News

DBS Politics Is Local

3/03/2002 7:00 PM Eastern

Hoping to improve their merger-approval odds, EchoStar Communications Corp. and DirecTV Inc. parent Hughes Electronics Corp., are playing the local-TV card.

The two direct-broadcast satellite providers said they would retransmit over-the-air TV stations in all 210 U.S. markets within two years, if the merger is approved. Their plan last October called for serving 100 markets, up from about 40 today.

Last week, EchoStar chairman Charlie Ergen was open about his intention to persuade regulators that the benefits of the merger far outweigh the harms outlined by opponents.

"I always felt the merger would be approved because of the benefits," Ergen said. "I just think we just made those benefits more compelling to every American."

Ergen, DirecTV chairman Eddy Hartenstein and Hughes CEO Jack Shaw laid out the plan at a press conference here last Tuesday, kicking off a two-day tour to sell the deal to Congress, the Federal Communications Commission and the Justice Department.

Both federal agencies must review the merger. FCC officials reacted to the merger announcement by saying it would lead to significant concentration in the DBS market. DOJ officials conduct their review behind closed doors.

The Senate Subcommittee on Antitrust, Competition and Business Rights is holding a March 6 hearing on the merger, at which Ergen and Hartenstein are scheduled to testify.

The new local TV plan could be seen as an attempt to soften strong opposition to the merger, which has come from smaller satellite competitors, local broadcasters and several senators, including Sen. Orrin Hatch (R-Utah), the senior Republican on the Judiciary Committee.

Hatch urged the Justice Department to review the deal closely.

"I don't think the offer will do much to help them get the deal approved. The offer does not change the fundamental antitrust analysis," said Legg Mason media analyst Blair Levin, a former FCC chief of staff. "The deal would still create a monopoly in rural markets and substantially increase concentration in urban markets."

SLOT SURRENDER?

In order to gain merger approval, EchoStar and DirecTV might have to give up one of three orbital locations that cover the entire continental United States, Levin said.

"If they gave up a full CONUS slot, they might be able to get it done, but it would still be tough and I don't think they would be willing to give it up," Levin said.

Last week, Ergen said he hoped the local-TV plan would dampen opposition from broadcasters. But that was not to be.

"Today's announcement appears to be a step in the right direction, but needs to be carefully scrutinized to determine its legitimacy," National Association of Broadcasters president Edward Fritts said in a statement. "We would have more confidence in the announcement were DirecTV to be the surviving entity.

"Broadcasters have had a long and tortured history of bad-faith dealings with … Charlie Ergen. Accordingly, we continue to oppose the merger."

Like Pegasus Communications Corp. and the National Rural Telecommunications Cooperative, the NAB has opposed the merger from the outset, claiming it would eliminate competition among DBS providers.

The NAB argued that EchoStar and DirecTV each have enough channel capacity to serve all 210 markets on their own, right now — a claim the DBS firms have repeatedly denied.

The broadcast trade group had said maintaining the EchoStar-DirecTV rivalry would enhance small-market stations' chances of gaining retransmission. Last week's pledge to serve every market apparently undermines that argument.

But The Carmel Group subscription-TV analyst Jimmy Schaeffler said the current rivalry would prompt an expansion of local-TV retransmission in a quicker time frame than the 24 months promised by the merging DBS giants.

SORE AT DISH

"Consumers today probably have a greater chance of getting all 210 [markets], and getting them sooner, if the deal does not go through," Schaeffler said. "This is one of the better examples of the real value of the existing competition between DirecTV and EchoStar in today's satellite industry."

The NAB is sore at Ergen because EchoStar requires subscribers in dozens of markets to obtain a free second dish to receive many non-network local TV stations. The FCC is reviewing that dispute and may wind up ordering EchoStar to end the practice.

Ergen called the second-dish requirement necessary because new spot-beam satellites have not been delivered on time.

The NAB is also upset at DBS providers for suing to overturn the law requiring DBS carriage of all local TV stations in a served market.

Satellite firms lost that case in the 4th U.S. Circuit Court of Appeals in December.

Now that EchoStar and DirecTV have committed to carrying every station in every market, the Satellite Broadcasting & Communications Association must decide whether to appeal the case to the Supreme Court.

LOTT'S RESERVATIONS

SBCA, the lead plaintiff, said it has not made a decision about a Supreme Court appeal.

The EchoStar and DirecTV promise to serve every local TV market came one day after Senate Minority Leader Trent Lott (R-Miss.) told an NAB audience he had serious concerns about the merger's impact on competition, particularly in rural areas.

"I am not prepared to come down, 'Bam, no merger,' at this point," said Lott. "But I have to say I have a lot of reservations about it.

"We need to make sure what is the effect on rural consumers' choices, for instance, and take a hard look at the financing and the ethics of what's involved here."

Rep. Billy Tauzin (R-La.), chairman of the Energy and Commerce Committee, said he figured either Ergen or Rupert Murdoch's News Corp. would acquire DirecTV. He said he wasn't sure it was good for consumers for Murdoch to buy DirecTV, given Murdoch's extensive programming interests that need cable distribution.

"If the EchoStar-DirecTV merger is bad, then the next question you've got to ask is, 'Well, is the other consolidation better?' I don't know.

"I think I lean toward the concerns of making sure we have a strong satellite competitor [to cable]," Tauzin concluded.

Today, 65 million TV households have access to local-TV signals from EchoStar and DirecTV. The plan to serve every local TV market would furnish that access to another 42 million TV households.

Collectively, EchoStar-DirecTV would own 16 satellites, dedicating five to local TV service.

Last week, the companies filed an application with the FCC to launch a new satellite that would allow them serve every local TV market.

Extending the service to every market would take two years because of lags associated with building and launching new satellites, EchoStar and DirecTV said.

If the merger is approved, the new company would serve at least 14.9 million subscribers, or 90 percent of the DBS market. But that translates to only 17 percent of the broader pay-TV market, which is dominated by cable.

PREVIOUS PLEDGES

Merger foes claim EchoStar-DirecTV would have a satellite-spectrum monopoly whose harms cannot be offset by service promises and economic efficiencies.

EchoStar and DirecTV have attempted to address the rural-competition issue by announcing support for a national pricing plan, in which DBS subscribers who can't get cable would pay the same prices as subscribers who can.

They also promised to offer a dozen high-definition TV channels and provide two-way, high-speed Internet service, using spectrum now needed to transmit duplicative programming.

Ergen has also said it wouldn't be economically feasible to offer two-way data service everywhere via DBS, unless the company enjoys the economies of scale the merger would bring. He repeated that claim last week.

"Many rural homes have a 'no-opoly' today," Ergen said. "We'll take those homes to a three-dimensional business," with services that include high-definition television and broadband.

Hughes already offers a satellite-delivered broadband service called DirecWay, and EchoStar markets a similar service from StarBand Inc., in which it is a major investor. But equipment costs at $700 and monthly service costs of roughly $70 make broadband via satellite too expensive for many consumers, the DBS companies contend.

Because their sales volumes have been relatively low, the companies are losing money on their broadband ventures.

Monica Hogan contributed to this story.

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