P}QP#эSee EchoStar/Directsat Comments at 47. Primestar argues that the technical issues are at least unsettled, and that further study would be required before concluding that fullCONUS service is possible from that location.#uV  P7}QuP##C\  P}QP#эSee Primestar Comments at 23 n.50. Tempo proposes that the Commission reserve the channels currently available at 148$ for paired use with channels at 61.5$ to ensure fullCONUS capability for permittees at the latter location.#uV  P7}QuP##C\  P}QP#эSee Tempo Comments at 3437. Only MCI contends that the 61.5$ orbital location should be included in a spectrum limitation despite the limitations involved in providing service from that location.#uV  P7}QuP##C\  P}QP#эMCI Reply at 15 n.37. ` ` As mentioned above, we agree that the 61.5$ orbital location should not be included with the other three fullCONUS locations. While it still appears that nationwide service from that location is a technical possibility, as a practical matter such service would not be comparable to service from 101$, 110$, or 119$ for the reasons advanced by Continental Satellite. Accordingly, for purposes of implementing the spectrum aggregation limitations we have chosen to adopt, we will only consider three orbital locations 101$, 110$, and 119$ to be capable of fullCONUS service. We have twice previously considered and rejected Tempo's proposal to reserve channels at the 148$ orbital location for use in conjunction with channels at 61.5$.#uV  P7}QuP##C\  P}QP#эSee Tempo Satellite, Inc., 7 FCC Rcd 6597, 6598 (1992); Advanced Communications Corp., 6 FCC Rcd 6977, 6978 (1991). Moreover, as discussed below, we have now decided to eliminate the east/west pairing scheme for DBS channels.#uV  P7}QuP##C\  P}QP#эSee  124, infra. We see no reason to revisit the issue at this time. ` ` d. Mechanism for Divestiture. ` ` The NPRM proposed that any permittee or licensee that acquires an attributable interest in channels in excess of the proposed spectrum limitations be given ninety days from the date of Commission approval of such acquisition in which to either surrender to the Commission its excess channels, or file with the Commission a transfer or assignment application in order to divest sufficient channels to bring the applicant into compliance with all applicable spectrum limitations.#uV  P7}QuP##C\  P}QP#эSee NPRM at  43. ` ` Primestar and Tempo assert that ninety days is an unreasonable and inadequate period in which to require divestiture that will force permittees to sell DBS authorizations in a "fire sale" atmosphere. They instead propose that we allow 18 months as we have done in the broadcast context.#uV  P7}QuP##C\  P}QP#эSee Primestar Comments at 2324; Tempo Comments at 1618. DOJ suggests a twelve month period in which to complete divestiture.#uV  P7}QuP##C\  P}QP#эDOJ Comments at 10. MCI, on the other hand, argues that ninety days is a reasonable divestiture period and that the apparent interest of prospective investors belies any fear that divestiture would require a "fire sale" by the permittee, who in any event did not pay for the spectrum it would be divesting.#uV  P7}QuP##C\  P}QP#эSee MCI Comments at 1415. EchoStar/Directsat also supports the spirit of the rule, but proposes that a dominant MVPD be required to return its excess channels to the public rather than assign or transfer them to another party, since such an MVPD would have an incentive to place those channels with anyone other than the party who could most efficiently use them to compete.#uV  P7}QuP##C\  P}QP#эSee EchoStar/Directsat Comments at 45. ` ` We agree with MCI that the number of parties interested in entering the DBS service or expanding their existing capacity should make for a competitive sales environment,#uV  P7}QuP##C\  P}QP#эSee MCI Comments at 1415. especially since the only channels subject to divestiture are those capable of fullCONUS service. Even those advocating a longer divestiture period recognize that the DBS service is in a stage of rapid development and evolution.#uV  P7}QuP##C\  P}QP#эSee, e.g., Primestar Comments at 16; Tempo Comments at 17. At this point, the proposed 18 month divestiture period is longer than any DBS licensee has been in operation. The divestiture rule must result in timely movement of channels to those who can use them from those who no longer can. Allowing more than a year for such a transition would be inconsistent with the rapid development of the DBS service. ` ` On the other hand, we recognize that building and operating a competitive, national DBS system requires the commitment of hundreds of millions of dollars. A transaction that implicates funding of that magnitude may reasonably be expected to take several months to negotiate. Accordingly, we believe it appropriate to allow twelve months for divestiture of DBS channels if necessary as a result of the auction rule we have adopted. That period should be sufficient to allow an orderly divestiture, and strikes a proper balance between the time necessary for negotiation and the desire to ensure that spectrum not remain idle in this vibrant industry. We do not believe that 18 months are necessary for this purpose.#uV  P7}QuP##C\  P}QP#эCompare Stockholders of CBS, Inc., FCC 95469 at  46 (released Nov. 22, 1995 )(granting temporary waiver of ownership rules for 12 months rather than 18 months, since that will still provide "ample time to locate potential purchasers and to negotiate purchase agreements for the stations to be divested" as a result of merger of CBS and Westinghouse). Accordingly, we will require any party who acquires fullCONUS channels at a second location in the upcoming auction to come into compliance within twelve months by filing applications necessary to divest excess channels at one location. ` ` Although a party may surrender channels to the Commission in order to comply with the onelocation rule, we will not require it do so. Such an approach would deny permittees and licensees the opportunity to recoup the investment of time and money that was necessary to remain in due diligence under our rules. When we receive an application from the successful auction bidders, any party will have the opportunity to argue that the proposed transaction should not be authorized due to its anticompetitive effect, and we will be in a position to assess the issue and take appropriate action at that time. We do not believe that a blanket rule would serve the public interest.  ` ` e. Attribution Rules ` ` For purposes of implementing the spectrum aggregation limitations, the NPRM proposed to attribute both controlling interests and any interest of five percent or more in a DBS permittee, licensee, or operator. The NPRM proposed to define a DBS operator as any person or group of persons who provides services using DBS channels and directly or through one or more affiliates owns an attributable interest in such satellite system; or who otherwise controls or is responsible for, through any arrangement, the management and operation of such satellite system.#uV  P7}QuP##C\  P}QP#эSee NPRM at 47. The NPRM proposed to rely on existing case law for making control determinations where such issues arise. Specifically, the NPRM proposed to adopt rules that attribute to the holder any interest of five percent or more, whether voting or nonvoting, and all partnership interests, whether general or limited. In addition, the NPRM proposed to adopt attribution rules that: (1) attribute any interest of ten percent or more held by an institutional investor or investment company, rather than a five percent interest; (2) employ a multiplier for determining attribution of interests held through intervening entities; (3) provide for attribution of interests held in trust; (4) attribute the positional interests of officers and directors; (5) attribute limited partner interests based not only upon equity but also upon percentages of distributions of profits and losses; and (6) provide for attribution based upon certain management agreements, joint marketing agreements, and status as a DBS "operator."#uV  P7}QuP##C\  P}QP#эId. at  4748. ` ` The NPRM also proposed to identify any individual or entity as an affiliate of a licensee, permittee, or operator, or of a person holding an attributable interest in a licensee, permittee, or operator, if such individual or entity: (1) directly or indirectly controls or has the power to control the licensee, permittee, or operator; (2) is directly or indirectly controlled by the licensee, permittee, or operator; or (3) is directly or indirectly controlled by a third party or parties that also has the power to control the licensee, permittee, or operator.#uV  P7}QuP##C\  P}QP#эId. at  49. The NPRM also sought comment on whether the definition of an affiliate should include individuals or entities that have an identity of interest with the licensee, permittee, or operator. ` ` The comments we received generally criticize the proposed rules as unduly restrictive. At least one comment urged us to postpone adoption of attribution rules until a fuller record can be developed.#uV  P7}QuP##C\  P}QP#эSee GE Americom Comments at 1011. GE Americom argues that overbroad rules will deprive the DBS market of capital and satellite operating experience, and as a result will slow the initiation of service while raising its cost.#uV  P7}QuP##C\  P}QP#эSee GE Americom Comments at 611; see also Tempo Comments at 18. Primestar and Tempo argue that the proposed rules are unreasonably harsh and that the Commission has failed to offer a sufficient justification for their imposition.#uV  P7}QuP##C\  P}QP#эSee Primestar Comments at 24; Tempo Comments at 1819, Reply at 22. See also Time Warner Comments at 1920. Tempo also expresses a preference for a narrow control test for determining attributable interests, rather than establishing the threshold at a five percent interest.#uV  P7}QuP##C\  P}QP#эSee Tempo DBS Comments at 1819, Reply Comments at 2223. Time Warner questions why the rules for DBS should be more restrictive than those for any other video delivery media, including broadcast and cable.#uV  P7}QuP##C\  P}QP#эSee Time Warner Comments at 1921. Even MCI, which generally supports the attribution rules, cautions against rules that would unduly restrict joint ventures that might have beneficial competitive effects.#uV  P7}QuP##C\  P}QP#эSee MCI Comments at 1415. DIRECTV and Tempo express concern about the impact of the attribution rules in the context of the proposed crossownership limitation.#uV  P7}QuP##C\  P}QP#эSee Tempo Comments at 13; Direct TV Reply at 8; but see EchoStar/DirectSat Reply at 2123. ` ` We note initially that these comments were submitted in the context of proposed spectrum aggregation limitations that would have restricted ownership of DBS resources by nonDBS MVPDs, and would have erected a 32channel cap on intraDBS ownership applicable to all future transactions. In view of our decision not to adopt such rules, our attribution rules will not restrict the ability of a nonDBS MVPD to invest in a system operating at any one of the fullCONUS locations, and will not rule out investments by existing fullCONUS operators in the future. Therefore, concerns raised over the impact of attribution criteria are largely moot. However, attribution rules are necessary at this juncture to implement the auction spectrum rule and ensure that any person that acquires an interest in the fullCONUS channels now available for auction will be truly independent of all other licensees and permittees holding fullCONUS channel assignments, and therefore in a position to provide vigorous competition to them. ` ` The attribution rules proposed in the NPRM were formulated to implement ongoing service rules, rather than a onetime auction rule. The proposed rules were designed to attribute both ownership interests and nonownership interests that would nonetheless give one entity significant influence over the operation of another entity's DBS system. Thus, we included within the ambit of those rules certain management and joint marketing agreements that confer operational control, as well as DBS "operators" whose use of or control over DBS channels warranted attribution. ` ` The auction rule we adopt is much more limited in scope, and accordingly, we adopt more limited attribution rules that are better suited to a onetime auction rule. In adopting attribution rules to accomplish the goal of facilitating the entry of another fullCONUS DBS operator, we have drawn almost exclusively from similar rules applicable in the broadcast service.#uV  P7}QuP##C\  P}QP#эSee 47 C.F.R.  73.3555 Note 1. We believe these rules will implement the onetime spectrum limitation in the least intrusive fashion consistent with our underlying concerns, while not unnecessarily disrupting existing arrangements within the industry. ` ` Our two primary areas of concern are control and influence. These two concerns have long driven attribution policies with regard to ownership restrictions in the mass media context,#uV  P7}QuP##C\  P}QP#эSee Review of the Commission's Regulations Governing Attribution of Broadcast Interests, 10 FCC Rcd 3606 (1995). and we believe that these concerns are also appropriate in the context of DBS. Experience has shown that control can be conferred or exercised over management, operation, decision making and market conduct in the absence of ownership interests that confer de jure control. Accordingly, as with virtually all of the attribution rules in existence throughout our various telecommunications regulations, and as proposed in the NPRM, "control" will be defined to include not only majority equity ownership, but also any general partnership interest, or any means of actual working control over the operation of the licensee or permittee in whatever manner exercised. Existing Commission precedent will govern casebycase "control" determinations when such issues arise.7#uV  P7}QuP##C\  P}QP#эSee e.g., WWIZ, Inc., 36 FCC 561 (1964), aff'd sub nom. Lorain Journal Co. v. FCC, 351 F. 2d 824 (D.C. Cir., 1965), cert. denied, 383 U.S. 967 (1966).7 ` ` As with other Commission attribution rules, concerns rest not solely with control but also with an ability to influence. An entity with a significant interest in two fullCONUS DBS licensees or permittees operating from different orbital locations could be able to influence the behavior of one or both of them, and would have an incentive to modify conduct to maximize joint profits or returns. We seek in our attribution rules to ensure that no party can hold interests at more than one fullCONUS location that might provide it the incentive and ability to exercise such influence. ` ` Accordingly, we conclude that in applying the auction spectrum rule adopted herein, interests will be attributed to their holders and deemed cognizable under criteria similar to those used in the context of the broadcast, newspaper and cable television ownership rules.#uV  P7}QuP##C\  P}QP#эSee 47 C.F.R. 73.3555, Note 1. Thus, we will attribute the following interests: (1) any voting interest of five percent or more; (2) any general partnership interest and direct ownership interest; (3) any limited partnership interest, unless the limited partnership agreement provides for insulation of the limited partner's interest and the limited partner in fact is insulated from and has no material involvement, either directly or indirectly, in the management or operation of the DBS activities of the partnership; and (4) officers and directors. The legal and policy justifications for those rules have been thoroughly discussed in prior Commission orders, and need not be reiterated here.u#uV  P7}QuP##C\  P}QP#эWe incorporate by reference the discussion of attribution criteria in decision such as Telephone CompanyCable Television CrossOwnership Rules, 10 FCC Rcd 244 (1994); and Reexamination of the Commission's Rules and Policies Regarding the Attribution of Ownership Interests in Broadcast, Cable Television and Newspaper Entities, 97 F.C.C.2d 997 (1984), recon. granted in part, 58 R.R.2d 604 (1985), clarified, 1 FCC Rcd 802 (1986). Our ongoing rulemaking proceeding to ascertain whether to revise the broadcastrelated attribution rules does not undermine the continuing validity of the existing rules. See Review of the Commission's Regulations Governing Attribution of Broadcast Interests, 10 FCC Rcd 3606 (1995).u As with the broadcast attribution rules, the attribution threshold for institutional investors is ten percent, and a multiplier will be used to calculate interests held through successive and multiple layers of ownership.#uV  P7}QuP##C\  P}QP#эSee 47 C.F.R. 73.3555, Note 1(c) and 1(d). ` ` We do not adopt a single majority shareholder exception to the attribution standard because we do not believe it is consistent with the underlying purpose of the spectrum limitation to permit a person with a cognizable interest in one fullCONUS DBS licensee or permittee to acquire a large minority interest in another fullCONUS DBS licensee or permittee that has a single majority shareholder. The rule we have adopted is based on the procompetitive effect of encouraging the development of three fullCONUS systems that are truly independent of and competitive with each other. Significant shared interests among these entities would diminish their independence and their incentive to compete rather than coordinate their activities. Thus, a single majority shareholder exception would conflict with the underlying rationale of the rule. ` ` As noted above, the commenters generally assert that we should not adopt any attribution rules, or at most that we adopt liberal attribution rules that only attribute controlling interests.