Witness Testimony and Exhibits Jointly Submitted by Sirius Satellite Radio Inc and Xm Satellite Radio Inc
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PUBLIC VERSION Before the COPYRIGHT ROYALTY BOARD LIBRARY OF CONGRESS Washington D.C In the Matter of Docket No 2006-1 CRB DSTRA Adjustment of Rates and Terms for Preexisting Subscription and Satellite Digital Audio Radio Services _____________________________________________________________________ WITNESS TESTIMONY AND EXHIBITS JOINTLY SUBMITTED BY SIRIUS SATELLITE RADIO INC AND XM SATELLITE RADIO INC VOLUME OF SethD GreensteinD.C Bar No 416733 Bruce Joseph D.C Bar No 338236 Todd Anderson D.C Bar No 462136 Michael Sturm D.C Bar No 422338 Laura Fentonmiller D.C Bar No Thomas Kirby D.C Bar No 450813 915231 Amy Roth D.C Bar No 501483 Karyn AblinD.C Bar No 454473 Aymeric Dumas-Eymard N.Y Bar No Matthew Astle D.C Bar No 488084 4243408 WILEY REiN FIELDING LLP CONSTANTINE CANNON LLP 1776 St NW 1627 Eye Street NW 10thi Floor Washington DC 20006 Washington DC 20006 tel 202 719-7258 tel 202 204-3500 fax 202 719-7049 fax 202 204-3501 bjosephwrf.com [email protected] sgreensteinconstantinecannon.com [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] Counsel for Sirius Satellite Radio Inc [email protected] Counsel for XMSatellite Radio Inc October 30 2006 Before the COPYRIGHT ROYALTY BOARD LIBRARY OF CONGRESS Washington D.C In the Matter of Adjustment of Rates and Terms for Docket No 2006-1 CRB DSTRA Preexisting Subscription and Satellite Digital Audio Radio Services DIIucT TESTIMONY OF ROGER RUSCH ON BEHALF OF XM SATELLITE RADIO INC AND SIRIus SATELLITE RADIO INC Introduction have been retained by the law firms Constantine Cannon P.C and Wiley Rein Fielding LLP on behalf of XM Satellite Radio Inc XM and Sirius Satellite Radio Inc Sirius have been asked to give expert opinions and testimony in the Copyright Royalty Board proceeding to determine the royalty payable by Satellite Digital Services retained Audio Radio was to provide expert opinions on the following issues The types and levels of risk in starting and operating satellite-based communications business The types nature and amount of investment required to make satellite enterprise viable The anticipated returns necessary to attract investment required to launch operate and maintain satellite business at various stages How changes in operating cost and revenues would affect the business 82519.5 How these considerations apply to Sirius and XM Qualifications am the President of TelAstra Inc technical and management- consulting firm located in Palos Verdes Estates California My firm advises prospective business investors in space-based systems In this capacity have reviewed many plans and have monitored the progress of new satellite enterprises Exhibit is my detailed in of satellite resume documenting the details of my 44 years of experience the area the last 10 and selected communications It also lists all my publications within years relevant publications in earlier years In summary have been active in the management and design of communications and broadcasting satellite systems since 1965 starting with INTELSAT III at TRW now Northrop Grumman INTELSAT IV at Hughes Aircraft Company now Boeing Space Systems and at Ford Aerospace now Space of communication Systems/Loral have held responsible positions on wide variety satellites and have been involved with radio broadcasting satellites since 1983 served on panel of the National Academy of Sciences to review early of studies concerning the use of direct radio broadcasting satellites for the Voice for radio America wrote an early paper on the use of S-band frequencies broadcasting the in 1986 that was published in 1990 was member of the U.S delegation to International Telecommunications Union ITU World Administrative of Sciences to The first paper was incorporated in the 1986 National Academy report the Voice of America and subsequently published Rusch et al Design and Price of Audio Broadcasting Satellites Symposium on Digital Audio Broadcasting Washington March 1990 82519.5 Radiocommunication Conferences in 1992 WARC92 and 1995 WRC-95 that dealt with all aspects of radio frequency spectrum allocation including the assignment of spectrum for radio broadcasting supported the U.S Department of Justice in defending the satellite television broadcasters have the United States from litigation proposed by provided expert opinions to the Federal Communications Commission relative to satellite broadcasting policy Under my supervision TelAstra Inc has prepared satellite system appraisals and due diligence reports for mergers and acquisitions litigation and bankruptcy proceedings have lectured extensively in North and South America Europe Asia Australia and Africa on the business and financial aspects