Lessons Learned from Death Star's Flameout

Publish date:
Updated on

Looking back at the foiled merger of EchoStar Communications Inc. and Hughes Electronics Corp., parent of DirecTV Inc., it's easy to point to DirecTV and claim it should never have dropped Rupert Murdoch and the bid from his News Corp. during 2001.

On top of that, DirecTV should surely never have dropped Murdoch's bid for a competing offer from its direct-broadcast satellite rival, EchoStar CEO Charlie Ergen.

Even years before the EchoStar-DirecTV merger plans were announced on Oct. 28, 2001, many keen observers suggested that the antitrust implications were huge. DirecTV should have guessed there would be opposition — especially from about 30 million rural Americans left with nothing more than a satellite monopoly. Plus, there was likely to be opposition from the National Association of Broadcasters, as well as from DirecTV's erstwhile co-distributors in rural America, the National Rural Telecommunications Cooperative and Pegasus Communications Corp.

Just the NAB's opposition in Washington, D.C., is something savvy insiders realize is the closest thing to a death sentence for just about any issue that trade group clearly opposes.

Yet this critique may be asking too much from hindsight, and may fail to give DirecTV its due. That's because from the beginning, DirecTV's foremost obligation was to its shareholders and, at the end of the day, it's likely that DirecTV managers sincerely believed that the EchoStar offer was favorable. In fact, a fair number of independent and knowledgeable satellite-industry pundits claimed early on that there was a reasonable chance the DirecTV-EchoStar merger would succeed, not unlike the sale of Tele-Communications Inc.'s assets to AT&T Corp. in 1999.

Nonetheless, judging by the most recent third-quarter 2002 subscriber counts, the merger process has hurt DirecTV.

DirecTV added a mere 206,000 net new subscribers for the July to September timeframe, while a more focused and more distributed EchoStar added 320,000 net new subscribers, a 55 percent increase.

EchoStar management now understands the complete business plan of its rival, DirecTV, from financing to technological areas, and from legal to marketing as well. Plus, DirecTV's employee and employee-family morale has suffered significantly, as longtime staff wondered first if they would remain with the merged company and, if so, would they live in Colorado or California?

Additionally, DirecTV lost the clear opportunity to sell during the 2001-2002 timeframe (and probably at a much higher price). It is questionable if even the $600 million breakup fee EchoStar agreed to pay DirecTV will ever truly cover that loss.

Echostar's lessons (and losses)

Looking at EchoStar and its Dish Network, many conclude their analysis of the foiled merger before they even begin, noting "Charlie wins, no matter what." Yet, that is far short of the clear picture and the bigger EchoStar goal (if the past year is any measure). Coming up short, as in this merger, is not the EchoStar way.

Still, there is little question that EchoStar has won something big, because the ability to forestall an opportunity for News Corp. — probably by as much as two or three additional years — has a value that is impossible to finally calculate. In fact, as such, the attempted merger was not only something EchoStar should have done, it was something EchoStar had to do.

It is also worth noting that in the same way that EchoStar learned all about DirecTV, in turn, DirecTV has learned a great deal about EchoStar and its future plans. This will have a significant negative effect on Dish Network's plans as it moves into 2003.

Plus, EchoStar must now steel itself against the real competitor that DirecTV will surely become, as it reaches a final split from EchoStar and a probable alliance with a new strategic or financial partner. If that new partner is a Rupert Murdoch, a John Malone, a Michael Eisner or even a telephone or studio company CEO, the days and the nights will get longer for a lonely Charlie Ergen.

Lessons for the rest

Going forward, there are a handful of clear lessons that the 20 or so legal and industry experts offered when consulted for this article. To paraphrase a popular ABC network sitcom, these are the "Ten Simple Antitrust Rules for Dating the U.S. Government." They include:

  • Do your homework, and do it well ahead of time;
  • Gather your friends and enemies in advance, understand and respect them;
  • Give those enemies solid reasons not to oppose your project;
  • Be willing to concede secondary points in order to preserve your credibility for those that really matter;
  • Always second-guess your very best argument;
  • Come to the table with a full and complete offer;
  • Study and understand antitrust law;
  • Study and understand Washington's legal, regulatory and political mechanisms;
  • Be unfailingly humble throughout the process, and celebrate privately (at best);
  • And be straight, consistent and fair with all involved, especially government officials and agencies.

As it stands today, one party that is surely better off following the failed merger is the DBS industry's trade group, the Satellite Broadcasting & Communications Association. Retaining two dominant service providers keeps the SBCA active, fully funded and left programmers more likely to stay active and involved.

The SBCA, like the National Cable & Telecommunications Association, probably also learned its set of important lessons. These include not siding with a particular player in a future business transaction, and probably even incorporating this proviso into the SBCA's future by-laws.

Finally, whether cable and the U.S. consumer are better off, well, that's a topic for another column.

Still too close to call

Ultimately, even if DirecTV, EchoStar, their allies and their counsel had followed all these rules, it is very tough to say if this merger would have succeeded. There was a lot facing it from the outset.

But it's also apparent that by not following any one of these rules, the deal was swimming upstream from the first day. In fact, any merger deal that misses any more than one or two of these elements can typically be expected to flounder — and flounder early.

In the end, don't be surprised to see the concept of a merger of these two dominant DBS providers surface again. And don't be surprised to see a satellite subscription services merger come up in a similar, but very different context, as one of the two satellite-radio providers may buy out or merge with the other.

Either scenario becomes quite possible if financial and competitive pressures significantly alter the companies' landscapes. This will occur in the years ahead, as terrestrial competitors ramp up their competitive muscle and start sticking it back to DBS and satellite radio.

In fact, a late 2002 Government Accounting Office report points to this very case: The 52-page study, entitled "Issues in Providing Cable and Satellite TV Services," concludes that much of the competitive dynamics and arguments made in the EchoStar-DirecTV merger case are indeed real, have validity and will not go away.