#uV  P7}QuP##C\  P}QP#эSee e.g., Tempo Comments at 1819, Reply at 2223; GE Comments at 711. Most of the commenters merely assert that we failed to adequately justify our proposed attribution rules, and did not proffer alternative or counter arguments in support of other attribution rules. See Primestar Comments at 24; Tempo Comments at 1819; Time Warner Comments at 1920. These commenters assert that more restrictive rules are unwarranted because DBS is a nascent industry in which the need for capital, financing, experience and expertise is particularly crucial to success. These comments suggest that the adoption of rules that attribute less than controlling interests may impact the ability of a new DBS licensee to obtain financing, capital, technical experience and expertise from a firm that is already invested or involved in the DBS industry. We are not unsympathetic to this argument. However, the rule we have adopted will only restrict the sharing of resources among fullCONUS DBS licensees and permittees operating at different orbital locations. Our underlying policy goal is to ensure a minimum of three independent providers of DBS service to the American consumer. We have long recognized that noncontrolling interests of even as little as five percent can confer an ability to influence the management, decisionmaking, control and market conduct of a company. We have thoroughly explained in numerous proceedings why we believe that influence, in addition to actual de jure control, is a critical component to determining attributable interests in media that involve the dissemination and distribution of ideas,#uV  P7}QuP##C\  P}QP#эSee footnote 178, supra. and we herein incorporate by reference our prior discussions of the justifications for this approach. ` ` GE Americom asserts that we should confine attribution of noncontrolling interests to those that are directly involved in the video programming distribution business themselves. GE Americom contends that our expressed concern is to prevent the concentration of control of programming distribution, and therefore any rule that limits an entity's ability to control more than one fullCONUS DBS orbital location is overreaching because according to GE Americom we are not concerned about the carrier, but about programming distributors. GE Americom is correct that we are concerned about ensuring competition among programmers. However, we are also concerned about ensuring competition in the DBS industry and believe three independent fullCONUS DBS licensees is the best means of ensuring competition. We agree with USSB that even a licensee that simply provides DBS satellite capacity to others has the power to select the programmers allowed to use that capacity, and therefore should be subject to spectrum limitations.#uV  P7}QuP##C\  P}QP#эSee USSB Reply at 8. The rule GE Americom proposes would undermine our rule by allowing entities to hold multiple interests inconsistent with the development of truly independent fullCONUS systems. Other than merely stating its position, GE Americom does not provide support for its argument or state why we should depart from our traditional methods for examining attribution.&#uV  P7}QuP##C\  P}QP#эWhile the Commission permits parties to seek to obtain nonattribution rulings for officers or directors of parent entities if a party can establish that the individual in question has no role whatsoever and no ability to influence the media related activities of the subsidiary entity, GE has cited no instance in which the Commission has held equity ownership interests nonattributable under similar circumstances. & Accordingly, absent a compelling supportive argument, and in light of the reasons delineated above in support of our auction spectrum limitation, we decline to depart from our traditional attribution approach as GE Americom suggests. ` ` Ameritech expresses concern that a five percent attribution threshold would be unduly restrictive if applied in the aggregate i.e., if an entity holding a three percent interest in each of two DBS permittees would exceed the five percent threshold.#uV  P7}QuP##C\  P}QP#эAmeritech Comments at 4. As with all of our attribution rules, each ownership interest stands alone.#uV  P7}QuP##C\  P}QP#эA company can have any number of shareholders holding less than 5% interests and not run afoul of any ownership rule, with one exception under the alien ownership limitations of Section 310 of the Communications Act, certain licensees may, in the aggregate, have a maximum of 25% of its equity held by aliens. See also 47 C.F.R.  100.11 (1995) (DBS service rule on foreign ownership). Aggregation otherwise exists only in the case of successive multiplication of interests within a succession of interrelated interests. Thus, Ameritech's concerns are unwarranted.  3.` ` Conduct Rules ` ` In addition to the structural solutions designed to promote competition by preventing the potential for undue concentration of DBS resources, the NPRM also proposed conduct limitations on the use of DBS channels and orbital locations to encourage, to the maximum extent possible, rivalry among MVPDs and to protect against the potential for anticompetitive strategic conduct. Specifically, we proposed to (1) extend the conditions imposed on Tempo Satellite, an existing DBS permittee that is wholly owned by a cable operator, to all MVPD providers that own DBS resources, so that DBS services will not be offered primarily as ancillary services, or be provided to other MVPDs under different terms than are being offered to nonsubscribers; and (2) prevent a DBS operator from selling, leasing, or otherwise providing transponder capacity to any entity that enters into an arrangement with an MVPD granting that MVPD the exclusive right to distribute DBS services within, or adjacent to, its service area.#uV  P7}QuP##C\  P}QP#эSee NPRM at  5556. The NPRM also requested comment whether our existing program access and program carriage rules adequately address vertical foreclosure concerns arising from integration among DBS operators, other MVPDs, and program vendors, especially in connection with "headend in the sky" distribution from DBS satellites.#uV  P7}QuP##C\  P}QP#эId. at  5762. ` ` Comments. The comments address all aspects of the proposed conduct rules some favoring the proposed conduct rules, some opposing them, and some proposing their own conduct rules. Primestar, Tempo and cable system operators are generally opposed to the proposed conduct rules. They contend that additional rules are unnecessary in light of increasing competition in the DBS service and existing legal safeguards the antitrust laws and two consent decrees under which Primestar and its cable partners operate.#uV  P7}QuP##C\  P}QP#эSee Continental Cablevision Comments at 19; Cox Comments at 89; GE Americom Comments at 6; NCTA Comments at 23; Primestar Comments at 2528; Tempo Comments at 1920; Time Warner Comments at 6, 1213; Tempo Reply at 2441; Primestar Reply at 1416. Several parties argue that there is no reason to extend the Tempo II conditions to all MVPDs, since there is no indication that Primestar has been marketed as ancillary to cable service or provided to noncablesubscribers on discriminatory terms, or that its cable owners have in any way engaged in any anticompetitive conduct aimed at other DBS operators.#uV  P7}QuP##C\  P}QP#эSee Continental Cablevision Comments at 1920; NCTA Comments at 23, 1011; Primestar Comments at 2728; Tempo Comments at 21; Time Warner Comments at 6; Primestar Reply at 8; Tempo Reply at 911. In addition, BellSouth argues that such conduct should not be prohibited in the first place. See BellSouth Comments at 56. These commenters also argue that the competitive nature of the market for the delivery of video programming will constrain any potential anticompetitive conduct and that the proposed rules would merely serve to limit flexibility during the developmental stages of the DBS service when flexibility is most necessary. #uV  P7}QuP##C\  P}QP#эSee, e.g., Continental Cablevision Comments at 12; NCTA Comments at 24; Tempo Comments at 810; Time Warner Comments at 3.  Finally, many parties argue that there is no basis for rewriting the program access rules, since there is no evidence that vertically integrated programmers have discriminated against DBS operators or that large MVPDs could prevent unaffiliated programmers from dealing with competing DBS systems.#uV  P7}QuP##C\  P}QP#эSee Continental Cablevision Comments at 1718; Cox Comments at 10; NCTA Comments at 1113; Primestar Comments at 2930; Tempo Comments at 1316. ` ` Others parties see the issues quite differently. DIRECTV asserts that the proposed marketing rules are necessary, reasonable, and serve the public interest, but do not go far enough since they do not expressly prohibit crosssubsidization.#uV  P7}QuP##C\  P}QP#эSee DIRECTV Comments at 1819. In addition, DIRECTV proposed that the Commission adopt the conditions it previously proposed in the Advanced Order proceeding, which include a number of conduct and regulatory measures that have been applied to common carriers, such as structural separation and review of cost allocation.#uV  P7}QuP##C\  P}QP#эId. at 2021 and Attachment 2. MCI favors the proposed rule that would prohibit exclusive marketing agreements for areas in or adjacent to an MVPD's service area, but only if it is limited to prohibiting such agreements with affiliated MVPDs since otherwise the rule would unduly restrain legitimate means for distribution of service between DBS operators and unaffiliated programmers.#uV  P7}QuP##C\  P}QP#эSee MCI Comments at 18. NRTC strongly supports conduct limitations, but argues that they should apply only to cable operators since application to other, nondominant MVPDs would unduly restrict capital available to DBS systems, and thereby perpetuate cable's dominance.#uV  P7}QuP##C\  P}QP#эSee NRTC Comments at 35. ` ` Both DIRECTV and EchoStar/Directsat contend that the program access rules are inadequate in two respects.#uV  P7}QuP##C\  P}QP#эSee DIRECTV Comments at 1821; EchoStar/Directsat Comments at 4854. First, they assert that existing rules do not prevent programmers from invoking illusory cost differentials or economies of scale as a basis for price discrimination. Second, they argue that the rules should be extended to apply to unaffiliated programmers as well those that are vertically integrated, a position with which BellSouth and NRTC also agree.#uV  P7}QuP##C\  P}QP#эSee BellSouth Comments at 9; NRTC Comments at 69. USSB opposes the latter proposal, arguing that the current rules would be triggered "if a DBS operator affiliated with a cable operator were to engage in anticompetitive programming practices" and that these rules are sufficient to remedy such conduct.#uV  P7}QuP##C\  P}QP#эUSSB Reply at 89; USSB Comments at 910. DBSC states that the proposed conduct rules would ensure that no one can dominate the DBS industry through manipulation of programming availability.#uV  P7}QuP##C\  P}QP#эSee DBSC Comments at 15. Ameritech favors any rules that remove unfair obstacles to programming access, and would even apply the proposals to the broadcast service.#uV  P7}QuP##C\  P}QP#эSee Ameritech Comments at 56. ` ` DIRECTV argues that a structural rule would be insufficient to ameliorate the concerns about cable participation in DBS service, and that conduct rules should be imposed upon cable activities in DBS instead. In particular, DIRECTV argues that the Commission should ensure strict conduct rules and ensure that DIRECTV and other current DBS providers be allowed to participate in the auction of the block of channels at 110$ to ensure that the public realizes the full value of the spectrum.#uV  P7}QuP##C\  P}QP#эDIRECTV Comments at 1213. It also argues that allowing cableaffiliated firms to participate in the auction would go well beyond the decision in Tempo II and it would essentially allow the cableaffiliated entities to control three times the current amount of fullCONUS spectrum assigned to Tempo alone.#uV  P7}QuP##C\  P}QP#эId. at 1516.֌` ` Discussion. We believe that the temporary structural rule we are adopting in this order will go a long way to promote rivalry among DBS systems and encourage the development of competition in markets for the delivery of video programming. Several parties support our conclusion that a structural approach may better serve the public interest than do conduct rules. DOJ makes the case that conduct rules "may actually be more intrusive than is necessary to achieve the goal of vigorous MVPD competition."#uV  P7}QuP##C\  P}QP#эDOJ Comments at 89. A structural solution is also superior because any conduct rule "cannot anticipate all forms of economically inefficient behavior by firms whose returns will be maximized by such behavior."#uV  P7}QuP##C\  P}QP#эId. at 9. ASN, an independent satellite programming vendor, seems to agree with DOJ about the need for structural rules, and argues that "fair access" and conduct rules, such as those advocated by DIRECTV, EchoStar and others, are healthy in theory but administratively difficult to enforce because they are subject to interpretation and bound to contain ambiguities or uncertainties that can only be resolved in lengthy and costly litigation.#uV  P7}QuP##C\  P}QP#эSee ASN Comments at 8. In fact, it is often difficult for anyone to detect a product differentiation strategy undertaken for the purpose of minimizing competition in this market, because it is difficult to assess the nature and quality of video programming. As a result, it would be even more difficult to fashion an appropriate and minimally restrictive remedy for such conduct. ` ` Accordingly, we will refrain from adopting conduct rules at this stage in the development of the DBS industry. As noted by GE Americom, conduct rules "are not cost free . . . [and if] unnecessary restrictions are adopted here, they can raise the cost of DBS for consumers, and chill the full development of this innovative service."#uV  P7}QuP##C\  P}QP#эGE Americom Reply at 3. Whether due to the relative novelty of the service or the existence of two comprehensive consent decrees already in place, there is little direct evidence of anticompetitive behavior specific to the DBS context. As the contours of the service emerge with greater clarity and as the consent decrees expire over the period from 1997 to 1999#uV  P7}QuP##C\  P}QP#эSee Continental Cablevision Comments at 18; Tempo Comments at 20. we intend to remain vigilant against any vertical foreclosure or other anticompetitive strategies that may arise. For now, we agree with Tempo that the Commission need not adopt conduct rules, mindful that we remain free to initiate a later proceeding if warranted by market conditions.#uV  P7}QuP##C\  P}QP#эSee Tempo Reply at 31. Indeed, to a large extent, the concerns raised in the NPRM and addressed in the comments ` ` With regard to the proposed extension of the Tempo II conduct rules and marketing restrictions, we believe that more competitive markets and vigorous DBS rivalry that should be fostered by our temporary structural rule will alleviate the competitive concerns we set forth in the NPRM. As discussed above, competitive rivalry among DBS firms, even where one of those firms is affiliated with a cable operator, will cause pressures for price competition and should lead to vigorous competition between cable and DBS systems. Given the market structure set in motion by our structural rule, we do not believe it necessary to adopt at this time rules ensuring that DBS services are not offered as "ancillary" to cable services. Similarly, we do not find a compelling need at this time for adopting rules designed to ensure that a cableaffiliated DBS operator will compete against other DBS providers for subscribers in cabled areas, or for determining that all joint marketing arrangements between DBS operators and other MVPDs will a fortiori reduce competition. We adopted those rules in Tempo II due to the stated intentions of Tempo to engage in such activities.#uV  P7}QuP##C\  P}QP#эTempo II, 7 FCC Rcd at 273031. Since we issued that decision, DBS has become an operational service with a significant subscriber base. As a result, we do not believe that the concerns justifying the Tempo II conditions are present, given that the structural rule we adopt should foster a competitive DBS and MVPD environment, and, therefore, hereby decline to extend the Tempo II conditions to other DBS operators, and to rescind them with regard to Tempo. Should Tempo or any other DBS operator engage in such activities, contrary to our expectations, we can reimpose such rules. ` ` We also decline to consider at this time the manner in which our program access rules apply to the conduct of DBS operators affiliated with cable operators or other MVPDs, or whether the rules should be extended to programmers that are not vertically integrated with a cable operator. As we recognized in our 1995 Competition Report, vertical restraints can often have procompetitive effects, though they can also be used strategically in a way that can deter competitive entry.#uV  P7}QuP##C\  P}QP#э1995 Competition Report at  158.IJ In the absence of record evidence that shows that protections beyond those already provided by our program access rules are necessary to protect against anticompetitive abuses, we hesitate to adopt a rule that may bring within its sweep legitimate and efficient business relationships. We do reaffirm the importance of program access to our efforts to create conditions for MVPD entry, and will continue to monitor this area closely. ` `  Both USSB and MCI argue that the existing program access rules are sufficient to accomplish their purpose.