of communication satellites Previous Experience as an Expert Witness or Consultant have been retained as consultant in legal actions including the following Expert witness for Lockheed Martin in dispute over prices of Proton launch vehicles in February 1998 Prepared expert report for Epstein Becker Green February 1998 Expert witness for the partners of Cellularvision in dispute over satellite in 2000 Retained ownership rights to the Visionstar system July by Robson Ferber Frost and Chan Testified in court as an expert for both sides of the dispute Expert witness for the U.S Department of Justice in defense of the in 2001 Satellite Home Viewer Improvement Act SHVIA starting April Prepared expert witness report and deposition 82519.5 Expert witness for the International Family Channel to retain broadcasting in December 2001 witness rights on the Echostar system starting Prepared expert report Expert witness for Pegasus Satellite Television Inc and Golden Sky Systems Inc to give expert opinions and testimony in legal action regarding the DIRECTV satellite broadcasting system also testified on behalf of the National Rural Telecommunications Cooperative NRTC and the plaintiffs in the related class action This activity extended from January 2001 to March 2004 debt in Expert consultant for both the and equity holders the Loral Space and Communications Ltd bankruptcy proceedings during the period from December 2004 to July 2005 Summary of Conclusions My conclusions are as follows Satellite communications is an inherently risky business because of the nature of space technology New satellite ventures embody great deal of uncertainty during start-up Investing in new satellite service is extremely risky Because of the high risk equity investors venture capitalists and other banking institutions expect high returns Founding new satellite venture requires many things to be done perfectly and almost nothing can go wrong After the initial phase of satellite service company the risks remain high 82519.5 Unanticipated costs and delays can burden the enterprise Affordability is key issue Many satellite services have failed because the service and equipment prices are set too high It takes long time to earn revenue become cash flow positive and faces eventually profitable The satellite radio broadcasting industry viable business significant risks before and even after it becomes Customer value including quality of service and customer satisfaction must be balanced against costs reduce 10 Driving up the costs of operation could impair profitability access to financing and have disruptive impact on the enterprise The principal of free enterprise is to balance the investment risk and rewards Investors must be able to realize profit on successful businesses If it will be difficult to finance government policy deprives investors of expected returns future innovation this Satellite radio is an innately risky space-based service Not only was since the industry subject to uncertainty during start-up but also there are ongoing risks service became operational Satellite radio is not yet profitable business and it faces There is competitive threats from terrestrial broadcasting services and new technologies to costs to the businesses Raising royalty rates pervasive pressure reduce and prices grow would clearly place satellite radio at greater disadvantage 82519.5 Risk versus reward assessment for satellite radio broadcasting An account of the changing perception of risk 10 Practical satellite communications started more than 40 years ago Some resolved2 business risks of the basic policy and technical issues have been but many remain Although satellite communication is glamorous and exciting industry and be evaluated developing new satellite service is still risky undertaking must as serious financial proposition 11 The theoretical roots of satellite communications go back to 1895 when orbits3 Russian visionary realized that artificial satellites could be placed in stationary The earliest tests of satellite communications were sponsored by civil and military that time because of the cost organizations Financial skepticism was widespread at high business were of space technology The risks of commercial space high Consequently Act to this nascent the U.S Congress passed the 1962 COMSAT protect industry Many technical issues resolved in 1963 when NASA launched II of the practical were Syncom additional to offset the first successful synchronous satellite Nonetheless as protection business uncertainties an international governmental organization was created for international service communications satellite services An international treaty created an with several national telecommunications monopoly Furthermore risk was syndicated FNTELSAT operators investing in the institution