Big is no vice, small is no virtue.
That, in a manner of speaking, seems to be the key regulatory philosophy that has steered officials at the Federal Communications Commission since Jan. 23, when Republican Michael Powell was installed as chairman.
In several speeches, Powell has sharply questioned FCC policies that limit the size of media companies based on market conditions that prevailed decades ago, and would appear to have no relevance in a broadband Internet age characterized by choice and abundance.
But the proposed $25.8 billion merger of EchoStar Communications Corp. and DirecTV Inc.— a union that would form a direct-broadcast satellite company with some 14.9 million subscribers, larger than any single cable operator — has apparently given Powell and his subordinates occasion to re-examine their basic philosophical assumptions.
Last week — in comments that tracked those Powell made the week before almost verbatim — FCC Cable Services Bureau chief W. Kenneth Ferree made it abundantly clear that EchoStar chairman and CEO Charlie Ergen's proposed merger — which has drawn scrutiny from many quarters, including the cable industry — would undergo a tough review.
"On first blush, there are some real serious concentration issues there when you are talking about all the prime DBS slots being held by a single entity," Ferree said. "That is a concern."
In response, DBS-industry sources said Ferree's statement is only partially correct. Although one company would control key U.S. satellite slots, both Mexico and Canada control orbital slots with footprints that cover the 48 continental U.S. states.
Mexico, they added, has a bilateral DBS entry agreement with the U.S. But Canada — which places government restrictions on foreign media content — is a more complicated issue. As a result, the U.S. has been reluctant to permit Canadian-licensed DBS providers to compete stateside.
No Easy Victory
Both Powell and Ferree went public with their concerns about the merger before the deal was formally submitted to the agency. That's a clear indication that EchoStar chairman and CEO Charlie Ergen should temper his hopes for an easy victory, according to one Washington communications lawyer.
In the past, Powell and Ferree have emphasized that the FCC should not make snap decisions until after the agency has examined the record. In the context of other deals, they have instructed parties to supply the agency with an abundance of hard data, rather than reams of unsupported speculation.
Yet Ferree said he decided to opine on the DBS merger based on "information that's widely available." But he cautioned that the FCC hasn't drawn any conclusions yet.
"Chairman Powell, I know, is open-minded about it," Ferree said. "I expect to have a full, fair, thorough and expeditious review."
Evidently, the EchoStar-DirecTV merger won't go before the FCC in conflict with any agency rules. That puts the onus on Ergen to demonstrate that the merger would promote the public interest, rather than on the FCC to demonstrate that the deal would hurt the public.
"The burden is on them to make a showing that the combination will be in the public interest," Ferree said.
Yet Powell has called the public-interest standard an "empty vessel" — a legal principle that means whatever a majority of FCC members says it does at different points in time, on an array of issues such as mergers, ownership limits and contractual provisions.
Ferree was asked whether he had developed a plan for applying the public-interest test to a merger that raised antitrust concerns, but did not run afoul of any current FCC rules. He said such a plan did not yet exist.
While on a visit here last week, Ergen said he had no quarrel with Powell's comments that the deal would produce "significant concentration" and would undergo "rigorous scrutiny" at his agency under a team headed by Ferree.
"I think the commission is doing exactly the right thing," Ergen said. "People should look at this deal. They should give it plenty of scrutiny."
Ergen on the Offensive
Moments later, Ergen went on the offensive, saying he was highly confident the Justice Department and the FCC would approve the deal, and that his arguments favoring it would outweigh the objections of opponents.
"Obviously, we have powerful, powerful enemies who will line up against us," Ergen said. "Obviously, the broadcasters and the others are going to line up against us."
Ergen said the merger was necessary to eliminate duplicative signals and save spectrum, lower programming costs, boost the number of markets that can receive local TV signals via DBS from 40 to 100, and promote the rollout of broadband Internet access, video-on-demand, and high-definition television.
"To be competitive, we have to figure out how we are going to fill those holes," Ergen said. "I think in this case that both EchoStar and Hughes will be severely weakened if they are not successful" in obtaining merger approval.
Ergen's attack on broadcasters apparently came in response to the National Association of Broadcasters' call for a high-level review of a merger that the industry group said would create "the world's largest monopoly video-delivery platform."
The cable industry's reaction to deal has been mixed. Some are concerned about a more powerful DBS competitor in the making, while others — most notably AOL Time Warner Inc. CEO Gerald Levin — effectively endorsed the deal by dismissing antitrust concerns.
Some in the cable industry aren't fretting because they believe the merger will take a year to close, thus gobbling up time that Ergen would otherwise devote to the business. After the merger, cable leaders expect Ergen will have to cope with reducing $11 billion in corporate debt and finding the $2.5 billion needed to convert either EchoStar subscribers or DirecTV subscribers to a set-top box that works with both satellite systems.
'Licking Their Chops'
Finally, cable executives are seemingly less concerned about Ergen heading a giant distribution company with no programming interests, than they would have been about Rupert Murdoch running a DBS firm with the substantial programming resources of News Corp., which lost out on the bidding for DirecTV after protracted negotiations.
"Cable is licking their chops regardless of the merger," Ergen said. "Cable is licking their chops because we have duplicative spectrum. So they like the environment today.
"Cable is licking their chops even when you combine these two companies because we do go through a long regulatory [process] where they can pick off our customers," he added.
With at least 14.9 million subscribers, the combined company would control 90 percent of the DBS market and 17 percent of the broader pay TV market. Ergen, however, said that any review of the deal must take into account the entire U.S. pay TV universe, which involves head-to-head competition between DBS and cable's 70 million subscribers.
"For knowledgeable people, I don't think there is a lot of debate on this issue," he said. "Clearly this transaction would be a non-starter if the relevant market was satellite-only and didn't include the broader market."
Critics of the deal have noted that the merger would reduce the field from three competitors to two in cable markets and from two competitors to one in rural markets that cable doesn't serve.
Ergen said the new company expects to continue to compete against the National Rural Telecommunication Cooperative and Pegasus Communications Corp. — both of which resell DirecTV in rural markets with about 1.8 million subscribers in 41 states — after the merger closes. That would likely leave about 8 million U.S. households with access to two DBS providers, Ergen said.
"So in many cases, the pundits have talked about rural America going from two to one, but in the NRTC territories, it may very likely be two staying at two," Ergen said, adding that rural DBS subscribers would be further protected by national pricing programs.
Until last week, it was unclear whether the Justice Department or the Federal Trade Commission would review the merger. That mystery ended when Lawrence Frankel, acting chief of the Justice Department's antitrust telecom task force, said his agency was selected to conduct the review.
In the past, the FCC has held up mergers until after antitrust authorities have completed their work. Frankel could not give an estimate on how long the Justice Department would take to review the DBS deal. EchoStar expects to file the merger for approval at Justice and the FCC by Nov. 21.
Ferree left the door open when asked if the FCC would await Justice's review.
"No way of answering that question," he said. "I would not rule anything out at this point."