#uV  P7}QuP##C\  P}QP#эSee MCI Comments at 1921; USSB Comments at 910. In addition, as noted by Primestar, there is no evidence in this record that exclusive agreements or other discriminatory conduct favoring a cableaffiliated DBS operator currently pose any anticompetitive concern.#uV  P7}QuP##C\  P}QP#эSee Primestar Comments at 2527, 3031. We believe that NRTC's allegations in this docket are too general for us to address the issue. Should NRTC or any other party bring a complaint based on substantiated evidence of a program access violation, we will address the matter based on that record.  Although DIRECTV has been in operation for over a year, and EchoStar, which is scheduled to launch its first DBS satellite in late December, presumably has made arrangements for programming to be carried on its system, neither has filed a complaint under the existing program access rules. In fact, only twenty program access cases have been filed with the Commission, none of which allege discriminatory conduct against a DBS operator.#uV  P7}QuP##C\  P}QP#эThe Commission did deny a petition for reconsideration of its report and order adopting the program access rules, which sought to include exclusive contracts between noncable affiliated DBS operators and verticallyintegrated programmers, such as the arrangement between USSB and HBO, within the per se prohibition of Section 628(c)(2)(C) of the Communications Act, 47 U.S.C. 548(c)(2). Implementation of Sections 12 & 19 of the 1992 Cable Act, Memorandum Opinion and Order on Reconsideration, 10 FCC Rcd 3105, 312122 (1994). The Commission did note, however, that the petitioner or any other aggrieved party is not precluded from seeking relief from the effects of such contracts through under other provisions of the program access rules. ` ` Additional prudential considerations also counsel against adopting further program access protections at this time. First, the extent to which affiliation between DBS system operators and programmers may develop is unclear. Second, exclusivity arrangements favoring Primestar currently the only operational DBSlike service that is cable affiliated are, in large measure, presently circumscribed by the Primestar consent decrees, and it is unclear to what extent such arrangements will be of concern after the decrees sunset. Finally, a DBS operator who believes it has been injured by an exclusivity arrangement or other discriminatory conduct that favors a cablerelated DBS entity including alleged price discrimination based on illusory cost differentials or scale economies may seek appropriate relief before the Commission, whether by way of a program access complaint or otherwise. ` `  We also note that several parties argue that the program access rules should be altered to switch the burden of proof or award damages.#uV  P7}QuP##C\  P}QP#эEchoStar/Directsat Comments at 5154; NRTC Comments at 69. We decline to adopt these proposals for the foregoing reasons in addition to the fact that these proposals apply to the program access rules generally and not to DBS service in particular. ٌ4.` ` "Headend In The Sky" Service ` ` Comments. The comments addressing access issues related to service to MVPDs such as the "Headend in the Sky" ("HITS") service proposed by TCI raise a number of important issues. For example, it appears likely that a number of parties may be interested in using DBS facilities to provide HITS service. #uV  P7}QuP##C\  P}QP#эSee DIRECTV Comments at 2122; EchoStar/Directsat Comments at 5556; Primestar Comments at 3134; Tempo Comments at 2527.  The comments also reflect a concern that a verticallyintegrated programmer might discriminate in favor of an affiliated DBS provider, even if other DBS providers offered more favorable terms and conditions for HITS service.@#uV  P7}QuP##C\  P}QP#эSee BellSouth Comments at 910; DIRECTV Comments at 2122; EchoStar/Directsat Comments at55-56; NRTC Comments at 89; Justice Comments at 1216; MCI Reply at 20; NYNEX reply at8-10.@ On the other hand, Primestar argues that the Commission should not be concerned about the potential effect of HITS service on competition among DBS operators and MVPDs because HITS service is not yet operational, there is no experience or data regarding the service, there are no examples of anticompetitive activity, and there is no support for concerns that the proposed HITS service would pose a significant advantage to a DBS operator.#uV  P7}QuP##C\  P}QP#эPrimestar Comments at 32. ` ` DOJ presents a comprehensive analysis of the HITS service and argues for Commission regulation of that service. It notes that HITS service may be valuable to MVPDs, but argues that the potential that it could be used to develop market power exists for several reasons: (1) there are barriers to entry in a HITS market due to expensive technology and other large upfront costs; (2) the number of firms capable of providing the service "is severely limited by the small number of available DBS satellite slots;" and (3) a substantial firstmover advantage may be conferred on a small number of DBS operators because of the possibility that deployment of different encryption technologies would "tend to lock MVPDs into their initial wholesale DBS provider"; HITS customers may therefore be likely to prefer a more established DBS provider than an upstart, to avoid stranded costs.#uV  P7}QuP##C\  P}QP#эDOJ Comments at 1014. Given the foregoing, DOJ predicts that there is "a substantial likelihood that the market for wholesale DBS service will be served by a monopolist for the immediate future. Moreover, according to DOJ, even if other firms eventually enter, the market is likely to be very highly concentrated."#uV  P7}QuP##C\  P}QP#эId. at 1415. As a result, DOJ argues that a HITS provider affiliated with a firm with market power in markets for the delivery of video programming may threaten competition through the use of vertical foreclosure strategies.#uV  P7}QuP##C\  P}QP#эId. at 1518. ` ` Tempo and Primestar, which have proposed to provide HITS service, contend that such service is not, as characterized in the NPRM, "wholesale DBS service" and therefore is not subject to the program access rules. They base their argument on the fact that, as currently planned, the DBS operator would only provide authorization and transport service for two parties (a wholesale programmer and a retail distribution service) that have an agreement to which the operator is not a party.#uV  P7}QuP##C\  P}QP#эSee Primestar Comments at 3134; Tempo Comments at 2527. Consequently, these parties assert that the program access rules applicable to "wholesale distribution for sale of satellite cable programming" does not apply to a DBS operator providing HITS service. See 47 C.F.R.  1000(i). In addition, like CATA,#uV  P7}QuP##C\  P}QP#эSee CATA Comments at 45. Tempo and Primestar assert that the Commission has no experience with such a service and that there is no indication that any party would engage in anticompetitive behavior in providing it. They also join GE Americom#uV  P7}QuP##C\  P}QP#эSee GE Americom Reply at 79. in arguing that attempting to bring HITS service within the ambit of a program accesstype regime would be inappropriate since it would apply to parties other than DBS operators. ` ` Tempo also disputes DOJ's characterization and analysis of HITS, noting that HITS service need not operate in the DBS band, and that TCI intends to launch HITS service with a combination of Kaband and Cband FSS satellites.#uV  P7}QuP##C\  P}QP#эTempo Comments at 27 n. 50; Tempo Reply at 3740; Owen Nov. 1995 Affidavit, submitted with Tempo Reply, at 1215. Tempo also argues that the authorization code, a signal that allows the decryption of the scrambled programming feed, can be transmitted outofband by a number of other means.#uV  P7}QuP##C\  P}QP#эTempo Reply at 3738. Tempo points out that a number of programmers, including HBO, already offer digitally compressed signals, and that many video programmers will decide to compress signal transmission in their existing satellite transponders.#uV  P7}QuP##C\  P}QP#эTempo Reply at 37. Tempo introduced evidence that another satellite provider, TVN Entertainment, recently announced the launch of a digital delivery system for cable systems.#uV  P7}QuP##C\  P}QP#эTempo Reply at 39. As a result, Tempo argues that DBS locations or spectrum cannot be viewed as a scarce resource for providing HITS services and, therefore, that there are no significant barriers to entry in the provision of HITS service.#uV  P7}QuP##C\  P}QP#эTempo Reply at 3940. For similar reasons, General Instrument Corporation also urges the Commission to reject the DOJ analysis, arguing that it is grounded in baseless and theoretical concerns.#uV  P7}QuP##C\  P}QP#эGIC Reply at 610. ` ` Among independent DBS providers, DIRECTV notes that it has no per se objection to the development of HITS distribution so long as independent DBS operators have a "real opportunity" to provide these services and the Commission adopts and implements "appropriate competitive conditions and crosssubsidization restraints."#uV  P7}QuP##C\  P}QP#эDIRECTV Comments at 2122; see also Hausman Nov. 95 Aff. at  31. EchoStar states that it is "intensely interested in providing wholesale services" and that the service offers opportunity to generate two revenue streams from the same facility. However, EchoStar/Directsat notes concerns that cable systems might tend to favor receiving HITS service from a cableaffiliated DBS operator, and therefore urges the Commission to clarify that the program access rules apply to DBS services and require the disclosure of contracts between cable operators and affiliated satellite providers.#uV  P7}QuP##C\  P}QP#эEchoStar/Directsat also notes that there may already be contracts between programmers and cable operators that "are less restrictive with respect to the provision of HITStype service than the contracts that EchoStar and DirectSat have been able to secure." EchoStar/Directsat Comments at 5556. ` ` Programmers generally give mixed reactions to the Commission's proposals and the HITS service. Viacom and ASN request that the Commission regulate the HITS service.#uV  P7}QuP##C\  P}QP#эViacom Comments at 56 (urging that the Commission ensure that proprietary digital technology is not used anticompetitively to create a gatekeeper between consumers and programmers); ASN Comments at 68 (provision of HITS service by a cableaffiliated DBS firm could harm independent programmers because that firm could impose draconian conditions upon independents seeking access to DBS channels). HBO flatly opposes any attempt by the Commission to regulate the provision of HITS service, arguing that in doing so, "the Commission effectively would regulate the means and technologies through which programmers digitize, encrypt and distribute their programming to cable operators" and other MVPDs.T#uV  P7}QuP##C\  P}QP#эHBO Reply at 12. HBO argues that mandating that programmers transport and authorize distribution of their services to MVPDs through all DBS operators would compromise security and quality. HBO Reply at 23.T ` ` Discussion. Cable, MMDS, and SMATV systems currently receive their programming through their own headend facilities, which among other things, consist of several satellite dishes and receiving equipment. In addition, they typically negotiate their programming contracts with individual programmers through buying groups or as multisystem operations. As a result, it appears that a service that provided most of the available programming, and provided it in a digital format that could be passed through to subscribers, could offer substantial efficiencies for many MVPDs.` ` The record reflects that one way that a HITSlike service might be deployed by a DBS operator is through use of its DBS satellite, authorization center, and encryption facility to transmit to MVPDs the same signals that are received by DBS retail subscribers. To the extent that the average cost of using those facilities is likely to decline as greater numbers of subscribers are served, providing HITSlike services over DBS facilities might provide such an operator with an important cost advantage over a competing DBS operator who was unable to provide such services, if, for example, programmers refuse to authorize MVPDs to receive programming services from the competing operator's DBS satellites. If this scenario develops, only the DBS operator whose programming stream was also serving MVPDs would be able to spread the fixed costs of its DBS service over a large base of subscribers by recovering a substantial portion of those costs from the purchasers of the HITS service. This cost advantage could substantially reduce rivalry among DBS operators and MVPDs, especially if that cost advantage is the result of a vertical foreclosure strategy. ` ` However, there is no evidence before us of firms presently supplying HITSlike service, and the actual characteristics of such a service remain unclear. Accordingly, we have never before addressed the vertical foreclosure issues presented by the proposed HITS services. As stated in the NPRM, we believe that a HITStype service can actually promote the competitive position of DBS providers. As discussed above, other DBS operators and permittees have indicated that they too will offer HITSlike service if the DBS channels and orbital locations at issue here are so used, which should benefit consumers. We continue to believe, however, that the benefits of this service cannot materialize if vertical foreclosure strategies are used to limit the ability of unaffiliated DBS operators to provide programming streams to MVPDs. Nonetheless, resolution of these issues is not necessary to the proceeding at hand. Accordingly, we agree with those commenters that advise us that it would be imprudent for this Commission to consider rules governing HITS service absent a better understanding of the nature of HITS service.  5.` ` Other Concerns About DBSRelated Conduct ` ` ASN argues that the Commission need not follow a monolithic DBS model of verticallyintegrated fullservice DBS operators at separate orbital locations, and that we should set aside ten percent of the channels at the auction for independent programmers, because it would cultivate independent programmers, offer individualized programming choices at the wholesale level, create programming niches, and foster partnerships, alliances and distribution models.#uV  P7}QuP##C\  P}QP#эASN Comments at 812. MCI, on the other hand, opposes such proposals, arguing that the standards are unclear, and that any such rules are likely to result in an inefficient allocation of DBS resources.#uV  P7}QuP##C\  P}QP#эMCI Reply at 19. ` ` We do not believe it necessary to restrict the participants in the auction as ASN suggests. In an environment of competitive rivalry between DBS firms, cable systems, and other MVPDs, which we believe our structural rule will foster, an independent programmer providing a programming service or niche programming desired by consumers in the free market will have ample opportunity to sell its offerings to these competing providers. ` ` The Commission has chosen to adopt a single structural rule that temporarily limits fullCONUS spectrum aggregation, and to rely upon this limitation and our continuing authority to review transactions under Title III rather than upon conduct rules to safeguard competition by ensuring the conditions necessary for development of three separate fullCONUS DBS services. The Commission also has the authority under Title III to, in the future, regulate by rule the use of DBS radio frequencies if that use is inconsistent with the public interest. ` ` However, we emphasize that we remain committed to fostering a vibrant DBS service in which DBS systems have the opportunity to offer vigorous rivalry to cable systems and other MVPDs. While we believe that the auction rule we are adopting today will guard against diminished rivalry among DBS providers and MVPDs, we recognize that periodic reviews will be necessary to ensure that the benefits of independent programming sources (i.e., those outside the distribution business) are available to the public. We are statutorily charged with conducting an annual review of competition in the MVPD market.#uV  P7}QuP##C\  P}QP#эSee 47 U.S.C.  548(g). We also have procedures for accepting and investigating complaints of program access and carriage violations.#uV  P7}QuP##C\  P}QP#э47 C.F.R.  76.1003. We intend to use these and other tools to keep a watchful eye on developments in this service to ensure that DBS systems have a chance to be competitive MVPDs.  6.` ` East/West Paired Assignments ` ` The NPRM tentatively concluded that progress in the DBS service since Continental was issued has rendered unnecessary the policy, developed in that decision, of assigning DBS channels only in east/west pairs, with eastern halfCONUS service permitted only from the four eastern orbital locations and western halfCONUS service permitted only from the four western orbital locations.#uV  P7}QuP##C\  P}QP#эSee NPRM at  65. The Commission adopted this pairing scheme in order to assure service to the entire United States from at least 128 channels at a time when fullCONUS service was untested.#uV  P7}QuP##C\  P}QP#эContinental, 4 FCC Rcd at 6293 and 6302 n.6. At the time, however, the Commission noted that the same number of channels would serve the entire United States if three eastern locations provide fullCONUS service and the other one (61.5$) provides service in tandem with channels at any western location.