Ergen Defends Merger as Foes Line Up

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There's something wrong with this merger picture.

Big players who stand to gain from the merger of EchoStar Communications Corp. and DirecTV Inc. oppose it — and those who stand to lose won't take a position.

But that was just one of the storylines that developed last week at two House committee hearings in which EchoStar chairman and CEO Charlie Ergen spent nearly six hours lobbying for the deal and deflecting substantial criticism from competitors and some troubled lawmakers.

One Ergen promise is to drive the new direct-broadcast satellite company into dozens of new local TV markets. Once the deal goes through, Ergen plans to offer every local TV station in 100 markets and serve at least one city in every state, no matter how small the community.

On the surface, such a move would be a boon for local TV stations. But the National Association of Broadcasters sent a witness to tell the House Subcommittee on Telecommunications and the Internet that Ergen — with whom the NAB has done battle for years — shouldn't be trusted.

"The broadcasting industry has little faith in that claim," said Dispatch Broadcast Group president and CEO Michael J. Fiorile.

By offering local signals in 100 markets, Ergen said nearly 85 percent of households would have satellite access to their local TV broadcasters. As a result, they'll finally have a true alternative to cable, which has carried local TV broadcasts around the country for years.

"The single biggest reason why people do not buy satellite systems today is lack of local broadcasting," Ergen told the House Judiciary Committee.

Even though Ergen has his eye on stealing subscribers from the dominant cable industry, big cable operators are not trying to blunt the threat by joining the ranks of merger opponents.

"We do not seek to gain competitive advantage by imposing regulatory conditions on competitors and we believe that any antitrust issues raised by the merger are best left to resolution by expert agencies," National Cable & Telecommunications Association president Robert Sachs told the House telecommunications panel.

EchoStar and DirecTV Inc. announced their merger on Oct. 29. They said the $25.8-billion deal was necessary to free up 500 channels of scarce spectrum not just to provide more local TV, signals but also for 12 channels of bandwidth-devouring high-definition TV and for a national high-speed Internet access service every bit as good as cable modems and digital subscriber lines.

ERGEN'S PITCH

Ergen said the benefits of the deal — especially for rural Americans with no hope of gaining access to a high-speed-data platform anytime soon — far outweigh the reduction in competition. Rural consumers left with only one satellite carrier, he said, would be protected by national pricing plans designed to ensure that those who don't have access to cable pay the same fees as those who do.

"I think in general their choices will be reduced. And that's why I think it's important to put safeguards in place for those … people who have less choice," Ergen said.

The merger would leave Ergen in control of 90 percent of the direct-broadcast satellite market, but just 17 percent of the entire pay TV market. Cable operators have about an 80 percent market share. "It hardly makes us a monopoly in that business," Ergen said.

A combined EchoStar-DirecTV would serve at least 14.9 million subscribers, making it the largest U.S. multichannel video programming distributor. It would have 1.2 million more subscribers than the largest MSO, AT&T Broadband.

EchoStar submitted the merger for Federal Communications Commission approval on Dec. 3; but Ergen would not say if the deal had been filed with the Justice Department. Both agencies must approve the deal.

The company's potential market clout caused small cable operators — led by the American Cable Association, whose members control 900 cable systems and 7.5 million subscribers — to strongly oppose the deal.

Testifying before the House telecom panel, Neal Schnog, president and part owner of Uvision in Stayton, Ore., said the merger would give Ergen enormous clout over programmers. That could result in small operators paying higher programming costs than DBS, or becoming entirely cut off from access to the cable networks they need to survive.

Small cable's problems could multiply if the FCC decides next year that it will no longer enforce a rule that requires large MSOs to sell the networks they control to competitors.

"These two facts, along with the possible sunsetting of [FCC] programming-access rules, would give EchoStar the ability to control access to programming, thereby limiting customer choice and providing enough forward bandwidth that small cable companies would never be able to compete on an economic basis," Schnog said.

