Kohl Pokes Holes in Pricing Plan


A Senate subcommittee chairman expressed a high level of skepticism over what's been hailed as a key consumer benefit of the proposed merger between EchoStar Communications Corp. and Hughes Electronics Corp., parent of DirecTV Inc.

If their $25.8 billion merger is approved, the direct-broadcast satellite firms pledge to offer a national pricing plan so that subscribers beyond cable's reach would pay the same rates as those in the country's most competitive markets.

But Sen. Herb Kohl (D-Wisc.), chairman of the Antitrust, Competition and Business Rights Subcommittee, expressed considerable doubt that the plan was operationally sound in the face of cable price cuts.

"I would submit to you that there needs to be an awful lot of discussion prior to an approval of this merger on that particular point," Kohl said.

Kohl — who brought EchoStar chairman and CEO Charlie Ergen before his panel last Wednesday — suggested the national pricing plan could trap the merged DBS company, if cable operators in one or several markets decide to cut rates.

"In New York, if the cable company offers a rate which is unbelievably low, you either have to respond to that over a few years or get out of the market. What will you do?" Kohl said.

"Then your competitor in Chicago does the same thing, forces you out of Chicago," he continued. "A competitor in L.A. forces you out of L.A. in order for you to maintain you national uniform pricing policy."


The pricing plan was far from perfect, Ergen responded. But the Justice Department or the Federal Communications Commission might provide flexibility to allow his company to meet cable discounts and promotions, he said.

"We've suggested a solution," he said. "It's a very simplistic solution, I'll admit. We are certainly willing to discuss those things."

But Ergen doubted that cable price cuts would drive the post-merger company, which will use the EchoStar name, from a big market like New York.

"We couldn't afford to leave that market, so we would have to meet that competition and the people in rural America would get the advantage of that competition in New York," he said.

Ergen did not volunteer the point that the Justice Department has sued companies that lower prices to eliminate competition, only to raise their rates later.

Ergen, who was joined by DirecTV chairman and CEO Eddy Hartenstein, stated the benefits of the deal: local TV service in every market within two years; a dozen high-definition TV channels; and high-speed Internet access that would reach millions of homes not served by cable or phone companies.

Sen. Mike DeWine of Ohio, the panel's senior Republican, said he had trouble seeing how a merger that reduces the DBS field to just one player could survive an antitrust review that bars mergers which reduce competition.

"The premise of this merger seems to be more competition by less competition," DeWine said. "Bluntly, it seems to me, you have a problem. I know you've got good lawyers, but are they that good?"

Ergen responded that the federal government has approved similar mergers and asserted that his deal would increase choice for millions of cable and non-cable subscribers.

"This will enhance competition and enhance our ability to compete. This will not lessen competition," he said.


The merger faced a barrage of opposition from National Association of Broadcasters president Edward Fritts, former Federal Trade Commission chairman Robert Pitofsky and Missouri Attorney General Jay Nixon, who may challenge the deal in court.

"Meaningful choices disappear if the proposed merger is not stopped," Nixon said.

The NAB fears that the post-merger EchoStar would engage in widespread discrimination against local TV stations and renege on its promises to carry every station.

"Regrettably, our local stations across the country have had less than a pleasant experience dealing with EchoStar," Fritts said.

On that point, Ergen planned to ask the Supreme Court to overturn a law that requires DBS carriage of every local TV signal in a served market.

Hartenstein suggested that the NAB does not speak for all local TV stations.

"Local broadcasters I've talked to in the last week are thrilled that they can gain satellite carriage as a result of the merger," he said.

Consumers Union Washington office co-director Gene Kimmelman endorsed the DBS deal as the best hope of breaking the "cable monopoly."

Kimmelman said he feared News Corp. chairman Rupert Murdoch was waiting in the wings to capture DirecTV if the merger failed. News Corp., he said, did not have the same incentive to compete against cable as EchoStar, because News Corp's TV stations and cable networks need cable carriage at attractive rates.

"That's a lose-lose for consumers: higher prices for programming, no competition from satellite, higher prices on cable," Kimmelman said.