#uV  P7}QuP##C\  P}QP#эId. at 6302 n.10. ` ` All parties commenting on the proposal agree that the general pairing requirement is no longer technically required or justified as a matter of policy.#uV  P7}QuP##C\  P}QP#эSee DIRECTV Comments at 25; EchoStar/Directsat Comments at 57; MCI Comments at 2223; USSB Comments at 10. As noted above, however, Tempo proposes that the Commission facilitate additional DBS service by pairing the channels at 61.5$ with those now available at 148$, thus combining the halfCONUS channels with the best technical attributes for service to the United States.#uV  P7}QuP##C\  P}QP#эSee Tempo Comments at 3437. Permittees with channels assignments at the 61.5$ orbital location already have western channels assignments at locations other than 148$, and the channels currently available at the latter location are insufficient to pair with all of those at the former location.#uV  P7}QuP##C\  P}QP#эUSSB has been assigned eight channels at the 148$ location. DBSC, Continental, and Dominion have been assigned eleven, eleven, and eight channels, respectively, at the 61.5$ location. Thus, there are six fewer channels available at 148$ than necessary to pair with all those assigned at 61.5$. If those permittees wish to provide a fullCONUS service from two halfCONUS locations, they are therefore already able to do so. Accordingly, we will not require permittees and licensees to retain their assigned channels in east/west pairs.  D.Service to Alaska and Hawaii ` ` In view of the increasing maturation of the DBS industry and the lack of certainty that DBS service will be provided outside the contiguous United States in the near future, the NPRM proposed: (1) to require that all new permittees provide service to Alaska and Hawaii if such service is technically feasible from their orbital locations; and (2) to condition the retention of channels assigned to current permittees at western orbital locations on provision of such service, from either or both of their assigned orbital locations.#uV  P7}QuP##C\  P}QP#эSee NPRM at  70. ` ` This proposal also received near unanimous support, although with some variations. DIRECTV, MCI, NRTC, and the State of Alaska favor adopting the rule as proposed in order to achieve the important goal of bringing service to important underserved regions.#uV  P7}QuP##C\  P}QP#эSee DIRECTV Comments at 2526; MCI Comments at 2324; NRTC Comments at 10; Alaska Reply at 1. DIRECTV especially supports phrasing the rule in terms of service that is "technically feasible" rather than "technically possible," since that will allow the Commission to take into account weight and power resources for such service, the size or receiving dish required, and technical limitations imposed by the Commission and the ITU. BellSouth similarly supports application of the rule in a manner that accounts for practical and economic limitations of satellite programming delivery.#uV  P7}QuP##C\  P}QP#эSee BellSouth Comments at 10. The State of Hawaii, Primestar, and Tempo support the rule, but propose that the requirement of service to Alaska and Hawaii be extended to both new and existing permittees.#uV  P7}QuP##C\  P}QP#эSee Hawaii Comments at 67; Primestar Comments at 24; Tempo Comments at 38. USSB asserts that the rule is unnecessary since progress in DBS will soon bring service to Alaska and Hawaii, but that if a rule is adopted it should apply only to new entrants and only where feasible.#uV  P7}QuP##C\  P}QP#эSee USSB Comments at 1011. ` ` We will adopt the rule as proposed in the NPRM. We do not believe that applying the first prong of this rule to existing permittees would be appropriate. All permittees currently have channels assigned at both eastern and western orbital locations. The rule as proposed requires that they serve Alaska and Hawaii from either or both of those locations, or else forfeit their western assignments. Two licensees (DIRECTV and USSB) are currently operating from their eastern location, and another (EchoStar/Directsat) will begin operations from its eastern location next year. None of these parties has designed satellites capable of providing full service to Alaska and Hawaii from those eastern orbital locations. We will not adopt a rule that would immediately place the only operational systems in violation of our regulations. Nor will we exempt them from a rule that would impose significant requirements on all those who have yet to complete satellite construction. ` ` As to the definition of "technically feasible," we note that Tempo's applications to modify its satellites have already demonstrated that service to Alaska and Hawaii from both 110$ and 119$ is technically feasible and economically reasonable. In addition, it is clear that all four western locations offer appropriate platforms for such service. Thus, any party acquiring channels at any of these six orbital locations should anticipate providing such service. We have not yet had occasion to assess the feasibility of such service from the 101$ or 61.5$ orbital locations. Any party acquiring channels at these locations that desires not to provide service to Alaska or Hawaii will bear the burden of showing that such service is not feasible as a technical matter, or that while technically feasible such service would require so many compromises in satellite design and operation as to make it economically unreasonable. #uV  P7}QuP##C\  P}QP#эThus, if service to Alaska is feasible but service to Hawaii is not, the permittee will not be excused from providing service to Alaska.  ٌE.License Term ` ` The NPRM proposed to increase the term of a nonbroadcast DBS license from five years to ten years, the maximum allowed under the Communications Act, which better reflects the useful life of a DBS satellite and is consistent with the current proposal for extending the term of satellite licenses in other services.#uV  P7}QuP##C\  P}QP#эSee NPRM at  71. ` ` This proposal received unanimous support from the commenters.#uV  P7}QuP##C\  P}QP#эSee CTA Comments at 1516; DBSC Comments at 15; DIRECTV Comments at 26; EchoStar/Directsat Comments at 57; MCI Comments at 24; USSB Comments at 1112. They agreed that extending the license term will help to reduce the burden of regulation on DBS licensees and the burden of oversight on the Commission, and will encourage investment and innovation in the service. Accordingly we will adopt the rule as proposed. USSB requests that we clarify the definition of "nonbroadcast" use of DBS as referring to the primary use of the satellite, since a DBS operator may transmit a limited number of nonscrambled signals, carrying promotional materials for the operator's services and other such materials, but should not therefore be rendered a "broadcast" service.#uV  P7}QuP##C\  P}QP#эSee USSB Comments at 11. Based on USSB's description, we would not consider such transmissions, constituting a de minimis portion of an operator's transmissions, to change its classification. We are, however, wary of crafting any general rule that allows a nonbroadcast licensee to provide essentially broadcast service. To the extent any DBS provider has questions as to the effect of such unscrambled transmissions, it should describe the nature and extent of those transmissions to the Commission in either a licensing or declaratory ruling context in order to receive a definitive ruling.  D III. ADOPTION OF A NEW METHODOLOGY DFOR REASSIGNING DBS RESOURCES ă ` ` Over six years ago, in the Continental decision, the Commission stated that existing DBS permittees would have first right to additional channel assignments upon surrender or cancellation of a DBS construction permit.#uV  P7}QuP##C\  P}QP#эContinental, 4 FCC Rcd at 6299. The NPRM tentatively concluded that this reassignment policy, adopted in an era before Congress explicitly authorized the Commission's use of auctions and well before any DBS system actually went into operation, no longer serves the public interest, and therefore should be abandoned.#uV  P7}QuP##C\  P}QP#эSee NPRM at  917. ` `  A majority of the commenters agree that the Continental reassignment policy is outmoded, would cause significant delays in DBS service as permittees sought to reaggregate and reshuffle channels, and would not serve the public interest, and they therefore support the use of auctions to reassign DBS channels.A#uV  P7}QuP##C\  P}QP#эSee Cox Comments at 3; CTA Comments at 2; DIRECTV Comments at 45; GE Americom Comments at 1617; MCI Comments at 24; PanAmSat Comments at 4; Primestar Comments at 9; NRTC Reply at 2.A DIRECTV, which stands to receive additional channels under the Continental approach, nonetheless supports the use of auctions in the special circumstances of this case as an appropriate means of reassigning channels in the most rapid and efficient manner, so long as it and other independent DBS operators can participate in the auction.#uV  P7}QuP##C\  P}QP#эSee DIRECTV Comments at 45. ` ` Five current permittees, each of which would receive additional channels free of charge under Continental, oppose adoption of a new reassignment approach.z#uV  P7}QuP##C\  P}QP#эSee Continental Satellite Comments at 310; DBSC Comments at 314; EchoStar/Directsat Comments at 431; Tempo Comments at 57. ACC, whose former channels would be auctioned, also opposes the use of auctions. See ACC Comments at 26.z They argue that the Commission's resolution of conflicting applications in Continental gave each of them a legal and/or equitable right to receive additional channels that become available due to cancellation of a DBS permit, and that the Commission cannot and should not take away rights upon which these permittees have relied in making substantial investment in their respective DBS systems. They note that five of the eight existing permittees expect to launch satellites with capacity built in for additional channels by 1997, and argue that those permittees are therefore in the best position to put the available channels to use in the most expedited manner. EchoStar/Directsat also contends that allowing new entrants to compete at auction for ACC's channels would reopen the Continental processing round, and thus deprive these permittees of their protected status as timely applicants. ` ` We remain convinced that the pro rata distribution of reclaimed channels to existing permittees no longer serves the public interest. We base this conclusion on the history of the DBS service, especially in the six years since Continental was decided. Our historic policy of assigning a relatively small number of channels to each permittee was based upon a conception of DBS service that has not been put into practice. There are currently only two DBS providers in operation: DIRECTV, with 27 channels, and USSB, whose fivechannel system uses transponders on one of DIRECTV's satellites. EchoStar/Directsat, which recently combined to control a total of 21 channels, expects to launch its first satellite by the end of the year. The move toward consolidation of channels is understandable, given that DBS systems must compete in the MVPD market with cable systems that are promising a 500channel service in the future. Even using advanced methods of digital compression, DBS licensees with a small number of channels face capacity limitations that may hamper their ability to compete effectively in that market. In fact, Tempo Satellite has indicated that the eleven channels it has been assigned "are not sufficient for a competitive system." #uV  P7}QuP##C\  P}QP#эSee Letter from Richard E. Wiley to Hon. Reed E. Hundt at 2 (dated August 15, 1995). ` ` Cancellation of ACC's construction permit reclaimed 27 eastern and 24 western DBS channels. Even if we were to combine these reclaimed channels with those channels that have never been assigned to any permittee channels that are not subject to a claim under Continental we would have a total of 30 eastern channels at two orbital locations and 30 western channels at three orbital locations available for assignment. Under Continental, these channels would be divided pro rata to assign five pairs of channels at these locations to each of the six permittees that received fewer channels than requested in Continental.#uV  P7}QuP##C\  P}QP#эThe channel reservations made in Continental were 5 paired channels fewer than had been requested by EchoStar, Directsat, Tempo, DBSC, and DIRECTV, respectively, and 5 paired and 8 fullCONUS channels fewer than had been requested by Continental Satellite. Continental, 4 FCC Rcd at 629597. Thus, the outstanding channel requests total 30 eastern channels, 30 western channels, and 8 fullCONUS channels. Only 27 eastern and 24 western channels are available due to cancellation of ACC's permit the only channels to which these permittees have a claim under Continental. The result would be a piecemeal assignment of the 28 fullCONUS channels available at the 110$ orbital location among six permittees. In order to aggregate sufficient channels to support a viable DBS service, these permittees would have to negotiate some form of agreement for joint operations from 110$, or else work out a system of channel swaps to consolidate assignments. The process necessary in either case is often a time consuming one that is not always successful,5#uV  P7}QuP##C\  P}QP#эFor example, EchoStar negotiated for over three years before finally abandoning its efforts to merge with ACC or acquire its channels. See Advanced Order at  43.5 which is further complicated by the time required for Commission consideration and approval of the resulting transactions. Moreover, because the number of parties receiving additional channels is limited, there is no guarantee that those channels would go to the person who values them most highly and who can put them to the most efficient use to the benefit of American consumers. Such a result would conflict with our goals for the DBS service, as they would impede prompt delivery of service to the public and thwart efficient use of valuable spectrum resources as a muchneeded competitor in the MVPD market.#uV  P7}QuP##C\  P}QP#эSee NPRM at  14. ` ` By contrast, the competitive bidding procedures we adopt today are specifically designed and intended to assign scarce resources to those who value them most highly and can make the most efficient use of them. By offering the available channels in two large blocks, we obviate the need for reaggregation and allow the auction winners to proceed directly to acquisition or construction of satellites and operation of their systems without having to negotiate with other permittees or engage in several rounds of administrative processing. Since we intend to hold this auction in January 1996, and to apply performance requirements to ensure due diligence,#uV  P7}QuP##C\  P}QP#эSee  10, supra. we believe that the method we have chosen to replace Continental is better suited to achieving expedited service from the channels available than is the existing policy. ` ` As a general matter, the arguments against adoption of a new assignment methodology are based on the misconception that the Commission cannot or should not change settled rules or policies if doing so would have a detrimental impact on those it regulates. On the contrary, the Commission enjoys wide latitude when using rulemaking to change its own policies and the manner by which those policies are implemented.#uV  P7}QuP##C\  P}QP#эSee, e.g., Rainbow Broadcasting Co. v. FCC, 949 F.2d 405, 409 (D.C. Cir. 1991). If the Commission is to function effectively, it must have the flexibility to amend its rules and regulations in light of its experience.#uV  P7}QuP##C\  P}QP#эSee Florida Cellular Mobil Communications Corp. v. FCC, 28 F.3d 191, 196 (D.C. Cir. 1994), cert. denied, 115 S. Ct. 1357 (1995). In fact, "the Commission should be alert to the consequences of its policies and should stand ready to alter its rule if necessary to serve the public interest more fully." #uV  P7}QuP##C\  P}QP#эFCC v. WNCN Listeners Guild, 450 U.S. 582, 603 (1981). See also National Broadcasting Co. v. United States, 319 U.S. 190, 225 (1943)("If time and changing circumstances reveal that the 'public interest' is not served by application of the Regulations, it must be assumed that the Commission will act in accordance with its statutory obligations"). Otherwise, its policies and regulations would be perpetually dictated by rationales that were appropriate at the time of adoption but may no longer serve the public interest. This is especially true given that technological, commercial, and societal aspects of communications media are in constant flux.  #uV  P7}QuP##C\  P}QP#эSee Rainbow Broadcasting Co., 949 F.2d at 409 (citing FCC v. Pottsville Broadcasting Co., 309 U.S. 134, 138 (1940)).  