Another merger foe is the National Rural Telecommunications Cooperative and its largest member, Pegasus Communications Corp., which combined serve 1.8 million DBS subscribers in 41 states.

NRTC invested $100 million in DirecTV to help the company get launched in exchange for exclusive rights to distribute the service to 7 million homes.

NRTC president Bob Phillips and Pegasus president Marshall Pagon said that before the merger that every American had access to two DBS suppliers. After the merger, the executives said, they'll have just one, creating a rural monopoly.

A national price plan proposed by Ergen was an insufficient substitute for competition, said Phillips. Competition, he said, not only includes fair pricing but also service quality, customer support, and innovation.

Restating a point made by the NAB's Fiorile, Phillips said the elimination of DirecTV would remove the incentive both EchoStar and DirecTV have today to coax each other into serving more markets with local TV signals.

"Price is not the only issue when you eliminate choice," Phillips told the House Judiciary Committee.

Lastly, both Phillips and Pagon expressed alarm that they would have to rely on EchoStar as a programming supplier while competing against it in some markets. Making the arrangement even more lopsided, they said, was that they would not have access to EchoStar's full range of programming services.

"We are simply going to be a distributor with a monopoly supplier, which will be Mr. Ergen," Phillips said.

WHAT MARKET

A raging debate last week concerned the relevant market: Do satellite carriers compete in their own market or do they operate in a market that includes both DBS and cable operators?

Few lawmakers announced undiluted support for the merger. Rep. Fred Upton (R-Mich.), chairman of the House telecom panel, said he supported the view that DBS and cable share the same market, while at the same time voicing concern about the impact on rural DBS subscribers.

House Judiciary Committee chairman James Sensenbrenner (R-Wis.) said 30 percent of homes in his state do not have access to cable, causing him to question the merger's impact on consumers who will be served by one satellite company.

"The market dominance and potential anti-competitive consequences of such a merged company raise important questions that this committee must address," Sesenbrenner said.

The most ardent backer of the deal was Rep. Rick Boucher (D-Va.), who endorsed every reason in support of the deal enunciated by Ergen.

"As the representative of one of the largest districts in the eastern U.S., I can say that I am firmly convinced that this merger is in the interest of my constituents," Boucher said.

CONSUMER NOD

Tepid support for the deal came from an unusual quarter: Gene Kimmelman, Washington office co-director of the Consumers Union. The lobby group has a history of opposing any large media and telecommunications merger.

Kimmelman said the deal could go a long way toward blunting cable-price increases — especially in markets where Ergen plans to offer local TV signals — and that harm to rural consumers could be offset by the national pricing plan and pre-merger approval FCC licensing of Northpoint Technology Ltd., which intends to share DBS spectrum to offer local TV signals and high-speed Internet access at low prices in virtually every U.S. market.

"What does satellite need to compete better against cable? We know they need local broadcast channels. That's what most consumers watch more than half the time and most consumers still do not have it from satellite," Kimmelman told the House Judiciary panel.

Robert Pitofsky, chairman of the Federal Trade Commission during the Clinton Administration, said the merger poses a serious problem, because the hallmark of antitrust law is the denial of mergers that create a monopoly. He also questioned whether the efficiencies of the deal justified reducing the DBS market from two players to one.

"The antitrust laws say mergers that lessened competition in any market are illegal, and we don't trade off pro-competitive effects in one market against anti-competitive effects in another," Pitofsky said before Judiciary.

On the relevant market, Pitofsky said it was true that cable and DBS do compete but there was another truth, too.

"The real issue is whether there is a [satellite] sub-market. I will go out on a limb and say it's about as clear a sub-market as I have ever seen," he said.

Rep. John Conyers (D-Mich.) noted that although the EchoStar- DirecTV deal had problems, a merger between DirecTV and News Corp. would have been worse. News Corp., headed by Rupert Murdoch, lost to Ergen in the bidding for DirecTV.

"All I am suggesting is that we may be between the devil and the deep blue sea," said Conyers, the judiciary panel's senior Democrat.

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