'Charlie's No Angel'

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Floating around Capitol Hill is a short history of EchoStar Communications Corp. The title: Charlie's No Angel.

In this case, Charlie refers to Charlie Ergen, EchoStar's maverick chairman and CEO, who wants to merge his company with DirecTV Inc. to a create a direct-broadcast satellite giant with roughly 14.9 million subscribers. Powerful forces, including the authors of Charlie's No Angel, are trying to scuttle the deal.

Before Ergen can surface as the sultan of satellite, he needs approval from Washington's regulatory emirs at the Federal Communications Commission and at Justice.

Although Ergen has his share of supporters, he has just as many detractors — and they have the legal talent and financial means to make plenty of public or private noise with FCC and Justice officials. According to one source, Charlie's No Angel is an unauthorized biography circulated by someone within the opposition's ranks. At least one House member had a copy in tow last week.

Last Monday, the first wave of merger comments hit the FCC, which has committed to acting on the deal within 180 days, or by June 19. On the same day comments arrived, the agency sent EchoStar and DirecTV a 10-page questionnaire seeking data on a range of sensitive business topics.

Cable Services Bureau chief W. Kenneth Ferree, who has been assigned to lead the merger review, said the request would not delay the review.

"We are not waiting," Ferree said.

The Justice Department works in private and has not yet announced a merger review schedule.

A Justice official last week put out word that merger opponents should think twice about waging political campaigns as an alternative to an on-the-merits legal approach.

"Stop devoting so much time to lobbying, and get out there and innovate, and we'll all do our job a lot better," said deputy assistant attorney general for antitrust Deborah Platt Majoras. "Leave the finger-pointing to us."

The FCC filings contained some surprises. Among those favoring the deal: Circuit City Stores Inc., Consumers Union, Consumer Federation of America, Media Access Project and the U.S. Internet Industry Association. All said consumers would be better off with the deal than without it, although the consumer groups tailored their support to the imposition of safeguards.

The opponents — led by the National Association of Broadcasters, Pegasus Communications Corp. and the National

Rural Telecommunications Cooperative — used the occasion to pound away in exhaustive detail at the pro-competitive underpinnings of the merger espoused by EchoStar and DirecTV.

For example, the NRTC's filing was as heavy as a telephone directory and ran 73 pages long, not including 15 exhibits that ran another 200 pages and contained maps, charts, graphs, and a lengthy analysis by Yale University management professor Paul W. MacAvoy.

NOTABLY SILENT

Just as noteworthy as those that did file were the number of media titans that stayed on the sidelines, including The Walt Disney Co., Viacom Inc., General Electric Co., News Corp., AT&T Corp., Comcast Corp. and AOL Time Warner Inc.

Some within the programming community have said that railing against the merger in public could eventually make it that much harder to cut carriage deals with a huge customer, if the merger is approved. Programmers opposed to the merger plan will wait to make their case with Justice.

As programmers see it, they are looking not only at an EchoStar-DirecTV deal involving 14.9 million subscribers, but also the proposed AT&T Broadband-Comcast Corp. merger, which affects at least 22 million subscribers. With merger approval, those companies would control access to at least 42 percent of all pay TV households.

"That gives you pause if you don't have any direct financial relationship with that company," said Shaun Sheehan, Washington vice president of Tribune Co., a TV station owner and newspaper publisher based in Chicago.

Tribune didn't file comments in the EchoStar-DirecTV merger, either.

"Officially we are silent. Unofficially, as an unaffiliated programming provider, it makes us very, very nervous," he said.

News Corp. — which lost to Ergen in the bidding for DirecTV and still has its eye on a satellite deal if EchoStar's plan collapses — is lobbying hard against the merger. For weeks, News Corp. has been circulating its own version of Charlie's No Angel.

Just like Tribune, Rupert Murdoch's News Corp. fears that consolidation among distributors poses enormous financial risk to programmers that can't find a channel elsewhere.

"As a programmer, that worries us immensely. The leverage is obvious," said Michael Regan, News Corp.'s senior vice president in Washington. "We say, 'X cents to carry the FX channel,' and the sole provider says, 'Nope, it's going to be significantly less than that, take it or leave.'

"You've got literally no running room. So it's a very significant concern."

Although the NAB is fighting Ergen, the National Cable & Telecommunications Association is steering clear. NCTA president Robert Sachs said that was nothing new.

"Officially, NCTA does not get involved in mergers," Sachs said.

ERGEN'S RATIONALE

Ergen offers at least three justifications for the merger, all of them aimed at spurring competition for the cable industry, which controls a 78 percent share of the pay TV market.

By eliminating the duplicative use of spectrum, Ergen claims the combined company can provide local TV stations in 100 markets (up from about 40 today); roll out a dozen high-definition TV channels; and provide two-way, high-speed data to millions of rural Americans who have no hope of gaining that service from cable operators or telcos.

But critics said the price — the creation of a DBS monopoly — is too high.

In its comments, the NAB said because both companies have the technical means to serve all 210 local TV markets today, the merger is unnecessary.

Last Wednesday, Ergen sent a letter to the House Judiciary Committee disputing the NAB's claim, which others have also made. Ergen said the analysis was based on technology "no one anywhere has deployed" and all that it proved was that "with enough time and money, almost anything is possible on paper."

Also last week, Sen. Orrin Hatch (R-Utah) told Justice that the deal raises enough anti-competitive concerns to merits rejection.

Hatch — the ranking Republican on the Senate Judiciary Committee, who has been friendly to broadcasters over the years — spelled out his concerns Jan. 25 in a three-page letter to Attorney General John Ashcroft. The merger, Hatch said, would result in a direct-broadcast satellite monopoly in rural America and "a satellite/cable duopoly in most of the cities, towns and suburbs across the country."

Congress, he added, has tried to promote DBS-cable competition over the years, and the merger, if approved, "could stifle this market-driven DBS competition."

The NRTC and Pegasus — which resell DirecTV to 1.9 million subscribers in 41 states under an exclusive deal to serve rural territories — said both EchoStar and DirecTV each offer broadband access at present. Eliminating competition between them would expose 30 million to 40 million U.S. homes unserved by cable or digital subscriber line to a monopoly satellite provider, they said.

"This is a merger that quite clearly, if it goes through, would be a merger to monopoly for millions of Americans," said Douglas Melamed, a former Justice antitrust official in the Clinton Administration. "The competitive harm is presumed in such circumstances. I think that is beyond dispute."

Melamed spoke at a conference hosted by the Precursor Group.

Ergen has acknowledged that his response to rural concerns is the imposition of a national pricing plan. Under that scheme, the price charged in competitive markets would prevail in markets with no competition.

Pricing isn't the only issue, said critics, noting that Justice has historically been unwilling to police a monopoly provider's decisions on programming selection, service quality or customer-service practices.

If Justice approves the merger, Melamed said, the department would effect a sea change in antitrust policy.

Melamed said he didn't expect that to happen because of the long-term consequences.

But Donald Russell, former chief of Justice's Telecommunications Task Force in the Clinton Administration, disagreed. Last May, Russell prepared a report for S.G. Cowen Broadband & Satellite Services detailing how the efficiencies of the merger could outweigh potential harms, thus obtaining Justice's approval.

"I don't think it would require a significant change in antitrust policy or merger policy for the agency to approve," Russell said. "I think there are some compelling efficiencies that under long-standing antitrust principles would justify letting the transaction go through."

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