Accordingly, the Commission reevaluates its regulatory standards over time, and such periodic examination of the continued vitality of regulatory approaches should not be discouraged. #uV  P7}QuP##C\  P}QP#эSee Office of Communication of the United Church of Christ v. FCC, 707 F.2d 1413, 1425 (D.C. Cir. 1983). ` ` EchoStar/Directsat and DBSC argue that failure to honor the Continental reassignment methodology would violate their Fifth Amendment rights, both as an arbitrary and capricious denial of rights to additional channels and as a "taking" without just compensation of that valuable right. #uV  P7}QuP##C\  P}QP#эSee EchoStar/Directsat Comments at 2130; DBSC Comments at 1314. The first step in both due process and takings analyses is to determine whether there is a protected property right at issue.0 #uV  P7}QuP##C\  P}QP#эSee, e.g., Bowen v. Public Agencies Opposed to Social Security Entrapment, 477 U.S. 41, 5455 (1986); FHA v. The Darlington, Inc., 358 U.S. 84, 91 (1958).0 The permittees have cited two such interests: (1) the right to distribution pro rata of additional DBS channels recovered by the Commission; and (2) the right to use additional transponders built at great expense in order to accommodate the expected distribution of channels. Neither of these supposed "rights" rises to the level necessary to support a due process or takings violation. ` ` While existing permittees do have a claim under Continental of first rights to reclaimed DBS channels, this right (and any related expectation) is not a property right for constitutional purposes. Each DBS permittee has a conditional construction permit for a specified term of years. Section 301 of the Communications Act clearly states that its purpose is, among other things, to "maintain the control of the United States over all the channels of radio transmission" and to provide for licensing the use of such channels, but not the ownership thereof, "and no such license shall be construed to create any right, beyond the terms, conditions, and periods of the license."#uV  P7}QuP##C\  P}QP#эSee 47 U.S.C.  301. Section 304 of the Act similarly provides that no station license may be granted until the licensee has "waived any claim to the use of any particular frequency or of the electromagnetic spectrum as against the regulatory power of the United States because of the previous use of the same, whether by license or otherwise."#uV  P7}QuP##C\  P}QP#эId. at  304. In addition, the Commission may modify any station license or construction permit if in its judgment such action will promote the public interest, convenience, and necessity, and, as noted above, such modification may appropriately be accomplished through notice and comment rulemaking. #uV  P7}QuP##C\  P}QP#эSee, e.g., Committee for Effective Cellular Rules v. FCC, 53 F.3d 1309, 1316 (D.C. Cir. 1995)(FCC properly acted within its rulemaking authority in adopting changes in cellular geographic service areas even though they will result in modification of existing licenses); Upjohn Co. v. FDA, 811 F.2d 1583, 1585 (D.C. Cir. 1987)("FDA was entitled . . . to diminish . . . entitlements under such licenses by means of noticeandcomment rulemaking"); WBEN, Inc. v. FCC, 396 F.2d 601, 618 (2d Cir.)(upholding exercise of FCC rulemaking authority without license modification hearings even though rule "result[ed] in increasing interference during the life of . . . present licenses"), cert. denied, 393 U.S. 914 (1968). See also 47 U.S.C.  316 (the Commission may modify any license or permit it has issued if such action will promote the pubic interest, convenience, and necessity).  Where, as here, the government retains at all times the power to alter rights it has created, the exercise of that retained power is not considered a "taking" for Fifth Amendment purposes.#uV  P7}QuP##C\  P}QP#эSee Democratic Central Comm. v. Washington Metro. Area Transit Comm'n, 38 F.3d 603, 60607 (D.C. Cir. 1994). Enforceable rights sufficient to support a due process claim cannot arise in an area voluntarily entered into and one which, from the start, is subject to such pervasive government control.8#uV  P7}QuP##C\  P}QP#эSee Bowen, 477 U.S. at 55; Mitchell Arms, Inc. v. United States, 7 F.3d 212, 216 (Fed. Cir. 1993), cert. denied, 114 S. Ct. 2100 (1994)(party who had voluntarily entered the firearms import business placed himself in a heavily regulated arena, and any expectation flowing from permit "could not be said to be a property right protected under the Fifth Amendment"); General Tel. Co. of the Southwest v. U.S., 449 F.2d 846, 864 (5th Cir. 1971)("The property of regulated industries is held subject to such limitations as may reasonably be imposed upon it in the public interest"); Black Hills Video Corp. v. FCC, 399 F.2d 65, 6970 (8th Cir. 1968)(rules requiring cable systems to use their system capacity to carry the programs of local broadcast stations were not a constitutional "taking" because cable systems "are under the Communications Act subject to reasonable regulation related to the Act's objectives").8 Accordingly, these permittees' claims to additional channels does not enjoy constitutional protection. ` ` EchoStar/Directsat and DBSC also cite their investment in additional satellite transponders as evidence of their investmentbacked expectation that rights under Continental would be honored. Courts have rejected attempts to support "the curious proposition that investmentbacked expectations can give rise to a constitutionally protected property interest."#uV  P7}QuP##C\  P}QP#эPeterson v. Department of Interior, 899 F.2d 799, 813 (9th Cir.), cert. denied, 498 U.S. 1003 (1990). The cases upon which the permittees rely do not support a contrary result.#uV  P7}QuP##C\  P}QP#эSee, e.g., Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1005 (1984); Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211 (1986). As explained by the Court of Appeals for the Ninth Circuit, such cases are ` ` ` authority for the proposition that once a constitutionally protected property interest is established, then a reasonable investmentbacked expectation is one of several factors to be taken into account "when determining whether a governmental action has gone beyond 'regulation' and effects a 'taking.'" Whether a "taking" has occurred is the second step of the inquiry. Here we do not reach that step because the [appellant has] failed to survive the first step, which is establishing that a property right exists.#uV  P7}QuP##C\  P}QP#эPeterson, 899 F.2d at 813 (emphasis added; citation omitted). Here too, these permittee have failed to identify any property right that is entitled to the due process and takings clause protection they claim. ` ` EchoStar/Directsat and DBSC have each been authorized to construct satellites using particular channels. To the extent they have configured their satellites to use additional channels, they have exceeded that authorization. It would be curious indeed if such unauthorized action could create a constitutionally protected right. Moreover, given that virtually all available DBS channels have been either requested or actually assigned for some time, no permittee could reasonably expect that channels recovered by the Commission would be available for reassignment at the orbital position of that licensee.#uV  P7}QuP##C\  P}QP#эFor example, the last channels available at the 119$ orbital location were assigned in November 1993. All three permittees holding those channel assignments EchoStar, Directsat, and Tempo have apparently been proceeding with due diligence toward construction and operation of their respective DBS systems. We also reject the argument that additional transponders that the permittees have built into their satellites will be wasted unless the Commission assigns additional DBS channels to use them. Satellite technology allows for use of those transponders to provide service from the channels already assigned. For example, the satellites used by DIRECTV employ switchable transponders, allowing DIRECTV to match the number of operating transponders with available power. Thus, it can use more transponders at lower power (16 channels at 120 watts) or fewer transponders at higher power (8 channels at 240 watts). The latter configuration provides the operator greater programming capacity, since the additional power allows greater compression. DIRECTV currently operates two of its satellites at the 101$ orbital location in this highpower mode.P#uV  P7}QuP##C\  P}QP#эSee Hughes Communications Galaxy, Inc., DA 95979 (May 1, 1995)(authorizing operation at high power). DBSC apparently has a satellite with similar capabilities. See DBSC Reply at 6 n.6.P ` ` We recognize that the Commission's action in Continental gave these permittees a claim to any channels that became available due to cancellation of another's permit, and that from this claim arose expectations upon which the permittees acted. We do not lightly disappoint those permittees' claims and expectations. It is our judgment, however, that the public interest in abandoning the Continental reassignment methodology discussed at length above outweighs the private interests of these parties. In the circumstances, the Commission may reassign available channels in a manner that better serves the public interest, convenience, and necessity, even if doing so has a detrimental impact on some individual parties. ` ` Nor do we believe that the use of a new methodology to reassign DBS channels in the future constitutes an impermissible retroactive rulemaking. "It is often the case that a business will undertake a certain course of conduct based on the current law, and will then find its expectations frustrated when the law changes. This has never been thought to constitute retroactive rulemaking, and indeed most economic regulation would be unworkable if all laws disrupting prior expectations were deemed suspect."#uV  P7}QuP##C\  P}QP#эChemical Waste Management, Inc. v. EPA, 869 F.2d 1526, 1536 (D.C. Cir. 1989). See also Langdraf v. USI Film Prods., 114 S. Ct. 1483, 1499 (1994)("A statute does not operate 'retrospectively' merely because it is applied in a case arising from conduct antedating the statute's enactment . . . or upsets expectations based in prior law" (citations omitted)). The use of a new methodology to reassign reclaimed channels applies to those currently available and those that may become available in the future. While this action modifies existing permits in a way that disrupts the permittees' expectations, it does not make past behavior unlawful or otherwise impose a penalty for past actions and thus does not have an impermissible retroactive effect.6#uV  P7}QuP##C\  P}QP#эSee, e.g., Langdraf, 114 S. Ct. at 1498 (retroactive law takes away or impairs vested rights, creates a new obligation, imposes a new duty, or attaches a new disability with respect to transactions already past); Bowen v. Georgetown University Hospital, 488 U.S. 204, 21920 (1988)(Scalia, J., concurring) (retroactive rules alter the past legal consequences of past actions; rules that do not change what the law was in the past may still have "secondary" retroactivity, but are permissible if reasonable); Miller v. Florida, 482 U.S. 423, 430 (1987)("A law is retrospective if it 'changes the legal consequences of acts completed before its effective date'").6 ` ` No more availing is the argument that abandoning Continental impermissibly reopens the last DBS processing round to new applicants and thereby deprives existing permittees of their protected status as timely applicants. Today we adopt a rule that modifies construction permits awarded in that processing round by removing claims on additional channels under certain conditions. We have taken this step because, as discussed in detail above, such action better serves the public interest. While this may be analogous to reopening the prior processing window in that spectrum awarded in that round will now be available to entities that were previously cut off from applying for it, it is nonetheless distinguishable. ` ` Even assuming, arguendo, that we were reopening the Continental processing round, the Commission is free to do so where the public interest justifies doing so. The cases cited by these commenters stand only for the proposition that the Commission has valid reasons for strictly enforcing its cutoff rules, and does not abuse its discretion if it chooses not to waive those rules for a noncomplying applicant.#uV  P7}QuP##C\  P}QP#эSee Florida Institute of Technology v. FCC, 952 F.2d 549, 55354 (D.C. Cir. 1992); Coalition for the Preservation of Hispanic Broadcasting v. FCC, 893 F.2d 1349, 1359 (D.C. Cir. 1990), aff'd in part and vacated in part, 931 F.2d 73 (D.C. Cir.)(en banc), cert. denied, 502 U.S. 907 (1991). In fact, one of the cited cases states that ` ` ` timely applicants have no "vested right against challenge from untimely competitors," in the sense of precluding the FCC from ever granting a cutoff waiver, but they certainly have an equitable interest whose weight it is "manifestly within the Commission's discretion to consider."#uV  P7}QuP##C\  P}QP#эFlorida Institute of Technology, 952 F.2d at 554 (quoting City of Angels Broadcasting, Inc. v. FCC, 745 F.2d 656, 663 n.7 (D.C. Cir. 1984)). As discussed above, we have considered those equities, and have determined that the public interest in expedited and competitive DBS service outweighs them in this instance. Since the public's interest in having licenses issued and service provided without undue delay is the basis for cutoff rules in the first instance,#uV  P7}QuP##C\  P}QP#эId.Č we find our decision all the more appropriate. We also note that Ashbacker and its progeny#uV  P7}QuP##C\  P}QP#эSee Ashbacker Radio Corp. v. FCC, 326 U.S. 327 (1954); see also Maxcell Telecom Plus, Inc. v. FCC, 815 F.2d 1551, 1555 (D.C. Cir. 1987); MultiState Communications, Inc. v. FCC, 728 F.2d 1519, 152526 (D.C. Cir.), cert. denied, 469 U.S. 1017 (1984). in no way limit our discretion to modify a construction permit by rule to provide for reassignment of spectrum in the public interest regardless of whether or not our action is viewed as opening an existing processing window. ` ` In further support of their argument, these commenters cite to a case in which the Commission chose as a matter of its equitable discretion not to use auctions (as opposed to lotteries) to award MDS licenses for applications filed before we received auction authority.#uV  P7}QuP##C\  P}QP#эSee, e.g., EchoStar/Directsat Comments at 1417. That case is inapposite.#uV  P7}QuP##C\  P}QP#эSee Amendment of Parts 21 and 74 of the Commission's Rules With Regard to Filing Procedures in the Multipoint Distribution Service and in the Instructional Television Fixed Service, 10 FCC Rcd 9589, 9633 (1995)("There is no doubt that we have the authority under the statute to use auctions to dispose of these previously filed applications for MDS station licenses, if using auctions satisfied the Section 309(j)(3) factors. Rather, the question before us here is not whether we may utilize an auction, but whether we should."). ĵ The Commission had not there decided through rulemaking that the public interest would best be served by making spectrum available for competing applicants. Rather, that case presented the question of how to assign spectrum for which applications had been filed prior to the Commission's receipt of auction authority. While that case, like this one, did involve the balancing of various public interest and equitable reliance factors, it does not stand for the proposition that equitable interests of particular entities outweigh the public interest in auctions in all contexts. ` ` Section 309(j)(6)(E) of the Communications Act provides that nothing in our auction authority shall "be construed to relieve the Commission of the obligation in the public interest to continue to use engineering solutions, negotiation, threshold qualifications, service regulations, and other means in order to avoid mutual exclusivity in application and licensing proceedings." #uV  P7}QuP##C\  P}QP#эSee 47 U.S.C.  309(j)(6)(E). Even if simply reassigning the available channels on a pro rata basis could be used to avoid mutual exclusivity, doing so would defeat the overall goals of auction statute itself for the reasons discussed in detail above.!#uV  P7}QuP##C\  P}QP#эSee  13638, supra; 47 U.S.C.  309(j)(3). Some existing permittees assert, however, that the Commission could use the Continental methodology to reassign channels in a way that would avoid mutual exclusivity while also rearranging channel assignments into a more rational plan."#uV  P7}QuP##C\  P}QP#эSee, e.g., Continental Satellite Comments at 810 and n.17; DBSC Comments at 56; EchoStar/Directsat Comments at 3235. They have submitted various ways in which existing channel assignments could be rearranged and available channels awarded in a consensual process.]##uV  P7}QuP##C\  P}QP#эSee Continental Satellite Comments at 7; DBSC Comments, Attachment; Letter from Philip A. Malet to William F. Caton in the Advanced Order proceeding, File Nos. DBS9411EXT/15ACP/16MP (dated June 14, 1995).] Unfortunately, no two permittees have yet submitted the same proposal, nor does any one proposal appear to enjoy support of all permittees who would be affected by it. We do not think that it would serve the public interest to continue this effort, and see no practical way to force reordering of assignments without increasing the disturbance of settled expectations that the permittees claim to enjoy. Moreover, if in fact these permittees can make the most expeditious and efficient use of the available channels and can voluntarily agree on a method of reordering assignments, they are free to form a bidding consortium and then divide up the channels as they see fit, achieving their aims while also recovering for the public some of the value of the spectrum resource. ` ` Lastly, these permittees argue that litigation over many aspects of the available DBS channels, including the method of their reassignment, can be expected to delay any auction and decrease the price received by the public.$#uV  P7}QuP##C\  P}QP#эSee, e.g., Continental Satellite Comments at 8; DBSC Comments at 8; EchoStar/Directsat Comments at 18.. While the prospect of litigation may, in appropriate circumstances, tip the balance between two comparable alternatives, if the Commission were to base its estimates of likely efficiency and expedition of service upon delays inherent in litigation, it would give anyone opposed to a rule the incentive to threaten litigation, and the system would quickly become unmanageable. We believe that the service and auction rules we adopt today are within our authority to adopt and are well designed to serve the public interest. ` ` ACC proposes that it should be able to recoup its DBS expenditures from the proceeds of any auction of its former channels.%#uV  P7}QuP##C\  P}QP#эSee ACC Comments at 1016. We do not believe that ACC is entitled to any such compensation, since it could have avoided the loss of its DBS permit had it complied with applicable due diligence rules.&#uV  P7}QuP##C\  P}QP#эSee Advanced Order at  2. Even if this were not the case, however, we would be unable to adopt this proposal since the auction statute specifically provides that, with limited exceptions not applicable here, all proceeds from the use of a competitive bidding system must be deposited in the United States Treasury.'#uV  P7}QuP##C\  P}QP#эSee 47 U.S.C.  309(j)(8)(A). ` ` We also reject the proposal that we impose a spectrum fee on existing permittees to place them in a comparable competitive position with those who must acquire their permits through auction.(#uV  P7}QuP##C\  P}QP#эSee Continental Cablevision Comments at 2122. It would be unfair to impose this burden on those permittees who had sufficient foresight to enter the service and the willingness to make the investment necessary to comply with the applicable due diligence obligations before others saw DBS's potential. And, as USSB notes, auction participants can take into account any competitive advantages or disadvantages associated with the channels available when formulating their bids at auction.)#uV  P7}QuP##C\  P}QP#эSee USSB Reply at 10. ` ` A number of commenters express concern that an auction in the DBS context might be seen as precedent for auctions in other satellite services, but would support the auction proposal so long as it is limited to the unique circumstances presented by the international allocation of DBS channels and orbital locations.*#uV  P7}QuP##C\  P}QP#эSee DIRECTV Comments at 5; GE Americom Comments at 34; Lockheed Martin Comments at 89; PanAmSat Comments at 4. In the NPRM, we discussed the characteristics of the DBS service that make it unique, principally the international allocation to the United States of both orbital locations and channels.+#uV  P7}QuP##C\  P}QP#эSee NPRM at  1822. It is those characteristics upon which we rely in determining that auctions are appropriate for this particular satellite service. We are aware that other satellite services, which do not have similar international allocations of resources, present different and very complex issues with respect to the use of auctions. The Commission is in the process of considering those issues,,#uV  P7}QuP##C\  P}QP#эSee Public Notice, "Roundtable Date Set on Satellite Licensing Policies," Report No. SPB31 (Nov. 21, 1995). and will be able to address them in the appropriate context. Those issues, however, are not now before us. Thus, our decision to use auctions in the DBS context is dependent upon the unique nature of the service, and in no way stands for the proposition that their use in other satellite services would also be appropriate. ` ` Primestar and Tempo request that we make clear to all auction participants that appeals of our Advanced Order are ongoing and any award of a DBS construction permit through auction is taken subject to judicial reversal.-#uV  P7}QuP##C\  P}QP#эSee Primestar Comments at 38; Tempo Comments at 39. This is a familiar aspect of any Commission action that is currently under appeal. In the unlikely event that a court either overturns our Advanced Order and ACC's construction permit with its associated orbital/channel authorizations is ultimately reinstated, or overturns this rulemaking and the Continental reassignment methodology is ultimately maintained, we would rescind any permit awarded through the auction process, and move with all deliberate speed to refund money paid up to that point. Participants in the auction are hereby put on notice of this possibility, and should be willing to facilitate that process if it becomes necessary.ٙ IV. ADOPTION OF RULES FOR AUCTIONING DBS PERMITS Đ A.Authority to Conduct Auctions ` ` The NPRM. The Commission has authority under Section 309(j) of the Communications Act of 1934, as amended (the "Communications Act"), to employ auctions to choose among mutually exclusive applications for initial licenses or construction permits where the principal use of the spectrum is likely to involve the licensee receiving compensation from subscribers..#uV  P7}QuP##C\  P}QP#э47 U.S.C.  309(j). In the NPRM, we tentatively concluded that the Commission has authority under Section 309(j) to use competitive bidding to award construction permits for the DBS spectrum reclaimed from ACC as well as other available DBS spectrum, and that the use of auctions in the DBS service would be consistent with statutory objectives. Thus, we tentatively concluded that construction permits available for reclaimed DBS spectrum are "initial" within the meaning of Section 309(j); that it is likely that mutual exclusivity will exist among applications for the DBS channels reclaimed from ACC as well as other DBS channels that may become available in the future; and that the "principal use" requirement of Section 309(j) is satisfied because DBS is likely to be primarily a subscriptionbased service. We tentatively concluded that using competitive bidding to award DBS authorizations would promote the objectives of Section 309(j) because, more than any other method of awarding construction permits, auctions are likely to foster the rapid deployment of new technologies and products and the efficient use of spectrum by putting spectrum in the hands of those who value it most highly. As we also explained, auctions will serve Congress' goal of bringing new services to rural areas where homes may not be passed by cable television, and the rapid deployment of DBS service in competition with cable will further Congress' objective of promoting competition. Unlike the reassignment policy set forth in Continental,/#uV  P7}QuP##C\  P}QP#эSee  131, supra. or other available methods of assigning spectrum, such as comparative hearings, auctions will promote the statutory goal of recovering for the public a portion of the value of DBS spectrum. ` ` With respect to the issue of mutual exclusivity, we explained in the NPRM that, pursuant to Section 309(j)(6)(E), we had sought means of avoiding mutual exclusivity in the DBS service and tentatively concluded that there are no means of doing so that are consistent with the objectives of Section 309(j). We also proposed to consider mutual exclusivity to occur only when the number of DBS channels sought at a given orbital location exceeds the number available there. ` ` Comments. The vast majority of commenters do not question the Commission's authority to use competitive bidding to award DBS authorizations, and commenters such as Primestar and MCI agree with our tentative conclusion that we do have such authority.0#uV  P7}QuP##C\  P}QP#эPrimestar Comments at 3435; MCI Comments at 2426. However, ACC argues that our proposed auction procedures exceed the Commission's statutory authority because DBS is not by definition a subscription service. According to ACC, competitive bidding will force DBS permittees to offer allsubscription service in order to recover the costs of competitive bidding and the Commission, by proposing to award construction permits through auctions, has chosen to sacrifice the free educational services that DBS operators would have otherwise provided.1#uV  P7}QuP##C\  P}QP#эACC Comments at 3, 89. EchoStar/Directsat argues in its comments that the Commission lacks authority to reassign ACC's spectrum by competitive bidding because we have ignored our statutory duty to try to avoid mutual exclusivity, which it asserts could be accomplished by applying Continental.62#uV  P7}QuP##C\  P}QP#эEchoStar/Directsat Comments at 3031 and Reply Comments at 12. See also DBSC Comments at 48 and Reply Comments at 8; Primestar Comments at 3435 and Reply Comments at 19.6 DBSC contends that the construction permits to be issued for the reclaimed ACC channels will not be "initial" under Section 309(j) because DBSC and others have the right under current Commission policy to acquire these channels through a modification of their permits.3#uV  P7}QuP##C\  P}QP#эDBSC Comments at 910. MCI, on the other hand, argues that the principal use of DBS spectrum will involve the licensee receiving compensation from subscribers, that no one can seriously doubt that there will be mutually exclusive applications for the spectrum reclaimed from ACC, and that the authorizations to be issued for the spectrum reclaimed from ACC are "initial" under Section 309(j).4#uV  P7}QuP##C\  P}QP#эMCI Comments at 2425. ` ` ACC, EchoStar/Directsat, Continental Satellite, and DBSC assert that the objectives of Section 309(j) would not be served by the use of competitive bidding in the DBS service. They argue that auctions would not promote the development and rapid deployment of new technologies, products or services, and would in fact delay the deployment of services. ACC states that the auction winner will not be required to complete its first satellite until at least January 2000, and that further delay is almost certain due to court proceedings, whereas ACC's plan to assign its construction permit to Tempo would have resulted in a new DBS service becoming available shortly after the spring of 1996.F5#uV  P7}QuP##C\  P}QP#эACC Comments at 3, 67. See also EchoStar/Directsat Comments at 3237 and Reply Comments at 68; Continental Satellite Comments at 2, 10; DBSC Comments at 79 and Reply Comments at 45, 7.F ACC also asserts, inter alia, that the Commission's proposed use of competitive bidding would not promote the statutory objective of disseminating licenses among a wide variety of applicants, and that the Commission has ignored Congress' mandate to offer small businesses the opportunity to participate in DBS.6#uV  P7}QuP##C\  P}QP#эACC Comments at 4, 10. See also Continental Satellite Comments at 11; DBSC Reply Comments at 78. EchoStar/Directsat contends that it is doubtful that any portion of the value of DBS spectrum would be recovered for the public through competitive bidding, arguing that there is a real possibility that the cost of paying for the spectrum would be passed on to the public through higher rates.7#uV  P7}QuP##C\  P}QP#эEchoStar/Directsat Comments at 3132, 3839. See also DBSC Comments at 12 and Continental Satellite Comments at 2. Although it believes the Commission has the authority to conduct DBS auctions, Primestar questions whether auctioning the channels reclaimed from ACC is consistent with statutory policies favoring the rapid deployment of services without administrative and judicial delay.8#uV  P7}QuP##C\  P}QP#эPrimestar Comments at 3435. DBSC, while it disputes that prevention of unjust enrichment is an objective of Section 309(j), argues that transfer of ACC's channels to eligible DBS operators does not unjustly enrich them because they have invested in the development of the industry.9#uV  P7}QuP##C\  P}QP#эDBSC Comments at 10. EchoStar/Directsat argues that an auction of channels at 110$ will unjustly enrich DBS operators DIRECTV/USSB because they obtained fullCONUS channels for free.:#uV  P7}QuP##C\  P}QP#эEchoStar/Directsat Comments at 1920 and Reply Comments at 12. In contrast, MCI argues that auctioning the DBS channels at issue here is fully consistent with the statutory goals of recovering for the public a portion of the value of spectrum, promoting efficient and intensive use of spectrum, and fostering the rapid development and deployment of services.;#uV  P7}QuP##C\  P}QP#эMCI Comments at 26. ` ` Discussion. Those parties who argue that the Commission lacks authority to use auctions to award construction permits for reclaimed DBS spectrum are unpersuasive. As we stated in the NPRM with respect to the "principal use" requirement of Section 309(j), auctions are authorized if at least a majority of the use of the spectrum is likely to be for subscriptionbased services, and we look to classes of licenses and permits rather than individual licenses in making this determination.,0Í/,0Í/\<  Њ#uV  P7}QuP##C\  P}QP# Í/NPRM at  76 (citing Implementation of Section 309(j) of the Communications Act Competitive Bidding, Second Report and Order, 9 FCC Rcd 2348, 2354 (1994) ("Second R&O")).\ Given that both DBS licensees now providing service to the public operate on a subscription basis, and all other permittees planning to initiate service in the near future also plan to offer subscriptionbased service, we think it is a reasonable assumption that a majority of the use of the spectrum is likely to involve the licensee receiving compensation from subscribers. Moreover, given that these operations and plans were in place before the Commission proposed to use competitive bidding in the DBS service, we do not agree with ACC's claim that competitive bidding will force DBS permittees to offer allsubscription service. Our "principal use" determination does not in any way preclude DBS licensees from providing any amount of nonsubscription service, and they are not precluded from recovering auction costs, as well as the substantial costs of construction, launch, and operation from sources other than subscribers, such as advertising. ` ` We do not accept EchoStar/Directsat's claim that we could have avoided mutual exclusivity by applying Continental because, as we have explained, we have determined that the spectrum reassignment policy in Continental would delay the development of DBS service and would squander valuable spectrum and thus would not be in the public interest. We also point out as we did in the NPRM that in any case where we have scheduled an auction and it turns out that only one application is filed for a particular construction permit, we will cancel the auction and process that application.,0Í/Í/,0Í/Í/=#uV  P7}QuP##C\  P}QP#эSee NPRM at  75 (citing Second R&O, 9 FCC Rcd at 2376). As we proposed in the NPRM, we will consider mutual exclusivity to exist only when the number of DBS channels sought at a given orbital location exceeds the number available there. ` ` We also do not agree with DBSC's contention that existing permittees have the right to acquire channels reclaimed from ACC by modifying their permits and that the construction permits to be issued for these channels therefore will not be "initial" under Section 309(j). As noted in the NPRM, Congress, by specifying that auctionable licenses must be "initial," intended only to preclude the use of competitive bidding for license renewals and modifications.>#uV  P7}QuP##C\  P}QP#эSee NPRM at  74 (citing H.R. Rep. No. 103111, 103d Cong., 1st Sess., at 253 (1993)). As explained above, we have withdrawn from existing permittees the ability to modify their permits pursuant to Continental. Moreover, ACC's permits have been cancelled and therefore cannot be modified.?#uV  P7}QuP##C\  P}QP#эSee  14243, 149, supra. Thus, any construction permits awarded for reclaimed channels will be new permits for the channels in question. ` ` We turn now to commenters' arguments regarding whether competitive bidding will promote the objectives of Section 309(j). ACC's contention that the development of DBS service would be delayed if we auctioned the reclaimed frequencies at 110$ and 148$ is entirely speculative. There is no reason to assume that it will take the auction winner until at least January 2000 to complete a first satellite. The auction winner may be an entity that has already begun construction or even launched a satellite. Even if it has not, it may be in a position to do so expeditiously. Paying for spectrum provides incentives for permittees to construct quickly in order to obtain a return on their investment. Indeed, an auction is likely to promote the rapid deployment of service because those parties that are in the best position to deploy technologies and services are also likely to be the highest bidders. ` ` With respect to the possibility of delay caused by court proceedings, a point raised by both ACC and Primestar, we do not believe that it would be appropriate to refrain from conducting auctions where we believe they would serve the public policy objectives of Section 309(j) simply because of the pending appeal of the Advanced Order and other legal challenges that might be filed and where we also believe those cases will ultimately be resolved in the Commission's favor. In addition, the objective of avoiding administrative and judicial delay is only one factor that must be weighed in light of the statute's other objectives and the other available alternatives to resolving the mutually exclusive applications we will receive for the reclaimed channels. In this regard, the only available alternative for issuing licenses would be comparative hearings.N@#uV  P7}QuP##C\  P}QP#эLotteries are not an available alternative to resolving mutually exclusive applications in DBS. See 47 U.S.C.  309(i)(1)(B); see also 1993 Budget Act, Pub. L. No. 10366,  6002(e). N Our experience with both auctions and comparative hearings clearly indicates that auctions will more likely result in less administrative and judicial delay.A#uV  P7}QuP##C\  P}QP#эSee, e.g., Second R&O, 9 FCC Rcd at 2358. ` ` In response to ACC's assertion that our proposed use of competitive bidding in the DBS service would not promote the statutory objective of disseminating licenses among a wide variety of applicants, including "designated entities," we observe again that this is one of a number of objectives Congress wished to promote through spectrum auctions and each objective must be considered with all others.B#uV  P7}QuP##C\  P}QP#эSee Establishment of Rules and Policies for the Digital Audio Radio Satellite Service in the 23102360 MHz Frequency Band, Notice of Proposed Rulemaking, IB Docket No. 9591, FCC 95229, 60 Fed. Reg. 35,166 (released June 15, 1995) at  107.  As discussed more fully below, we have concluded that, because of the extremely high implementation costs associated with satellitebased services, no special provisions should be made for small businesses and other designated entities in an auction of the spectrum available at 110$ and 148$.MC#uV  P7}QuP##C\  P}QP#эAs noted in the NPRM with respect to the cost of DBS, Tempo Satellite states that it has spent nearly $250 million on the construction of two satellites for use at either the 110$ or the 119$ orbital location. See Application for Review of Tempo DBS, Inc. at 3 (dated May 24, 1995), filed in the Advanced Proceeding. EchoComm Communication Corporation, parent company of EchoStar, has raised $323.3 million to finance the DBS systems of EchoStar and Directsat (each system will include at least two satellites). See Request of EchoStar Satellite Corporation for Additional Time to Construct and Launch a Direct Broadcast Satellite System at 5 (dated July 28, 1995), File No. DBS8801. M This does not mean, however, that we have ignored Congress' mandate to offer designated entities the opportunity to participate in competitive bidding, nor does it mean that designated entities will be unable to participate in the DBS industry or that auctions of DBS spectrum will not promote many of the objectives of Section 309(j). Indeed, the legislative history of the designated entity provisions shows that Congress did not necessarily intend for special measures in services such as DBS: "The characteristics of some services are inherently national in scope, and are therefore illsuited for small businesses."D#uV  P7}QuP##C\  P}QP#эH.R. Rep. No. 111, supra, at 254. Moreover, the abandonment of our Continental policy opens the DBS industry to a wide range of potential new entrants. Judging by the comments in favor of auctioning DBS spectrum submitted by such entities as MCI and CTA, a minorityowned aerospace company, it appears that there will be a "wide variety" of applicants for this spectrum in the future. We also anticipate that a wide variety of businesses will be involved in various sectors of this industry as nonlicensed operators, programmers, and equipment suppliers. ` ` The possibility that auction costs will be passed on to consumers does not necessarily lead to the conclusion that DBS auctions will not serve the statutory objective of recovering a portion of the value of DBS spectrum for the public. Auction and other costs may be passed on to consumers by providers of any service subject to competitive bidding.E#uV  P7}QuP##C\  P}QP#эSee  157, supra. Nonetheless, in giving the Commission auction authority, Congress clearly perceived that auctions would compensate the public for at least a portion of the spectrum awarded, and this is just as true of DBS as it is of any auctionable service. It should also be pointed out that auction winners will be constrained from charging rates that are higher than those of competitors that have not paid for the spectrum assigned to them, and that rational operators will charge the market price for services in any event. ` ` Another facet of the statutory objective of compensating the public for spectrum licenses or permits is the avoidance of unjust enrichment to licensees. DBSC argues that this is only an objective of auction design and assumes that an auction is to be held. We disagree. Section 309(j)(3) states that "[i]n identifying classes of licenses and permits to be issued by competitive bidding, in specifying eligibility and other characteristics of such licenses and permits, and in designing the methodologies for use under this subsection" the Commission shall promote, among other objectives, "avoidance of unjust enrichment through methods employed to award uses" of the spectrum. The statute requires us to consider the avoidance of unjust enrichment in choosing whether to auction DBS spectrum. DBSC goes on to argue that an auction of DBS spectrum does not promote avoidance of unjust enrichment because eligible DBS operators that would have received channels under Continental have developed the DBS industry at great cost. Conversely, EchoStar/Directsat argues that current DBS operators DIRECTV/USSB will be unjustly enriched because they paid nothing for DBS channels. These arguments, however, ignore the fact that DBS channels have significant value to any entity possessing the right to use them. Transfer of these channels to operators that have already developed service using their current channels would be a windfall to those operators. Auctioning them would ensure that the ultimate holder of these channels paid their market value to the U.S. Treasury and was not unjustly enriched. ` ` In sum, we conclude that the Commission has the authority to award DBS construction permits, for reclaimed or other available spectrum, by means of competitive bidding. We further conclude that the use of competitive bidding to assign DBS spectrum will promote the rapid deployment of DBS service and the efficient use of DBS spectrum more effectively than any other assignment method. We will therefore award construction permits for the channels available at 110$ and 148$, as well as DBS construction permits that become available in the future, by means of competitive bidding. In reaching these conclusions, we emphasize that we wish to encourage DBS operators to provide free services for schools, libraries, and other institutions serving the public that may not have the financial resources to pay for DBS services, and we do not believe that the use of competitive bidding should preclude the provision of such free services, which can be provided without incurring additional buildout costs. As we also noted in the NPRM, subscriptionbased DBS is subject to a statutory public interest requirement to reserve capacity for noncommercial, educational, or informational programming found in Section 335 of the Communications Act.F#uV  P7}QuP##C\  P}QP#э47 U.S.C.  335. But see NPRM at  32 (discussing court challenges to this provision).  B.Competitive Bidding Design ` ` The NPRM. In the NPRM, we proposed to auction two permits for the construction of satellites to use the DBS channels currently available at the 110$ and 148$ orbital locations. We tentatively decided not to divide the available blocks of channels into smaller parcels, or to auction each channel individually, because the configuration of current DBS systems indicates that channels are most effectively utilized when they are available in a substantial quantity at a given orbital location. ` ` We also proposed in the NPRM to award the construction permits for the channels currently available at 110$ and 148$ by means of a sequential auction, with the channels at one orbital location being offered immediately after the other, because we tentatively concluded that there would be little to gain by conducting simultaneous auctions of the two construction permits. We explained that the channels at 110$ and at 148$ are not likely to be close substitutes in the near term, nor did we find evidence of synergies between the channels at the two orbital locations. We further tentatively concluded that multiple round bidding would be the best method of auctioning the channels reclaimed from ACC, and that oral outcry would be the best method of submitting bids. However, we sought comment on whether an oral outcry auction could pose problems for bidders that need time between bidding rounds to arrange for additional financing if bidding goes higher than anticipated. We also requested comment on whether a combined sealed bidoral outcry auction might be appropriate for the channels available at 110$ and 148$ to help reduce the risk of collusion while retaining the benefits of a multiple round auction. ٌ` ` Comments. Most commenters who discuss our proposal to auction one permit for the DBS channels available at the 110$ and one permit for the channels available at 148$ support this proposal.G#uV  P7}QuP##C\  P}QP#эSee Primestar Comments at 35; KennedyWilson Comments at 1; MCI Comments at 45. However, CTA recommends dividing the channels at 110$ into two blocks of 14, and the channels at 148$ into two blocks of 12. According to CTA, a tenchannel block is more than adequate to support a viable DBS system given the development of digital compression techniques, and vigorous DBS service can also be established using small satellite technology with fewer than half of the 32 channels allocated to an orbital slot. CTA also points out that dividing an orbital slot's channel allocation into thirds or halves would create the possibility of more competitors at each orbital location.H#uV  P7}QuP##C\  P}QP#эCTA Comments at 36. ASN proposes that the Commission set aside, at the 110$ and 148$ locations as well as in any future DBS auction, 10 percent of the channel capacity at each orbital location for "independents," DBS programmers or distributors who have no market power through a nationwide cable system or other multichannel video distribution system. According to ASN, cableaffiliated DBS distributors have numerous incentives to restrict the scope of DBS product, program, and service offerings, and exclusive operation of a fullCONUS orbital location by a cableaffiliated DBS operator would prevent or at least slow the development of new DBS offerings. ASN believes that its proposed spectrum setaside for independents would have sufficient capacity to support an economically viable product.I#uV  P7}QuP##C\  P}QP#эASN Comments at 812. ` ` In its reply comments, MCI argues against CTA's suggestion that the channels at 110$ and 148$ be divided into smaller blocks, stating that CTA's claim that 14 DBS channels could support "upwards of 280 programming channels" by the end of the decade is based upon nothing more than its expectation of vast advances in video compression by the year 2000. According to MCI, CTA's proposal, if implemented, would place those entering the DBS market prior to the year 2000 at a tremendous disadvantage because it would effectively preclude aggregation of more than 14 channels by any bidder. MCI states that, if it is awarded the reclaimed DBS channels, it expects to have satellites in operation well before the end of the decade.J#uV  P7}QuP##C\  P}QP#эMCI Reply Comments at 21. MCI also opposes ASN's proposal to set aside 10 percent of the spectrum for independent programmers, arguing that it would necessitate delay in the auction and lead to fragmentation of the spectrum block and that the proposal lacks sufficient details.K#uV  P7}QuP##C\  P}QP#эId. ` ` Most commenters express no opinion regarding our proposal to use sequential oral outcry bidding for DBS, although Primestar and DIRECTV voice support for this auction design.L#uV  P7}QuP##C\  P}QP#эPrimestar Comments at 35. Primestar believes that the Commission should not have reclaimed the spectrum at 110$ and 148$ from ACC. However, Primestar supports our proposed auction design in the event this spectrum is auctioned. DIRECTV supports this design provided that it is not precluded from bidding by spectrum caps. DIRECTV Comments at 27. MCI also generally supports our proposal and recommends a "structured openoutcry auction."M#uV  P7}QuP##C\  P}QP#эMCI Comments at 27. This auction design is described in a paper submitted by MCI and prepared by University of Maryland game theorist and economist Lawrence M. Ausubel. Under this methodology, oral bidding would be conducted in fiveminute increments. A bidder would place a bid, which would then be recorded on a board at the front of the bidding room. The bidder would then have one minute, to be timed by an official timer visible to all bidders, to withdraw that bid without penalty. Any bidder withdrawing its bid subsequent to this oneminute grace period would be subject to the Commission's standard withdrawal payment and would be disqualified from further bidding on the same construction permit. At the conclusion of the oneminute withdrawal period, a fiveminute time period, signifying the start of the new bid submission period, would begin. At any time during this time period, any bidder would be free to announce a new bid. New bids would be dictated by predetermined increments. For example, incremental bids of $5 million could be required for bids up to $200 million, followed by increments of $10 million for bids between $200 and $400 million, followed by increments of $20 million for any bids beyond $400 million. Once a bid is recorded on the board, any new bid must follow the required bidding sequence, and no jump bids would be accepted. The auctioneer would not retain discretion to change the predetermined bid increment during the course of the auction. If a default or a bid withdrawal occurs outside of the oneminute bid withdrawal period, the Commission would retain the discretion to reauction the license that same day. To prevent a bidder from strategically delaying the close of the auction, the Commission would retain the discretion to limit the number of times that a bidder may rebid on a construction permit and then withdraw the bid during the permitted oneminute withdrawal period.N#uV  P7}QuP##C\  P}QP#эMCI Comments, Ausubel Paper at 24. MCI claims that its proposed oraloutcry structure would be straightforward to implement, would serve the goal of maximizing the availability of information to bidders, and would encourage aggressive bidding by creating a simple and predictable environment for bidders to operate in, thus making higher revenues likely. ` ` GE Americom states that our proposed auction procedures appear reasonable for the unique purpose of auctioning the channels reclaimed from ACC but asserts that other procedures which it does not specify would probably achieve a fairer and more efficient result in future DBS auctions. GE Americom asks that we limit any auction procedures adopted here to the auction of the channels available at 110$ and 148$.O#uV  P7}QuP##C\  P}QP#эGE Americom Comments at 2122 and Reply Comments at 2. We note also that Continental Satellite claims that our proposed auction methodology is unworkable, but its only support of this claim is the fact that we have asked for comment on the various aspects of this methodology.P#uV  P7}QuP##C\  P}QP#эContinental Satellite Comments at 1113. ` ` CTA and KennedyWilson, an auction contractor and consultant, recommend that we use simultaneous multiple round bidding instead of our proposed sequential auction. CTA states that bidding on individual channels or small channel blocks in a simultaneous auction would allow market forces to determine the value of spectrum and the appropriate aggregation of channels. According to CTA, DBS channels are highly interdependent within each orbital slot. CTA also argues that bidding on individual channels or small parcels in a simultaneous auction would increase revenues by increasing the number of bidders and forcing up the price to acquire all channels, and that this auction design would have the advantage of allowing smaller entities to participate in the auction and still allow larger entities to aggregate all channels available at a given orbital location.Q#uV  P7}QuP##C\  P}QP#эCTA Comments at 68. KennedyWilson recommends a simultaneous oral outcry auction offering the two channel blocks proposed in the NPRM, stating that this auction design would allow bidders to adjust their bids as they acquire information regarding the relative value of each block. According to KennedyWilson, it is probable that some bidders for one block will also be interested in bidding for the other block, and a bidder primarily interested in the second block might prematurely drop out of the bidding for the first block if it lacks information about the ultimate price of the second block.R#uV  P7}QuP##C\  P}QP#эKennedyWilson Comments at 12. KennedyWilson also proposes that bidders be allowed to submit bids either orally or electronically, suggesting that electronic bids could be displayed electronically on site and announced orally. KennedyWilson suggests that we allow both telephone bids and computer bidding.S#uV  P7}QuP##C\  P}QP#эKennedyWilson Comments at 23. ` ` In its reply comments, MCI continues to support sequential auctions with the higher value block of channels offered first, stating that this is a simpler method than a simultaneous oral auction.T#uV  P7}QuP##C\  P}QP#эMCI Reply Comments at 22. According to MCI, no telephonic or electronic bidding should be employed. In its reply comments, Primestar generally supports MCI's proposal to employ an oral outcry auction including a oneminute penaltyfree withdrawal period following each bid and a fiveminute period to submit new bids. Primestar suggests that when a bid is withdrawn, the bidding should revert to the previous high bid and if no new bid is announced, then the auction would conclude at that bid.U#uV  P7}QuP##C\  P}QP#эPrimestar Reply Comments at 20. ` ` In response to our request for comment on whether bidders in an oral outcry auction would need time between bidding rounds to arrange for additional financing, Primestar argues that there should be short intervals (Primestar suggests 15 to 30 minutes in its comments and 30 minutes in its reply comments) at predetermined stages to allow bidders to assess the bidding and confer with their principals.V#uV  P7}QuP##C\  P}QP#эPrimestar Comments at 36 and Reply Comments at 2021. KennedyWilson, however, expresses concern about giving bidders time to react to ascending pricing. KennedyWilson proposes a closing rule that would allow each eligible bidder one opportunity to suspend closure of the auction by requesting a break in lieu of bidding. KennedyWilson suggests that the duration of such a break should be one hour.W#uV  P7}QuP##C\  P}QP#эKennedyWilson Comments at 2. In its reply comments, MCI contends that, to prevent opportunities for collusion and to expedite the auction, breaks should be prohibited. MCI states that entities that are serious about bidding for the permits being offered should be able to send a representative to the auction site, that there should be no need to consult with principals or to arrange for additional funding, and that the auction should be conducted and completed in one day.X#uV  P7}QuP##C\  P}QP#эMCI Reply Comments at 2223. ` ` In response to our request for comment on whether a combined sealed bidoral outcry auction would be appropriate for DBS, Primestar and MCI state that this method should not be used because it limits bidders' access to information and thus is not consistent with aggressive bidding.Y#uV  P7}QuP##C\  P}QP#эPrimestar Comments at 35 n.79; MCI Comments at 28. KennedyWilson also recommends against a combined sealed bidoral outcry procedure, arguing that nothing would be gained by this auction format, that otherwise qualified bidders might be disqualified, and that such an auction design might have the effect of reducing the amount bid.Z#uV  P7}QuP##C\  P}QP#эKennedyWilson Comments at 3. ` ` Discussion. Little opposition was expressed with regard to our proposal to auction the DBS channels available at the 110$ and 148$ orbital locations in two blocks. Moreover, the trend in the industry has been to aggregate large blocks of spectrum, and we believe that large channel blocks are needed to create a viable service at this time. As we noted in the NPRM, Tempo Satellite has indicated that the 11 paired channels it has been assigned at the 119$ orbital location "are not sufficient for a competitive system."[#uV  P7}QuP##C\  P}QP#эSee letter from Richard E. Wiley to Hon. Reed E. Hundt at 2 (dated August 15, 1995). EchoStar has combined with Directsat to control a total of 21 channels at each of two orbital locations, and USSB has been able to operate using five channels by striking a deal with DIRECTV, which held the remaining 27 channels at the same orbital location. We also note that there is no prohibition against disaggregating channels in the postauction aftermarket once they are acquired. Moreover, small entities have the option of forming groups to bid for spectrum and then dividing the channels among themselves after the auction. Therefore, we will implement our proposal and will auction one construction permit for a block of 28 channels at 110$ the 27 channels reclaimed from ACC and one channel that has never been assigned and one construction permit for the block of 24 channels at 148$ that were reclaimed from ACC. As explained in the NPRM, a separate ITU feeder link plan allocates frequencies for transmitting radio signals from a DBS operator's ground facilities to a DBS satellite ("uplink") and from the DBS satellite to the United States, Puerto Rico and the Virgin Islands ("downlink"). The construction permits available for auction include authority to transmit pursuant to these allocations in accordance with the BSS Plan.,0Í/,0Í/\  Њ#uV  P7}QuP##C\  P}QP#Í/See ITU Radio Regulations, Appendix 30A (Orb88). ` ` We recognize that there may be legitimate arguments for auctioning spectrum in smaller blocks, particularly in the future as digital compression technology is further developed. There may also be opportunities for niche services to develop once DBS service is generally established. Therefore, in the future we may auction DBS spectrum either channel by channel or in small blocks. However, for the reasons stated above, we believe that designating two permits for auction for the channels at 110$ and 148$ will best serve the public interest and the objectives of Section 309(j)(4)(B), especially the promotion of investment in and rapid deployment of this new service.  ` ` We conclude that a sequential multiple round electronic auction would be the best method of awarding construction permits for the channels available at 110$ and 148$. We are persuaded by the comments of MCI that we should provide the auction with more structure, but we believe that the best way to provide such structure is through electronic bidding, and not by imposing restrictions on the auctioneer in an oral auction. The primary benefit of additional structure is the reduced risk of bidders making errors in submitting bids. Erroneous bids are occasionally entered in rapidly moving oral auctions. Based on our experience with PCS auctions, we believe that such errors are far less likely with electronic bidding than in a traditional oral auction. Given the absence of erroneous bid submissions with electronic bidding, we believe there is no need to adopt MCI's proposal of providing a oneminute bid withdrawal period in an oral auction. ` ` We see three additional benefits to multiple round electronic bidding. First, electronic bidding with discrete bidding rounds provides bidders more time to analyze previous bids, confer with decision makers, and refine their bidding strategy than a continuous oral auction. Moreover, timeouts can be better tailored to the needs of individual bidders. If, as KennedyWilson proposes, the Commission were to provide each bidder with the right to call a one hour timeout in an oral auction, the entire auction would be stopped whenever a timeout is called. In contrast, with electronic bidding in discrete rounds, bidders can be provided with waivers that will allow them to sit out rounds without losing eligibility while other bidders continue to bid, and without the auction closing. Second, a multiple round electronic auction with the activity rule discussed below will provide bidders more information about other bidders' valuations. The activity rule requires bidders to be active in every round (or use one of a limited number of waivers) to maintain their bidding eligibility. Thus, absent the use of waivers, all bidders willing to acquire a construction permit at each announced price will be observable. Providing this information may enable bidders to refine their estimates of the permit value, thereby reducing the tendency of bidders for permits with uncertain value to shade down their bids to avoid the "winner's curse." Third, given the Commission's experience with electronic auctions, such an auction is likely to be easier for the FCC to implement than an oral auction with novel features, such as those proposed by MCI. Because of the Commission's discretion to adjust the length of bidding rounds in an electronic auction and the other auction design features described below, we expect the auction to proceed rapidly. ` ` We will provide for electronic bidding at an FCC auction site because of the anticipated rapid auction pace. We do not anticipate allowing telephone bids and remote electronic bidding, as suggested by KennedyWilson, but the Wireless Telecommunications Bureau will announce by Public Notice whether such bidding will be permitted. In the event telephone bids and remote electronic bidding are not allowed, all bidders will be required to have an authorized bidding representative at the auction site. Because no commenter has made the case that there is significant interdependence between the channels available at 110$ and those available at 148$, we do not believe simultaneous bidding is necessary. Hence, we shall auction the channels at 110$ and the channels at 148$ separately. We may auction one channel block immediately after the other, but we also reserve the discretion to hold two separate auctions for the two blocks. ` ` Although we will not use simultaneous multiple round bidding, oral outcry bidding, sealed bidding, or a combined sealed bidoral outcry auction, to reassign the spectrum reclaimed from ACC, we recognize that such auction designs could be suitable for DBS under certain circumstances and we reserve discretion to employ such auction designs for DBS in the future. We therefore adopt rules to provide for these auction designs, and we retain discretion to modify by Public Notice the procedures pertaining to these auction methods. As we have done in previous auctions, we also delegate to the Wireless Telecommunications Bureau the authority to implement and modify auction procedures including the general design and timing of an auction, the number of authorizations to be offered in any one auction, the manner of submitting bids, and procedures such as minimum opening bids and bid increments, activity and stopping rules, and application and payment requirements and to announce such procedures by Public Notice.  C.Bidding Procedures ` ` Sequencing. We proposed in the NPRM to auction the 28 channels available at 110$ first. As we explained, all of the information available to us indicated that these channels have the highest value of those currently available, and we thought that bidders would not wish to bid on the channels available at 148$ until they had had the opportunity to bid on the channels at 110$. We also sought comment on any general principles interested parties might wish to suggest for determining the sequence of future DBS auctions that may be held. None of the commenters suggested that we offer the channels available at 148$ before the channels at 110$, and the comments clearly reveal that there is more interest in these channels than in the channels available at 148$. We will therefore implement our proposal to auction the 28 channels available at 110$ first. As noted above, we reserve the discretion to hold two separate auctions for the channels available at 110$ and the channels at 148$, rather than auctioning the channels at 148$ immediately after the channels at 110$. We will determine the sequence of future DBS auctions in keeping with our general finding that the highest value licenses should be auctioned first because the greater the value of the license, the greater the cost to the public of delaying licensing.,0Í/Í/,0Í/Í/]#uV  P7}QuP##C\  P}QP#эSee Second R&O, 9 FCC Rcd at 2368. In the event that we need to assign separate blocks of channels that we believe to be interdependent, we may choose to utilize a simultaneous multiple round auction. ` ` Bid Increments and Tie Bids. In the NPRM, we tentatively concluded that, if we employed oral outcry bidding, the auctioneer should have discretion to establish bid increments and raise or lower them in the course of an auction consistent with directions provided by the Commission. We stated our view that such discretion on the part of the auctioneer would contribute to the efficient conduct of an oral outcry auction. We also solicited suggestions as to how bid increments should be determined in the event bids are submitted electronically. According to KennedyWilson, bid increments are most crucial at the conclusion of an auction and must be low enough at that time to withstand a legal challenge from bidders who want to make bids above the high bid but below the bid increment. KennedyWilson suggests that the auctioneer be given the discretion to set the amount of bid increments subject to a minimum increment of 1 percent rounded down to the nearest $100,000 or $1 million, whichever is less.^#uV  P7}QuP##C\  P}QP#эKennedyWilson Comments at 3. Primestar suggests in its comments that bid increments of $5 million would be sufficient to ensure that full value of the spectrum is received and that the auction proceeds to an expeditious conclusion._#uV  P7}QuP##C\  P}QP#эPrimestar Comments at 37. In its reply comments, however, Primestar supports KennedyWilson's proposal of granting the auctioneer the discretion to set bid increments subject to a minimum of 1 percent rounded down to the nearest $100,000 or $1 million, whichever is less. Primestar disagrees with MCI's proposal of having bid increments increase as the bidding amounts increase. Primestar believes that this method runs counter to the Commission's goal of maximizing the value of the spectrum because at higher overall bidding levels, bidders may be willing to pay $1 million more but not $20 million more.`#uV  P7}QuP##C\  P}QP#эPrimestar Reply Comments at 21. ` ` We conclude that the Commission should have discretion to establish, raise and lower minimum bid increments in the course of the auction. We believe that this discretion over minimum bid increments is necessary to ensure that the Commission can efficiently control the pace of the auction. We anticipate using larger percentage minimum bid increments early in the auction and reducing the minimum increment percentage as bidding activity falls. In light of MCI's comments, we also believe that the efficiency of the auction may be enhanced by limiting jump bidding, i.e., bidding above the minimum accepted bids. Therefore, we will also retain the discretion to establish and change maximum bid increments in the course of the auction. Where a tie bid occurs, the high bidder will be determined by the order in which the bids were received by the Commission. ` ` Minimum Opening Bid. We proposed in the NPRM to establish a minimum opening bid for the 28 channels available at 110$, both to help ensure that the auction proceeds quickly and to increase the likelihood that the public receives fair market value for the spectrum. We asked interested parties to suggest the appropriate level of a minimum opening bid for the permit for these channels, and to comment on whether we should have a minimum opening bid for the 24 channels at 148$ and for other DBS construction permits that may become available in the future. Primestar states that the minimum opening bid should be the same as the upfront payment, which should be based on the value of the channels being auctioned. Primestar suggests the amount of $10 million for the channels available at 110$, stating that this is approximately 25 percent of the amount ACC would have received for these channels through its proposed transaction with Tempo and Primestar.a#uV  P7}QuP##C\  P}QP#эPrimestar Comments at 37. MCI suggests that the minimum opening bid for the 28 channels available at 110$ should be $175 million, and reiterates its commitment to making this opening bid.b#uV  P7}QuP##C\  P}QP#эMCI Comments at 28. KennedyWilson, on the other hand, states that there is nothing to be gained by setting a minimum opening bid, unless the Commission is convinced that there is a high probability of bidder collusion, and it therefore recommends not setting one.c#uV  P7}QuP##C\  P}QP#эKennedyWilson Comments at 34. ` ` We continue to believe that it would be useful to have a minimum opening bid for the channels at 110$ to help move the auction along and to increase the likelihood that the public receives fair market value for the spectrum. We will therefore establish a minimum opening bid for this spectrum, the amount of which will be announced by the Wireless Telecommunications Bureau by Public Notice. The Wireless Telecommunications Bureau and the International Bureau will determine the amount of the minimum opening bid using all available information and taking into consideration the uncertainty as to the value of the spectrum. No commenter has suggested a minimum opening bid for the channels available at 148$, but it appears that their value is substantially lower than the value of the channels at 110$. Therefore, we will not set a minimum bid for the channels at 148$. As our PCS auction experience shows, a minimum opening bid is not an absolute prerequisite for a successful, efficient auction. Because no parties have commented on whether we should have minimum opening bids for future DBS auctions, we reserve discretion to decide this issue with respect to individual auctions as circumstances warrant. ` ` Activity Rules. To maximize the amount of information generated during the course of an auction and to ensure that the auction closes in a reasonable amount of time, we will require a bidder to be active in each round of the auction or use an activity rule waiver, as defined below. To be active in the current round, a bidder must submit an acceptable bid in the current round or have the high bid from the previous round. A bidder who is not active in a round and has no remaining activity rule waivers will no longer be eligible to bid on the construction permit being auctioned. However, as discussed below, in the event of a bid withdrawal, the eligibility of all bidders who have not withdrawn will be restored. ` ` Activity Rule Waivers. To make allowance for unusual circumstances that might delay a bidder's bid preparation or submission in a particular round, we will provide bidders with a limited number of waivers of the abovedescribed activity rule. We believe that some waiver procedure is needed because the Commission does not wish to end a bidder's participation due to an accidental act or circumstances not under the bidder's control.d#uV  P7}QuP##C\  P}QP#эSee Second R&O, 9 FCC Rcd at 2372. We will provide bidders with five activity rule waivers that may be used in any round during the course of the auction.e#uV  P7}QuP##C\  P}QP#эSee id. at 2373. A waiver will preserve eligibility in the next round.,0Í/,0Í/Sf  Њ#uV  P7}QuP##C\  P}QP# I. A. 1. a.(1)(a) i) a)Í/,X` hp x (#%'0*,.8135@8: